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Much has been written about the potential and growth of the ‘Chinese wine market’, as though a cohesive, recognizable and quantifiable market exists. In reality, numerous clusters of distinctively different markets exist within China and the national statistics available through the customs and statistics departments, are more a moving target than a set of reliable and fixed figures. Each potential ‘Chinese market’ is guided by a strong provincial government that answers to the national communist party. Each market is unique and locals often prefer to speak in their regional dialect than the national language taught at school. In Xinjiang for example, where vineyards are increasing at the fastest rate in China, about half of the population are Uyghur, with their own unique language and customs more akin to the Middle East than Central Asia.
In this vast and diverse country that hopes to join the ranks of the G8 economic powerhouses, wine is an aspirational beverage. With consumption rising at 10-15% per year it can be tempting for producers whose traditional markets are stagnant to consider China as a possible solution to their problems. Though there is little doubt that the market will continue to expand, the challenges are numerous: Lack of transparency and unreliable information, dominance of the domestic giants, consumer and cultural challenges and finally, distribution and logistics. Two aspects of China’s character as a country that should not be underestimated are: Their goal for agricultural self-sufficiency, under which category wine falls, and the strong sense of nationalism and pride which no doubt the 2008 Olympics will only fuel.
Slippery figures
China’s officially released government statistics are a moving target. Paul French, the publishing and marketing director of Access Asia, a market research firm based in Shanghai says, “Back figures are constantly revised (by the government) so I see fluctuations in numbers every year.”
French says many of the figures need to be cross referenced with practical market knowledge and independent analysis. Government figures only reveal what they what you to see for that particular year. Domestic consumption figures vary from just under 500 million litres (according to Euromonitor) to 360 million litres (the latest 2006 Vinexpo market research report) and 400 million according to foreign trade departments such as Austrade. The differences may seem trivial; however, in light of domestic wine production, this number is the difference between a surplus or deficit situation. According to China’s National Statistic’s Bureau, domestic wineries in China produced 434 million litres of wine last year.
Market analysts from Bank of China to UBS do agree on several key aspects of wine importation and consumption throughout China: Imports total somewhere between 3% (Vinexpo 2006 study) to 5% (Macquarie Research) of the total volume of wines consumed. |
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Within the imported wines, the vast majority, up to 90%, arrives in bulk on the eastern shores in 20,000 litre containers with an average price of US$0.50 per litre. Encouraging statistics such as the 150% increase in imports since 2000 must be considered in light of the fact that since 1998 the percentage of imports as part of the total wine market is declining.
Using numerous sources, including China’s official customs statistics, Access Asia’s 2005 wine market study points to the steady decline of the percentage of imported wines against the total consumption volume from 40% in 1998 to 10% in 2004 and currently only about 5%. In the Vinexpo study, the percentage of wine in total alcoholic beverages in 1996 was 8%, while spirits enjoyed 25% and beer 65%. In 2005, wine’s percentage shrunk to just 5%, with beer gaining and spirits also losing. According to Access Asia, the total value of wine imports has been in decline for seven years.
What these figures show is that while the pie is getting bigger, it is the domestic producers who are taking the lion’s share. However, there are still many reasons to be hopeful: There is steady growth and major importers of bottled wine have reported 30-50% year-on-year sales increases for the past three years. Since China joined WTO, duties for wine have come down significantly from 45% to 14%. However, with all taxes added, the total is closer to 50%. Bong Ha, greater China regional manager of Constellation wines based in Beijing says, “Prices have not really come down. While recent laws are making the logistics of importing wine easier, the enforcement is stricter. Ten years ago, everyone underdeclared. Now the government is looking at the paperwork more closely.” Since early 2006, the criteria for accurate translation of imported wine labels has been eased, alleviating a bottleneck which was a problem even a year ago.
There is opportunity for everyone is this burgeoning land. The total value of the market is close to US$1 billion according to the latest wine sales figures from the National Statistic’s Bureau. Analysts such as Euromonitor paint a rosier picture and figures between US$3 to 7 billion are not uncommon. What is important about all these confusing numbers, is that growth percentages are similar, in the double digits across the board.
Domestic giants
Three of the largest Chinese wineries – Changyu, Dynasty and Great Wall - enjoy about 50% of the entire market. The top ten wineries have an 80% market share. The large producers all plan to grow by at least 25%, if not more, in 2007. Gao Xiaode, executive director and general manager of Dynasty, says they will double their production capacity to 60,000 tons by 2008. Great Wall plans to increase production by 30% per year over the next few years. Fu Mingzhi, deputy general manager of Changyu-Castel winery, says, “We expect substantial growth in China’s wine industry with 20% increase in |
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production, reaching about 500,000 tons for the entire country over the next few years. On the consumption side, we project a 15% increase during the same time period.” Like many senior executives in management positions, Fu is also the local Deputy Secretary of the Communist Party.
This close link between the producer and the communist party is significant. It is a theme found among nearly all the successful domestic wineries, many of which, like Changyu, are closely allied with the local government. Vini Suntime, one of the fastest growing wineries in China, was established by the national People’s Liberation Army. The local Yantai government has substantial shares in Changyu, with foreign partners such as Illva Saronno from Italy and France’s Castel group investing huge sums to ensure the company’s continuing
success. Currently, Changyu is the largest producer by value and enjoys 18% of total wine sales. The Great Wall group, the largest producer by volume, is 100% owned by one of the national government’s largest import and export companies.
The close government ties by domestic players pose several challenges for importers: First, the wholesale and distribution channels are closely regulated, if not operated, by the local government. Second, the hidden costs of selling wine increases as competition forces local players to create more incentives to move their product. Third, there is little incentive for local governments to enforce regulation created to encourage label integrity, be it the correct vintage or blending of imported bulk wine then labelled ‘Produced in China’. Although by law Chinese wine must be produced from domestically grown grapes, enforcement is non-existent. All major producers officially deny inclusion of imported wine into their product, but the large volumes of imported bulk have to go somewhere.
Brand dominance
The emergence of the top ten domestic producers over the past twenty years has created a market that is both brand conscious and loyal. For example, Access Asia’s report states that Dynasty is especially strong in coastal cities such as Shanghai, Hangzhou and Suzhou. In southern China, Great Wall holds over 30% of that region’s retail market. Changyu and Great Wall perform well across all national markets, but in Beijing, Changyu commands an especially strong following.
According to Paul French, “Unlike in other food markets, Chinese wine consumers are loyal to their favoured brands. All the top brands in the wine market enjoy high brand loyalty, which is calculated in surveys as repeat purchases: Changyu with 56.7%, Great Wall 72.6%, Dynasty 56.3%, Weilong 48.3%, China Red 50.9%, Qingdao 43.9%.”
China is currently a brand dominated market with local companies having a near monopoly at every price point. While Changyu and Great Wall’s entry basic wines are around 20 RMB (€1,98), their mid-market wines, which compete |
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with entry level imports, are between 50-100 RMB (€4,95-9,90), and their super premium wines, beautifully packaged in bright red and gold, usually from an unlimited supply of a said vintage, with the current favourite being 1994, may be found at 300 (€29,75) to over 500 RMB (€49,60).
Logistic and distribution woes
Distribution of domestic products was entirely controlled by the National Sugar and Wines Corporation and its local branches until just recently when foreign and joint venture companies were allowed to use their own distribution channels. However, regulation is tightly controlled by the provincial governments: The domestic alcoholic beverages industry is controlled by the China Light Industry Association and the Municipal Liquor Monopoly Bureau issues wholesale and retail licenses. These government bodies are gatekeepers to local consumer markets, which are distinct from the growing expatriate and western-educated Chinese market.
According to Access Asia, there are around two million wholesale establishments in China, at all levels of the industry, with an average staff size of about six people. The vast majority are one-man trucking operations taking agricultural produce to market. Beer companies have opted to control their own distribution and it is probably only a matter of time before wine importers will follow suit.
Navigating the local distribution system is so difficult, expensive and challenging that even local producers have given up and are using alternative channels. Boutique player, Grace Winery, instead of using traditional distribution channels, is setting up their own shops. With cheap rents and inexpensive labour, Judy Chan, Grace’s CEO, feels it is more lucrative to operate a small shop selling just their own range than to pay off layers of buying, management and sales teams. Chan expects to have ten shops by the end of 2007.
A local sales director for a large wine importing company based in Shanghai who wanted to remain anonymous says, “For a wine to enter a Chinese restaurant, there are many different hidden fees: The biggest is the listing fee, whether on a restaurant list or a retailer’s shelf. These range from 10,000 RMB (€990) to 500,000 RMB (€49,500) – and such payments are mostly under the table. If it is an exclusive arrangement, the cost can be as much as 700,000 RMB. Gift packets, or payments, are made to everyone related to the business – from sales staff, purchasing manager, accounting manager, food and beverage manager to the general manager and owner. There is almost always a payment made to the restaurant for every cork returned, which ranges from 5 to 50 RMB. A proprietary payment offers the producer exclusive rights during a set period of time to send promotional girls who are paid a salary and a commission for every bottle they sell. The persons promoting or selling wine play important roles since many consumers often do not know much about wine and |
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will follow the promoter or the waiter’s recommendation.”
Besides the hidden costs, logistics for moving goods around in China can be a nightmare. The sales director confides, “We once hired a Shanghai company to deliver some wines to a client’s office. Because of the city’s regulation, deliveries could only be made late at night. They just left the wines at the lobby and the bottles disappeared. When we called to follow up and complain, they hung up.”
Payment terms are 90 days for wholesalers and 30 days for retailers. Don St. Pierre Jr of ASC says there are several categories of markets in China, which they have identified as high risk. Local bars, karaokes and nightclubs are among this category because they are notorious for not paying their debts. This sector also has a high turnover, so a popular club may be closed overnight and resurface under a different name, but with the same investors. St. Pierre says that ASC is now in a position not to have to sell to high risk customers. “However,” he adds, “in the beginning we had to [take the risks] because the market was so small.” The magnitude of this problem is highlighted by Montrose, once one of the major players among importers, who is rumoured to be in financial difficulty due to the number of outstanding invoices.
In preparation for the 2008 Olympics in Beijing and the 2010 World Expo in Shanghai, new hotels, shopping outlets and international multiple grocers such as Wal-Mart and Carrefour are opening at breakneck pace. Importers will continue to have much greater options as the potential market expands. Hopefully some of these new ventures will target the small off-trade segment which is currently only around 20-30%.
Consumers first
The population of the affluent provinces along the eastern and southern coast in China is about 420 million. Among those, market analysts believe approximately half are able to afford wine. Although no reliable figure exists for how many of these would choose to drink wine, it is most likely that the new wine consumer will be aged between 25 and 40, most likely male, living with relatively high income in one of the top ten cities. Nearly every major coastal city has its own dialect – and eating and drinking habits differ widely. Shanghai and Guangzhou, both with long historical ties to the west, are the two wealthiest provinces in terms of average per capita income.
Both cities sell more white wines, for example, than the national average, which remains at about 80% red to 20% white. The shelf of Carrefour’s Gubei branch, acknowledged by many to have the best wine selection, is a colourful, red and gold tribute to Chinese packaging specialists. The majority of wine purchases are during the major holidays – Chinese New Year, Spring Festival and mid-Autumn festival. Most of the wines are destined for gifts, often to people who do not even own wine glasses or corkscrews at |
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home. French confides. “I often receive so many of these red boxed wines that I am convinced that many were re-circulated. I do that too.” Critics of local brands point to the high prices relative to the wine’s quality and the wide bottle variation and questionable label integrity. How long will it be before the consumer can tell the difference and demand the imported wine? If consumers were drinking wine, together with a meal, lingering over the fine, or not so fine, qualities of a wine, perhaps that time would come soon. However, a trip to any major Chinese city will reveal that wines are rarely consumed with everyday, comfort food. Wine bottles are being pushed as an alternative to beer or spirits and, more often than not, consumed as part of a social lubricant. However, the advent of fine dining establishments and the proliferation of western restaurants offer the opportunity to appreciate wine as part of the dining experience.
A relatively simplistic mentality exists in many parts of northeast Asia: Eating is for eating and drinking is for drinking. Eating, for the most part, is done traditionally without any beverages that might detract from the pure enjoyment, whether it be devouring a bowl of noodles or savouring the fine delicate flavours of steamed abalone. This is true in most cities in China, Korea as well as Japan. Tea is the only traditional beverage served with food and more recently beer. In addition, Chinese believe that cold beverages are not healthy, especially in summer months and particularly not for girls since cold brings too much yin into the body, with the potential to decrease fertility. Drinking alcoholic beverages is often for enhancing social interaction and breaking down the rigid and formal barriers between people. With wine replacing whisky as the healthier and trendier option, the kampai, or bottom’s up culture, applies equally to wine.
Looking towards 2008
There are subtle signs that despite the robust forecasts of domestic producers, the picture may not be what it seems. During vineyard and winery visits to Shandong, Hebei and Xinjiang provinces at the height of harvest in mid September of 2006, a group of Austral-Asian wine professionals were surprised at the inactivity in major wineries such as Great Wall Yantai (Shandong province), Changyu (Shandong province) and Vini Suntime (Xinjiang province). At Suntime, chief winemaker Robert Wu, said, “We can process a maximum of 120,000 tons per year. Our maximum output was 80,000 tons in 2005, but in 2006 it will be 60,000 tons.” As an explanation, Wu cited smaller wineries who were ‘stealing’ their grape sources by paying more. On the bottling lines of the Great Wall Yantai, 2003 whites were being bottled in 2006. It could be a question of label integrity or it could be that wine is not selling as well nor as quickly as the figures being bandied about.
One of the biggest challenges for the future will be bridging the cultural gap between |
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China and traditional wine consuming countries. Differences are inherent in even the language of wine. The word wine has no direct translation except hong jiu (red alcohol) or bai jiu (white alcohol), which usually means spirits, but can also mean white wine. Hardly anyone uses the more precise term, putao jiu (grape alcohol) for wine. Even ‘winery’ translates into the very unglamorous ‘grape production factory’. Looking at Japan, the most mature wine market in Asia, the saturation point may have already been reached at two litres per capita consumption. The reality check is a visit to one of the narrow noodle counters where there is barely room for a plate or bowl, much less a wine bottle and wine glass. Despite the challenges ahead, importers do have distinct advantages. Generally, foreign brands are highly regarded and considered superior in quality. The international reputation and the higher prices enjoyed by foreign brands confer a sense of achievement, pride and social standing in being able to afford the higher priced, higher quality foreign products. The large local producers are paving the way for importers who, if they are nimble enough, have much to gain from the marketing efforts of these giants. Every sector and price point in the market offers opportunities. For the branded wines, the opening of new distribution channels via multiple grocers and discount warehouses will enable greater exposure. For premium and luxury items, there are also plenty of opportunities for those who can navigate the complex market.
Nicholas Pegna, managing director of Berry Brothers and Rudd Hong Kong says, “The fine wine market in China is beginning to take off, but it is still at an early stage, comparable to Japan in the early 90’s or Hong Kong in the mid 90’s. Demand tends to be label driven, being predominantly for first growth Bordeaux, especially Lafite. Of our total sales of 2005 Bordeaux, Asia accounted for 30%, and approximately 8% overall to China.”
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