The $400B+ Liquor Company You Probably Don't Know

During a visit to Hong Kong a few years ago, our host handed me a small shot glass of room temperature clear liquor with a robust ganbei (which in Mandarin literally translates into “dry glass”), and my first reaction was to the fumes that entered my nostrils!? That was my first introduction to this company’s fiery product and its omnipresence in the Chinese market.

Its sole product is liquor with a unique 53% alcohol mix (for comparison beer is around 4-7%, vodka ~40%) and a taste that some describe as, “a rough vodka with flavour of soy sauce”.? Auction house Sotheby’s described it at a recent auction as, “...mellow, delicate and leaves a lingering fragrance in the mouth” [1] (Numbers in square brackets refer to footnotes below).?

A limited edition 1980 bottle of this liquor sold at Sotheby’s earlier this year for approx. HK$250,000 (~$44,000).

Just like only whisky produced in Scotland can be labelled “Scotch Whisky” and sparkling wine produced only in the Champagne area of France can be labelled as “Champagne”, this liquor also requires a specific “terroir”, to give the spirit what the French call, “go?t de terroir” or the characteristic taste and flavour imparted to a liquor by the environment in which it is produced.?

The area of production experiences mild winters and hot summers, with low wind and rainfall. The hot and humid climate is conducive to the habitation and proliferation of micronutrients necessary for liquor fermentation. In addition, the excellent water quality of the local river, abundant in trace elements, shapes the fragrant essence.

A 500ml distinctive red-white ceramic bottle of this company’s Feitian (Flying Fairy) liquor can retail for almost $400 - compared to $40-45 for a 12-year old Macallan single malt Scotch Whisky of similar size. It has been acknowledged as the most valuable alcohol brand in the world.

Its revenue has grown 14% CAGR over past five years while EBITDA has increased at 14% CAGR.? This company boasts an EBITDA margin of >80% in an industry where the norm is <15%!

This is the story of Kweichow Moutai’s transformation from a rural liquor in a remote Chinese province to a global brand with a current $400 billion market capitalisation.??

Stellar financial performance

It is China’s largest non-technology company and one of the Top-50 companies in the world by capitalisation.

Meteoric valuation

It is also currently the largest alcoholic beverage company in the world by market capitalisation with the nearest competitor, Anheuser Busch, (brands include Budweiser, Corona) half its size at about $175 billion and Diageo (brands include Johnnie Walker, Smirnoff, Guinness) at $55 billion.

Chinese market regulatory authorities have been wary of the company’s lofty valuation in the past. In 2017, state media called out the firm after its shares more than doubled in just 11 months, urging investors to take a “rational view” of the company and not engage in “short-sighted speculation".? That stabilized the stock momentarily, though it continued to be a favorite pick among analysts, and has resumed its upward path helped by the pandemic which spurred domestic consumption and its valuation peaked at $0.5 trillion during 2021 [2].

Importance of Terrior

One of the aspects of its popularity is the tight control on where Moutai is brewed. Known in China as a type of baiju (白酒, or white liquor in Mandarin) it is only made from red sorghum (a cereal whose grain is firm and plump enabling it to withstand the multiple rounds of cooking)? known locally as hongyingzi [3] and grown around the Chishui river in the town of Maotai (茅台镇) of China’s land-locked South Western Guizhou province - an area of approx. 15 square kilometers.? This province was a relative backwater compared to its neighbouring prosperous Sichuan province, and that deterred initially the widespread popularity of its alcohol.

Moutai liquor goes through a year-long process involving nine cycles of steaming, eight cycles of fermentation and seven cycles of drawing. The resulting baijiu is then stored for three to four years to allow the distilled spirit to mature before blending. It is then blended by experienced blenders according to technical standards.

Kweichow Moutai (the name is Romanization of Guizhou Maotai, names of the Province and the town) is not the only producer of Moutai in the town, nor does it own exclusive rights to the name.

The Legendary Status

In China, the Moutai brand has almost legendary status.? It was part of the Chinese folklore around the 1934-36 Long March [4] led by later Chairman, Mao Tse-Tung, that soldiers washed their feet in Moutai to heal their sores during the 9,700 Kilometer (6,000 Mile) journey - though the Communist Party of China refuted that rumour in 2002.

When President Nixon arrived in China to open relations with it in 1972, the toast was Moutai.? At a 1974 banquet, US Secretary of State Henry Kissinger is famously quoted as saying, “I think if we drink enough Moutai, we can solve anything.[5]

Origins

Moutai as a liquor has been recorded as produced on banks of the Chishui river around 1BC.? The current distilleries have their origin in a 1860s attempt to resurrect the production of this baiju by a few merchants after the destruction of the previous distilleries during the 14-year Taiping Rebellion, a civil war between two kingdoms in China that began in 1850.? Two distilleries, Chengyi and Ronghe, were set up.

The vital break came in two ways - the designation of Moutai as a “tribute liquor” to be presented at the court of one of China’s last emperors between 1915-16 and its being awarded a medal at the 1915 Panama-Pacific Exposition in San Francisco.? This led to its popularity amongst the affluent in China as a way to demonstrate prestige.? To handle demand a third distillery, Hengxing, was set up in 1929.

Moutai was designated as a superior liquor in 1951, soon after the establishment of the Republic of China in 1949.

Subsequent to China becoming a republic in 1949 and the nationalization of all businesses, in the early 1950s, the local government merged Chengyi, Ronghe and Hengxing distilleries to establish the state-run Guizhou Moutai Distillery.? The company was incorporated in 1999 and went public in 2001 and it remains partially state-owned.??

In 2013, the Chinese government designated that only liquor produced in a specific 15.03 sq. km geographic area in Maotai town could use the brand thus solidifying its status.

All of this has led to hoarding of the liquor given its short production run annually. The company was so frustrated by hoarding of its liquor that in desperation it collaborated with the American retailer, Costco, when it launched its first store in Shanghai, the company offered 10,000 bottles at 2/3rd of its retail price, which were sold out in two days. It has also launched a direct-to-consumer channel to prevent blackmarketing of its products.

Elements of its success

Here are some of the elements of its success:

• Robust domestic brand recognition: >95% of its sales are in China where it has a strong brand presence as a premium liquor and due to its origins story.? Doing shots with Moutai is part of the business culture in China and accelerates building trust and friendships.
• Robust political support: as the spirit of choice at major international official functions and in gift-giving evidenced by the 1951 designation as a national superior liquor?
• Growth of China’s affluent and middle class: Post-1970s, as China became more industrialised and the factory of the world, its affluent and middle class population grew phenomenally which spurred the consumption of alcohol
• Repositioning of the customer segments: During the early 2010s, the company underwent a transformation from focusing on the business banquets and gift-giving market to mass retail and thus expanded its distribution network
• Focus on specific customer segment: the company focuses its marketing on the 40-60 year old Chinese male singularly and that has led to its popularity.? It is not that famous with Generations that follow and that is a gap.
• Good distribution: The company owns almost 900 stores in China in every province providing it with easy access to its customers. ? The company controls almost 60% of the Chinese baiju market.
• Limited production: Due to its intensive manufacturing process and limited amount of terroir, it cannot increase production dramatically and this enhances its scarcity appeal to consumers.
• Pricing power: the company increased the prices of its flagship products by 20% in mid-2023 leveraging its strong brand.
• Rapid International expansion: while the company has expanded to over 100 countries globally in terms of distribution and exports 200 tons of liquor annually, according to its distributors the clients in those countries are predominantly of Chinese origin, again leveraging its strong branding.? To facilitate the expansion, the provincial government purpose-built a new airport at Maotai.

Looking ahead

A number of variables are likely to impact the company going forward:

• China’s population is aging, which initially may mean ongoing demand for its products as its customers age, but eventually will impact sales
• Environmental factors are impacting the Chishui river upstream and pollution has increased thus impacting the company’s ability to keep its quality
• New generations of consumers: It has not targeted the new and upcoming Generations of consumers that could switch to other Chinese or even foreign brands
• New card game displacing binge drinking: Growth of a new card game, guandan (which translates as “egg tossing” or “bomb tossing”) that is replacing drinking at business and could curtail demand for baiju
• Economic slowdown, particularly in the property sector, in China is likely to reduce demand for its products
• The crackdown on corruption in China in recent years has meant that Moutai is no longer the liquor that is gifted during official function
• Retail shareholder base: Finally, >90% of the company’s non-provincial shareholders are individuals who are likely also strong consumers of its products and are likely the spirit behind the stock price thus introducing a potential irrational exuberance

(This article is for informational purposes only, and is not investment advice).

Additional reading:

Baijiu: The Essential Guide to Chinese Spirits, Derek Sandhaus, Penguin China. 2014

Notes:

1. Li, Rico. “What Makes Moutai The Leading Liquor of China?”, Sotheby's, March 2024
2. "Who shaved $250bn from Kweichow Moutai’s market value?", The Economist, June 2024?
3. “Moutai’s Rise to the Top: A Blend of Tradition and Modernity”, Wall Street Journal, October 2024
4. Wei, Song. “Did Red Army soldiers wash feet with Moutai liquor?”, China Daily, August 2016
5. “Memorandum of Conversation”, Office of the Historian, US Government, April 1974