Losses hang over top liquor firms in tough Q1

Workers check bottled liquor at Shui Jing Fang Group in Chengdu, Sichuan province. The group saw a loss of 85 million yuan ($13.7 million)in the first three months of 2014 and is forecast to report a loss for the full year. XINHUA

Slumping economy, austerity drive both help dry up revenue

China's leading liquor producers continue to feel the effects of the ongoing austerity and anti-corruption campaigns, according to reports showing that first-quarter revenues and profits were hard-hit.

Baijiu maker Shui Jing Fang Group, acquired in 2006 by London-based Diageo, saw a loss of 85 million yuan ($13.7 million) in the first three months of 2014 and is forecast to report a net loss this year.

Its first-quarter results showed the liquor maker's revenue reaching 74 million yuan, down 77 percent from the same period in the prior year. Its 85 million yuan net profit reflected a 175 percent drop.

Last year, the company's revenue fell by 70 percent to 486 million yuan, and it reported a net loss of 154 million yuan.

Last year was the first loss Shui Jing Fang posted since being acquired by Diageo, a British multinational that sells spirits including Johnnie Walker Scotch whisky and Smirnoff vodka.

Medium- and high-end products make up about 90 percent of its portfolio. Its new low-end products, which entered the market only in the latter part of last year, saw declining revenue of 31.89 percent. The liquor maker has set a sales target of 335 million yuan in 2014, down 30 percent from 2013.

As for Wuliangye Group, another top baijiu brand, its first-quarter financial results showed net profits down by 27.8 percent to 2.61 billion yuan and revenue of 6.71 billion yuan, down 22.5 percent, the first decline of the first quarter since 2003.

Jiugui Liquor Co Ltd recorded revenue of 81.3 million yuan, down 58.94 percent. Its net profits declined 83.92 percent to 1.62 million yuan. Kweichow Moutai Co Ltd, the flagship brand in the industry, saw slight growth at 2.96 percent in terms of net profits, but it still was its lowest growth in net profits in the first quarter since going public in 2001.

Overall liquor industry revenue has fallen since the latter part of 2012, when the government initiated a national campaign to curb extravagant spending on gifting and banqueting among officials.

Profits last year at 2,535 major distillers totaled 106.2 billion yuan, up only 0.17 percent year-on-year. Ten percent of them lost money, according to the China Alcoholic Drinks Association.

There will be more effects from the government's corruption crackdown and austerity drive, said Ben Cavender, senior analyst for the China Market Research Group. It has become increasingly harder for Chinese liquor producers to compete as middle-class consumers experiment with new products, including wine and foreign spirits.

In addition, demand from corporate and government officials may not come back quickly, Cavender said. Liquor producers in China will have to try much harder in marketing, packaging and distribution to catch up with their previous sales.

Liang Mingxuan, an alcohol analyst with CIConsulting, said slow sales of high-end products and supply-demand imbalance for medium-end liquor have squeezed profits even thinner.

None of the top Chinese liquor makers will be able to escape the impact of the austerity drive; instead, they will have to adapt quickly, said Liang. Consumers of high-end liquor will primarily be individuals and business groups. Liquor producers will have to become more market-driven with branding, pricing and marketing. The medium ranges will be the mainstream of the industry, he said.