Private equity investors are betting China's hard driving middle class can be convinced to relax and have a drink.
Why else would a top global firm like KKR & Co. join other investors in a more than $100 million deal to back the operator of China's largest network of liquor stores?
Earlier today KKR said that it had done just that, and joined New Horizon Capital, a Chinese private equity firm founded by Winston Wen, the son of Chinese premier Wen Jiabao, in financing VATS Liquor Store Co.
Of all the investment opportunities in China, why liquor stores? For China's consumers, VATS offers a trusted source for high-end Chinese and imported liquors, in a market that is overrun with fakes, said one person with knowledge of the deal.
China's business culture has long cultivated heavy drinking as a part of deal making, but as elites begin to indulge in the luxury lifestyle, recreational drinking is growing, and high-end brands are the order of the day.
And in a country famous for knock-off luxury goods like watches, bags, clothes, and shoes, it's no wonder there are also companies doing a booming business in fake liquor and cigarettes.
"If people buy Moutai [a famous brand of baijiu, a sorghum-based liquor], or French wine in your local convenience store, 90% of them are fakes," said the person with knowledge of the deal. "If you go to the Moutai site and look at their annual report in terms of production, annual consumption in China is ten times what the company actually produces."
Liquor is huge moneymaker in China already, and getting bigger every year. The country's baijiu market racks up annual sales of approximately $27 billion while consumption of bottled baijiu has risen at 20% a year over the past five years, according to China's National Bureau of Statistics.
VATS, founded in 2005, operates over 270 liquor stores across mainland China. The company stocks premium Chinese liquor brands like Wuliangye Vintage Series, Guyuelongshan Vintage Series, Zhenjiu and Xiangjiao, along with high-end Western wine and liquor brands like Lafite, Latour, and even Laphroaig scotch whiskey.
The chain has made the reliability of its stock a central part of its sales pitch, occasionally launching public relations campaigns warning consumers over the ubiquity of fake alcohol in China. In an interview with local media earlier this year (in Chinese), the company's chairman Wu Xiangdong, claimed the company had not once had a customer complain about being sold fake alcohol in the five years the company has operated.