Kweichow Moutai

The new spirit of austerity

Xi Jinping's crackdown on excess has put a lid on sales of Kweichow Moutai, once the high-end liquor for the party official with everything

PUBLISHED : Thursday, 28 February, 2013, 12:00am
UPDATED : Monday, 15 April, 2013, 2:00pm

Kong Guoqing hasn't seen a quieter Lunar New Year in the 12 years his family has been running their small liquor and tobacco shop in downtown Shanghai.

They didn't sell a single bottle of the high-end spirit made by Kweichow Moutai that has become synonymous with banquets and gift-giving during the national holiday. Kong blames the vanished sales on incoming president Xi Jinping's crackdown on extravagant spending by officials: Kweichow Moutai's sorghum spirit can fetch US$300 a bottle - about half the average monthly disposable income in the financial hub.

"Demand for the most expensive liquors and cigarettes this New Year seemed to have just dried up," said Kong, pointing to red boxes of cigarettes costing about US$10 a pack, or more than six times the price of regular brands. "People are afraid to accept gifts."

The austerity campaign helped push down prices on some high-end spirits by about 30 per cent over the holiday, the Ministry of Commerce said. Kweichow Moutai's shares have fallen 29 per cent since Xi announced the clampdown in November, the biggest drop of 996 companies on the Shanghai Composite Index.

The test now is how committed Xi is to rooting out corruption once the new leadership is cemented at the National People's Congress beginning next week.

"Whether it's a short period as the new leaders are just on board and they're trying to do something, or whether it's an ongoing exercise, that will have different impacts," said Sarah Xing, a Hong Kong-based analyst at Nomura International.

"At this point in time, there are some uncertainties."

Three of 17 analysts covering Kweichow Moutai cut their 2013 profit outlook for the liquor maker in the past month, according to data compiled by Bloomberg.

Public criticism of ostentatious displays of wealth by officials typically peaks when the nation's elite gather for the annual congress in Beijing.

Xi warned in November that resentment at graft and the enrichment of cadres and their families threatened the party's grip on power.

The role of mao-tai and other liquor in seasonal banquets and gift-giving meant distillers were unlikely to see a recovery until at least the mid-autumn festival in September, said Katharine Song, Fortune CLSA's Shanghai-based analyst.

"Last Chinese New Year, the baijiu makers had a splendid sales season, Moutai bottles were selling for more than 2,000 yuan (HK$2,465)," said Song, who estimates that mainland officials account for about a third of high-end liquor consumption.

Kweichow Moutai suspended deliveries for March to encourage distributors to reduce inventory, she said. Prices are falling because "no one would dare to go out and throw lavish dinners and gatherings".

Cognac and Scotch might also be hurt by the crackdown, with Paris-listed Remy Cointreau most exposed, said London-based Deutsche Bank analyst Jamie Isenwater.

"They will get caught in the crossfire of reduced entertainment and less gift-giving more generally," Isenwater wrote in a note earlier this month, advising investors sell Remy and Pernod Ricard shares.

Booze-fuelled banquets at which guests were expected to give the host cash-filled envelopes had become one of the biggest ways to earn money, the party-owned Global Times newspaper reported in December.

Credit Suisse cut its rating on Kweichow Moutai to neutral from outperform last month, saying it expected a 25 per cent drop in purchases from the government this year and a 40 per cent slump in direct orders from the military.

Li Hong-fang, Kweichow Moutai's spokeswoman, did not answer two calls by Bloomberg News to her mobile phone. The company's nearest rival, Wuliangye Yibin, is down by 29 per cent on the Shenzhen exchange since November. The Shenzhen bourse has gained about 10 per cent in that time.

Kweichow Moutai's fortunes mark a reversal for a drink that once embodied the revolutionary virtues of self sacrifice and privation.

In Communist Party lore, the 106-proof liquor was used to clean the wounds of soldiers during the Long March, when chairman Mao Zedong's soldiers endured immense hardships as they fled over snow-clad mountains and through deadly marshes to evade Chiang Kai-shek's Nationalist forces.

As the economy boomed following Deng Xiaoping's market opening in the late 1980s, the fiery spirit - with a taste reminiscent of distilled engine oil - came to symbolise instead the growing wealth and power of the country's elite. The Guizhou-based company's market value soared from less than US$1 billion a decade ago to peak at US$41 billion last year.

At about US$30 billion today, Kweichow Moutai remains the third-most valuable distiller, behind London-based Diageo and Pernod Ricard in Paris.

Xi's drive is being felt in other parts of consumer spending too.

Takings at high-end restaurants had fallen significantly since the government first encouraged austerity, the Ministry of Commerce said last week. Sales at luxury eateries in Beijing fell about 35 per cent and 20 per cent in Shanghai, it said, without giving exact dates. Demand for shark fin and pricey hampers of food plunged over the Lunar New Year season, the ministry said, attributing the drop to Xi's policy.