Chinese Liquor at the crossroads
The latest report from Kantar Worldpanel China indicates that the Baijiu (Chinese liquor) market experienced noticeable slowdown after a few years of double digit growth. As the macro economy in China turned soft and the government has escalated its anti-corruption campaign, the sector reported only 4.8% value growth, but virtually little volume increase in the last months, suggesting that price remains the main driver of the market.
Facing the challenges of other alcoholic beverage such as wine and foreign spirits, lack of innovation and restriction on public spending, the Chinese liquor market is at a crossroads. Over the last three years, category penetration dropped from 72.7% to 68.7%. Essentially, out of every 100 households, 4 have stopped buying the category. Average household consumption has also dropped from 7.3 liters to 7.1 liters. Chinese consumers today are more influenced by health and modern lifestyle, and at the same the post 80s/90s are becoming the major force of consumption. This poses serious challenges to a sector which enjoys rich cultural heritage. However, research from Kantar Worldpanel suggests that there are still opportunities to grow the category by uncovering the insights from consumer purchase.
Chinese Liquor Market under Moderate Upgrade
The average price of the Chinese liquor category has grown by approximately 5.5% in the past 12 months. As the category features clear price division, it is critical to study the movement by different price tiers within the category. The market share of low-end Chinese liquor was squeezed the most, with share dropping from 45.7% to 42.5% over the past two years, whereas the share of products priced between 100 and 400RMB/500ML enjoyed a noticeable growth. Yet products priced at the top of pyramid also suffered losses in share. In short, the category is entering a phase of moderate consumer upgrade, with the mid-tier price range winning more consumer purchases.
Alcoholic drinks and beverages are the most common categories for gifts in China. Kantar Worldpanel indicates that 50% of the category consumption comes from gifting. Hence it is critical to explore the market opportunities from both self-consumption and gifting. Self-consumption, products priced 101-200 RMB have shown the biggest increase of market share. By comparison, for the gifting market, the biggest share increase comes from products priced over 400 RMB (particularly those priced 600 RMB/500ML). This suggests that the opportunity for the premium segment still exists. The key to growth is to market specific premium products for gifting occasions.
Higher Market Concentration
With limited room for overall growth, the Chinese liquor market is increasingly characterized by intense competition amongst brands. The growth of premium products has been seriously dampened by the reduction of business entertainment. As a result, the profit margin has been squeezed continuously, and medium and small size brands face more brutal challenges. Kantar Worldpanel shows that the share of the top 10 brands enjoyed a steady increase, up from 43.9% to 46.4% within two years. The top 10 brands for gifting, compared with self-consumption, have an even higher market share, at 50.1%, though the growth is slower. For self-consumption market, the top 10 brands only take up 42.8% of the whole market, but their market shares grow faster. This suggests that as consumers are footing the bill for their own drinking with families and friends, they are more willing to buy quality products with strong brand equity. Hence for smaller brands who used to focus on distribution channels but less on brand building, they need to consider adjusting their product strategy and invest more on their relevance to ordinary consumers.
As mentioned above, for Chinese alcoholic beverages, the loss in growth is due to the decreasing penetration. However, against such background, the penetration of the top 10 brands has increased, which suggests that consumers have stronger brand awareness and have higher demand for quality products. Here is even better news for famous brand producers: non-gift giving products have a more marked penetration increase, demonstrating that more consumers are buying famous brands.
Summary of Opportunities
1. High income consumers
Chinese liquor market buyers are more biased towards lower income consumers instead of higher income consumers. However, they contribute more to the category sales, particularly to the gifting market. In general, those families are also critical to premium segments, both for self-consumption and gifting. Marketers have to understand the consumption habits, motivation and purchase occasion for those high income consumers when it comes to purchase of Chinese liquor to win this critical consumer segment.
2. Young families
Young families today are contributing more to the growth of the self-consumption market, while Chinese liquor has to compete with other alcoholic beverage such as wine, foreign sprits and other emerging drink categories. Brands are increasingly conscious of the value of younger consumers and have started to launch small pack size lines to appeal to them. The segment did show strong performance initially but failed to expand further due to lack of differentiation. Penetration for Baijiu below 200ml now stands at 14%. The key barrier to win younger families is to create unique product to meet the individual aspirations of the post 80s/90s. The recent success of Rio mixer can be an excellent case study to demonstrate how to engage the younger generation.
3. Old families
Old families remain the biggest group as gift recipients. To cater for health, nutrition and care needs of the elderly, brands should consider the launch of more functional products that deliver new benefits to those grey consumers with a clear marketing message to their children/families.
Chinese Liquor at the crossroads
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