China: China’s top brewer diversifying into baijiu white liquor

China's top brewer is diversifying as beer sales shrink in China. It is homing in on the baijiu white liquor market, which it sees as having huge growth potential, the Nikkei Asia reported.

In October, China Resources Beer (Holdings), known for its Snow brand, announced that a unit of the company had agreed to buy a 55.19% stake in Chinese colorless liquor maker Guizhou Jinsha Jiaojiu Winery Industry to bolster its nonbeer assets. It will buy the stake for some 12.3 billion yuan ($1.75 billion) as it looks to become a diversified and dominant maker of alcoholic beverages.

According to a report on the details of the investment published recently by CR Beer, the leading brewer views Jinsha Jiaojiu Winery as a company with a "solid financial record in recent years." Jinsha Jiaojiu Winery has developed a "high-quality brand image" in the 70 plus years since its foundation, the document says. Jinsha Jiaojiu Winery had sales of 2 billion yuan in the first half of 2022, up 15% from a year earlier, posting a net profit of 670 million yuan, an increase of 12%, according to the report.

CR Beer's purchase of Jinsha Jiaojiu Winery, a midsize player in the market, is a calculated move.

China's baijiu market is active, with large distillers generating tens of billions of yuan in sales. State-owned Kweichow Moutai, based in the central city of Renhuai, is the top producer of baijiu. The traditional Chinese spirit typically made from sorghum, wheat and barley, racks up over 100 billion yuan in sales annually.

Baijiu is classified into several different types according to the ingredients and production methods used, as well as the aroma profile. Jinsha Jiaojiu Winery, like Kweichow Moutai, specializes in the Jiangxiang sauce-aroma type of baijiu, known for its distinct, lingering fragrance, which is said to resemble soy sauce.

Baijiu sales in China reached around 603 billion yuan in 2021, with the Jiangxiang type accounting for 190 billion yuan, or 32% of the total, according to Boston Consulting Group.

Sales of this type of white liquor grew at a brisk average annual clip of 17% during the 2015 to 2021 period. CR Beer is betting that turning out more Jiangxiang baijiu to meet growing demand will translate to higher long-term profits.

Under the detailed acquisition plan unveiled by CR Beer, a group company, China Resources Wine Holdings, will provide a 1.03 billion yuan capital increase to Jinsha Jiaojiu, taking a 4.61% stake in the baijiu maker, and then buy another 50.58% stake for 11.27 billion yuan from Jinsha Jiaojiu's existing shareholders to raise its total interest in the company to 55.19%.

The purchase must be approved by the Chinese regulator, the Assets Supervision and Administration Commission of the State Council. CR Beer has not said when the acquisition will be completed.

CR Beer has also stressed the investment will generate synergies. Under its diversification strategy, the company hopes to take advantage of its management know-how, brand power and domestic sales network, built through its years in the beer business, to raise its profile in the baijiu market.

This is not the CR group's first foray into the market. In October 2021, the company entered the business by buying a 40% stake in Shandong Jingzhi Baijiu, another baijiu distiller. The beer giant also acquired a 49% stake in Anhui Golden Seed Winery through a unit in June 2022. A sales representative for Shandong Jingzhi points out that the two companies' businesses are complementary because in China beer sales are strong in summer while white liquor sells well in winter.

CR Beer says it will keep looking for partners among white liquor makers. This strategy reflects the brewer's ambition to widen its array of offerings. It may continue gobbling up other companies.

CR Beer's diversification drive comes in response to a structural change in the Chinese beer market. Beer sales in the country rose 34% in value terms between 2015 and 2021, but sales fell 7% by volume, according to Euromonitor International, a British market research specialist. Demand for middle-market and high-end beer products grew, but sales volume was hit by market fragmentation as Chinese drinkers developed a taste for wine and other types of alcoholic beverages.

In response to these trends, CR Beer is working to increase its sales and production of medium- and high-grade products. It is expanding capacity to make such products through Dutch brewer Heineken's Chinese business, which it purchased in 2019.

At the same time, CR Beer has been shrinking its capacity in low-price products by shutting down plants it acquired in past purchases. The number of beer breweries it owns has fallen 30% in the five years to the end of last June. It has also reduced its workforce by 60%.

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