I think if we drink enough Moutai we can solve anything,” Henry Kissinger remarked to Deng Xiaoping in 1974. Moutai is a version of baijiu, the white spirit classed as China’s national drink.
Baijiu’s fermentation process actually makes it a peculiarly provincial tipple with a finish that ranges from soy sauce to hint of pear. This diversity was part of the appeal for Legend Holdings when it took control of a batch of baijiu producers in 2012. Each makes a local version of the grain-based spirit, such as Hunan Wuling, the best known Moutai in Hunan and Hebei Qianlongzui, a local favourite distilled from sorghum and wheat.
Lenovo grouped them under a newly established unit named Funglian. Because customers from different provinces display such different tastes, the market is fragmented. The idea was to make the brands into bigger bestsellers in their home territories but then to take them national, benefiting from more professional management.
As we first reported in WiC129, the bet on baijiu was part of Legend’s plan to reduce its reliance on sales of personal computers and mobile phones by Lenovo, of which it is the controlling shareholder.
Legend cited Chinese cultural preferences for baijiu as backing for the plan to create its own booze conglomerate, as well as the custom for toasting with it at celebrations and business dinners.
But the foray into baijiu was poorly timed, coming just as sales of spirits started to suffer from Chinese President Xi Jinping’s campaign against banqueting on the public purse. It could have been worse: Funglian wasn’t selling the top-end baijiu preferred by profligate public servants. Other newcomers, including Diageo, were harder hit (see WiC252).
But the distiller seems to have missed out on the industry rebound which saw revenues rise as consumption shifted from official to individual use. According to Sina Finance, Funglian reported a loss of Rmb853 million ($123.7 million) in 2014, even though at that point Legend had invested more than Rmb1.6 billion in the unit. The loss was narrowed to Rmb73 million by 2015 and Funglian finally broke even last year with a net profit of Rmb15 million.
However, its performance still lags premium producers like Kweichow Moutai and Wuliangye Yibin, two of the sector’s best performers.
In fact, the Shanghai-listed Kweichow Moutai has just toppled Diageo as the world’s most valuable liquor firm (see WiC325 for coverage of the share price surge).
Critics initially took issue with Lu Tong, the dealmaker who brought the baijiu brands together. Lu soon left Funglian and China Wine News wasn’t impressed with his contribution, saying that that he was more bothered about self-promotion than making the business work.
Another gripe was that Legend should have purchased higher-end producers because it is the best brands which are benefiting most from the upswing in the market. Trading on the trend for ‘premiumisation’ among drinkers, companies like Kweichow Moutai have exploited their pricing power to grow profits at a time in which the costs of raw materials, labour and transportation have been increasing.
Chen Shaopeng, an executive with an illustrious career at Lenovo, took over as Funglian’s chairman, promising to transform the industry with “internet thinking”. Chen was richly experienced in the computing world yet he knew little about baijiu, says Huxiu, a financial news portal.
Funglian’s turnaround last year wasn’t enough to keep Legend interested and last month it agreed to sell its baijiu business to Laobaigan, another producer from Hebei, in a deal worth Rmb1.4 billion.
The new owner is also talking about a multi-brand offering that achieves national scale. At least Laobaigan has experience in the sector, ventures Time Weekly.
And in the meantime Legend has not given up on its “agriculture and food” business and it is looking further afield for opportunities. It has invested in the largest apple supplier in New Zealand and is buying into KB Food, an Australian seafood producer.
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