Over the past decade, the per capita consumption expenditure of Chinese residents has doubled, which has determined the weak cyclical nature of the baijiu industry and also determined that the average consumption price per customer and the average consumption volume will eventually stabilize and recover. The competition at the top of the pyramid for mid-to-high-end baijiu is relatively healthy, and it is difficult to be pessimistic in the long term.
It is important to note that the "baijiu industry" referred to in this article does not include low-end baijiu. The competition in the baijiu industry is a misaligned competition divided by price bands, and understanding this is crucial to understanding the baijiu industry. We can regard mid-to-high-end baijiu and low-end baijiu as different sub-industries, with completely different growth logics. Low-end baijiu has a single scenario and is difficult to break through upwards, so it has to downplay the brand and pursue sales volume and share.
At present, the thousand-yuan price band is firmly occupied by Feitian Moutai, Wuliangye P5, and Guojiao 1537, and there are no more than 10 single products with a scale of 500 million yuan in the second high-end and mid-range. This article regards the eight top baijiu enterprises listed earlier in the A-share market, including Moutai, Wuliangye, Luzhou Laojiao, Fenjiu, Yanghe, Gujing Gong, Shede, and Shuijingfang, as representatives of mid-to-high-end baijiu. Their total output in 2023 accounts for less than 15% of the national baijiu output. The purpose of this article is to find the growth logic of such baijiu enterprises.
The first level: profit source
If we regard these eight top baijiu enterprises as a virtual group, the revenue of this enterprise group increased by 282.78% from 2013 to 2023. Let's break it down: the sales volume increased from 748,052 tons to 873,647 tons, a slight increase of 16.79%; the average price increased from 59 yuan per bottle to 193 yuan, a significant increase of 227.75%.
Looking at net profit, the net profit of the virtual group increased by 343.39% over ten years, higher than the revenue increase. The reason is very simple, the net profit margin increased from 35.22% to 40.80%.
Therefore, from the perspective of micro enterprises, the growth of baijiu enterprise performance is contributed by three parts: sales volume, average price, and net profit margin.
The natural growth of sales volume is self-evident and is a common feature of all consumer goods. As the per capita disposable income of residents increases year by year, consumer brands will seek to go from local to nationalization and even internationalization. The penetration rate of baijiu is increasing, and the market share of famous and excellent baijiu is also increasing. Most baijiu enterprises benefit from the growth of sales volume, such as Moutai with a growth of 191.02%, Shuijingfang with a growth of 155.38%, and Fenjiu with a growth of 487.80%.
Price increase is the first logic. Looking at a few billion-yuan brands in life, such as Nongfu Spring, Telunsu, and Wang Laoji, it is not difficult to understand that price increase is a difficult thing. Even strong brands like Coca-Cola have to follow a low-price strategy for a long time. The representatives of baijiu brands that have successfully broken through in recent years, such as Fenjiu, Gujing Gong, and Jinshiyuan, all won by creating high-end and indirectly increasing prices. The reasons why baijiu dares to increase prices and can increase prices will be discussed later.
Many investors simply attribute the increase in net profit margin to price increases. In fact, there are two factors driving the increase in net profit margin: one is the increase in gross profit margin, and the other is the decrease in the ratio of period expenses to revenue. The gross profit margin of the virtual group increased from 75.61% in 2013 to 83.68% in 2023, while the ratio of management expenses, sales expenses, and financial expenses to revenue, that is, the period expense ratio, decreased from 18.45% to 13.10%.The second level: Industry supply and demand
The following question is, what is the driving force behind the simultaneous increase in sales volume, average price, and net profit margin of high-end and mid-to-high-end baijiu enterprises?
From the demand side, the demand scale for high-end and mid-to-high-end baijiu is equal to the total population multiplied by the penetration rate multiplied by the average consumption price per customer multiplied by the average consumption quantity per customer. Among them, the factors affecting sales volume are the total population, penetration rate, and average consumption quantity per customer, while the factors affecting the average price and net profit margin are the average consumption price per customer.
In different stages of economic development, the driving force behind the growth of baijiu industry demand varies. For example, in the 20 years after the reform and opening up, it was generally a story of total population and penetration rate. In the first 20 years of the 21st century, it mainly relied on the dual increase in average consumption price per customer and average consumption quantity per customer brought about by consumption upgrading.
Looking at the supply side, structural contradictions are prominent, and it is necessary to view the baijiu industry from the perspective of price bands. The higher the price band, the fewer competitors there are. The higher the enterprise, the more it conforms to the logic of this article. Baijiu companies continuously launch new products and upgrade to squeeze into the next higher price band, achieving the goal of raising the average price and net profit margin. When a company announces a price increase, other competitors will fall into a dilemma of "follow or not follow". In terms of sales volume, in recent years, only a few products such as 1935 and Xi Jiu Junpin have truly squeezed into the price band above the sub-high-end.
The more top brands have resilience. The process of high-end, sub-high-end, and mid-range brands exploring downwards is similar to trampling, and the brand will inevitably be more crowded in the next price band. Investors need to focus on observing: is the overall price band migrating upwards or downwards? Is a certain price band being squeezed by products from the upper and lower levels? Does a certain product occupy a strong position in a certain price band? Are there any new products entering this price band?
In order to achieve growth targets, compete for market share, and seize channel resources, baijiu companies have a strong motivation to expand production, and baijiu sales naturally rise with the increase in demand. However, high-end and mid-to-high-end baijiu is difficult to truly overflow, because there are two important characteristics on the supply side:
First, the adjustment of quantity has the characteristics of elasticity rather than rigidity. On the one hand, baijiu companies can control sales when the industry is facing headwinds, reduce supply, achieve a new balance between supply and demand, and thus achieve the goal of supporting prices. Therefore, it is common in the baijiu industry to see the special state of "production and sales volume
Second, the adjustment of the ex-factory price has the characteristics of being easy to rise and difficult to fall. Competition is the archenemy of profit, but during the non-boom cycle of the industry, baijiu companies will not easily take the initiative to reduce prices and dump, because once they fall into a lower price band, it means accepting more intense market competition. Not only is it questionable whether price reduction can be exchanged for market share, but once the brand image is damaged, it is difficult to reverse. In the choice between "protecting quantity" and "protecting price", baijiu companies will only choose the latter. If the ex-factory price is observed to be reduced, it should alert investors.
The supply clearance in other industries is often fierce price competition, but baijiu industry companies know the importance of brand first and usually stick to high-end ex-factory prices, control quantities, subsidize, and adjust wholesale prices through dealers to try to stabilize retail prices. When investors judge the position of the cycle, in addition to observing the market retail price, they can also observe whether the leading baijiu has started to control goods. Once the most resilient leading baijiu also starts to control goods, it means that a new round of channel inventory reduction cycle has been confirmed, and the industry is bottoming out.The Third Level: Fundamental Drivers
First, let's examine the supply side. Why is the supply structure of high-end baijiu stable? Why can it frequently raise prices directly or indirectly, while other consumer goods find it difficult? The answer still lies in the brand pyramid.
A brand represents the premium that consumers are willing to pay for a product. The culture of drinking at the table is a vivid reflection of Chinese social interactions and traditional etiquette, and baijiu is often closely linked to personal identity. When choosing alcohol, they are strongly influenced by a herd mentality, preferring to choose well-recognized brand-name baijiu, while the actual characteristics such as taste and quality are relatively secondary.
The baijiu industry is the most brand-friendly track, where brand power constitutes the main driver of supply-side adjustments in baijiu. The closer a famous liquor is to the top of the pyramid, the weaker its substitutability, the easier its price is to rise and hard to fall, and the more flexible its quantity adjustments are. The subtext of "price increase is the first logic" is "brand is the first logic."
Now, let's look at the demand side. Behind penetration rate, average customer spending per unit, and average customer consumption volume, the core driving force is the consumption power of residents, and behind consumption power is the combined effect of wealth effect and income effect.
Generally speaking, the main factors affecting residents' consumption include residents' income, consumption willingness, and the wealth effect brought about by fluctuations in asset prices. The rise in real estate asset prices over the past few decades, combined with the stable growth of enterprise and resident income, has brought about rapid growth in consumption and baijiu consumption.
In summary, the supply structure of the baijiu industry is determined by brand power, and the growth on the demand side is determined by consumption power, which is backed by the growth of residents' income and wealth. The brand is the internal driver, and consumption power is the external driver. Among the three elements affecting residents' consumption, the growth of residents' income is the decisive factor. However, over the past 10 years, the per capita consumption expenditure of Chinese residents has doubled, which determines the weak cyclical nature of the baijiu industry and also determines that the average customer spending per unit and the average customer consumption volume will eventually stabilize and recover. The competition for high-end baijiu at the top of the pyramid is relatively benign, and it is hard to be pessimistic in the long run. As for whether young people still drink baijiu, the author believes that this change in social customs is a quite long-term and slow process, and it is temporarily not considered in the research framework.