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UPDATE 2-Baijiu liquor maker shows how to ride out China luxury crackdown
August 28, 2014 / 4:35 AM / in 3 years

UPDATE 2-Baijiu liquor maker shows how to ride out China luxury crackdown

* Kweichow Moutai H1 net profit down 0.25 pct

* First H1 profit drop ever for liquor maker

* Company set for weakest 2014, bounce in 2015 - analysts

* Investors help drive shares up 36 pct this year (Adds Moutai earnings, Pernod Ricard China sales)

By Adam Jourdan

SHANGHAI, Aug 28 (Reuters) - Chinese premium liquor maker Kweichow Moutai Co Ltd suffered its first ever drop in first-half profit, but investors are keeping faith with a company that is showing rival brands a way to survive Beijing’s crackdown on ostentatious spending.

Moutai said late on Thursday that net profit for the first half of the year edged down 0.25 percent to 7.23 billion yuan ($1.18 billion) from 7.25 billion yuan a year earlier.

The firm blamed the fall on oversupply in the sector combined with a complex and changing industry environment.

Its fiery baijiu liquor, which is distilled from sorghum grain and outsells vodka worldwide, was the tipple of choice for China’s elite, but Beijing banned it from official banquets in 2012. At over $300 a bottle, it was deemed too opulent for state functions.

Helping limit the damage to its business, Moutai has been cutting prices and its online sales and distribution deals have attracted a wider range of consumers, reducing its reliance on dwindling government spending.

Those moves have helped drive the company’s shares in Shanghai up 35 percent this year, even as the benchmark CSI300 Index remained flat. The results were released after the close of share trading in Shanghai on Thursday.

Moutai offers a potential lesson for premium product makers in China, from global No.1 luxury group LVMH Moet Hennessy Louis Vuitton SA to cognac maker Remy Cointreau SA , who have also seen their Chinese sales drop.

World No. 2 spirit maker Pernod Ricard SA said on Thursday that annual sales in China had fallen 23 percent.

“Like Moutai, I wouldn’t be surprised if other mass luxury brands look at new ways to move their products in China,” said Ben Cavender, principal at China Market Research Group.

“We’re at a stage now where brands are trying to hook in the next generation of consumers, who are very tech-savvy and are used to buying things online.”

Moutai narrowly avoided its weakest ever profit growth last year and profit for 2014 is expected to rise 5.4 percent, its slowest rate ever, according to 18 analyst polled by Reuters.

Its first-half revenues rose 1.4 percent to 14.3 billion yuan, also the slowest growth for the period on record.

Moutai’s main rival Wuliangye Yibin Co Ltd, which saw its first-half net profit fall 31 percent, is set to see profits shrink this year after recording its first annual fall in nearly a decade in 2013.

PRIME TARGET

Annual worldwide sales of baijiu are 1.3 billion gallons, greater than those of vodka, at 925 million and whisky in third place at 766 million, according to journal Drinks International.

To survive and thrive below the radar of officialdom, the former icon of opulence for China’s generals and the envy of rivals for its eye-watering profits has pushed more sales online, halved its prices and boosted tie-ups with discount sellers.

This has made the brand more affordable to the average buyer. The cost of Moutai’s core product, Feitian 53°, dropped from around 2,200 yuan (US$358) in 2012 to around 950 yuan now.

These moves were a major departure for a company once fined for illegally protecting its high prices. But the shift has convinced 17 of 19 analysts polled by Reuters to recommend the stock a “buy” or “strong buy”. None rated it a “sell”.

“The government crackdown on public spending targeted officials using public funds to treat guests. It doesn’t mean as an individual consumer I can’t still buy Moutai,” said a Zhejiang-based government official, who asked not to be named as he is not permitted to speak to the press.

Premium baijiu makers like Moutai face not only the challenge of surviving the anti-luxury drive, but still contend with consumers not entirely won over by the drink’s pungent taste and high alcohol level.

“Before Moutai was just too expensive. Now the price is okay, but I still won’t buy much,” said Zhang Hong, 47, a partner at a travel agency in the city of Wenzhou. “The truth is I just don’t like the taste.”

Bar owners like Simon Dang, co-founder of Capital Spirits in Beijing, are playing host to baijiu producers and distributors eager to learn how to target younger drinkers.

“It’s going to take some time to change the perception of baijiu, but we’re seeing that a relaxed bar setting is becoming a popular way to enjoy it,” he said. ($1 = 6.14 Chinese yuan) (Additional reporting by Shanghai newsroom; editing by Tom Pfeiffer)

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