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Baijiu set to storm 2017 - Analysis 

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The world's two largest spirits companies (in profit terms) are both major players in China's baijiu category. While the past few years have proved challenging, 2017 is shaping up to be the year both Diageo and Kweichow Moutai catch a break.

Diageo will relaunch its Shui jing Fang baijiu brand in China this year

Diageo will relaunch its Shui jing Fang baijiu brand in China this year

Immediately following the Chinese government's 2012 anti-extravagance campaign, Kweichow Moutai's stock began to drop, finally bottoming out at the start of 2014. Meanwhile, the measures hit Diageo and its near-40% stake in baijiu producer Shuijingfang. In 2014, Diageo was forced to take a GBP264m (then-US$446m) write-down on the asset.  

Last year, however, things began to look up. In October, Diageo's Greater China and Asia president Sam Fischer told analysts the category "is now stable". He also said the baijiu category is expected to grow mid-single digits. 

"In the last reported period Shuijingfang was the fastest growing baijiu company in China and net sales were up strong double digits," he added.

As with Cognac, baijiu has needed to diversify to attract new consumers. Fischer described different growth rates across different segments. "I'm expecting the standard baijiu to be growing at about 3% into the medium term," he said in October. "We think that super-premium baijiu is going to grow at 4-5% - and the premium baijiu, which is a real sweet spot for at-home consumers."

Meanwhile, an article in this week's Financial Times hailed a rebounding Moutai the world's second-most-valuable spirits company in the world - after Diageo. According to the FT, Moutai's stock has been rising at a steady pace. "The company reported a 19% year-on-year rise in revenue in 2016, with net profit up more than 7%," the newspaper said.

The report follows a note from Bernstein last month, which said the profits gap between the two companies has been getting smaller. 

"We note that over the years, Moutai has slowly reduced the gap in total profits with Diageo, even during the severe decline in premium spirits consumption in China," said Bernstein. "Two years ago, the gap in profits between the top two players by profitability was more than US$1bn, whereas in 2015 the gap has shrunk to approximately $370m."

Not one to rest on its laurels, Diageo has big plans for 2017 with the relaunch of Shuijingfang's super premium core variant. Fischer said the move would "bring to life its quality and heritage".  

"We have a clear roadmap to continue to enhance our route to consumer using local city distributors," he added. "I have ambitious expectations for our baijiu brand and I expect it to continue to lead industry growth."

It looks like Cognac is not the only category to be enjoying a comeback in China. 


Sectors: Spirits

Companies: Diageo

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