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Text | Digital Reading of Business

In the first half of this year, the output of Moutai base liquor was 39,100 tons. This is the first year-on-year decrease since 2018.

The price reduction storm at the terminal of Moutai liquor that started in April did not cause any trouble to Moutai in terms of performance, but Moutai has quietly responded.

The growth rate of performance may slow down, but the faith in Moutai must never collapse.

Ignore the storm

If you only look at the performance, it is hard to imagine that Moutai experienced a turmoil in the first half of the year.

In April, the terminal bulk price of Feitian Moutai began to fall, falling below 2,600 yuan per bottle. Since late May, the bulk price of Feitian has taken a sharp turn downward again, and has fallen all the way to the recent 2,200 yuan mark.

Along with the decline in terminal prices, Moutai's stock price also began to shrink significantly, falling from around 1,700 yuan in early May to 1,361 yuan, creating a new low since November 2022. Combined with the total share capital, this wave of decline has shrunk Moutai's market value by 400 billion yuan.

But looking at the performance, Moutai does not seem to be affected by this storm.

In the first half of the year, Moutai achieved operating income of 81.931 billion yuan, a year-on-year increase of 17.76%; looking at the second quarter alone, Moutai also achieved a revenue growth rate of 16.95%. There is no doubt that this is another record-breaking semi-annual report. Moutai has achieved double-digit year-on-year revenue growth for 11 consecutive quarters.

As the largest wine company, Moutai's revenue growth rate is also second to none. Among the top wine companies such as "Moutai, Wuliangye, Yanghe, Luzhou Laojiao and Fenjiu", Moutai's growth rate is not much different from that of Luzhou Laojiao and Fenjiu, but its scale is more than 4 times that of the latter two. With a large scale and high growth rate, no wine company can shake Moutai's position.

As the industry leader, Moutai's strong profitability is also enduring, with a gross profit margin of 91.76% and a net profit margin of 52.70%. In the first half of the year, Moutai achieved a net profit attributable to shareholders of listed companies of 41.696 billion yuan, a year-on-year increase of 15.88%. To this end, Moutai has formulated a cash dividend return plan for 2024-2026. In the next three years, the total amount of cash dividends distributed each year will not be less than 75% of the net profit attributable to the parent company in that year.

Since the only controlling shareholder of Moutai is the Guizhou State-owned Assets Supervision and Administration Commission and there is no individual major shareholder, this dividend can be seen as a return to many small and medium shareholders, sending a positive signal.

In fact, despite the fierce storm, Moutai's appeal to distributors has not diminished. At the end of the first half of the year, Moutai's prepayments (contract liabilities and other current liabilities) were 11.233 billion yuan, up 36.3% from the end of the first half of last year and 5.29% from the end of the first quarter of this year. This means that Moutai's voice in the industry chain is still strong enough, and distributors are willing to pay in advance to buy goods from Moutai.

Moutai's basic foundation remains very solid.

The loosening of the empire

Moutai has always been telling the story of the overall leap in sales of its series of wines, with Moutai as the core. Moutai is mainly Feitian and non-standard, and its series of wines are mainly Prince, Lai Mao, 1935, etc. In this story, Moutai is the basic plate.

The vast majority of Moutai liquor is not directly sold to consumers, but has a four-level price system: ex-factory price, guide price, wholesale price, and retail price. The ex-factory price is the price sold to first-level distributors, and usually requires matching, that is, Moutai and series wines are packaged. The ex-factory price of 53-degree 500ml Feitian is about 1,169 yuan, and the actual cost may be higher than this price. The guide price is the well-known 1,499 yuan; the wholesale price is the price that distributors sell to e-commerce and offline stores; the retail price is the price that ordinary consumers buy. In addition, there are scalpers who resell the difference in various ways in the second-hand market.

For a long time, Moutai's production capacity was limited and the demand was insufficient. The older the year, the more valuable it is. Due to this scarcity, the public generally recognizes the brand premium of Moutai and regards it as an important tool for high-end banquets, collections, and gifts. After a long period of development, Moutai has financial attributes, and the profit margin from the ex-factory price to the retail price is getting bigger and bigger.

In the period of booming consumer market, this financial attribute is a powerful weapon for Moutai, which makes money almost without doing anything. But it also objectively leads to the situation that Moutai is only hoarded but not consumed, and is flooded with high-quality imitations.

In the past few years, Moutai has carried out drastic reforms. Since 2020, Moutai Group has begun to cultivate a direct sales system. The contribution of direct sales to revenue has increased sharply, from 19% in the first half of 2020 to 44% in the first half of 2023. The selling price of direct sales channels is the retail price rather than the ex-factory price, and the direct sales channels are mainly non-standard wines with higher unit prices, which has greatly increased Moutai's revenue and profit levels.

At the same time, in order to strengthen brand awareness, Moutai tried to increase its appeal to young consumer groups and made a series of attempts to attract young consumers. Moutai ice cream, Luckin Coffee, and chocolate with liquor filling, etc., have aroused widespread response.

However, these two reforms have not only benefits. The direct sales system has broken the original balance. More consumers have flocked to Moutai's direct sales platform to buy Moutai at a price lower than the previous retail price. In addition to destroying the original price system, Moutai also faces price fluctuations at the terminal. At the same time, the attempt to link brands has broken the high-end and mysterious feeling of Moutai. As a result, consumers who have tasted the new products are no longer curious about Moutai, which is a kind of damage to the Moutai brand.

Weak consumption has become another negative factor. As companies generally control costs, business scenarios have recovered slowly, and group purchases by small and medium-sized enterprises and private enterprises have yet to recover. For consumers, it is becoming increasingly difficult to spend thousands of yuan to buy such consumables. This has changed the supply and demand of Moutai, which in turn has challenged the financial attributes of Moutai.

At the end of July this year, UBS Securities downgraded the ratings of Kweichow Moutai, Wuliangye, Luzhou Laojiao and Yanghe Shares from buy to neutral. UBS Securities said that since leading liquor companies have not actively controlled supply and expanded production capacity, the retail prices of ultra-high-end liquor companies are expected to face greater pressure in 2024-2025. If the industry leaders fail to control supply, the pessimistic scenario shows that by the end of 2025, the wholesale prices of Moutai and Wuliangye may fall by 50% and 17% from the current level, and will stabilize in 2026.

If the price continues to fall, it seems that it has only broken the financial attributes of Moutai, but in fact, the financial attributes are related to brand influence and are also linked to the Moutai series of wine product lines to a certain extent. Losing the financial attributes may lead to the loosening of the Moutai empire.

Reduce production and support dealers

In the semi-annual report, several details revealed Moutai’s response measures.

The number of Moutai distributors has increased. As of the end of the first half of the year, the number of Moutai domestic distributors was 2,097, an increase of 17 from the beginning of the period. This is the first time that Moutai has increased the number of distributors since 2021. It is also the highest number of distributors since 2020.

In the first half of the year, Moutai's distribution contribution to revenue was 48 billion yuan, accounting for 58% of total revenue, an increase of 5 percentage points year-on-year. At the same time, the revenue contribution from direct sales decreased by 4 percentage points.

On April 29 this year, Moutai changed its leader, and 51-year-old Zhang Deqin became the new chairman. At that time, some commentators believed that this might be because Zhang Deqin had the ability to mobilize old Moutai employees and Moutai liquor distributors. After taking office, Zhang Deqin made it clear at the distributor symposium that distributors are Moutai’s family, an important support for Moutai’s growth... and an indispensable key force for Moutai. In the future, Moutai will continue to respect and care for distributors.

The semi-annual report cannot determine Moutai’s long-term development direction for the time being, but this series of signs at least shows that Moutai is trying to appease distributors and tilt policies towards distributors.

At the same time, the output of Moutai base liquor decreased year-on-year. In the first half of the year, the output of Moutai base liquor was 39,100 tons, a year-on-year decrease of 5,500 tons, and the output of series liquor was 22,700 tons, a year-on-year decrease of 1,300 tons.

During this year's Guizhou Moutai shareholders' meeting, Zhang Deqin publicly stated that when output, efficiency, and speed conflict with quality, the first three must be subordinate to quality, and "Moutai can only have a future if it improves quality."

This may be an important sign that Moutai is changing its strategy of increasing production and instead controlling output.

These two approaches actually lead to the story that Moutai tells the market. Continue to stabilize the price system on the distributor side to ensure the stability of Moutai prices. At the same time, further consolidate the scarcity of Moutai by controlling production. When Moutai can maintain the situation of supply exceeding demand in the market and the price stabilizes, Moutai will be able to maintain the basic market and cross the cycle of fluctuations. In the short term, Moutai's growth may enter a slowdown phase as the adjustment deepens. But in the long run, only by stabilizing this basic market can Moutai stand at the top of the liquor market for a long time.

In the "Brand Finance 2024 Global Most Valuable Wine Brands List Report" released by Brand Finance of the United Kingdom, Kweichow Moutai topped the BF Global Spirits Brand Value List for the ninth time with a brand value of US$50.1 billion. There is no doubt that Moutai is still a unique existence among wine companies.

According to historical experience, Moutai will smoothly go through the cycle. However, this time the price fluctuation and consumption downturn are very different from those in the past few decades. It may be a shock, or it may be a complete disruption and reshuffle of the brand. After decades, Moutai's story may face real challenges.

References:

1. Moutai maintains the price of liquor, but why can't it maintain the stock price? , Source: 36Kr

2. "The price of each bottle of Moutai has dropped by 300 yuan, which is something I have never seen since I started selling." Source: e Company