06/09/2023

What is the new normal for China’s beverage alcohol market?

IWSR assesses the outlook for China's beverage alcohol market after Covid-19 restrictions were eased in early 2023

After a challenging 2022, the prospects for China’s beverage alcohol market are brighter in 2023 – but brand owners anticipating a return to the highs of 2019 may need to temper their expectations.

The lingering effects of Covid-19 and economic concerns impacted trading during the first half of 2023, ushering in a ‘new normal’ of cautious consumer spending and downtrading.

But a resurgent on-trade has boosted sales, and overall consumer optimism remains stronger here than almost anywhere else in the world. While baijiu and wine continue to face challenges in the years ahead, the prospects are brighter for international spirits and RTDs.

The impact of Covid-19 lockdowns

China’s beverage alcohol market endured probably the most challenging year of the past decade in 2022, as renewed Covid-19 lockdowns and consumer caution led to a -4% volume decline for total beverage alcohol (TBA), according to IWSR data.

Wine suffered a -26% volume decline thanks to a slump in demand coupled with punitive tariffs on Australian wine imports, while spirits volumes fell by -17% and beer was essentially flat (+0.4%).

Meanwhile, the on-trade suffered double-digit market share declines in 2022, and ended the year significantly below 2019 levels.

Ongoing recovery

Industry stakeholders had hoped that the easing of restrictions in December 2022 would spark a resurgence during the Chinese New Year celebrations a month later, but this failed to materialise, reports Shirley Zhu, IWSR research director, Greater China.

“The restrictions were lifted so close to the celebrations that people weren’t ready to go back to travelling and gathering on a large scale yet,” she points out. This was exacerbated by a fresh wave of Covid infections as lockdowns were eased.

There have been signs of market recovery from the second quarter of 2023, particularly as the on-trade has reopened, with people increasingly happy to visit nightclubs and music venues.

This on-trade resurgence is likely to fuel growth across all beverage alcohol categories, but the recovery is being impaired by concerns about the Chinese economy, and the poor performances of the stock market and real estate sector.

“Those are two key indicators of optimism,” says Zhu. “If you own a house and the price is going up, you tend to be more confident – and the same goes for the stock market. There are also a lot of young people who are unemployed, so they are not spending so much, they are very cautious.”

Price-conscious consumers

Zhu believes people are becoming savvier with their money – comparing prices and trying to get the most value for their money, both in local spirits such as baijiu and in international categories including Cognac.

She adds: “This downtrading is very noticeable in the on-premise. People are still visiting high-end restaurants, but not as often. And when they do, they are not spending as much. The footfall may be back and restaurants may be quite busy, but the average spend is down.”

This softer than anticipated growth is also apparent in China’s vibrant ecommerce channel, the largest and most mature in the world, with a less than 5% share of total sales by value, according to IWSR figures.

Trading in the 618 festival in June – the country’s largest online shopping event after Singles’ Day in November – was weaker than expected, with heavy discounts eroding profitability.

Now attention is shifting to the Mid-autumn Festival at the end of September – the year’s second-biggest celebration after Chinese New Year. “Companies will definitely be looking to see if they can drive increased sales there,” says Zhu.

The impact of heavy online discounting, as well as cross-border ecommerce – where a China-based company buys products direct from overseas and sells them online, bypassing China’s traditional supply chain – is making price management an increasingly sensitive issue for brand owners.

“Distributors might be buying a product at the equivalent of, say, US$100, but then that same product is available online for US$80,” explains Zhu. “How do you manage online versus offline pricing? Price management is becoming increasingly difficult and important.”

Optimism for the medium- and long-term

Despite these ongoing challenges, China remains one of the world’s most attractive beverage alcohol markets, thanks to the optimistic outlook and financial prosperity displayed by many of its inhabitants.

Consumers here show strong financial confidence for the present and future, especially compared to more pessimistic locations such as Europe, Australia and South Africa, according to IWSR consumer data tracking.

Alcohol budgets are less likely to come under pressure here, and China’s Gen Z legal drinking age population has the lowest proportion of abstainers (15%) amongst 15 key markets (Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Mexico, South Africa, Spain, Taiwan, UK, US).

“Consumers here are still fairly confident in the future,” says Zhu. “If you look at their finances, they’re still higher than a lot of other countries – maybe not quite as good as before, but still very positive.

“And companies are quite determined to wait this difficult period out. They still want to develop this market, and brands are continuing to invest in the future.”

The market outlook

IWSR forecasts that TBA volumes in China will fall between 2022 and 2027, at a CAGR of -0.4%, but this decline masks the ongoing premiumisation trend, with the value of the market expected to grow by US$41.7bn over the same timescale.

While spirits as a whole are forecast to contract at a volume CAGR of -4% to 2027, the dominant baijiu category is entirely responsible for that decline. All other major spirits categories – whisky, gin/genever, vodka, agave, rum and brandy – are forecast to grow sales volumes by healthy single-digit CAGRs.

Beer will be essentially flat (+0.2%) to 2027, but premium-plus volumes are set to rise at a CAGR of +6% as consumers continue to trade up. Meanwhile, wine will decline at a CAGR of -2%, and the relatively small RTD category will grow at a CAGR of +6%.

“In many ways, 2023 is looking like a transitional year for China’s beverage alcohol market,” says Zhu. “The country is reopening, but we will know much more a few months into 2024, by the time of the next Chinese New Year celebrations.

“In the meantime, companies will need to temper their expectations. Many of them have become accustomed to double-digit growth in China every year. Maybe that won’t happen again and gains will be slower than before, but there is still plenty of potential for positive growth going forward.”

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