Do you know which beverage company has the highest market capitalization in the world? 

Many people may say the Coca-Cola. Indeed, Coca-Cola is so popular that you may not be able to find some one never know about it, and Coca-Cola Co. does have a very high market capitalization.

However, the market capitalization of Kweichow Moutai, a Chinese liquor company, far exceeds that of Coca-Cola Co.

The market capitalization of Guizhou Moutai surpassed that of Coca-Cola for the first time in April this year. By September 2020, Guizhou Moutai had a market capitalization of about 2 trillion yuan ($295.972 billion), meaning it was worth $80 billion more than Coca-Cola in the same period, which is incredible.

Unlike Coca-Cola, which is a soft drink for all ages, Maotai is a kind of spirits with very unique flavor.

It is brewed with Daqu and originated in Maotai Town, Guizhou Province, China. The smell of Maotai is fragrant and mellow. In both smell and taste, the aroma of it is very prominent, just like a high concentration of perfume. In the first National Liquor Review Conference of China in 1952, Maotai Liquor, Fenjiu Liquor, Luzhou laojiao Liquor and Xifeng Liquor stood out among all the selected liquors and was awarded the national famous liquor.

Maotai since became well-known throughout the country and had become the most suitable representative of China’s high-end liquor in the coming decades. And Guizhou Moutai is the enterprise that produces this kind of famous wine.

But how does Guizhou Moutai, which has only small consumers group (compared with Coca-Cola), achieve such business miracle?

How unbelievable are Maotai’s financial data?

Guizhou Moutai released its 2019 annual report on the evening of April 21, showing that the company achieved annual revenue of 88.85 billion yuan (US $13.2 billion), an increase of 15.10% over the same period last year, and a net profit of 41.206 billion yuan (US $6.1 billion), an increase of 17.05% over the same period last year. This means that for every day of operation, the company can earn a profit of 113 million yuan (about US $17 million), which can be described as a strong ability to make money.

Meanwhile, on the afternoon of April 22nd, the share price of Guizhou Moutai reached a record high of 1249.49 yuan (about US $185). The company’s market capitalization recently surpassed Coca-Cola to become the world’s first share in food and beverage, while its current market capitalization surpassed ICBC to reach the highest A-share level. What even more amazing was that as Maotai’s business performance was impacted but still very good during the COVID-19 epidemic, Maotai’s share price reached more than 1800 yuan (about $266) at one point in September this year.

This means that the buyer needs to prepare at least $20000 or more for a trade in Maotai stock in the secondary market, which is enough to buy a car. Although Maotai stock has made a lot of money for many shareholders, its persistently high share price scares many traders. In spite of this, some major shareholders still insist on holding Maotai shares for a long time.

The strong performance of its capital market is supported by Maotai’s excellent financial data. As mentioned above, Maotai’s income and profitability are so outstanding that shareholders almost never need to worry about losses. 

In addition to revenue capacity, Maotai also has extremely amazing profit quality.

On the one hand, the cash flow of operating activities during the reporting period reached 45.211 billion yuan (about US $6.7 billion), higher than its net profit level. On the other hand, Maotai’s gross profit margin was as high as 91.3%, and its net profit rate was as high as 51.47%-which was no significant increase compared with the previous year, just the usual profit margin level of Maotai.

What is striking about Maotai is that its return on equity (ROE) is even higher than that of its liquor counterparts. Maotai’s weighted ROE rose to 32.95 per cent in 2017 and has remained high since then. This shows that Maotai has a strong ability to gain income from its own capital, which is also a key indicator for Maotai’s high investment value to be maintained for a long time.

Why is Maotai so strong?

The success of Maotai operation should be seen from two aspects. First of all, we need to understand its value in the hands of consumers. 

Generally speaking, China’s liquor industry believes that Maotai has three attributes: consumer goods, investment goods and luxury goods.

There is little doubt that Maotai is an excellent liquor at the consumer level. Taking into account China’s liquor culture, the more formal the occasions are, the more often the high-end liquor is drunk. Maotai frequently haunts large family dinners, as well as corporate business banquets and other occasions, so that Maotai has a fairly stable consumer group.

The curve of Maotai stock price in the past 20 years

Once upon a time, Maotai was even often used for banquets held by Chinese government departments, but after China actively restricted the consumption of public funds, Maotai consumption mainly turned to the private sector. This has once frustrated the sales of Maotai and other high-end liquors. However, the production capacity of Maotai is limited, and in the era of public consumption, there is little Maotai that private consumers can buy, so this part of the demand is hidden. In the end, it turns out that even if government consumption is greatly reduced, private demand can fully absorb the output of Maotai. Therefore, private demand continues to push up the price of Maotai. Maotai is not difficult to buy, but it is really very expensive.

In another article, I wrote about the price of Maotai: the most standard bottle, the “Feitian” Moutai (this and a better one is called Maotai by the Chinese, and cheaper wine is not called “Moutai” even if it is produced by Moutai Distillery), has 53% alcohol content in 500ml. If you want to buy it at any time, the price can be as high as 3000 yuan (more than US $400). Although the ex-factory price of Maotai is only 1499 yuan, few consumers can get Maotai at this price-because no dealer will sell it at such a cheap price.

Some liquor lovers even points out that the aroma of Maotai is very strong, which makes its taste “aggressive”. Some old people told me that their evaluation of other spirits had declined after they got used to drinking Maotai. This makes the enthusiasts of Maotai become “captives” of Maotai almost for life, or you could use ‘addiction’ to describe it.

In terms of investment products, Maotai, as a traditional Chinese liquor, has the excellent characteristics of aged liquor: the longer the age, the higher the evaluation, and of course the higher the price. The market price of a new bottle of Maotai can be as high as 3000 yuan (more than US $400). Ten years later, the price of the same bottle may be as high as 10000 yuan (more than US $1400). The Chinese joke that Maotai is the only asset that can appreciate more steadily than houses in Beijing and Shanghai. In fact, that is so true.

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Maotai has a clear insight into the psychology of consumers who regard it as an investment product, so it caters to this demand by introducing different packages of Maotai, which are often limited. For example, depending on the consumer group, there is Maotai liquor specially for the Chinese Air Force, which is obviously more precious than those on the mass market. In addition, depending on the sales channels, Maotai has limited editions available at some airports, which are more collectible.

Moreover, Maotai will launch zodiac-themed wines in different zodiac years in China, and once these wines are on the market, they will immediately become the object of competition among collectors. As for more than 30 years, 50 years old Maotai, it has become a pure investment – no one is willing to drink it anymore, because its price is often as high as hundreds of thousands of yuan.

In terms of luxury goods, although Maotai officially claims to be “not a luxury” and its packaging design is not very fastidious, in the end, Maotai has become a symbol for many consumers to show their spending power. When giving gifts, Maotai is an absolute top grade. Even if the bottle is only displayed at home, it is also a status symbol (although the Maotai bottle is not good-looking).

When the above attributes are combined, Maotai becomes an unusual commodity: it is a consumer product consumed by thousands of people, but its price is very amazing and the profit margin is very large; it has investment value, but the price is much more stable than the usual investment goods. Appreciation is almost inevitable; it is a luxury to show off, but it will eventually be consumed on some occasion and need to be repurchased, which means new demand is continuously occured.

Compared with famous cars, watches and other goods that are often depreciated over time, Maotai’s strong room for appreciation is obvious to all;  Not drinking Maotai is absolutely not the reason for you not to buy it, because it can help you make money.

Unique business around Maotai

Because of Maotai’s stable appreciation, dealers will choose to snap up Maotai without hesitation, even if the sales are not high for a while-it will be even more profitable to sell it later. This makes dealers choose to pay first and get goods later when dealing with Maotai. It is almost impossible for Maotai to be put on credit because everyone would rather give the money to Moutai one or even two years in advance to pre-order the limited Maotai liquor produced in the future.

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A dealer is cleaning his new Maotai store in Tianjin.

Many manufacturers envy Maotai’s high-quality cash flow, but only very few of them can compare with Maotai. In operation, Maotai is often criticized for lack of innovation and slow increase in output. In fact, the main assets of Moutai Liquor come from the secret liquor-making recipes handed down in history, as well as the unique soil and water environment of Moutai Town, Guizhou Province. Maotai operators sit on a pile of gold coins, it is difficult for outsiders to distinguish their business ability, but on some key issues, Maotai did make the right choice.

A particularly correct choice is related to the setbacks suffered by the entire liquor industry as mentioned earlier. When the Chinese government sharply reduced liquor consumption, many wineries judged that demand would plummet in the future and chose to lower the price of alcohol in order to clear the inventory as soon as possible and avoid huge losses. However, no matter what the decline in sales, Maotai has persisted in the strategy of not lowering prices and maintaining regular price increases in the last decade. As a result of this strategy, all dealers are more confident in Maotai and are willing to cooperate with the company to buy large quantities of bottles in advance. It can be said that Maotai’s maintenance of the brand has also won the trust of partners, killing two birds with one stone.

Another decision is that although many people criticize Maotai operators for not stepping forward, Maotai objectively protects the value of the core product Maotai Liquor without allowing more products to dilute the value of the brand. In contrast, Wuliangye, another well-known liquor in China, was once very popular in the Chinese market. However, it is greedy for spreading. Wuliangye launched hundreds of new product in the past decades, yet most of which failed to stand the test of time, but brought some negative reviews for the company.

There are also negative comments about Maotai. For example, a few of its other products have always been of low value, contributing low revenue and profits. Some people even think that it is a waste to use the precious production capacity to brew something is not real Maotai.

Perhaps Maotai’s overly conservative business strategy will cause trouble in the future, and almost everyone believes that Maotai’s share price will eventually plummet. But at least for now, Maotai is still a very healthy company, if not worth investing in, at least worth holding. If you still don’t understand why Maotai is so good, come to China, invite some friends and have a bottle of Maotai with them.