The most undervalued consumer staples sector in the world: Chinese baijiu sector
Betting on a reversal from a consumption downturn in the largest consumer market in the world
A strong distilled alcohol with profound roots in China's history, culture, and social customs, baijiu is frequently referred to as "China's national liquor." It is one of the most popular alcoholic beverages worldwide by volume, with an alcohol content that usually ranges from 40% to 60% ABV, but its international popularity is not as high as its home recognition. Researching this sector has been a journey and a half and I’ve learnt some very valuable lessons on both a personal as well as on an investment level. At first, when I started researching the sector, I couldn’t believe my eyes— this is a sector where average gross margins range between 70-85% and this is not the technology sector that we’re talking about here; I mean come on this is mostly fermented sorghum and glutinous rice. As I dove deeper and deeper into the sector and consulted people like Robert Wu from Baiguan and Moatless Musings (give them a follow if you want) I was led into a rabbit hole of inventory levels, pricing, and even speculative bubbles (again, I’m reiterating this isn’t sexy technology or even real estate but just fermented sorghum and glutinous rice made into alcohol). To guide you through all of this, allow me to explain to you— what baijiu is.
What is baijiu?
A strong distilled alcohol with profound roots in China's history, culture, and social customs, baijiu is frequently referred to as "China's national liquor." It is one of the most popular alcoholic beverages worldwide by volume, with an alcohol content that usually ranges from 40% to 60% ABV, but its international popularity is not as high as its home recognition. This paper explores this complicated and legendary drink's history, production processes, cultural significance, and changing worldwide presence.
The history of baijiu spans more than two millennia, with the earliest examples appearing during the Han Dynasty (206 BCE–220 CE). But thanks to commerce with Central Asia and the Middle East, modern distillation methods became more established under the Song (960–1279) and Yuan (1271–1368) dynasties. During the Ming (1368–1644) and Qing (1644–1912) periods, the spirit earned imperial favor, and regional variants flourished throughout China. Its lengthy history in Chinese medicine and ceremonies is shown by historical documents that detail early production processes, such as Li Shizhen's Compendium of Materia Medica (1596). Baijiu is now more than just a beverage; it is a cultural relic that represents decades of skill and custom.The manufacturing of baijiu is a painstaking process that combines tradition and science. Although recipes may call for rice, wheat, corn, or barley, sorghum is the main component. Qu (or jiuqu), a fermentation starter prepared from crushed grains inoculated with bacteria, yeasts, and molds (Aspergillus), is an essential ingredient. A method exclusive to Chinese alcoholic beverages, this natural starter catalyzes fermentation and saccharification (the conversion of starches to sugars) at the same time.
Grain starches are first gelatinized by heating, after which they are combined with qu and fermented in clay vessels, stone jars, or earthen pits. Depending on the type, fermentation periods might range from a few weeks to several years. To concentrate the alcohol and flavors, the mash is frequently distilled several times in conventional pot stills. High-quality baijiu is kept for decades in underground basements or ceramic jars, where it acquires complex scents. A remarkable variety of flavors and styles are produced as a result of the entire process, which is controlled by regional methods and environmental influences. In the next section, I'll explain the different types of baijiu.
Types of baijiu
There are four main fragrance categories for baijiu, each with unique production processes and regional connections:-
Strong Aroma (Nong Xiang): The most popular style, originating from Sichuan. It undergoes fermentation in mud pits, yielding a bold, fruity profile with notes of pineapple, vanilla, and anise. Brands like Wuliangye and Luzhou Laojiao epitomize this category.
Sauce Aroma (Jiang Xiang): Famous for its umami, savory character reminiscent of soy sauce, this style is tied to Guizhou Province. Moutai, China’s most prestigious baijiu, dominates this category. Its production involves multiple fermentations using brick-shaped qu and wheat-based starters.
Light Aroma (Qing Xiang): Hailing from northern China (e.g., Shanxi), this style uses sorghum fermented in stone jars, resulting in a clean, floral, and slightly sweet profile. Fenjiu is a leading example.
Rice Aroma (Mi Xiang): Produced in southern China (e.g., Guangxi) from glutinous rice, it offers a delicate, honey-like sweetness. Guilin Sanhua is a notable brand.
There are additional styles like Feng Xiang (phoenix aroma) and Chi Xiang (herbal aroma) but they are less popular and more niché. Baijiu has a significant influence on Chinese cultural, social, and even political life, which I’ll explain in the next segment.
Cultural significance of baijiu: why it’s different from every other alcohol around the world
Chinese social and ceremonial life is deeply entwined with Baijiu. It is a standard at business meetings, weddings, and banquets, where group toasts (ganbei) represent friendship and trust. Baijiu is frequently used in ancestral offerings to honor the deceased during holidays like Lunar New Year. It has been used politically as a diplomatic instrument; for example, it was served during Nixon's 1972 visit to China, solidifying its position as a part of "toast diplomacy."In fact there’s a famous quote by Kissinger about Moutai— the most popular baijiu—"I think if we drink enough Moutai, we can solve anything.”
Premium baijiu, which rare vintages fetch exorbitant prices, is a gift that demonstrates status and respect. A 1957 Moutai brought $1.4 million at auction in 2021, highlighting its worth as a luxury piece and cultural treasure. Due to its cultural significance, baijiu is an economic powerhouse and the sector in and of itself has a very heavy moat.
Economic powerhouse: baijiu’s economic power and moat
China’s baijiu industry is a behemoth, valued at over $150 billion annually. State-owned giants like Kweichow Moutai and Wuliangye dominate the market, with Moutai’s market capitalization briefly surpassing Coca-Cola in 2020.
The economic moat of the baijiu industry, or its capacity to hold onto competitive advantages and repel competitors, is rooted in a special fusion of production complexity, cultural history, and structural market dynamics. Fundamentally, the industry's strength is found in baijiu's longstanding cultural relevance in China. Brands like Wuliangye and Kweichow Moutai are more than just alcoholic drinks; they are also representations of social capital, heritage, and reputation. Baijiu has been incorporated into customs for millennia, ranging from ancestral veneration to commercial banquets, generating a persistent demand that is independent of economic fluctuations. Particularly premium brands gain from being linked to luxury and diplomacy. Top players are protected from replacement by this cultural entrenchment, which also promotes brand loyalty, this is so because consumers associate the top baijiu labels with identity, trust, and status. The gifting culture in China further amplifies this dynamic, with high-priced bottles serving as tangible expressions of respect or gratitude, ensuring consistent demand even at elevated price points.
The complex, time-consuming production process that few rivals can imitate forms the second pillar of the moat. Qu, a microbiological starting culture specific to Chinese spirits, and terroir-driven elements including local climate and water sources are essential to Baijiu's fermentation. For instance, the ecology of the Chishui River Valley, where native sorghum and humidity levels influence its flavor, is linked to Moutai's unique "sauce aroma." It takes decades of artisanal knowledge, frequently passed down through generations, to master these processes, making the learning curve high for newcomers. Supply scalability is further constrained by aging processes, which can take years or even decades to complete. Because it is nearly hard to replicate the precise conditions and experience of established producers, the combination of natural resources, specialized labor, and time investment creates a severe barrier to entry.
The moat is further strengthened by vertical integration and economies of scale. Thanks to mass production, effective supply chains, and premium pricing power, dominant companies like Moutai operate with gross margins over 75%, which are the greatest in the consumer goods industry worldwide . Consistent quality and cost benefits are guaranteed by their control over raw materials, such as obtaining exclusive sorghum contracts. Due to inelastic demand among core consumers—such as wealthy professionals and government agencies—who value tradition over price sensitivity, pricing power is still strong. Newer or smaller businesses find it difficult to compete on this scale, especially when it comes to distribution. Access to vital channels, such as government procurement networks and luxury retail partnerships, is dominated by established firms.
Due to the heavy economic moat and perhaps the best pricing power (X and the wannabe investors on that platform have made me hate this word), the entire baijiu sector always trades at elevated valuations— Moutai and Wuliangye traded at 40x earnings not very long ago but now the sector is at its cheapest levels in decades. The only time that it traded lower was during President Xi’s anti corruption campaign in the early 2010s. The baijiu sector has not been doing that well due to an agglomeration of factors that I’ll broadly cover individually starting from the next segment.
Weak consumer and real estate market
There’s no gainsaying the fact that the Chinese consumer and real estate markets have been in a constant free fall over the last few years due to a perfect storm of three things—popping of the real estate bubble , net zero COVID lockdowns, and a deleveraging and downsizing cycle— coming together to wreak havoc in the economy. All of these things were necessary for the economy to grow stronger structurally and things are recovering now after years of pain but there’s no denying that there was a a significant impact on the consumer discretionary industry because of this.
The weakening consumer and real estate markets in China dealt a dual blow to the baijiu industry, disrupting its traditional reliance on corporate gifting and luxury consumption. A slumping real estate sector, which once drove lavish business banquets and client entertainment, has sharply reduced demand for premium brands like Moutai and Wuliangye, as cash-strapped developers and businesses cut back on discretionary spending. Meanwhile, subdued consumer confidence, exacerbated by falling property values and job market uncertainties, has led households to prioritize essentials over high-end baijiu. As I’ve outlined in almost all of my articles particularly the restaurant and real estate series— the real estate sector is slowly recovering and so is consumer demand along with it—the opportunity now in this current market, where all tech stocks have rallied exponentially, lies in these hated and unloved sectors as the economy— now with a significantly better structural base— now enters a new leg of economic growth, unburdened by the prospect of massive structural defects and risk of a bubble forming which could threaten the sanctity of the economy as a whole. I’ll illustrate with a historical example of when the baijiu sector reached rock bottom valuations and why it was an excellent time to buy.
What happened when the government cracked down on corruption and why it was an excellent time to invest into baijiu
President Xi’s anti-corruption campaign, initiated in late 2012, profoundly impacted China’s Baijiu industry, which had long thrived on government-related demand. Baijiu, a potent distilled liquor with deep cultural and historical roots in China, was more than just a popular beverage—it was a symbol of status, wealth, and officialdom. Premium Baijiu brands like Kweichow Moutai, Wuliangye, and Luzhou Laojiao were frequently gifted among government officials, used to secure business deals, and served at extravagant state banquets. However, as Xi Jinping’s administration launched a sweeping crackdown on corruption, extravagant spending, and gift-giving among officials, the Baijiu industry, particularly its high-end segment, faced an unprecedented crisis.
Before the campaign, the Baijiu industry was experiencing a golden era, driven largely by state-related consumption. High-ranking government officials, state-owned enterprises (SOEs), and businessmen used expensive Baijiu as a tool for networking and bribery. Kweichow Moutai, often considered the "national liquor," was the most prestigious brand, with bottles priced at thousands of yuan. The demand was so high that Moutai was often used as an unofficial currency in business transactions. However, with Xi’s anti-corruption drive targeting both "tigers" (high-ranking officials) and "flies" (lower-level bureaucrats), conspicuous consumption became politically dangerous. Officials feared drawing attention to themselves by continuing their luxurious habits, leading to an abrupt drop in demand for premium Baijiu.
By 2013, the effects were evident. The overall Baijiu industry growth rate dropped to 11.22%, a steep decline from the 26.82% growth seen in 2012. Profitability took a hit as well, with the industry's total profits falling by nearly 2%. Kweichow Moutai, which had enjoyed a staggering 51.86% profit growth in 2012, saw its growth rate shrink to just 13.74% in 2013. Wuliangye, another major Baijiu producer, announced that its net profits for 2013 would decline by an estimated 18%. The impact was not limited to a single brand—high-end Baijiu across the board suffered. In 2014, the China Food and Drinks Fair in Chengdu, a key industry event, saw a marked reduction in Baijiu exhibitors, with only two pavilions dedicated to Baijiu compared to four the previous year. Meanwhile, wine and imported alcohol brands expanded their presence, reflecting shifting consumer preferences.
One of the most dramatic signs of the downturn was the drop in Moutai’s retail prices. Before the anti-corruption campaign, a 500ml bottle of Moutai’s flagship product, Feitian Moutai, could sell for over 2,000 yuan. As demand from government-related consumption plummeted, prices dropped significantly, falling to around 900 yuan at their lowest point. This price collapse affected not only producers but also distributors, many of whom had stockpiled Baijiu in anticipation of ever-increasing demand. With sales falling, inventory piled up, forcing distributors to offload products at deep discounts. It was at this point that the market started pricing the baijiu industry for complete extinction with it broadly being priced between 6-8x earnings, a generational opportunity lied here but hardly anyone even gave it a second look believing the industry to be a sunset one primed to disappear. Needless to say this didn’t end up happening.
Faced with these challenges, Baijiu producers had to rapidly adapt their business models to survive, as the industry’s previous reliance on state-linked demand was no longer viable, forcing a shift toward the broader consumer market. To attract ordinary consumers who were previously priced out of the market, manufacturers introduced mid-range products and launched more affordable versions of premium Baijiu, targeting middle-class professionals rather than government officials. Packaging and branding were adjusted to make Baijiu appear less extravagant and ostentatious, reducing the stigma of luxury consumption in the post-anti-corruption era. Marketing efforts shifted toward younger consumers, emphasizing Baijiu’s role in social gatherings rather than official functions, and campaigns were launched to promote it as a cultural symbol rather than a political or elite product, positioning it as a drink of choice for everyday occasions. Additionally, Baijiu producers began focusing on direct-to-consumer sales instead of relying on government procurement and high-end restaurants. The rise of e-commerce platforms like JD.com and Alibaba provided an alternative distribution channel, allowing companies to market their products to a wider audience, and Baijiu brands invested in online marketing campaigns and live-streamed sales events, capitalizing on China’s digital shopping boom.
By 2015, the Baijiu industry began showing signs of recovery, albeit with a fundamentally different market structure. The shift from government-driven demand to consumer-driven sales took time, but industry leaders successfully reoriented their strategies. Moutai’s retail prices, which had dropped significantly, began stabilizing as consumer confidence returned. Companies that had adapted by diversifying their product lines and marketing efforts saw renewed growth. A major turning point came when Chinese consumer spending power increased in the latter half of the decade. The rise of the middle class, along with a growing sense of national pride, contributed to a renewed appreciation for Baijiu. Younger consumers, once uninterested in Baijiu’s strong taste and traditional image, began embracing it in modernized formats, such as Baijiu cocktails served in upscale bars. Companies leveraged this trend by sponsoring cultural events, engaging in collaborations with trendy lifestyle brands, and incorporating Baijiu into contemporary culinary experiences.
Moreover, as China’s anti-corruption campaign became more institutionalized rather than an active crackdown, some degree of luxury consumption returned—though in a more discreet manner. While excessive gifting and banquet culture never fully recovered to pre-2012 levels, there was a gradual resurgence in demand for premium Baijiu, driven by private sector business dealings and special occasions.
This historical example proves how sometimes the best opportunities are found in places and at times where no one is willing to look and which no one is willing to touch. In the next segment, I’ll outline the issues faced by the industry right and why it should make us think about reorient our investing methodology.
Inventory stockpiling, speculation, and price cuts: why the sector has derated and how the issues are complicated to solve
If there’s one thing that something which has limited supply, always increasing prices, and a perceived high value can foster— it’s unbridled speculation— and we’ve seen time and time again throughout history through various bubbles, most notably the Tulip Mania, how these things end up developing and the impact that they can have. A similar thing happened to Moutai— the most popular baijiu brand in China. If you’re interested in reading more about this then check out Moatless Musings’ post on Moutai and Fenjiu— his input and article was important for me to come up with my own investment thesis as he speaks Chinese and has boots on the grounds in China and through his WeChat connections which I don’t. But the gist of the issue is that— Moutai’s management wants to grow earnings at 15% per year, this is hard to do because the consumer market hasn’t really done that well over the past few years and still might take some more time to recover back to late 2010 levels, so the only thing that they can do to achieve this is reduce prices to increase volumes but now this creates a problem for their existing distributors and people who stockpiled bottles upon bottles of Moutai because they perceived it to be an investment on which they could never lose money since because you can’t really hedge against Moutai prices any rapid fall in price would lead to the speculators and distributors dumping their inventory at fire sales prices to recover whatever little money they can recover from the debacle. Now the company can do one of two things: either raise prices to keep distributors and speculators happy, sacrificing their earnings growth targets to appease these stakeholders which will inflate the bubble even further which I don’t think would bode very well for the company or the baijiu market as a whole in the long run or cut prices to meet earnings growth targets, leading to distributors and speculators dumping their inventory which would lead to a further crash in prices. This whole situation is very similar to what happened to luxury watch prices after COVID but obviously on a much larger scale. This is precisely why I don’t encourage purchasing and hoarding these luxury commodities as investments.
From the way things look right now, it’s hard to figure out what Moutai will end up doing but if they choose to drop prices then it will hurt some of its competitors in the process as well. So for context, Moutai, Wuliangye, and Luzhou Laojiao are the three largest baijiu brands with Moutai being perceived as the most premium offering; if Moutai prices drop to 1300 RMB while Wuliangye is priced at 1000 RMB then the value proposition of Wuliangye completely diminishes because of its slightly lower brand value. So then this once great industry becomes a race to the bottom for prices: which can’t really be good for shareholders.
Now I— for the life of me— couldn’t tell you how this whole industry dynamic will play out simply because I, like almost all of you, don’t speak Chinese and unfortunately don’t have boots on the ground (maybe hopefully that will change someday or soon) but well what I can tell you is that I believe like 2013-2015 the industry will figure out a way to correct itself and once it does so, the upside is quite tremendous. If you’re interested in individual names then check out Moatless Musings’ article on Fenjiu but I have something else to pitch to you.
Penghua CSI Alcohol ETF (512690.SH)
This ETF tracks the CSI Alcohol Index and is 80% composed of baijiu stocks with the other components being beer and wine stocks mostly. Investing in the sector allows us to own the entire sector at the cheapest valuations since 2013 while not being exposed to the whims of what individual players might be facing. If you believe like me that Chinese consumer spending will come back rapidly in the subsequent years and that like 2013, this glut in the baijiu sector is temporary, then this is perhaps the best opportunity in the entire Chinese stock market right now.
You don’t need me to again elaborate how amazing this sector is, just open the recent earnings statements and you’ll be blown away (75%+ gross margins, 30-40% net margins while selling alcohol). Perhaps the best part about the economic system is that errors correct themselves though they might involve some decent amount of pain or blood on the streets.
Using the ETF strategy hedges us from individual security risk while exposing us to this gem of a sector that is trading at bargain basement prices. I shall be attaching the top holdings of the ETF for your convenience.
Thank you so much for reading, I know that this post was quite delayed but I had to put in significant hours of research to put this together so I hope that you’ll like it. As always, I shall highly appreciate any feedback or suggestions.
My main concern is young people shifting away from baijiu and liquor in general and being less into the drinking culture of their parents.
Thanks for the detailed article and history of the whole sector! Saw a related news article that got published on this topic as well…
Ebbing demand for Maotai, China’s favourite baijiu, adds to debt concerns
https://www.scmp.com/business/banking-finance/article/3300819/ebbing-demand-maotai-chinas-favourite-baijiu-adds-debt-concerns