China’s liquor capital drowning in overproduction
February 7, 2014 Leave a comment
China’s liquor capital drowning in overproduction
Staff Reporter
2014-02-04
China’s “capital of liquor” is facing its coldest winter as a considerable number of small and medium producers of Chinese liquor or baijiu are being forced to close shop, reports the Guangzhou-based Southern Metropolis Daily.
Some 30% to 50% of local Chinese liquor producers have closed in Renhuai in south China’s Guizhou province. Many of them are not expected to resume operations after the current downturn.
The Chinese liquor sector has seen sales plummet following the country’s slowed economic growth and the government’s austerity measures against extravagant spending of public funds, the report said.
Industry expert Wan Xinggui stated that small and medium producers are facing a challenging environment that threatens their survival because of a flawed business model. “Most producers in the town of Moutai rely on the earnings they generate from the sale of base liquor — used as an ingredient in Chinese liquor — for future production. But no one is buying base liquor, so these producers are now experiencing strained liquidity,” Wan explained. The situation is only aggravated by their poor marketing skills and lack of efforts in building their own brand, he added.
The end of the golden decade of Chinese liquor, the newspaper pointed out, also led to the emergence of problems in the sector despite local government efforts to consolidate the industry. Although only 328 companies are licensed to produce Chinese liquor, it is estimated that there are actually over 1,400 businesses, including home workshop-styled operations in Renhuai, the newspaper said.
The government in Renhuai had announced plans to consolidate the sector in 2006 and 2010, and further proposed that a business group be set up under Renhuai-based market leader Kweichow Moutai in 2012.
The company has not made any moves, despite the provincial government’s plan, with one Kweichow Moutai official stating that the company has to consider the business aspect of the proposal in order to acquire other producers.
Renhuai has further come up with another plan of forming a company to integrate local producers and promote their products under one single brand, which became operational in March 2013.
A research report by Orient Securities forecast that the Chinese liquor sector would see sales decline to a new low in 2014, with factory prices and gross profit margins expected to drop further. Given such a poor outlook, industry expert Bai Yufeng noted that the government should help support pillar companies, but leave the market to decide the fate of small and medium producers.
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