Spotlight - V&S attracted by premium opportunities in baijiu market
V&S Group's move into the local Chinese spirits market via a joint venture with Sichuan company JianNanChun offers the Swedish company access to the growing premium sector of a massive spirits industry. Sam Mulligan examines the opportunities and challenges presented by the huge baijiu market which is proving such a tempting proposition to international companies.
The recent announcement that V&S Group is to enter the baijiu market in China via a joint venture with the Sichuan company JianNanChun (JNC) means that four major international companies have now invested in the staple domestic Chinese spirit sector.
V&S Group follows an example set by Diageo, LVMH and Camus, who have all joined the category in one form or another, and the Thai Beverage Group could become the fifth foreign entrant if its deal with Anhui Gujing in Anhui province goes through.
V&S's joint venture with JNC will sell and distribute existing JianNanChun premium baijiu brands, competing immediately and directly with other leading baijiu brands in the lucrative premium category. The joint venture itself will not be involved in production but will focus on the marketing and sales of its brands. This, therefore, combines V&S's skills and experience in the marketing and development of premium white spirits brands with JNC's know-how as a producer of premium baijiu.
The premium focus, the fact that the joint operation is targeted solely towards sales and marketing - rather than being involved in production - and JNC's location in Sichuan, considered to be the best region for producing high-quality baijiu, could all be seen as advantages to the V&S strategy.
"China is the biggest spirits market in the world," says Ketil Eriksen, president of V&S Absolut Spirits. "Recently, there has been a significant premiumisation of that market, with 80m cases sold at premium and super-premium levels. That's where we are focusing - we want to go in and take a slice of that pie, with a strong focus on the super-premium segment."
While there are over 3,000 baijiu producers in China, the best quality baijiu - a spirit distilled from a mash of sorghum, rice, unhusked barley and other local cereals - is generally thought to come from Sichuan province. The province is the home of three of the top four brands. This includes the market leader Wuliangye, JianNanChun, which is the second largest producer, and the fourth biggest producer called LuZhouLaoJiao.
The most famous baijiu brand internationally and the most premium of all the brands is MaoTai, which is not from Sichuan, however. Its fame and premium image developed because it was a strong favourite of the country's leaders after the communist revolution. The brand remains closely tied with government functions and state banquets today.
The baijiu category in China is an estimated 520m case market, making it the largest spirits category in the world. But it is in the premium sector where the prime attraction for foreign investors lies.
The biggest problem with the production process of baijiu is that the yield of premium grade spirit is very low for each batch produced. Therefore, if a company wants to produce and sell more premium Baijiu it will also produce more low-grade product, which is often sold at a loss or at break-even at best.
This means that the leading baijiu producers will have hundreds of different brands, some priced as low as US$0.50 while others will be priced as high as $200-plus. The average price off-premise for a 500ml bottle of premium grade baijiu from one of the leading Baijiu companies is US$38. By comparison, the average off-premise price of a 700ml bottle of Johnnie Walker Black label is US$18.
As personal wealth has grown in China, so has the demand for premium baijiu. This demand, combined with the relative shortage of premium grade spirit, has led to a dramatic rise in the price of premium baijiu and the domination of the premium segment by several of the large producers.
This domination of the lucrative premium segment by the top baijiu brands is driven primarily by consumers. When consumers are going to drink an expensive bottle of baijiu they will want it to come from one of the large, national companies, such as Wuliangye, Maotai, JianNanChun or LuZhouLaoJiao. They will also generally want a baijiu that comes from Sichuan province, with Maotai being the one exception. Smaller, regional brands do not have the same quality or premium credentials and so are not deemed suitable for special occasions.
Interestingly, just as can be seen in Scotch whisky or Cognac, heritage, provenance and history are the most important brand attributes that consumers look for. And these are the values that are promoted by the premium operators. For example, LuZhouLaoJiao markets a premium brand called 1573, a date which refers to the age of the fermentation pits used in its production.
Looking at the other international groups that have moved into the baijiu category, Diageo now holds just under 17% of Swellfun, a local Baijiu producer from Chengdu in Sichuan. Swellfun produces a premium brand called ShuiJinFang.
The LVMH deal saw the French company purchase a majority share of the Wenjun distillery. Wenjun went bankrupt several years ago and was taken over by JianNanChun and the Blue Sword Beer group. Under the management of JianNanChun and Blue Sword, the company recovered, before being sold on to LVMH.
To turn these brands into national players in the premium market to compete with the likes of Wuliangye, Mao-tai, JianNanChun or LuZhouLaoJiao will require significant investment. For example they will need to match the advertising investment of the major brands. In 2006, WuliangYe spent over $140m on advertising while JianNanChun spent close to US$70m.
In April, the Singapore-listed brewer and distiller Thai Beverage confirmed that it had tabled a bid for Anhui Gujing Group through its subsidiary International Beverage Holdings. The takeover is likely to cost ThaiBev in the region of US$130m. Anhui Gujing Group owns Anhui Gujing Distillery, a baijiu distiller located in the Anhui province.
The Anhui Gujing Group, which is listed on the Shenzhen Stock Exchange, also has interests in the hotel, real estate and finance sectors, but ThaiBev intends to sell off all but the distillery and liquor-related businesses to TCC International Limited. While ThaiBev has agreed the takeover, the deal is yet to be ratified by the provincial government.
Sam Mulligan is a director of Data Driven Marketing Asia (DDMA), a consultancy which specialises in alcohol research in China and Asia.
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