Wuliangye’s “Second-in-Command” Faces Challenges as Performance Growth Lags Behind the Average
Recently, at the 27th 12·18 Collaborative Development Conference held by Wuliangye, Chairman Zeng Qintou revealed that the rationalization of channel profits is the primary issue that needs to be addressed. Wuliangye is committed to vigorously promoting the improvement of channel profits.
In addition, Wuliangye will moderately adjust the ex-factory price and reduce the volume of the eighth generation Wuliangye. The industry’s opinions on Wuliangye’s strategy are mixed, and discussions arise regarding whether liquor enterprises in the new industry cycle should opt for “price reduction to increase sales” or “volume reduction to increase prices.”
Rowing against the current, one must forge ahead, or risk falling behind. In the author’s view, Wuliangye’s recent significant moves are responses to the industry’s intense volatility and downward trend. These changes are based on Wuliangye’s weak sales momentum, declining performance growth, and severe price inversion, aiming to build a more sustainable development momentum for the brand.
I. Controlling Inventory to Boost Prices and Revert to Brand Value
Regarding the price adjustment, Zeng Qintou stated at the conference that the company would optimize the products, channels, and market structure. The planned volume for the traditional channel of the eighth generation Wuliangye would be appropriately reduced and solidified, with the optimized volume directed towards special specifications of Wuliangye, cultural wines, direct sales channels, and the international market.
While the specific price adjustment range was not explicitly disclosed, considering Zeng Qintou’s emphasis on “reducing the volume of investment” and “accelerating the return of prices to brand value,” Wuliangye’s price adjustment this time falls into the category of price increases.
In fact, Wuliangye’s strategy of adjusting prices and reducing volume had been anticipated. Earlier reports from Wuliangye dealers in the Shanghai area revealed that the annual contracts for the eighth generation Wuliangye for 2024 had been signed, with each dealer seeing a 20% reduction in the contracted volume.
Internal sources from Wuliangye mentioned that the reason for the volume reduction is the scarcity of the eighth generation Wuliangye. The company plans to reduce the planned volume, and there will be other arrangements in the future. Guotai Junan also disclosed in its latest research report that Wuliangye’s recent 2024 dealer contracts focus on reducing volume to support prices, more conducive to controlling the price and quantity strategy in 2024.
According to Baidu Finance, controlling inventory is a common method for price increases in the Baijiu industry. To stabilize prices, liquor companies often choose to release limited edition or scarce products while reducing the volume, using the scarcity of products to enhance the brand’s pricing ability, promote the actual transaction price in the market, and boost channel profits.
It is worth mentioning that the liquor industry has faced high inventory levels this year, with slow sales. According to the “2023 Mid-term Research Report on China’s Baijiu Market,” many enterprises and distributors have not successfully digested last year’s accumulated inventory during the peak season of the Spring Festival. Therefore, inventory digestion has become the industry’s top priority, and controlling inventory and adjusting prices have become the main theme of liquor enterprise management.
Starting from November 1 this year, Guizhou Maotai (SH:600519) announced a 53% increase in the ex-factory price of Guizhou Maotai liquor (Feitian, Wuxing), with an average increase of about 20%. Subsequently, Luzhou Laojiao (SZ:000568), Yanghe Shares (SZ:002304), and other companies also announced price increases for some products.
Apart from the goal of reducing inventory, Wuliangye’s pricing strategy also aims to stimulate performance through price increases. After experiencing a surge in the market, Wuliangye’s performance growth has noticeably declined. The revenue and net profit growth rates for 2020 and 2021 were 14.37% and 14.67%, respectively, far below 2019’s 25.20% and 30.02%.
In 2022, Wuliangye achieved revenue of CNY 73.969 billion, a year-on-year increase of 11.72%, and a net profit attributable to shareholders of CNY 26.691 billion, a year-on-year increase of 14.17%. While still maintaining double-digit growth, its growth rate not only lags behind the “leader” in the liquor industry, Guizhou Maotai, but also falls behind Luzhou Laojiao, Shanxi Fenjiu (SH:600809), and Yanghe Shares.
In the first three quarters of 2023, Wuliangye’s revenue was CNY 62.554 billion, a year-on-year increase of 12.11%, and net profit attributable to shareholders was CNY 22.833 billion, a year-on-year increase of 14.24%. In the third quarter alone, the company achieved revenue of CNY 17.03 billion, a year-on-year increase of 16.99%, and net profit attributable to shareholders was CNY 5.796 billion, a year-on-year increase of 18.57%.
However, according to iFinD data from Tonghuashun, in the first three quarters of 2023, the total revenue of 20 A-share liquor companies was CNY 311.162 billion, a year-on-year increase of 15.91%, and the total net profit attributable to shareholders was CNY 118.98 billion, a year-on-year increase of 18.92%. Based on this calculation, Wuliangye’s revenue and net profit growth rates are both lower than the industry average.
“It’s not easy to be the leader, and it’s not easy to be the second in command. It’s even harder for the second in command who has been the leader before.” Former Chairman Li Shuguang once described Wuliangye’s awkward situation. Since being overtaken by Guizhou Maotai in 2013, the gap between Wuliangye and the former has continued to widen. Now, Wuliangye needs to be vigilant against other liquor enterprises catching up from behind.
II. Offering Incentives to Distributors and Emphasizing Channel Profits
Wuliangye’s previous price increases were mostly related to its confidence in channels and the reconstruction of its pricing system. A research report from Zhongtai Securities shows that between 2003 and 2007, Wuliangye was able to moderately increase prices by less than 10% while maintaining its leading position in ex-factory prices and channel profits, and this was well accepted by the channels.
However, in 2013, the baijiu industry entered a period of turbulent decline under the dual impact of frequent “plasticizer incidents” and the introduction of the “Three Public” consumption ban. Counter to the trend, Wuliangye quickly faced a situation where channel profits collapsed, product batch prices were inverted, and many distributors gave up their agency rights after raising the ex-factory price of the seventh generation Wuliangye from CNY 659 to CNY 729.
In addition to the impact of the overall market environment, the distribution model of Wuliangye at that time also had certain problems. Previously, Wuliangye mainly adopted a large distributor model. The multi-tiered distribution model helped save management costs, quickly helped Wuliangye establish channels, but at the same time, it gave large distributors pricing and dominant rights, making it difficult to control prices.
As Wuliangye grew, the model of “manufacturers connecting with large distributors, large distributors connecting with small distributors” became a constraint on reducing Wuliangye’s channel control. Under the impact of the “Three Public” ban, some large distributors pushed down their products, leading to chaotic prices and serious product price inversion.
With Li Shuguang assuming the position of chairman in 2017, Wuliangye entered the era of “second entrepreneurship.” In this stage, Wuliangye began to implement a control and profit-sharing (fuzzy rebate) model, concentrating on controlling the supply and value systems, and dominating the distribution of profits among producers, distributors, and terminals.
After implementing control and profit-sharing, Wuliangye’s several minor price increases during the industry’s recovery period brought gradual repair and transmission of batch prices and terminal transaction prices. However, the increase in batch prices and terminal prices was less than the increase in ex-factory prices, and the effect of price increases was not significant. The eighth generation Wuliangye, after a brief price increase in 2021, fell back to a low point of CNY 930.
As the baijiu industry transitions from an incremental market to a stock market, the drawbacks of control and profit-sharing are gradually becoming apparent. It is reported that under this model, distributors can only receive “fuzzy rebates” on December 18 each year. Once the pressure on sales increases and product supply exceeds demand, distributors whose channel profits are squeezed may easily fall into the trap of price inversion.
Taking the eighth generation Wuliangye as an example, the official suggested retail price is CNY 1,499 per bottle (500ml), targeting the specifications and price of Feitian Maotai. However, in Wuliangye’s official flagship store on Taobao, the actual selling price of the eighth generation Wuliangye is CNY 1,070 per bottle, and the price on the platform’s billion-dollar subsidy channel is even as low as CNY 858 per bottle.
To address the long-term price inversion issue of the eighth generation Wuliangye, Wuliangye emphasized at its shareholder meeting in May this year that it would strive to promote marketing organizational transformation and optimize channels. Wuliangye promised to handle the issue of price and volume, maintain a balance between price and volume, avoid long-term inversion, increase channel profits, and enable distributors to make money.
Analyzing Wuliangye’s new channel strategy, it is evident that the company has put effort into boosting channel profits and invigorating the enthusiasm of the distribution end. According to reports, to reasonably distribute distributor profits, Wuliangye will cancel the annual incentive starting from 2024 and instead allocate it quarterly.
Zeng Qintou mentioned at the conference that, in addition to regular performance assessment rewards, the company will provide eighth-generation Wuliangye distributors with an incentive of 2-3 percentage points. The incentive will be paid in stages based on distributor contract performance, market order, development of product sales, and market share, aiming to help distributors strengthen market construction and effectively respond to market changes.
III. Conclusion
According to Jiang Wenge, Vice Chairman and General Manager of Wuliangye, the marketing policy for 2024 will focus on enhancing the brand value of Wuliangye, continuously strengthening product quality, brand cultivation, and channel profits, better ensuring “channel efficiency, shareholder returns, employee income, government tax revenue, and corporate profits.”
Wuliangye’s series of measures undoubtedly respond to the current situation of declining consumption in the baijiu industry. These measures are proposed based on the overall framework of various interests on the enterprise side, the channel side, and the buying side, with the aim of maintaining the balance between product prices and cost control.
However, Wuliangye has not yet provided further interpretation of the quarterly rebate model for channel distributors, nor has it disclosed the specific amount and extent of the price adjustment and volume control. The impact of these measures on Wuliangye’s future remains to be measured and judged through practical results.