Industry Insights | The trend towards high-end industries is evident, with sauce-flavored liquor continuing to lead the liquor industry

Baijiu refers to distilled liquor made primarily from grains such as sorghum, using Daqu (large yeast), Xiaoqu (small yeast), or bran yeast, as well as mother liquor, as saccharifying and fermenting agents. It is produced through processes including steaming, saccharification, fermentation, distillation, aging, blending, etc. Baijiu is a unique type of liquor in China and is listed alongside brandy, whisky, vodka, rum, gin (also known as golden rum), tequila, and other spirits as one of the world's seven major distilled liquors. The aroma components of baijiu determine its style; the types of aroma components are basically the same among various baijius, but their contents vary greatly and affect the style quality and taste of baijiu, holding profound significance for its development.

In 2016, China's liquor production was 13.057 million kiloliters, while in 2021, it was 7.156 million kiloliters, a year-on-year decrease of 0.6%. The average annual compound growth rate over five years was about -11.3%.

Source: Frost & Sullivan

The upstream of the liquor industry chain mainly includes suppliers of raw grains and water for liquor production, various production equipment, and packaging and storage materials for base liquor. Sorghum, wheat, rice, millet, glutinous rice, corn, barley, etc., are the main raw materials for liquor; due to the large number of packaging and printing manufacturers in China, liquor production enterprises have a relatively large choice.

The midstream of the industrial chain mainly involves the brewing and production of various fragrant types of liquor. The brewing process of liquor mainly includes steps such as starch saccharification, koji making, raw material processing, alcohol fermentation, distillation for liquor extraction, aging and blending, and seasoning.

The downstream of the industrial chain mainly includes liquor distributors and liquor end consumers.

Currently, the liquor industry has formed a dual-channel distribution system that operates online and offline, with a trend towards flattening the distribution channels that allows manufacturers to be closer to the consumer needs at the terminal level.

Source: Frost & Sullivan

• average selling price

The liquor industry is affected by a combination of factors such as economic development, policy regulation, and inventory production. The average selling price of each round in the liquor industry is not caused by a single macroeconomic factor. In addition to the macroeconomy, it is also influenced by multiple factors such as industrial policies, industrial inventory cycles, and food safety incidents.

Since 2016, the sales prices of ultra-high-end and high-end liquor have been continuously rising. According to data released by the National Bureau of Statistics, the average selling price of ultra-high-end and high-end liquor in China's 36 major and medium-sized cities increased from 791.0 yuan per bottle in 2016 to 1,173.6 yuan per bottle in 2021, with an annual compound growth rate of about 9.1%.

Meanwhile, the price of mid- to low-end liquor has always maintained a stable fluctuation level. The average selling price of mid- to low-end liquor in 36 large and medium-sized cities slowly increased from 152.1 yuan per bottle in 2016 to 178.5 yuan per bottle in 2021, with an average annual compound growth rate of about 3.3%.

Source: National Bureau of Statistics, Frost & Sullivan

Source: Frost & Sullivan

The Chishui River Basin has created high-quality sauce-flavored liquor with its unique soil, water quality, climate, and microorganisms. Its production capacity accounts for about 85% of the national total, gathering a large number of famous and premium sauce-flavored liquors, making the Chishui River Basin a core sauce-producing area. In 2020, the production capacity of sauce-flavored liquor in the Chishui River Basin was about 500,000 tons, accounting for more than 85% of the national total. It is difficult to expand the production of sauce-flavored liquor, and the limited capacity has also increased the scarcity of this type of liquor.

In 2021, the national production capacity, sales revenue, and profits of sauce-flavored liquor accounted for approximately 8.4%, 31.5%, and 45.8% of the liquor industry, respectively. Compared with the data from 2020, which were 8%, 26%, and 39.7%, there has been a significant increase in the industry's share of sauce-flavored liquor sales revenue and profits. The reasons for this are as follows:Jiangjiu has fully enjoyed the dividend of fragrance type switching due to its outstanding quality, reputation, and brand advantages. The industry has rapidly expanded, leading the liquor industry and forming a large number of national enterprises with leading scale.

Source: Google Maps

The Chinese liquor market showed a downward trend from 2016 to 2018, mainly due to the combined effects of government penalties for political corruption and a continuous reduction in production.However, with the development of the 'online + offline' new retail model, as well as the increase in personal income and the expansion of the middle class, the sales model in the liquor market has undergone a transformation and improvement.

Benefiting from continuous innovation, the upgrading of brewing technology, and the increasing awareness of consumers about liquor consumption, China's liquor market is expected to continue expanding in the coming years. At the same time,The penetration rate of high-end and mid-range baijiu is continuously increasing, which will further drive the development of the Chinese baijiu market.

Since the classification of liquor flavors in 1979, strong-flavor liquor has always dominated Chinese liquor and is the most widely consumed type. In 2016, strong-flavor liquor accounted for half of the Chinese liquor market size. In recent years, with the rise of Guizhou Moutai, one of China's most well-known liquor brands, sauce-flavor liquor has gained increasing popularity.

In addition, the development of sauce-flavored liquor is largely driven by consumer cultivation, industrial construction, and capital investment, gradually making it the second most popular flavor type in the Chinese liquor market.The market scale of sauce-flavored liquor increased from less than 100 billion yuan in 2016 to about 177 billion yuan in 2021, with an average annual compound growth rate of about 12%.

1)With urban residents pursuing higher living standards and consumption concepts, their contribution to economic growth through consumption has experienced strong growth.The continuously growing middle class with strong purchasing power is also expected to drive the development of China's liquor market.

2)Baijiu is one of China's most traditional beverages, with a long historical heritage and cultural significance.Cultural and heritage attributes support liquor consumption and continue to drive the development of the Chinese liquor market.

3)Fixed asset investment has promoted commercial consumption, which in turn has driven the demand for baijiu.The total fixed asset investment of China's society increased from 434.364 billion yuan in 2016 to 5528.84 billion yuan in 2021, with an annual compound growth rate of about 4.9%. The continuous improvement in business consumption, the good market acceptance of baijiu, as well as its long-standing historical status and unique cultural heritage, often make baijiu a popular choice for business banquets.

1)With the continuous industrial adjustment of the Chinese liquor market, the liquor industry is concentrating towards famous liquor-producing regions and distinctive areas, such as the Chishui River region and the Yangtze River Yilu region. At the same time, liquor brands are concentrating towards famous liquor brands and strong regional brands.From 2019 to 2021, the market share of the top 10 liquor companies increased from 41.0% to 49.7%. In addition, sufficient cash flow has made it possible for leading liquor enterprises to expand production capacity and engage in mergers and acquisitions. It is expected that leading enterprises will gain a larger market share, and the market will become more concentrated in the future.

2)In recent years, liquor consumption has gradually shifted from basic consumption to personalized, diversified, and upgraded consumption.Coupled with people's pursuit of personal consciousness and healthy consumption, behaviors such as 'drink less but better' have gradually become new consumer concepts for customers. At the same time, factors such as accelerated economic construction, consumption upgrading, and the expansion of the middle class have effectively expanded the market capacity for high-end liquor. The market share of high-end baijiu has increased from 26.9% in 2019 to 35.5% in 2021.

3)Sauce-flavored baijiu has become a new driving force for the development of the baijiu industry and is gradually becoming the mainstream product.Due to the low content of volatile substances stored in baijiu, which has little irritation to the human body and is beneficial to health. Due to the unique geographical environment and brewing technology requirements, sauce-flavor baijiu has become a scarce resource, especially for many distributors of all sizes. With the continuous popularization of sauce-flavor baijiu, the market scale of sauce-flavor baijiu will continue to expand.

• Brand awareness

The competition in the Chinese liquor market is fierce, and the brand awareness of liquor production enterprises is crucial for establishing and maintaining long-term brand reputation. Brands are often the exclusive and core value of enterprises in the liquor industry. On the other hand, some liquor brands have gained consumer favor through long-term marketing and brand building, forming brand barriers. New entrants in the industry need a long time to establish their own brand characteristics before they can gain consumer recognition.

• financial institutions

For the liquor industry, substantial capital investment is necessary. This is mainly because liquor manufacturers require a large amount of capital for early procurement of raw materials and expensive equipment to produce liquor. In addition, they continuously improve production lines and enhance production technology to meet the ever-changing needs of the downstream market. A large amount of capital is crucial for liquor manufacturers to establish and maintain their leading market position. Therefore, it is difficult for new entrants without sufficient capital to enter the industry and compete with other companies.

• capacity

The construction of production capacity takes a long time. From the start of construction to the production of finished liquor, it takes 2-3 years for strong-flavor liquor, and even longer for sauce-flavor liquor. Stable and sufficient production capacity is crucial; the size of production capacity directly affects the number of products and market share of liquor companies. Therefore, new entrants in this industry need a long time to build their own production capacity and produce high-quality liquor that satisfies consumers.