Chinese president Xi Jinping’s crackdown on corruption and extravagance has cut into demand for luxury goods throughout the economy. Now the campaign is bruising the balance sheets of some of China’s biggest companies.
In the latest example, Kweichow Moutai, the $37.9-billion maker of a fiery liquor long used at political celebrations, has seen a spike in unpaid bills, as distributors delay paying them. Prices for Moutai have tumbled, cutting distributor profits and forcing them to buy on credit. Payments due to the company (what accountants call receivables) almost quadrupled at the end of September, the most recent quarter available.
As Kweichow Moutai prepares to report earnings next week, the results will illustrate the corporate fallout of Xi’s crackdown. The question is whether distributors will need to borrow more to keep buying, or whether they’ll start handing over cash. The distributors have typically have used bank-guaranteed cheques that defer payments for as long as six months.
“The retail price of Moutai has come down a fair bit,” said Yao Yue, an analyst at Morningstar, Inc. “The distributors may not have as much cash flow as they used to.”
Moutai – part of a family of white sorghum-based spirits called baijiu – earned its cachet as the alcohol of choice for Chinese leaders and diplomats. At its peak in 2012, about half of Moutai’s annual sales volume came from government or government-related consumers, according to a March report from Goldman Sachs Group, Inc.
Back then, distributors could charge several times the wholesale price from Kweichow Moutai. A bottle of the company’s 106-proof Feitian Moutai could sell for as much as 2,200 yuan ($354), more than three times the roughly 700-yuan wholesale price at the time, said BNP Paribas SA analyst Charlie Chen.
The easy profits are now gone. This month, some bottles of the liquor could be found for 798 yuan, below the current wholesale price of 819 yuan.
Payments are much slower, too. In the past, baijiu-makers would typically require distributors to pay months in advance, Yao of Morningstar said, getting cash before they handed over product. Now, some Moutai distributors do the opposite, taking the liquor in return for bank cheques that give them months to produce cash.
“Moutai is a brand that is more than 200 years old,” BNP Paribas’s Chen said. “People still believe this is the best brand in the Chinese liquor industry.”
Bloomberg News, edited by ESM
