Recently, there has been a surge in articles discussing the significant drop in the retail price of Moutai on the internet. The mainstream viewpoints mostly analyze from the perspective of supply and demand, suggesting that the rapid expansion of production capacity and relatively weak demand are the main reasons. Some even jokingly attribute it to the prevalence of card games leading to less time for drinking. However, from a macro perspective, the rise and fall of high-end liquor prices are closely related to the real estate cycle, and signs of weakening prices emerged as early as three years ago.

Looking at the changes in economic growth rates—

The supply and demand relationship of various assets

China's economy entered a high-growth phase in the early 1990s, which lasted until 2010. During these two decades of high growth, there was a transition from scarcity to surplus in goods, and from scarcity to relative surplus in assets.

In my 2006 article "Buy What You Can't Afford," I proposed that when China's Engel coefficient was as high as 40%, the proportion of residents' asset allocation was very low. As the economy grew and the Engel coefficient decreased, meaning the proportion of spending on food and clothing declined, the proportion of residents' asset allocation would correspondingly increase.

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Therefore, when you anticipate that in the future, everyone will significantly increase their proportion of asset allocation, asset prices will rise sharply. In other words, the demand for assets will far exceed supply. To achieve excess investment returns, one should leverage and buy things they can't afford. In 2006, Moutai's stock price had already reached over 170 yuan, making it the most expensive stock in the A-share market at the time. If calculated without adjustment, it is equivalent to about 45 yuan today.

I once wrote in my 2011 article "The Economic Driving Force Behind the Transition of Baijiu to Luxury Goods" that the correlation between the growth rate of baijiu production from 1998 to 2009 and China's GDP and residents' income growth rates were 0.69 and 0.65, respectively. This indicates a clear correlation between economic growth and the increase in residents' income and the consumption of baijiu. In 2003, the price per ton of liquor for large-scale enterprises in the baijiu industry was 16,000 yuan, and by 2008, the price per ton of liquor had risen to 28,300 yuan. This shows that consumption upgrading was very obvious in these years, and the price increase of medium and high-end baijiu far exceeded the CPI.

From the beginning of 2006 to October 2007, in less than two years, the Shanghai Composite Index actually rose more than five times. The increase in housing prices should be even greater, as this bull market in China's real estate, if calculated from 2000, has at least risen for 20 years.

According to McKinsey's statistics, from 2000 to 2020, China's net asset value grew from $7 trillion in 2000 to $120 trillion in 2020, an increase of 16 times. In the same period, the United States' net asset value doubled, reaching $90 trillion. The global net asset value increased from $156 trillion to $514 trillion, a growth of 2.3 times.

It can be seen that the scale expansion speed of China's assets not only far exceeds that of the United States but also significantly exceeds the global average. However, looking at the increase in stock price indices, over the past 20 years, the S&P 500 index has risen 6.3 times, and the NASDAQ 100 index has risen 12.6 times, but the Shanghai Composite Index has increased by less than 2 times. Obviously, the growth of China's asset scale mainly relies on the increase in supply as the main characteristic, rather than an increase in the rate of return on investment. For example, in 2006, the circulating market value of the A-share market was only over 3 trillion yuan, and now the circulating market value has reached 74 trillion yuan, but the index increase is not significant.In other words, the expansion of our country's asset scale is mainly due to the increase in supply. For instance, our economy is primarily driven by investment, and the contribution of capital formation (investment, one of the three engines) to GDP is about twice the average level of other global economies. The high growth of real estate investment, the rapid development of high-speed rail with a total mileage leading globally, and the continuous increase in the scale of IPOs in the A-share market have all contributed to the expanding supply of assets, ultimately leading to an excess of assets.

Moreover, as the scale of investment continues to expand, the financial attributes of many consumer goods have also significantly increased, with their prices rising sharply, such as luxury watches, jewelry and jade, rare wood materials, and high-end baijiu. This reflects the process of financial deepening in our country, but does it also indicate that financialization has become excessive?

In 2018, I wrote another article titled "Buying What You Can't Buy," which mainly argued that before 2000, China was an era of commodity shortage. After 2000, commodities achieved a balance of supply and demand, but there was a shortage of assets. After 2007, commodities experienced an overall surplus. After 2015, most assets have become surplus relative to market demand, but some assets, namely the so-called core assets, are still in short supply. That is, one should buy scarce assets.

Of course, scarcity is also relative. For example, before 2001, the base alcohol output of Moutai was only a little over 4,000 tons, but now it has exceeded 50,000 tons, and in the future, it can reach more than 70,000 tons. This shows that as supply continues to increase, its scarcity will decrease. If the growth rate of demand is not as fast as the supply, then the price pressure will increase.

The main trigger for the weakness of high-end baijiu is the entry of the real estate market into a long-term downward cycle.

The decline in the total sales volume of baijiu in our country has actually occurred a long time ago. Since 2000, the output of baijiu has been continuously increasing. By 2007, the growth rate of baijiu sales reached a peak of 34%, which coincided with the year when the growth rate of nominal GDP reached a new high. After the eight regulations, the growth rate of baijiu sales obviously fell back, but it still maintained growth, and it was not until after 2016 that negative growth appeared. In 2015, the total sales volume of baijiu in our country was 13.12 million tons, and by 2023, it dropped to 6.29 million tons, a decrease of 52%.

However, at the same time, the sales revenue of Maotai-flavor baijiu, which represents high-end baijiu, still maintained an upward momentum. Its proportion of the total baijiu sales revenue increased from 14.2% in 2015 to 31.5% in 2021, indicating that after the eight regulations, although the proportion of high-end baijiu consumption for official use has significantly decreased, the growth of business consumption and private consumption almost completely replaced official consumption.

By 2023, the proportion of sales revenue of Maotai-flavor baijiu has fallen back to 30.4%. With the accelerated decline in the price of high-end baijiu, it is estimated that the proportion will continue to fall in 2024 and beyond. Looking at the baijiu output during the three years of the pandemic from 2020 to 2021, there was no significant decline, but the sales revenue of Maotai-flavor baijiu actually increased significantly.

An interesting phenomenon has been observed: Moutai, once the main official liquor, saw a significant increase in sales after the eight regulations, but Audi, which was also used as an official vehicle, saw a significant decline. It went from being far ahead of foreign brands like BMW and Mercedes-Benz to being far behind other foreign brands. The logic behind this may be that official vehicles must use domestic cars, so Audi is no longer a symbol of official vehicles. However, Moutai still has a distinct "official liquor" color.The phenomenon mentioned above essentially conveys the idea that the primary factor behind the current decline in baijiu prices is the downturn in the real estate cycle. The contribution of China's real estate to GDP should be between 20-25%. When the real estate cycle enters a downtrend, it typically has a significant impact on the economy, which is known as the multiplier effect.

In fact, the decline in high-end baijiu prices did not start this year; it's just that the frequency of trending on search engines has increased. Looking at the price trend of Moutai aged liquor, the batch price of the liquor from the year 2021 onwards has already been lower than today's market price. The compound annual growth rate of Moutai liquor purchased in the same year and held for five years has dropped from 28.81% in 2021 to the current 4.83%.

From the chart above, it can also be seen that the last decline in the five-year return on holding Moutai occurred between 2012 and 2017, which should be related to the Eight Regulations. However, the sales volume of Moutai liquor did not decrease significantly. But will the decline in this round of prices affect its sales volume?

From 2015 to 2023, the price increase of the top 11 baijiu listed companies was 215%, which means that during the process of a significant drop in sales volume, they maintained high profit growth through price increases. Now that prices have turned from rising to falling, the logic of continuing to maintain high profit growth seems no longer valid.

Accelerating population aging ——

What is the impact on high-end baijiu consumption?

Baijiu, similar to cigarettes, has gone through a process of reduced volume and increased prices. That is, sales volume has decreased, but sales revenue has been continuously increasing, indicating that before 2021, the momentum of consumption upgrading in our country was very obvious. For example, the sales revenue of high-end cigarettes accounted for only 27% in 2013, which increased to 42% by 2018. Similarly, Moutai's sales revenue now accounts for about one-third of the top 14 sales revenues among baijiu listed companies.

Looking at the global share of luxury goods consumption, according to Bain Consulting statistics, China only accounted for 1% of the global share in 2000, but by 2018, it accounted for one-third of the global share. 2020 should be the peak year for China's luxury goods consumption share globally, which coincides with the inflection point of China's real estate cycle.

Affected by the epidemic, the momentum of consumption upgrading in our country has obviously weakened after 2020. From the perspective of population, China entered the stage of deep aging in 2021, that is, the proportion of the population aged 65 and above exceeded 14% of the total population. Moreover, due to the group of the "second baby boom" with the largest birth population in our country's history, starting from 2027, they will enter the "elderly wave" defined by the United Nations, thus accelerating the aging process.

For example, Germany took 36 years to go from deep aging to super aging (elderly population reaching 20%), which was very slow. Japan took 12 years, while China only needs 9 years. This means that the consumption of high-alcohol beverages may show a trend of rapid decline.According to the "2022 Strategic Study of Luxury Spirits" report released by the International Wine and Spirits Research (IWSR), baijiu occupies 84% of the market share in the international luxury spirits market (products with an average price of over $100 per bottle), but its consumption is almost entirely confined to China. China is the largest market for international luxury spirits (excluding baijiu), accounting for more than 30% of the global market share.

This means that China's high-end baijiu already has an astonishingly large share in the global high-end spirits market. How much room is there for further growth? According to statistics from the China Alcoholic Drinks Association, from 2014 to 2022, the revenue of baijiu enterprises above a certain scale increased from 580 billion to 660 billion, with a cumulative increase of only 13% over 8 years, and an annual compound growth rate of less than 2%.

Therefore, I speculate that with the acceleration of population aging, the sales volume of high-proof spirits will decrease, gradually entering an era dominated by low-proof spirits. Looking at the cases of Western countries such as the United States, Europe, and Japan, there is a common characteristic of increased sales share of low-proof spirits and decreased sales share of high-proof spirits during the process of population aging.

Looking back over the past 30 years, domestic famous cigarettes and spirits have taken advantage of the opportunity of consumption upgrading, defeating foreign cigarettes and spirits through continuous price increases; and high-end baijiu has completely defeated high-end wine. But everything has a cycle, and when the tide of the times surges forward, individual efforts may seem insignificant.