Focusing on cash flow to fight crisis
Gujing’s growing pains and path to success
By Ding Yuan and Zhang Hua
In the 1980s and 1990s, Anhui Gujing Distillery transformed itself from an unknown local distillery into Gujing Group, with billions of yuan in assets. Located in Eastern China’s Anhui Province, the distillery is best known for its Gujing Tribute Liquor, one of China’s well-known liquors that has a history of hundreds of years.
In the 1980s, Gujing Distillery expanded, funded by debt and fuelled by China’s transition from a planned economy to a market economy. By 1995, Gujing Distillery was the second-most profitable liquor maker in China, with pre-tax profits of 595 million yuan.
In 1996, it became the first publicly-listed liquor maker with its listing on the Shenzhen Stock Exchange, and began a round of diversified expansion into a wide spread of sectors that ranged from pharmaceutical products to hotels.
By 2000, it had over 30 wholly-owned or controlled subsidiaries in more than 20 sectors. However, the different companies became bogged down in a string of troubles that ate away at profits as liquor sales began to fall.
In 1997, with Asia being battered by a financial crisis, was a turning point for Gujing Distillery; it began to feel the effects of the recession. Investments ― both at the distillery and the group level ― went sour and by 2000 the distillery began downsizing.
The group was plagued by allegations of unfair distribution of stock ownership and its consecutive losses placed the distillery in danger of being delisted.
By April 2007, several of the group’s senior executives were under investigation by the authorities for serious disciplinary offences. It was time to halt the company’s aggressive expansion. The once-promising Gujing Group was facing a crisis.
On Aug. 29, 2007, Gujing Distillery held an extraordinary general meeting of shareholders and dismissed three directors. A new young management team was appointed, headed by Chairman Cao Jie.
Gujing Distillery started its revitalisation progress. The new management soon put forward a “refocus and revitalisation” development plan, in which the strategy was to “refocus on the core liquor business, and reoccupy the top-end market share” as the chairman put it.
This included a series of steps. They adjusted the product mix by eliminating low-profit, low-end products and putting more emphasis and money into marketing its top-end drinks, such as Gujinggong and Gujing Tribute Liquor.
In addition to building up a bigger and better marketing team and strengthening its distribution network, the company also conducted market research to gain deeper insight into the market dynamics and consumers’ changing demands.
By 2008, it had cut the number of brands to 259, down from more than 874 in 2007 and 1,000 in 2006.
Gujing also worked with the China Liquor Industry Association, the body officially sanctioned by the government to set industry standards. Guided by the association, Gujing established itself as the standard-setter for the market’s light-flavoured drinks.
Then in 2009, Gujing Group began to extricate itself from enterprises that were less relevant to its core business.
The driving factor in its decision-making process was always its future financial health. For example, it got out of the non-profitable and investment-intensive agro-product processing sector ― wheat and other grain ― shed its loss-making printing business and exited the hotel industry.
Having achieved a better focus, Gujing wanted to lower the cost of operations. It devised 75 cost-saving programs. For example it managed to slash procurement costs by about 15 percent. Meanwhile, the company established an internal audit department to conduct budget management with a focus on cash flow, accounts receivable, inventory and many more. The aim was to improve the performance measurement and budget management by combining management objectives with key performance metrics.
Their efforts paid off.