By Adam Jourdan
SHANGHAI (Reuters) - Nearly three-quarters of a century after it was hailed for helping China's Red Army survive the tortuous Long March, fiery grain liquor baijiu has fallen down the ranks, hit by a crackdown on luxury spending that has clouded its prospects.
For decades, famed baijiu makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd enjoyed fat profit margins that once dwarfed those of Apple Inc (NSQ:AAPL - News), helped by the Communist Party's penchant for a brew that fuelled many a business deal and smoothed over countless egos.
But at more than $300 a bottle, premium baijiu was also the perfect target for President Xi Jinping's campaign against extravagance as his administration tries to assuage public anger over corruption and restore faith in the party.
Last week, market leader Moutai reported its weakest first-half profit growth since 2001, and the company is set to post its slowest annual growth since it listed, according to data from Thomson Reuters SmartEstimates. Rival Wuliangye is also struggling: analysts forecast the distiller's 2013 profit growth will be the slowest since 2005.
Moutai declined to comment about its earnings or plans for the future, but a Wuliangye official, who declined to be named because he was not authorised to speak to the media, said the company was shifting its focus away from official and military channels and towards the wider consumer market.
Baijiu's fall from grace, however, means it now has to jostle for unfamiliar clients in China's $76 billion a year liquor market, where it has few devotees among the thirty-year-olds who drink most frequently and where imports such as plum liqueur from Japan's Choya Umeshu Co Ltd and Chivas Regal Scotch whisky from Pernod Ricard SA (PAR:RI.PA - News) are gaining popularity.
"Good baijiu is too expensive so I can't afford it, while bad baijiu is way too strong, and drinking it can actually harm your health," said Xu Chunhui, 26, a Shanghai-based construction engineer whose drink of choice is whisky.
Prices have also tumbled, boding ill for those historically fat margins. A bottle of premium Moutai that sold for 2,000 yuan just last year could be had on cut-price website JiuXian last week at nearly half the price.
"The way Moutai used to be drunk until last year was always very much through government network, VIP and military networks," said Waldemar Jap, a managing director at Boston Consulting Group who works with liquor makers in China.
"In the mass premium market the margin is much lower so you're not going to see the good old days of being able to sell just a few bottles," he added.
Kweichow Moutai's net margin hit 52.7 percent in the March quarter, more than four times greater than the drinks industry median of 11.9 percent, but analysts expect a full-year net margin of 49.9 percent, Thomson Reuters SmartEstimates data shows.
GRAPHIC: China baijiu kings dethroned http://link.reuters.com/kyp82v
Baijiu, which translates as white alcohol, is usually 40 to 60 percent proof and, depending on the palate, is often described as tasting more like paint stripper or vodka. It is usually distilled from sorghum, although wheat, barely, millet or glutinous rice are also used.
The liquor is believed to have originated from Sichuan in western China and has featured in important occasions for centuries. Zhou Enlai, the first premier of the People's Republic of China and a top aide of Mao Zedong, once said the fiery spirit was key to the success of the Long March, when soldiers from the Red Army, the precursor to the People's Liberation Army, fled the rival Kuomintang in 1934-35.
Before Xi came to power, the government and the military accounted for more than half of the sales of baijiu brands that cost more than 500 yuan a bottle, Jap said, with businesses accounting for a further 30-35 percent.
Because of its auspicious history, baijiu distillers have had little need to appeal to a wider client base, and now analysts say they may have left it too late.
"Baijiu is popular among mid- and elder-aged consumers, but the younger generations don't show strong interest," said Jessie Du, an analyst at consumer research firm Euromonitor.
And with more wealthy, elderly Chinese concerned about being caught splashing out on luxuries, more baijiu bottles are likely to remain on the shelf.
"For baijiu there is a new reality they need to adjust to," said Torsten Stocker, Hong Kong-based partner with consulting firm AT Kearney.
"With younger consumers adopting different drinking and entertainment habits, the underlying trend is that, in terms of market share, baijiu has nowhere to go but down."
(Additional reporting by Shanghai Newsroom; Editing by Miral Fahmy)
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