A paradox: Much of the world has not heard of baijiu, but most of the world’s most valuable spirits brands are baijius.
If this surprises you, you are not alone. “In the Western world when people are talking about baijiu, a lot of people come up with the feeling like, ‘strange and the taste is a bit disgusting’,” says Rose Hu, senior consultant at the Brand Finance research firm. “I can understand why people [think it’s] unbelievable when they see the top five brands all Chinese baijiu, while the beloved Johnnie Walker only manages to squeeze into the top ten.”
If you follow baijiu’s place in the world, you have probably heard of Brand Finance. Each year they publish the lists of the most valuable brands in various industries and sectors, including a list of the world’s most valuable spirits brands. For the past several years, baijiu brands have been creeping up the top-ten list, and last month a remarkable milestone was reached: Baijiu has swept the top-five spots.
Baijiu’s meteoric rise in the global spirits industry is hardly news, but it seems to defy trends. In the past year most of the world’s leading spirits brands lost value. All of the non-Chinese brands on Brand Finance’s list lost significant value, including a 40.6% doozy of a tumble by Johnnie Walker, the fifth-most-valuable brand in 2019. Meanwhile in China, the baijiu industry’s production volumes have cratered. In 2013 China produced an estimated 10.44 billion liters of baijiu (2.76B gallons), a number that had contracted to 7.4B liters (1.95B gal) in 2020.
So what does this mean, and how exactly does Brand Finance’s list arrive at its numbers? To find out, I (virtually) sat down with Rose Hu, who oversees Chinese brands for Brand Finance.
Inside the Methodology
The first and most obvious question raised by this list surrounds its methodology, namely how Brand Finance comes up with its figures. According to its website, three factors go into a brand valuation: brand strength index, brand royalty rate, and brand revenues. This is meaningless jargon to the lay person, but it reflects quantifiable data. A brand’s strength reflects a combination of its finances and public image, whereas its royalty rate is the estimated value its brand name would fetch in a sale, an especially important figure in the beverage industry. “With something like Coca-Cola, that brand name is probably more than half the value of the business,” notes Hu. It is a drinks company’s most valuable asset.
This brings us to a brand’s revenue. One may rightly question self-reported statistics from any brand, let alone brands in China’s market, so Brand Finance uses financial figures compiled by Bloomberg. “It’s their responsibility to check if this financial data meets all the standards they need,” Hu explains. “We’re not challenging them.” On top of this they supplement these figures with publicly available financial reports and, when possible, corroborate this data with third-party research.
Public perception is also key to understanding a brand’s value. Brand Finance acquired consumer information from third-parties in the early years, but has since started compiling its own data. “We can ask the questions we want and have the quality control,” Hu explains. “Also, a lot of the third parties don’t offer data in the frequency that we want.” For example, if they only gauge consumer familiarity and reputation with a brand based on reports published every several years, their figures may fail to reflect market conditions in real time.
Chinese Brands vs. Global Brands
There is also the question of comparing like to like. Most of the non-Chinese concerns on the Brand Finance list are part of large international conglomerates. Jack Daniel’s is part of Brown Forman. Smirnoff and Johnnie Walker are part of Diageo. Hennessy and Barcardi both have their own groups. Why compare Moutai to Johnnie Walker rather than to Diageo? Hu says this decision rests in a fundamental difference between how spirits companies operate in China and elsewhere.
In the West, a conglomerate will never act as a substitute for its individual brands. “Johnnie Walker will always be Johnnie Walker. There’s no way one day they decide to rebrand to Diageo,” she says. “So for those [international] brands, the key point for us to evaluate is to consider is how much revenue does Johnnie Walker contribute to the whole portfolio. What are their sales and how much in percentage they contribute to the whole group’s financial [performance].” So Brand Finance considers the value of the conglomerate first, and breaks that value down into its component brands.
In China the situation is reversed, according to Hu. “[Baijiu producers] only do master brands. Only a few of them have small sub-brands, but if they sell it in China, in most cases, they make it extremely clear that the sub-brand comes from the master brand.”
All Chinese sub-brands derive their value from a single flagship product. With Kweichow Moutai, sub-brands get their legitimacy from the Feitian (Flying Fairy) brand; with Luzhou Laojiao, it is the Guojiao 1573 brand. “Let’s say one day Moutai decided it will develop a new brand, totally different from Moutai,” says Hu. “Do you think they’re going to launch it as a separate brand, saying ‘this has nothing to do with Moutai, but we’ll still sell it for 1,000 yuan in China?’ Is anyone going to buy it? I don’t think so.”
This theory was convincingly demonstrated by Wuliangye, currently number two on Brand Finance’s list. In the past decade the Chinese distillery attempted to launch several mid-range products in the domestic market, but abruptly reversed course when it discovered that this tactic damaged the company’s overall brand value. “Looking at their customers, who are buying 1,000 Chinese yuan [approximately US$155] bottles of liquor, those are the consumers who care about the privilege of the brand. If one day they think this brand lost its value . . . then its core competence is dropped,” Hu says.
This master-brand strategy has enabled Chinese brands’ stranglehold on the top-ten list. Not only does a group like Diageo lag far behind Moutai in value, but the Chinese producer spends all its resources pumping up a single brand and the Western conglomerates distributes its resources to dozens of subsidiary brands. Put in these terms, it is hardly surprising that Moutai is almost fifteen times as valuable as the most valuable Western brand.
“In China drinking is not just leisure, it’s a business technology.”
One must also consider the cultural underpinnings of baijiu’s relative strength in the global market. “Culturally, in China drinking is not just leisure, it’s a business technology,” says Hu. “If you’re the big brother in this family, and you want to host a dinner to show you’re doing very well in my business—I’m hosting you to show my success—he will tend to use [premium] brands as endorsements of his success. So they carry more cultural value. Whereas here, in Western countries, most people are drinking for fun.” This societal function makes name brands much harder to dislodge in China.
To the Western consumer, value calculations are less obvious. The status conferred by a drink might come from its sale price, but it could just as easily come from fuzzy concepts of craftsmanship or coolness. The demand for a specific brand is more elastic when there are several competing notions of a drink’s “goodness.”
Yet in China, the value of a status drinks remains largely unchanged. Even in a global downturn in alcohol sales, baijiu sales figures continue to tick skyward. Yesterday’s prestige brands remain prestigious, and the societal pressures that encourage consumption remain encouraging.
What is true today, however, may not be true tomorrow.
In the short-term present trends should continue apace. Luzhou Laojiao could slide into the number three spot within a year. A number of other Chinese brands are creeping up in the top-50 list, largely by a combination appealing to the mid-range segment, like no. 5 Gujinggong, or by having a distinctive flavor profile, like no. 28 Jiuguijiu. The latter—progenitor of the fuyu (extra-strong) aroma category—saw its brand value rise almost 90% in the past year.
Meanwhile, a generational shakeup may be in play. “I think in five to ten years’ time the younger generation will have a larger market size. At that time what they like is probably going to change this ranking a lot,” says Hu. “Don’t forgot that China is a relatively young country, [so] the market is easier to change. Even in the last ten years you see baijiu brands dominate the whole market, but with the young generation we already start seeing the differences. They’re not buying the privileged brands . . . We might see a lot of new brands come on the list, like Jiangxiaobai, they’re growing. They’re a very successful story in China.”
China’s prestige baijiu brands and their astronomical price tags may not scare off successful middle-aged businesspeople, but they price themselves out of contention with younger consumers. Some of them are turning away from baijiu altogether, but those who still embrace the national spirit often prefer cheap to mid-range products. When this generation comes of age, there’s no guarantee they will decide to embrace the same brands that their parents championed.
At present, the top baijiu brands are so far ahead of their domestic and international competitors that their place at the top of Brand Finance’s list is all but assured for years to come. But unless the current market leaders diversify their portfolios to capture emerging segments, the Brand Finance list could be made up of entirely different drinks in a decade or two.
There are two key points I take away from my conversation with Rose Hu about Brand Finance. First, the world ignores Chinese brands at their own peril, and should be doing more to attract Chinese consumers in an ever-changing marketplace. Second, Chinese brands also ignore Chinese consumers at their own peril.
In the competition for hearts and minds and wallets, adaptability and understanding of market differences are everything. The future is anyone’s game.
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