The Chinese liquor industry, particularly the segment centered around baijiu (a traditional distilled spirit), is facing a moment of crisisWhile the market has not yet reached its nadir, dealers and distributors are already finding it hard to sustain their businessesThis troubling trend paints a grim picture of an industry that was once roaring with success.

Reports from the stock market indicate that Huazhi Wine Trading, the first liquor circulation company listed on the A-share market, has reported record-low net profits in its third-quarter earningsIt has seen a significant 60% drop in its contract liabilities, alongside an alarming inventory surplusSimilar challenges loom over other leading distributorsNotably, Gedeyingxiang is mired in controversy with allegations of unpaid salaries, and there are even suggestions that the controlling individual of Jiudian Kuaican has gone missing amidst an investigation

It’s worth noting that among smaller distributors, 49% of dealers in the Henan province reported a staggering 30% drop in performance.

Haohongfeng, the chairman of JiuXianWan, has highlighted the dire situation by claiming, “The inventory levels of distributors are reaching a critical point.” He reflects a broader sentiment that both incentives and threats from liquor manufacturers are falling flatThis situation is compounded by the collective slowdown faced by liquor companies in Q3, with nearly half of the publicly listed entities reporting negative revenue growthEven among top brands, only Kweichow Moutai and Shanxi Fenjiu retain double-digit growth ratesIn striking contrast, brands like Wuliangye and Luzhou Laojiao barely managed to maintain positive growth, while Yanghe experienced a staggering contraction of 44.82%.

These visible declines are perhaps only the tip of the iceberg

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The baijiu consumption landscape is in freefall, and as intermediaries sandwiched between manufacturers and consumers, distributors are often the first casualties of market fluctuations.

The reality is that the relationship between baijiu companies and their distributors has never been equitableAs Haohongfeng bluntly states, “When the market is tough, manufacturers speak of camaraderie; when the tides are high, who treats the distributors as brothers?” By looking back to 2012, one can draw parallels with today's situationThat year marked a downturn in the spirit industry, largely due to restrictions on government banquets and the scandal surrounding plasticizers, which led to slumping sales and aggressive inventory buildup in the market.

At the end of that fateful year, during a meeting of Moutai’s distributors, Yuan Renguo, the then-chairman of Moutai, sternly instructed his distributors to “hold the line – anyone selling below cost will be eliminated without question.” The following years saw Moutai relaxing its agent requirements, eventually allowing the brand to capitalize on distributor cooperation and securing a leading position in sales.

Fast forward to 2018, Moutai shifted gears again, opting to “expand direct sales” in a move to centralize control, resulting in a dramatic decline in the number of domestic distributors from 2,987 to a mere 2,046 by 2020, a figure that has stabilized ever since

Alongside this, self-operated revenue accounted for a whopping 44.65% in 2023, slightly tapering to 43.05% in the first three quarters of 2024.

The burden on distributors is heavy, especially given that the majority of baijiu companies have historically relied heavily on them for dramatic growth; in many cases, over 90% of revenue has been attributed to these intermediariesFor instance, Shanxi Fenjiu witnessed its number of distributors grow from 1,268 at the end of 2017 to 3,637 by the end of 2022, indicating that even without increased terminal sales, the mere addition of distributors could translate into higher revenues.

The collaborative dynamics between manufacturers and distributors adhered to several models over the past few years: the “Manufacturer-led,” the “Distributor-led,” and “Cooperative Win-Win” modelIn essence, however, the dominant beneficiaries have consistently been the liquor companies.

In the Manufacturer-led situation, the liquor companies monopolize the chain, wielding significant control over market operations while leaving their distributors at a disadvantage when it comes to cash flow

Examples include Moutai's smaller vendors and Gujing Gongjiu’s “1+1 model.” Conversely, under the Distributor-led model, major distributors are appointed as the exclusive agents for product sales in specified areas, which allows for rapid channel expansion but at the cost of weakening control over the terminal marketThis has been observed with Wuliangye and Yili Te.

The Cooperative Win-Win model characterized the collaboration of distributors who have a stake in the sales company, enjoying both dividends and a direct alignment of interests with manufacturers, as evidenced by Luzhou Laojiao.

At all times, however, liquor companies have effectively utilized the resources of their distributors to propel themselves forwardThe modus operandi of “payment-in-advance” turned distributors into reservoirs of liquidity for liquor manufacturers, helping to stabilize fluctuating sales and offset risk.

This uneven distribution of power within the industry saw manufacturers comfortably at the helm, while dealers toiled at the margins, often being forced to relinquish profits at the behest of their more dominant counterparts

In the turbulent climate we now observe, it’s the distributors who face the most immediate demise.

For liquor companies, pushing product on the channel remains crucial; without this pressure, growth is untenableFor instance, Jiuqi Liquor stated that “we refrained from applying pressure on our distributors, allowing them to maximize their inventory, which in turn restored their confidence,” yet the outcome was significantly plummeting performance.

The situation for distributors is now hanging by a thread, their inventory termed a “dammed lake,” with Haohongfeng emphasizing, “Currently, distributors are at a critical tipping point—if manufacturers continue to neglect their precarious situation and keep loading inventory, a collapse is all but assured.”

By 2023, public liquor companies amassed an inventory exceeding 150 billion yuan, but the far greater volume held by distributors suggests that many have declared themselves unable to offload their stock

Reports have even surfaced of one distributor claiming, “Even if all liquor factories ceased production for a year, the existing inventory would still satisfy market demand.” A look at Huazhi Wine Trading shows that by September 30, 2024, their inventory reached 3.463 billion yuan, reflecting a 19.80% increase year-on-year, with inventory turnover sitting at a concerning 130 days—far exceeding historical averages.

Over the past few years, the majority of profits earned by distributors have remained stagnant in warehouse stocksThe model of “payment prior to goods” benefits manufacturers while exposing distributors to toxic liquidity stressThe recent controversies surrounding Gedeyingxiang — unpaid salaries and store closures, along with nearly 200 million yuan in frozen assets — underscore these financial strains.

The tactics adopted by liquor firms today vary greatly

Some have resorted to coercive measures, with several companies introducing aggressive end-of-year policies, threatening to revoke distributor rights if annual quotas are not met.

In other cases, to offer hope, some companies have released year-end rebate policies, or made promises of subsidies aimed to prevent losses for their distributorsIn recognition of the liquidity challenges faced by their intermediaries, certain manufacturers are collaborating with financial institutions to offer options like “subsidized loans” and “commercial drafts,” albeit often with the caveat that distributors must fulfill annual requirements.

Firms are now finding themselves treading lightly; after the second quarter of 2023, many liquor companies began to ease demands on distributor payments, and by the fourth quarter, some have opted to increase market investment on stronger distributors.

However, these methods are diminishing in effectiveness, as they merely push more product onto struggling distributors amidst a stagnating market

This creates a snowball effect, wherein potentially many distributors may face solvency issues.

If the emerging imbalance goes unaddressed, we might witness a complete dismantling of the existing price structures within the baijiu marketNotably, even the celebrated Moutai struggles to maintain its value; during significant sales events such as Double Eleven, prices of its overseas variants plummeted to below 2000 yuan per bottle—a drastic fall from grace.

Should manufacturers persist with their inventory pressures, thereby further saturating the market, distributors will be compelled to liquidate stock at discounted prices to avert greater losses, which could provoke a catastrophic price collapseMoreover, some distributors may utilize any year-end incentives to further reduce prices, igniting a vicious cycle wherein competition leads to price wars and rapid devaluation—thus catalyzing further detriment to the distributor's position in the market.

This could precipitate a broader collapse of the distributor ecosystem as many smaller firms are already caught in a struggle for survival, and larger distributors are ceasing payments altogether