Quick Summary of Key Points
Recently, an executive from Luzhou Laojiao made an industry observation at a shareholders' meeting: The current adjustment in the liquor industry is not a minor fluctuation that would end in a couple of years, but rather a long-cycle adjustment similar to what the Japanese liquor industry experienced between 1973 and 1994, lasting for 20 years. Subsequently, some organizations analyzed the Japanese liquor consumption data from the past 50 years and found that the total sales volume followed an inverted U-shaped curve, with significant shifts in market dominance. For example, sake, which once accounted for 90% of the market share, now accounts for less than 5%; beer, once very popular, has seen its popularity decline due to the emergence of lower-tax alternatives; on the other hand, cost-effective shochu, high-end whisky, and low-alcohol fruit wines have seen a surge in sales.
The driving factors behind this trend have many similarities to those in China today, such as an aging population, more cautious spending after real estate market adjustments, and a younger generation that prefers other types of alcohol. However, there is a fundamental difference between China and Japan: the structure of the Japanese liquor market is largely shaped by the substantial tax differences between different types of alcohol, which does not exist in China. Therefore, there is no need to simply conclude that China's liquor industry will follow the same path as sake. There are still many new growth opportunities in the existing market competition.
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Detailed Analysis
1. The Japanese Liquor Market Over the Past 50 Years: From Dominance to Decline
Many people still think of sake as the national drink in Japan, but the reality is more dramatic than imagined:
- In 1973, at the peak of its popularity, 9 out of every 10 bottles of alcohol sold in Japan were sake, similar to the popularity of liquor in China. By 2023, sake's total sales volume had shrunk by three-quarters, and its market share was less than 5%, making it a niche product.
- The decline of beer is almost a paradox: it once accounted for 70% of the market, but its market share has now dropped to one-third due to the emergence of "beer-like" beverages that took advantage of tax loopholes. In contrast, traditional shochu has seen its sales nearly increase tenfold, whisky has rebounded after a significant drop, and fruit wines have seen their sales increase 135 times, becoming a mainstream category.
- Over the past 50 years, the Japanese liquor market has seen a constant shift in dominance, with no single category maintaining its lead.
2. The Underlying Reasons for the Change
The shift in the Japanese liquor market is the result of several major environmental changes:
- The aging population: Nearly 30% of the Japanese population is over 65 years old, and this group drinks less and less frequently. Additionally, there is a generational gap: the "baby boomers" grew up drinking sake, while their children are less likely to do so. Surveys show that 63% of 18-26-year-olds in Japan have never tasted sake, and 70% of young people have never drunk it.
- Financial constraints: Before the economic bubble burst, Japanese employees would often treat each other to drinks after work, and companies covered the costs of business entertainment. After the bubble burst, many people struggled to pay their mortgages, and companies cut back on entertainment expenses. Young people also reject the culture of relying on alcohol to get things done.
- The real estate crisis: The collapse of housing prices reduced household wealth by half, leading to more cautious spending on daily necessities. The decline in high-end alcohol consumption for business events and gifts is similar to the situation in China after the real estate market adjustment in 2021.
3. The Surprising Role of Taxes
A significant factor in the Japanese liquor market's transformation is the huge tax differences between different types of alcohol. For example, beer was taxed at the highest rate, leading manufacturers to reduce its malt content to avoid higher taxes. This led to the creation of "beer-like" beverages with lower tax rates. Shochu and whisky also saw tax reductions, making them more affordable and popular.
4. Lessons from the Japanese Market
The Japanese experience offers three key insights for China's liquor industry:
- Switching from Quantity to Quality and Pricing: Despite a 75% decline in total sales, the average price of high-end sake has doubled over the past 50 years, resulting in higher profits. This strategy can be applied in China, where the demand for high-end liquor remains strong despite a decline in overall production.
- Expanding into Overseas Markets: Japan's declining domestic market has been compensated by growing exports. China's liquor industry can also explore overseas markets, particularly among Chinese communities and consumers with an interest in Eastern flavors.
- Targeting New Consumers: By creating low-alcohol and flavored wines, Japanese brands have attracted younger and female consumers who previously avoided strong alcohol. This strategy can help Chinese liquor brands regain lost market share among younger consumers.
5. Will Chinese Liquor Follow the Same Path as Japanese Sake?
It is highly unlikely. Liquor in China is deeply ingrained in cultural traditions and cannot be replaced by other beverages. Moreover, the tax differences between different types of alcohol in China are not as extreme as in Japan, so it is unlikely that manufacturers will create new categories to avoid taxes and drive out existing ones.
In summary, while the Japanese liquor market has undergone significant changes, these changes are not inevitable in China due to the unique cultural and economic context. China's liquor industry can learn from Japan's experiences by focusing on quality, expanding into overseas markets, and targeting new consumers.