The Chinese spirits sector was one of many to suffer under the government crackdown on auspicious spending from mid-2012. Yanghe appears to be emerging from its hangover better than peers thanks to its exposure to a younger target audience and middle-end segment (US$13-48 per bottle) – the only segment growing at a double digit rate. In fact, the party may just be getting started given Yanghe’s dominant 12% share of the fragmented middle-end segment and just 3% of the total Chinese spirit (baijiu) market.
With a history spanning over 500 years, Yanghe’s leading product Yanghe Daqu is one of China’s eight famous spirits. In 2003, the company launched its medium- to high-end Yanghe Blue Classic Series (Dream Blue, Sky Blue and Ocean Blue) which has achieved rapid growth. Unlike the notoriously fickle vodka market of the US, dominant baijiu companies can enjoy long term success, as Yanghe is proving. Its current marketing slogan of “a dream of an individual, a nation and a country” embodies its aspirational message that still holds great appeal to the masses.
During and post crackdown, Yanghe’s lower government end-market dependence, savvy product mix management, middle-end positioning and unique business model have helped it to gain market share. Yanghe’s competitive advantage lies in its ability to adapt to its environment, its strong channel management and excellent marketing. In reaction to the corrections in demand for premium liquor, Yanghe has proactively adjusted its focus more to its mid-range products. It is a true disruptor, with the strongest competitive edge, the most powerful marketing network and strongest ecommerce presence. The highly attractive packaging and unique flavour appeal to the very desirable younger generation. This target audience prefer mild, less strong and healthier beverages, with the flavour being difficult to replicate given it is a product of a unique fermentation process in Jiangsu province.
Yanghe operates a typical fast moving consumer goods or FMCG-style distribution model, rather than the typical wholesale model operated by most liquor peers. This means it has fast market penetration and reaction times thanks to lots of smaller sized distributors and a sales team that works closely with these distributors to manage retail-end sales.
There are multiple growth drivers left, including complementary product categories and expansion outside of its home province of Jiangsu, led by an incentivised management team (25% ownership). Yanghe is expanding across China, with particular focus on nearby provinces Henan, Shandong, Anhui, Zhejiang and Shanghai. Its mere 5% share of Henan province’s US$3.2bn market pales in comparison to its 30% share in Jiangsu, highlighting the scale of the opportunity. 35% of total sales come from outside of Jiangsu but this is set to rise. Operating leverage and consumers trading up from the lower end market (