Feature 7. Alcoholic Beverages

In the pursuit of elevating the positioning of Martell, I believe our primary consideration should be our target audience. What are the consumption preferences of our consumers? What level of products are they willing or hoping to purchase? Simultaneously, we aim to provide consumers with greater cost-effective value for their preferences, meaning that at this price point, we can deliver exceptional quality.

César Giron, President and CEO of Martell Mumm Perrier-Jouët (MMPJ), the prestige champagne and cognac business of Pernod Ricard

Overview 2023

China’s alcoholic industry entered a phase of adjustment in 2023. From January to October 2023, spirits and wine production have seen a narrowed decline, while beer production showed general growth momentum with a return to growth in October, according to the National Bureau of Statistics of China. Other statistics show that in the first three quarters of 2023, 20 listed baijiu enterprises generated a total revenue of ¥309.11 billion in the first three quarters of 2023, accounting for 81.97% of the total revenue of listed Chinese alcoholic companies during the same period. The profit of these 20 enterprises totaled ¥118.979 billion, accounting for 93.25% of the total profit. 6 leading baijiu enterprises, including Kweichow Moutai, Wuliangye, Luzhou Laojiao, Gujing Group, Yanghe Distillery, and Shanxi Fen Wine, achieved a total revenue of ¥260.727 billion, accounting for 84.34% of the total revenue of the 20 listed baijiu companies. The net profit of these six enterprises totaled ¥109.722 billion, accounting for 92.21% of the total net profit. Tsingtao Brewery’s financial report showed that in the first three quarters of 2023, its product sales grew 0.2% year over year to 7.294 million kiloliters, generating revenue of ¥30.978 billion, a year-on-year increase of 6.42%; the net profit attributable to shareholders of the listed company increased by 15.02% to ¥4.908 billion over the previous year. Chongqing Brewery and Beijing Yanjing Brewery ascended to the ten-billion-yuan-revenue club with revenues of ¥13.029 billion and ¥12.416 billion, respectively. Budweiser APAC’s revenue climbed 11.5% over the previous year to $5.563 billion in the first three quarters of 2023. The brand's ongoing premiumization strategy in China remains effective, with performance exceeding the pre-pandemic level. Heineken achieved revenue of €27.040 billion in the first three quarters of 2023, up 4.7% year-on-year, with net profit down 12.51% year-on-year caused by the impact of special actions such as withdrawing from Russia and selling its soft drinks maker Vrumona. Thanks to the continued growth of Heineken Original and Heineken Silver, the company’s third-quarter sales in China rose 40%. The wine industry is polarized on performance. Changyu achieved a revenue of ¥2.801 billion and a net profit of ¥425 million in the first three quarters of 2023, both of which saw a slight decrease over the previous year. Weilong Wines saw a narrowed decline rate to 14.05% in the third quarter. LVMH’s Wines & Spirits business group saw its organic revenue in the first three-quarters of 2023 drop by 7% year over year. Constellation Brands’ wine segment declined by 11.67% in net sales for the first quarter of fiscal 2024 compared to the previous year. French wine group Pernod Ricard’s financial results for fiscal 2023 (ended June 30) showed a 10% increase in net sales to €12.137 billion, with 17% growth in Asia and other regions. However, affected by macroeconomic uncertainties, Pernod Ricard's first-quarter report for the 2024 fiscal year (July 1, 2023 - September 30, 2023) reveals a net sales figure of €3.042 billion, marking a 2% year-on-year decline. Its performance in Asia and other regions remained consistent with the same period last year, while net sales in the Chinese market experienced an 8% year-on-year decrease. In contrast, although Treasury Wine Estates reported a 1.7% year-on-year decline in total revenue for the 2023 fiscal year (July 1, 2022 - June 30, 2023), its Penfolds series recorded robust growth—the Asian market contributed AUD 467.4 million to Penfolds’ revenue, up 14.8% from the previous year and accounting for more than half of its global revenue. In addition, *ST Mogao Winery, ST Tonhwa Winery, and Citic Guoan Wine achieved positive growth in the first three quarters of 2023, with increases of 91.09%, 15.24%, and 7.58%, respectively.

Challenge

• The intensification of concentration in the leading brands further squeezes the market space for medium/small and regional liquor enterprises. 

• As the main consumer demographic undergoes intergenerational shifts, connecting with the younger generation or female consumers becomes a pivotal consideration. 

• The adoption of fashion-forward strategies is gradually becoming a new industry consensus.

2023 marked a bittersweet year for the liquor industry. Despite the high-growth momentum among the leading brands, small and medium-sized as well as regional liquor enterprises were suffering from serious market saturation. The whole industry showed a polarized landscape. Of the distributors and retailers surveyed, 36% reported feeling more pressure to manage cash flow, 48% believed inventory pressures had increased, and 64% said the degree of “price inversion” had escalated, according to the 2023 Interim Report on Chinese Baijiu Market released by the China Alcoholic Drinks Association. The wine sector also faces a serious inventory backlog. As global wine production decreases, consumers prefer mid- and high-end wines. In addition, rising exchange rates and the intensifying price war have pressured low-priced brands. Meanwhile, the younger generation takes the lead in alcohol consumption, women become crucial customers for wine, and the demand for diverse flavors increases, coupled with the expansion of drinking scenarios from business gatherings to personal and social contexts. These new changes all demand a transformation in product and marketing strategies for wine brands. These shifts in wine consumer behavior pose shared challenges for other alcoholic beverage brands as well. With the industry entering an era of market saturation, beer is embracing a "quantity reduction, price increase" approach, high-end strategies are becoming a focal point for brand transformation, and the restructuring of product lineups is notably accelerating; baijiu and wine are also actively exploring pathways toward rejuvenation, upscale positioning, and diversification. According to Statista, China has the biggest revenue in the global spirits industry. The country’s spirits market revenue is predicted to reach around $165.9 billion in 2023, accounting for almost 30% of the total industry‘s revenue worldwide. Baijiu, however, dominates the Chinese spirits market, with Western spirits making up a very modest share. It is quite challenging for Western spirits to maintain constant growth in China.

Action

A period of adjustment implies continuous experimentation and exploration. Whether there is a new growth formula in the saturated liquor market remains unknown. However, engaging in effective communication with consumers, excelling in core product marketing, and opening up new perspectives have become crucial exploratory directions for many liquor enterprises. Penfolds, owned by Treasury Wine Estates, is leading the Asian market in 2023. In July 2023, Penfolds launched its One by Penfolds wine collection in Hong Kong, China, and announced NIGO, founder of the Japanese fashion label Human Made, as its first-ever creative partner, responsible for the design of the wine labels of its new product series. NIGO designed four stylish animal motifs featuring a panda, a rooster, a brown bear, and a crocodile, representing the four winemaking regions where One by Penfolds wines are sourced - China, France, the United States, and Australia, respectively. The campaign also unveiled a limited-edition collection of fashion pieces and peripherals that were co-branded by Human Made and Penfolds. World-renowned rapper Pusha T was invited to attend the launch party and reimagine the wine-tasting experience with NIGO. Penfolds has also collaborated with fashion bloggers on multi-platform marketing and participated in trendy music festivals to further deepen its ties with youth, trends, and fashion. Hashtags related to this campaign hit 12.48 million views on Weibo. Young generations who are willing to “pay for the design” also actively shared their Penfolds x NIGO unboxing moments and created a sensation on Xiaohongshu. The launch of One by Penfolds and its multi-source product lineup has boosted continuous sales in Asia, according to Treasury Wine Estates’ FY2023 report (July 1, 2022 - June 30, 2023). Building upon this momentum, Penfolds has opted for an effective approach in brand collaboration marketing, guided by culture and values and utilizing fashion as a method. This strategy has successfully brought Penfolds Bin 1 into the consumption scope of the younger demographic, as well as seamlessly integrated the brand into a broader cultural sphere, fostering diverse growth opportunities. Several beer brands are also exploring premiumization with fashion collaborations as a strategy. In 2019, Chinese leading beer brand Tsingtao Beer collaborated with the world-renowned fashion brand KARL LAGERFELD to launch the MUSE collection, which sold 10,000 cases on its Tmall debut, driving the brand’s sales surge of 212% that same day. As a sponsor of the 2022 Winter Olympics, the time-honored beer producer invited Carol Lim and Humberto Leon, former creative directors of KENZO, to design the Year of the Tiger limited-edition packs to cheer for the event. In 2023, Tsingtao Beer celebrated its 120th anniversary by launching the 1903 Four Seasons Evergreen Series in collaboration with Chinese fashion designer Angel Chen, reviewing the brand’s history from the lens of fashion and art and once again promoting its premiumization transformation. In 2023, baijiu maker Kweichow Moutai explored several ways of collaborating with Luckin Coffee and Mars-owned Dove. Its co-branded products including Moutai-infused ice cream and Moutai Latte went viral on the Internet, effectively boosting its sales and brand exposure. “The trends of rejuvenation and fashionalization are unstoppable, which requires Nongxiang (strong-aroma) Baijiu makers to actively explore and compete,” said Zhang Liandong, chairman of Yanghe Distillery. Despite the low share of Western spirits in the Chinese market, many Western brands are still active in boosting their presence in China by connecting with local cultures and creators. ABSOLUT.®, the largest spirits brand owned by Pernod Ricard Group, is committed to its “Born to Mix” idea and has long been relating to young cultures and markets through collaborations with creative partners, which include ANDY WARHOL, sacai, and G-SHOCK. In 2023, the brand teamed up with British artist and designer Dr. Samuel Ross to launch a limited-edition bottle to further reach out to young Chinese consumers with a focus on Chinese culture. Martell, which drove Pernod Ricardo China’s overall growth of 6% in fiscal 2023, has also joined hands with Chinese designer Angel Chen in recent years. In 2023, the French cognac house continued its localization roadmap in China through the collaboration with Dunhuang Inspiration, as well as the appointment of Eddie Peng as the spokesperson for its Martell Noblige and Tony Leung as the spokesperson for Martell Cordon Bleu.

GROWTH in 2024

In addition to experiment and exploration, the adjustment period also means that challenges always go hand in hand with opportunities: 

• Marketing innovation anchored in brand construction and value propositions.

• Drive brand rejuvenation, fashion-forward transformations, and diversification through cross-industry collaborations. 

• Consumers’ cultural perception precedes brand awareness, and the areas with a weaker consciousness of values may present opportunities for value creation and incremental growth.

And more

Nowadays, consumers’ perception of and empathy for diverse cultures have preceded the wake of brand awareness. In a complex, ever-changing marketplace where top players are getting the lion’s share and e-commerce platforms are saturated with low-price competition, there is no doubt that small and medium-sized as well as regional liquor enterprises are having a hard time surviving. However, due to the differences in "brand" and the representation of "culture" among liquor enterprises, coupled with the continuous segmentation of consumer demands, many unoccupied value niches are emerging. In the future, as liquor enterprises continue to strengthen their product and channel capabilities, it becomes crucial to enhance the soft power of brand and culture. Leveraging soft power to drive the brand's transformation toward youthfulness and diversity presents itself as a growth path worthy of consideration. The brand collaborations and cross-industry partnerships actively pursued by leading brands are indeed effective strategies, yet the key for other liquor enterprises lies in choosing suitable collaboration partners and ensuring the precision of communications and connections, which is also an aspect that every brand should pay attention to. The success of Moutai x Luckin is almost impossible to replicate, plus Moutai has changed from a consumer good to a luxury liquor with investable attributes, raising these worth-thinking questions: Can cross-industry collaborations only serve as a “bonus point”, or are they also capable of providing substantial support in times of need? Admittedly, each alcohol company has different categories, origins, tastes, supply chains, manufacturing technologies, history and cultures, audiences, consumption scenarios, price ranges, sales systems, and brand powers. However, for a long time, the liquor industry, often perceived as a sector where "product" and "distribution channels" reign supreme, has tended to overlook the critical significance of brand development in enhancing sales and profits. Simultaneously, the profound "cultural" forces embodied in the regions, communities, and ethnicities behind each type of alcohol have yet to receive the attention they deserve from every liquor enterprise.