SHANGHAI China's largest makers of popular, fiery "baijiu" liquor are bracing for a slowdown this year after nearly a decade of heady growth as a crackdown on lavish official spending starts to hit home.
Analysts say the clampdown will force baijiu producers to offer cheaper brands and buy up less-glitzy local players to get around the government ban.
Despite healthy financial results for 2012, this year will be tougher, especially for industry leader Kweichow Moutai Co Ltd, whose prestige brand and high prices put it directly in the line of fire for official anti-luxury campaigns.
"Moutai is going to get hit harder because it's become the 'Ferrari' of alcohol. It's the brand that everyone is sort of scared to buy," said Shaun Rein, the Shanghai-based managing director of China Market Research Group.
Baijiu, a potent white liquor that outsells vodka worldwide, is prized in China at official banquets and as a gift to sweeten business ties. Sales and bottom lines have surged with China's luxury boom of recent years.
But since the middle of last year, the government has announced a number of policies to rein in official spending on luxury goods, including baijiu, which typically costs around $250 per bottle for premium brands, but can fetch into the thousands of dollars.
"The baijiu sector faces pressure unlike any it has seen before," the board of Kweichow Moutai said in its 2012 financial report released last week.
As a price comparison, luxury whisky The Dalmore, a bottle of which once auctioned for $190,400, ranges in price from around $58 to $230 on the Scottish distiller's website.
Shares in top baijiu makers have tumbled since the crackdown began. Moutai is down 38 percent and rival Wuliangye Yibin Co Ltd has lost 44 percent since July last year.
BEATING THE BAN
Sales prices have also come under scrutiny. In February, Kweichow Moutai was fined 449 million yuan ($72 million) for violating pricing rules, opening the door for distributors to set lower retail prices.
High price tags are important in the luxury baijiu industry because they are a mark of prestige and the bottles are traditionally given to authority figures as a sign of respect.
Since then prices have fallen. The official Xinhua news agency reported that the price of a popular Moutai brand had dropped for three straight months, falling from 1,300 yuan per bottle in January to 800 yuan at the end of March.
This could further dampen growth as rising prices had been a main driver of rapid growth in 2012, said Huatai Securities analyst Hong Ting in a research note following the results.
Anti-luxury measures have also hit volume sales, and there are signs this is starting to put pressure on producers as well as distributors. Kweichow Moutai's 2012 results showed accounts receivable at end-December, while still a tiny $3 million, had surged to eight times their level at the start of the year, suggesting some distributors are struggling with unsold booze.
Industry analysts and consultants say that while the pain will be felt industry-wide, less high-end players will be better able to dodge the effects of official scrutiny in the year ahead.
Moutai's revenue growth is forecast at 25 percent in 2013, down nearly 19 percentage points from its 2012 growth, according to Thomson Reuters StarMine smart estimates, which give more weight to top-rated analysts. Wuliangye's revenue growth is also expected at 25 percent, although that would be a more modest drop of 9 percentage points.
"Firms who have more of a local or regional footprint and guys who focus more on the mid-price range, maybe they can escape it," says Torsten Stocker, head of Greater China consumer practice at Monitor Deloitte.
Analysts and consultants said the bigger baijiu makers may move to buy up local players, package their product in smaller bottles and roll out cheaper brands to get around the crackdown.
But they are unlikely to sustain the resilience of last year, when Kweichow Moutai's net profit jumped 52 percent to 13.3 billion yuan.
Wuliangye posted a profit of 9.9 billion yuan, up 61 percent against the year before, improving on its growth rate for 2011.
As often occurs with China's official campaigns against corruption and excess, however, market commentators say companies and consumers will find ways to skirt around the ban, cushioning the impact on those caught in the crosshairs.
"Actually this year the real estate companies have told us they're spending more on the hard alcohol sales, and we've found when we've interviewed distributors, that a lot of the officials are going underground with their purchases," said Rein.
"They're finding ways around the crackdown at the local level and it's very difficult to turn off the switch overnight."
($1 = 6.2080 Chinese yuan)
(Editing by Edmund Klamann)