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Mao’s $300 Red Army Liquor Suffers Before China Congress: Retail

Kong Guoqing hasn’t seen a quieter Chinese New Year in the 12 years his family has been running their small liquor and tobacco shop in downtown Shanghai.

They didn’t sell a single bottle of the high-end spirit made by Kweichow Moutai Co. (600519) that has become synonymous with banquets and gift-giving during China’s national holiday. Kong blames the vanished sales on incoming President Xi Jinping’s crackdown on extravagant spending by officials: Moutai’s sorghum spirit can fetch $300 a bottle -- about half the average monthly disposable income in China’s financial hub.

“Demand for the most expensive liquors and cigarettes this New Year seemed to have just dried up,” said Kong, pointing to red boxes of cigarettes costing about $10 a pack, or more than six times the price of regular brands. “People are afraid to accept gifts.”

The austerity campaign helped push down prices on some high-end spirits by about 30 percent over the holiday, the Ministry of Commerce said. Moutai’s shares have fallen 29 percent since Xi announced the clampdown in November, the biggest drop of 996 companies on the Shanghai Composite Index.

Moutai fell 0.3 percent to 176.77 yuan in Shanghai today, for a third day of losses. The index rose 0.9 percent.

Photographer: Nelson Ching/Bloomberg

Bottles of China Kweichow Moutai Distillery Co. baijiu liquor are displayed at the company's facility in the Maotai section of the Renhuai District in Zunyi, Guizhou Province. Close

Bottles of China Kweichow Moutai Distillery Co. baijiu liquor are displayed at the... Read More

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Photographer: Nelson Ching/Bloomberg

Bottles of China Kweichow Moutai Distillery Co. baijiu liquor are displayed at the company's facility in the Maotai section of the Renhuai District in Zunyi, Guizhou Province.

The test now is how committed Xi is to rooting out corruption once the new leadership is cemented at the National People’s Congress beginning next week.

“Whether it’s a short period as the new leaders are just on board and they’re trying to do something, or whether it’s an ongoing exercise, that will have different impacts,” said Sarah Xing, a Hong Kong-based analyst at Nomura International. “At this point in time, there are some uncertainties.”

Slow Recovery

Three of 17 analysts covering Moutai cut their 2013 profit outlook for the liquor maker in the past month, according to data compiled by Bloomberg.

Public criticism of ostentatious displays of wealth by officials typically peaks when the nation’s elite gather together for the annual congress in Beijing. Xi warned in November that resentment at graft and the enrichment of cadres and their families threatened the Party’s grip on power.

The role of Moutai and other liquor in seasonal banquets and gift-giving means distillers are unlikely to see a recovery until at least the mid-autumn festival in September, said Katharine Song, Fortune CLSA’s Shanghai-based analyst.

“Last Chinese New Year, the baijiu makers had a splendid sales season, Moutai bottles were selling for more than 2,000 yuan,” said Song, who estimates that Chinese officials account for about a third of high-end liquor consumption. Moutai suspended deliveries for March to encourage distributors to reduce inventory, she said. Prices are falling because “no one would dare to go out and throw lavish dinners and gatherings.”

Photographer: Nelson Ching/Bloomberg

Ceramic vessels age China Kweichow Moutai Distillery Co. baijiu liquor at the company's facility in the Maotai section of the Renhuai District in Zunyi, Guizhou Province, China. Close

Ceramic vessels age China Kweichow Moutai Distillery Co. baijiu liquor at the company's... Read More

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Photographer: Nelson Ching/Bloomberg

Ceramic vessels age China Kweichow Moutai Distillery Co. baijiu liquor at the company's facility in the Maotai section of the Renhuai District in Zunyi, Guizhou Province, China.

Booze Banquets

Cognac and Scotch may also be hurt by the crackdown, with Paris-listed Remy Cointreau SA (RCO) most exposed, said London-based Deutsche Bank analyst Jamie Isenwater.

“They will get caught in the crossfire of reduced entertainment and less gift-giving more generally,” Isenwater wrote in a note on Feb. 8, advising investors sell Remy and Pernod Ricard shares.

Booze-fueled banquets at which guests are expected to give the host cash-filled envelopes have become one of the biggest ways to earn money, the Party-owned Global Times newspaper reported in December.

Credit Suisse on Jan. 28 cut its rating on Moutai to neutral from outperform saying it expects a 25 percent drop in purchases from the government this year and a 40 percent slump in direct orders from the military.

Li Hong Fang, Kweichow Moutai’s spokeswoman did not answer two calls by Bloomberg News to her mobile phone.

Self Sacrifice

Moutai’s nearest rival Wuliangye Yibin Co. (000858) is down by 29 percent on the Shenzhen exchange since November. The Shenzhen bourse has gained about 10 percent in that time.

Moutai’s current fortunes mark a reversal for a drink that once embodied the revolutionary virtues of self sacrifice and privation. In Communist Party lore, the 106-proof liquor was used to clean the wounds of soldiers during the Long March, when Chairman Mao Zedong’s soldiers endured immense hardships as they fled over snow-clad mountains and through deadly marshes to evade Chiang Kai-shek’s Nationalist forces.

Acquired Taste

As China’s economy boomed following Deng Xiaoping’s market opening in the late 1980s, the fiery spirit -- with a taste reminiscent of distilled engine oil -- came to symbolize instead the growing wealth and power of the country’s elite. The Guizhou-based company’s market value soared from less than $1 billion a decade ago to peak at $41 billion last year.

At about $30 billion today, Moutai remains the third-most valuable distiller, behind London-based Diageo PLC (DGE) and Pernod Ricard (RI) SA in Paris.

Xi’s drive is being felt in other parts of consumer spending too.

Takings at high-end restaurants have fallen significantly since the government first encouraged austerity, the Ministry of Commerce said last week. Sales at luxury eateries in Beijing fell about 35 percent and 20 percent in Shanghai, it said, without giving exact dates. Demand for shark’s fin and pricey hampers of food plunged over the Chinese New Year season, the ministry said, attributing the drop to Xi’s policy.

Greater Scrutiny

Consumers also bought fewer watches costing more than HK$100,000 ($12,892) over the Feb. 10-Feb. 17 break, said Karson Choi, chairman of Hong Kong-based luxury watch retailer Halewinner Group, which runs more than 30 branches in the city, mainland China and Macau. Buyers switched to mid-priced timepieces such as Biel, Switzerland-based Swatch Group (UHR) AG’s Omega, Tissot, and Longines, he said.

While the government’s greater scrutiny of gift-giving will weigh on China’s luxury goods market for now, the longer term picture is clear: a rising share for private consumption, where sales are driven by personal choice and not the capacity of a gift to curry favor or win business and political allies.

“What’s currently causing the decline is gifting, which doesn’t give healthy growth and is not sustainable,” Xing said. “In the short run, we’ll definitely see a negative impact on the high-end, but in the long run, we’ll see consumers with more money who will be trading up to more branded products.”

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editors responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net; Ben Richardson at brichardson8@bloomberg.net

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