A salesman in a Beijing-based liquor shop is putting bottles of Moutai on a shelf. China's urbanization is helping the consumption of liquor, especially the high-end variety, to grow fast. [Photo: Chinadaily.com]

China's leading liquor maker Kweichou Moutai said yesterday it will raise its average product price by 13 percent from Jan 1, a move expected to spark a wave of price hikes in China's high-end liquor industry.

Moutai referred to "rising raw material costs, the current liquor market situation and corporate strategy requirements", as the main reasons for the price increase in a statement released yesterday.

Analysts said they had expected such a rise months ago.

"Moutai led the way and many others will probably follow suit, later this year or early next year," said Huang Wei, an analyst with China Jianyin Investment Securities.

Tong Xun, a beverage analyst at Shanghai-based Shenyin & Wanguo Securities, agreed, saying that "a 13 to 16 percent price increase may boost earnings by 20 to 24 percent, and more companies will take the measure".

Industrial analysts attributed the surge to two other issues: Growing pressure following a recent increase in consumption tax on liquor sales by the Chinese government, which has squeezed profits, and predicted growth potential for the local high-end spirits market, also the most profitable, in years ahead.

Among high-end liquor producers, Moutai has the most scope to raise the product price. The company's gap between the product price and sale price is the largest among all the manufacturers. Since 2006, the company has raised its product price once every year. The most recent price hike of 20 percent took place in January 2008.

Guizhou-based Kweichou Moutai, Sichuan-based Wuliangye Group and Luzhoulaojiao Group are the nation's top three high-end liquor makers.

"There is a high possibility that Luzhoulaojiao will raise its product price soon, following a market test of an increase," said Teng Wenfei, a food and beverage analyst at Shanghai Securities.

Wuliangye, the second largest player, will also do the same, in a bid to catch up with its archrival Moutai for more profits, predicted Teng.

Moutai's price hike ignited investor confidence in liquor manufacturers yesterday. Moutai shares rose for the first time in four days yesterday, gaining 3.29 percent to 176.53 yuan.

Wuliangye closed at 29.65 yuan, up by 2.35 percent. Luzhoulaojiao grew by 1.88 percent to 38 yuan.

It is estimated a rise in the product prices from 2 to 10 percent could help liquor makers to boost profitability. "The 13 percentage points will translate into good profits for Moutai," said an insider.

Despite the fact that the financial crisis hurt the high-end liquor makers, China's economic stimulus package, recovering economic growth, and the rich liquor culture are boosting the market and encouraging the makers to raise prices.

"By 2020 when China's urbanization ratio will be higher, consumption of liquor, especially high-end liquor, will grow fast," said Huang.