Wang Lianbo, chief financial officer of Zhenjiu Lidu, speaks at a CFO salon recently. (PROVIDED TO CHINA DAILY)

Having witnessed ups and downs, China’s baijiu sector is developing towards a healthier business model this year, said a financial executive from a well-known baijiu maker. 

Speaking at a CFO salon recently, Wang Lianbo, chief financial officer of Zhenjiu Lidu (ZJLD), shared his insights on the development and emerging trends in this industry amid various challenges.

“In the baijiu industry, digital transformation may not be the best, but it is certainly among the top,” Wang said. 

In 2022, when many companies in the baijiu industry experienced negative revenue growth, ZJLD maintained a growth of 15 percent, thanks to the excellent channel inventory management capability empowered by data.

He emphasized the importance of understanding customer needs for success in the baijiu industry. He also underscored the importance of accurately capturing critical customer information beyond surface-level data to encompass deep-seated desires, tastes, and consumption habits.

Wang highlighted the significant trend of “Rising of Sauce Aroma”, which has been gradually gaining prominence since the early 2000s as Moutai started to gain popularity. In his view, this isn’t merely a change in flavor preferences but a sustainable shift underpinned by intrinsic logic. 

He illustrated how premium brands like Moutai strategically aligned their growth with the country’s overall consumption upgrade by nurturing the high-end market segment. This trend is propelling the growth of the high-end market as a driving force behind the industry’s scalable growth.

In contrast to light-aroma baijiu, the production of sauce-aroma baijiu is more intricate and capital-intensive. It involves prolonged aging, substantial infrastructure investments, and the utilization of cash flow for inventory. To some extent, this hindered the early-stage expansion of sauce-aroma baijiu enterprises. Still, top-tier sauce-aroma baijiu companies, began experiencing significant growth in 2020, thanks to their ongoing expansion of production capacity and Moutai’s ability to attract high-end consumers.

Wang Lianbo, chief financial officer of Zhenjiu Lidu, speaks at a CFO salon recently. (PROVIDED TO CHINA DAILY)

Although the overall growth rate in the baijiu market may not be exceptionally high, market concentration is on the rise. 

Wang cited the number of publicly listed companies in the baijiu industry, underscoring the expanding market share of leading enterprises. High market concentration implies that top-tier companies hold more market share and wield more influence, significantly shaping the industry’s landscape.

Diverging from the norm of many other baijiu enterprises, ZJLD boasts a distinctive profile. While most publicly listed baijiu companies focus on a single brand, ZJLD operates three distilleries under four different brands.

The flagship distillery, Guizhou Zhen Jiu, stands out as the company’s largest contributor, accounting for over 65 percent of its revenue. 

Historically, Guizhou Zhen Jiu primarily focused on earning forex through exports and catering to state banquets. 

However, overexpansion during a period of weak market demand led to cash flow difficulties, forcing Guizhou Zhen Jiu into bankruptcy restructuring in 2009. Jindong Group acquired Guizhou Zhen Jiu and restructured it in the same year. 

Over the subsequent 14 years, around 10 billion yuan investment revitalized the historical Zhen Jiu brand, propelling it into a phase of rapid growth. The distillery’s production capacity expanded from 2,000 metric tons to the current 40,000 tons.

The group’s second distillery, Li Du, hails from Lidu Town in Jiangxi’s Jinxian county. Li Du adopts a marketing strategy distinct from most baijiu brands by packaging thousand-yuan baijiu in simple bottles. Experiencing rapid growth, Li Du has secured a prominent position in Jiangxi’s thousand-yuan-grade baijiu market. 

The third distillery, located in Shaoyang, Hunan, is responsible for the Xiang Jiao and Kai Kou Xiao brands.

ZJLD’s multi-distillery, multi-brand background imposes higher demands on the company’s financial management. 

It has established a financial headquarter, concentrating financial analysis and management functions, while simultaneously implementing comprehensive financial teams in each distillery. The teams, catering to both the sales and production ends, enable the distilleries to adapt flexibly while maintaining centralized management. 

The company's financial management system will continue to evolve towards greater financial sharing in the future.

Due to the intense competition in the baijiu industry, Wang believes that the finance department should be involved in business decision-making, aiming for financial data to empower business departments. 

Since the industry’s settlement methods are highly complex and involve various discounts and rebate mechanisms, the finance department should primarily assess these from three perspectives, said Wang.

Firstly, different discounts affect the accounting basis and tax burden of consumption taxes and may impact gross profit margins or increase sales expenses. The finance department needs to provide optimization recommendations to the business department based on these considerations. 

Secondly, the company should learn from successful practices of companies with similar business models (distribution models) to continually enhance the capabilities of its own financial team. 

The third important task in to take the capital market’s sentiment into consideration. This involves establishing a comprehensive financial budget and analysis system and managing the overall compliance of the business. It also requires aligning with the capital market's expectations for a rapidly growing baijiu company and understanding the market's varying focuses on key financial indicators.

ESG has been a key focus of ZJLD, which has made significant contributions to local fiscal income and employment of local farmers. In terms of taxation, for baijiu enterprises, around 33 yuan in taxes is included in every 100 yuan of sales. Consumption tax and other surcharges alone account for 15-16 percent of ZJLD's income, providing ample tax resources for the local fiscal budget. 

Wang Lianbo, chief financial officer of Zhenjiu Lidu, speaks at a CFO salon recently. (PROVIDED TO CHINA DAILY)

On the employment front, ZJLD annually purchases over 10,000 tons of grains, ensuring income security for over 20,000 farmers in Zunyi. The group employs more than 11,000 individuals, many of whom are recruited locally as distillery workers, thereby safeguarding local employment opportunities.

In terms of sales strategy, financial empowerment plays a crucial role, said Wang. 

The company's finance team evaluates the return on investment (ROI) for each expenditure in order to select sales strategies that are more efficient. 

ZJLD Chairman Wu Xiangdong was quick to seize the opportunity when the Chinese national football team qualified for the World Cup. By signing the national team coach, Bora Milutinovic, as brand ambassador, he successfully grew the Jinliufu brand to the leading bottled baijiu brand in China in a short period. 

In the current landscape, he approaches advertisement with caution, recognizing that the baijiu industry has evolved beyond relying solely on advertisement for effective marketing. 

The company currently leans more towards immersive marketing methods such as tasting events and distillery tours. While advertising may seem to have a broader outreach, tasting events bring more stable customer conversions, stronger customer loyalty, and a higher ROI.

"In the baijiu industry, our digitalization may not be the best, but it is certainly among the top," Wang said while discussing the financial empowerment through data. 

In 2022, when many companies in the baijiu industry experienced negative revenue growth, ZJLD maintained a growth of 15 percent thanks to the excellent channel inventory management capability empowered by data.