Marketing U.S. Wine in China

An Expert's View about Wine in China

Posted on: 3 Jun 2012

The wine market in China is growing rapidly and is highly competitive. While U.S. wine exports to China continue to increase at double digit rates, our share of China's wine market is falling.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Voluntary Public - Date: 4/19/2012 GAIN Report Number: 12805 China - Peoples Republic of Post: Shanghai ATO Marketing U.S. Wine in China Report Categories: Wine Approved By: Keith Schneller Prepared By: Kate Chan Research Report Highlights: The wine market in China is growing rapidly and is highly competitive. While U.S. wine exports to China continue to increase at double digit rates, our share of China's wine market is falling due to aggressive promotion by our competitors. American wines are premium products, but still relatively unknown to Chinese wine consumers. Introduction The wine market in China is growing rapidly and is highly competitive. U.S. wines are generally not known and the U.S. share of the wine market continues to slide in the face of aggressive promotion by our competitors. Our wines are generally premium products and should be priced as such when appropriate. But neither our industry nor most individual wineries have been willing or able to put in the resources necessary to market a luxury product. The following report was commissioned by the Agricultural Trade Office in Shanghai, China and was written by Kate Chan Research. It provides a valuable perspective on the wine market and how U.S. wines and the U.S. wine industry should go about marketing their products in China. Notes 1) In this report, the term “wine” refers specifically to still grape wine unless otherwise indicated- examples include “grape based alcoholic beverage”, etc. 2) The term imported “grape based alcoholic beverage” includes sparkling wine, still grape wine, vermouth and spirits. 3) China’s imported (still grape) wine accounted for approximately 93% of China’s total imported grape based alcoholic beverage. This report is mainly focused on “wine” – still grape wine. Executive Summary Market Position Imported wines are identified as luxury/high end goods in China. While imported wines are not necessarily considered luxury products in the U.S.A and in Europe, they are viewed as such in China. Due to their relatively high price they reach a wealthy clientele. By definition they are a relatively high-priced, identity or status symbol of an elite/wealthy group, etc and have some high quality characteristics. Therefore, American wines need to position themselves as (mid high to) high end in China. Most importantly, the American wine industry needs to promote itself jointly with American wine importers/distributors in China. Reasons Basically, there are three main reasons: 1. With the rapid development of the wine industry in China, the Chinese will know about quality wines sooner rather than later - like many currently developed countries. The development pace will be faster in China than in previously developed countries; 2. Imported wines are considered to be a luxury product in China, and will be undoubtedly welcomed by Chinese luxury consumers. This group of customers, currently estimated at 169 million people, are typical target customers of American wines; 3. The initial impression is significantly important, especially for American wines in China. Similar to the French market positioning, “American wines” should position themselves as a high end brands. This will help develop a image and better sales in the Chinese wine market. More detailed information is presented in the following sections. Summary China is changing rapidly and developing preferences for particular products and for products from certain countries. New world, including American, wines are emerging along with the development of the wine consumer. The Chinese wine industry continues to develop rapidly. Chinese wine consumption reached approximately 1.4 billion liters and 36 billion RMB in both volume and value in 2010. Imported wines accounted for approximately 20% in volume, with an AAGR of approximately 60%. By 2015, the market share of imported wines (including American wines) is expected to be approximately 30% to 45%. Generally, there are significant opportunities for American wine companies wishing to develop their market in China. Imported Wines & American Wines Wine imports wines reached approximately 283 million liters and 770 million USD in volume and value in China in 2010, an increase of 60% to 70%. American wine imports grew to approximately 37 million USD, and accounted for 4.8% of the total imported wine, an increase of 42%. The United States is ranked as the number 6 wine exporting country to China. The pricing of American and French wines is comparable in China, with American wine being 45% higher than the average. Though, interestingly, the general growth of American wines is NOT affected. This shows that the purchasing power of the target Chinese customer is high; therefore appropriate marketing activities are needed to bolster sales. Market Opportunities Many market participants are speculating that China may gradually reduce import tariffs on wines by 2% to 15% in the next 5 years. If that occurs, annual imported wine consumption is expected to gradually increase to approximately 600 million liters from the present 283 million liters by 2015. Geographical Segmentation of Consumption on Imported Wines Market sizes vary vastly across the different regions of China. The largest regions are, in order of size, East, North, and South China. China’s four largest markets for imported wines - Shanghai, Beijing, Shandong and Guangdong - jointly account for approximately 80% of total consumption (equivalent to 235 million liters). Shanghai and Beijing are the largest markets for imported wines and are about the same size. They are followed by Shandong and Guangdong. Regulatory Market Entry Barriers Imported wines are subject to approximately 12 Regulations and 9 specific National Standards under Chinese law. The National Standards are sometimes slightly different from international standards. This is especially true with the labelling requirements outlined in Chinese National Standards GB7718-2004 and GB10344. For detailed information, please see Chapter 3.8. The total duty paid on wine is calculated using a compound formula that involves three taxes, as opposed to simply adding the rates together. The three rates are the consumption tax, the value added tax (VAT), and the import tax. For bottled wine total duties equate to 48.2 %; for bulk wine duties are 56 %. For detailed information, please see Chapter 3.8.2. All necessary custom requirements and the implementation should be known, and carried out by an experienced local partner on behalf of American wine companies. Imported Wine Consumer Primary and secondary research conducted for this study resulted in several key findings. Approximately 70% of Chinese do not have “wine knowledge”, and most Chinese wine consumers are males between 30 to 50 years old. The group of 40 to 50 year olds in senior positions is the primary target customer of imported wines. They are often businessman or government officials who drink wine at important business lunches and dinners. This type of corporate consumption often takes place in Hotels, Bars/Clubs/Karaoke bars and Restaurants. These consumers have a disposable annual income of above RMB 56,000 and work in high-income sectors. These include Finance, Software, Air transport, Tobacco, etc. These consumers are regarded as the China’s upper middle class and/or highest income class, and have a total population of approximately 25 million. Consumer Purchasing Preferences Structured questionnaires with sales managers of imported wines, as well as extensive discussions with wine importers revealed some interesting initial findings: The off-trade sector is mainly characterized by INDIVIDUAL consumption, and the on-trade sector is mainly characterized by CORPORATE consumption in China. Corporate Consumer vs Individual Consumer CORPORATE Consumer INDIVIDUAL Consumer 80-20 Rule 80% 20% Main Purchasing Channels Hotels, Bars/Clubs/Karaoke bars, Restaurants Hypermarkets & supermarkets On and off-trade Sector On-trade sector Off-trade sector Consumption Type Corporate consumption Individual consumption Customer Type B2B & B2C B2C Sales Type “One to all to One” “One to One” Preferred Sales Approach “VIP Membership benefits” “Discount” Impulsive Consumption More Less Source: KateChanResearch Note: There are channels that have a mixture of both corporate consumers and individual consumers, such as specialty wine chain stores etc. CORPORATE consumption generated approximately 80% of the sales revenue of imported wines, and happens mostly in the hotels, bars/clubs/karaoke bars (BCKs), and resaurants of the on-trade sector. Followed by INDIVIDUAL consumption, which mainly happens in the hypermarkets & supermarkets of the off-trade sector. Gifting is the most important purchasing trigger for the INDIVIDUAL consumer. “Quality”, “Taste” , etc., on the other hand, seem less important to them as compared with “gifting”. Consumption frequency of imported wines is quite high. The Chinese INDIVIDUAL consumer purchases imported wines 6 to 10 times a year and purchases 4 bottles/time. Individual purchase reached 24 to 40 bottles per year, but the wine was still used primarily as gifts. See detailed Chapter 4.4.1 The most chosen price for a bottle of imported wine is “RMB 200 to RMB 500”. Of the nearly half of buyers that went for “above RMB 500”, they are usually high-income INDIVIDUAL/CORPORATE consumers. Note that these Chinese consumers might not know what they really want, even if they can afford to buy almost any high-end wine. Prices are not the issue as long as it is believed that it is the market price and is compatible with the quality of the wine. Brand loyalty - Chinese consumers do not have high loyalty to one particular brand or wine, and tend to try various brands and wines. While Chinese consumers choose “Discount” as the most traditional, effective and preferred, sales approach, American wines may call for a different approach. The target customer of imported wines is the Chinese luxury consumer. They respond better to concepts like “VIP/membership benefits”, and “buy one get one gift”. These can both make Chinese consumers feel like a real VIP, and strengthen the high-end brand image. Research also shows many potential customers can be reached by “word of mouth”. Internet forums, microbloggings (weibo) [1] , and verbal recommendations/marketing by a distributorship are also effective. Thus, from a marketing perspective, retaining existing clients is equally important as client acquisition in this growing market. The nationality of wine is the most influential factor affecting purchasing decisions of customers in China. This is followed by “Taste”, “Brand”, “Quality”, etc. Marketing “American” wine is absolutely necessary. This requires American wine companies to effectively promote the image of “American” wine in China. The Unique Selling Points of “American” wine need to be emphasized and marketing activities need to be reinforced to gain more and optimize brand exposure for “Imported from the U.S.A”. The majority of the interviewees suggested that American wine suppliers increase brand awareness of American wines in the market through more marketing and promotional activities, like wine tasting events, etc. Local Partnership & Distribution There is an old saying that - “To have a good rider with a reasonable horse is better than to have a reasonable rider with a good horse.” Ideally, you want to have both a good rider and horse (importer and distributor, respectively). Or, the rider (the importer) must be good. 1, Basic Conditions We believe that in most cases the following conditions should show the capability and competency of the local importer. (For detailed Selection Criteria of local partner, please see Appendix 7.5) No. Main Selection Criteria of Local Importer 1 To be a financially sound/liquid company, and have experience in the market (not start-up); 2 To have a certain budget for initial market product promotion and development; 3 To have extensive knowledge of the Chinese wine market; 4 To have access to distribution channels in the premium segment (no discounters); 5 To have relations with relevant authorities and communication channels that can positively influence wine sales; 6 To have infrastructure (IT, logistics), as well as sales and marketing force; 7 To have partners that have possible synergy or complementary products in their product range; 8 To have English language skills; 9 To be able to register/label the products for American wine companies and also handle import and customs procedures Source: KateChanResearch Note: Strategic Partner Search is really necessary. 2, Distribution Successfully and effectively entering the Chinese market requires a strategic and solid partnership between the American wine companies and a successful local partner with extensive knowledge of the Chinese wine market. It also requires a strong distribution network and prioritized distribution channels. Additionally, the ideal partner should have sound cash flow and branch offices ideally located in major cities of China - such as Shanghai, Beijing, Guangdong. The offices should be effective in developing their geographically divided markets as well as sub-tier distributors. These support the ultimate goal of covering as many locations and profitable channels as possible in China. 3, Traditional Distribution Channels Ensuring that the local partner uses the most profitable distribution channel is a determinative factor to assure sales performance in China. Results showed that hotels, bars/clubs/karaoke bars (BCKs), and restaurants of the on-trade sector are the most important distribution channels. American wine companies and their importer will need to focus on these as a priority. 4, Emerging/Alternative Distribution Channel The wine specialty chain store (aimed at both corporate and individual consumption) is the new fast growing channel in the Chinese wine market, and consists of four typical models as follows. Featuring exclusivity: 1. “Straight Wine Importer + Exclusive Distributor + Online Store” (SWIEDO); 2. “Straight Wine Importer + Exclusive Distributor + Direct-owned Stores” (SWIEDS); Featuring non-exclusivity: 1. “Importer + Exclusive Distributor + Online Store and Franchise Stores” (IEOF); 2. “Comprehensive Online Stores of Wine” (COSW). See chapter 4.4 for more details. It is very important to identify the right model in accordance with requirements of the marketing and sales objectives. 5, Sub-tier Distributors Sub-tier distributors are the key sales force of American wines. The efforts of 10,000 distributors are much more effective than that of 1,000 distributors, especially in the retail business. Strengthening and developing appropriate distributorships offering more motivated “Stairs Type” margin incentives is absolutely necessary. Competitors Six competitors were identified in China. They are the leading domestic companies of Changyu, COFCO’s Great Wall and Dynasty, and the leading importing countries of France, Australia and Chile. While some, such as the French, Australians, and Chileans, offer wines which are very similar to American wines, the others like Changyu, COFCO’s Great Wall, and Dynasty, offer slightly different quality wines and pricing. Nonetheless, these local players could compete with American wines in some particular ranges, being both the pricing and positioning of low and mid end, etc. These competitors have seized approximately 50% of the Chinese wine market. They generally operate via extensive networks of distributors and constantly invest in an array of marketing and promotional activities. (For detailes, please see below.) Leading Domestic Companies (1) Changyu COFCO’s Great Wall Dynasty Year of 1892 1980s 1980s Establishment for Wines Market Share 19% 12% 5% Sales Value in 5 billion RMB 3.1 billion RMB 1.3 billion RMB 2010 AAGR 18% 15.6% 12.38% Production 200,000 tons 100,000 tons 70,000 tons Capacity IPO Yes Yes Yes Distribution 29 provinces through a vast Reaches all parts of China. Dynasty enlists national distributors to Network network of distributors, reach all provinces, autonomous regions, wholesalers, and retailers that is municipalities, and special administrative well over 3,000 members strong. regions governed by China. Market Mid-end to high-end Low-end to low mid-end. Relatively high-end Positioning It has recently been experimenting with high- end lines. Main Foreign Joint venture with French based COFCO purchased Joint venture with Remy Martin Partnership Groupe Castel and Canadian based Château de Viaud situated Aurora Ice Wine Ltd. in Bordeaux, France. COFCO is willing to buy wineries in the U.S.A. in the coming 5 years. Main Marketing Strategies: In order to accelerate business growth and fortify market positions, their strategic focus is to leverage the brand equity and to continue to strengthen and expand distribution channels and networks by planning to establish retails shops/specialty chain stores in certain selected markets in China; evaluating appropriate acquisition opportunities and distributorships for foreign brand wines. Source: KateChanResearch Leading Importing Countries (2) France Australia Chile Share of Imports 45% 19% 10% Growth Rate in 2010 86% 53% 40% Entry Time 1980 2002 2006 Business Model Through Sino-French joint venture. Partnership with Dynasty. Partnership with COFCO. Dynasty is willing to buy COFCO bought a winery in Chile. wineries in Australia. Prioritized Starting from East as the priority, Starting from East China Starting from North China Geographical then North and South China Target Main Local Dynasty, Changyu, Sopexa Austrade’s 15 offices in China Their local government in China Partnership Main Marketing 1, Use extensive distribution 1, Made its presence known 1, Entered a free trade agreement Activities in China networks of local partners like through creative promotions with China; Dynasty, Changyu and Sopexa; and branding; 2, Promote the country itself 2, Invest in local partners to 2, Use Austrade’s support whilst implement a series of orchestrate an array of promotional programs and financial promotional activities; activities. assistance; 3, Book tour of Chilean Wines; 3, Book tour of Australian W ines 4, Use government support Source: KateChanResearch Note: For detailed, please see Chapter Competitors. SWOT Analysis Exporting Wine to China Source: CH9808 Report of ATO American Wines in China To describe the situation of American wines in China, the following SWOT analysis was conducted. Market conditions are evaluated and listed in accordance with the internal and external factors in the China market below. The SWOT analysis shows that at present American wines are located near the center of the SWOT grid covering quadrants of A, B, C and D. Results indicate that “American Wines” in China currently have slightly more weaknesses versus strengths. The weaknesses are mainly linked to missing marketing activities, brand promotion, and sufficient sales and distributorships in China. The positive side is that there is absolutely no doubt that “American Wines” are a supreme product with a number of strengths such as high quality, growing customer retention, production resources, country image, etc. These just have to be better exploited in China. Keys to Success “Ask not what the market can do for you - ask what you can do for the market.” The most important key in a successful export strategy to China is providing full support, especially marketing operations and sales related incentives, to local partners in the wine market. U.S. wine companies will be disappointed if they only rely on their Chinese counterparts to promote and sell their products without their own marketing involvement or financial support. This is especially true in the Chinese wine sector, where active promotions and distributor motivation – the most important sales force – can make or break a wine’s chances of success. Chinese nationwide distribution success stories tend to come after labels build upon their marketing and promotion, putting in the ground work and time for creating and developing their market. Importers and distributors act more or less as the gatekeepers to the market, due to their allocated responsibilities (see below), based on harmonic partnerships rather than competition. Tier Party Key Responsibility Scope of Work Tier 1 Exporters Production & Marketing 1, assure sustainable supply capability; Operations 2, provide marketing operations; 3, promote the brand itself/or engage a third party to carry out the activities on it behalf. Tier 2 Importers Distribution Network 1, establish the distribution network; Building 2, expand distribution channels; 3, develop more sub-tier distributorships by region or channel Tier 3 or Distributors (sales Sales Network Building 1, develop sub-tier distributor by designated city; more force) 2, develop sub-tier distributor by channel; 3, sell products to retailers; or 4, sell it to end-users; Source: KateChanResearch (For detailed see chapter 4.1) The point cannot be stressed enough that the interaction with them is quintessential and directly correlated to success in China. The most important is to motivate the importer to take the initiative to develop and expand sub-tier distributorships on behalf of the exporters, so the exporters can mainly focus on marketing and promotional activities. Conclusion Price sensitivity is seemingly the key obstacle to American wines. However, it is the fears of unmotivated distributors that create this sensitivity. The consumers of imported wine are not particularly price sensitive. Only a series of effective incentives and marketing assistance can help. Once motivation and commitment is widely grown in distributorships, key obstacles will give way to sales opportunities. Active promotion and sturdy distribution networks have proven effective for leading domestic companies and importing countries. In addition, current import leaders have developed strong export programs that coordinate a united marketing strategy geared towards China. In spite of the United States’ leading competitors’ head start, the growing Chinese market is a good opportunity for American wines. American wine associations should work with companies together to implement an array of marketing activities on behalf of American wine companies, aiming at promoting American wines, will help American wines companies navigate their business successfully and effectively in the Chinese wine market. Recommendations Marketing Strategies: American wines will need to develop their marketing and sales strategies. This report argues that they should adopt the successful marketing approaches of their major competitors’ in China. These strategies include the following. Item Marketing Strategies Market Positioning 1, Positioning American wines as (mid high to) high end; 2, Remaining with its original pricing or increasing prices slightly due to the requirements of the market, brand image, and distributors in the non-distance future; Distribution & Sales 1, Focusing on development of strategic partnership; 2, Strengthening and expanding the extensive distribution network and channels through the successful local partner; 3, Selling more products to retail shops; Distributorship 1, Developing and increasing sub-tier distributorships; 2, Offering more motivated “Stairs Type” margin incentives to sub-tier distributors; Sales Channel Focusing on the sales channels of Hotels, Bars/Clubs/Karaokes and Restaurants of the on-trade sector as a priority; Geographical 1, Developing “American wines” brand promotion and sales primarily in both Shanghai and Beijing, followed by segmentation both Shandong and Guangdong; Marketing activities 1, Designing a web site with local language and interests, introducing specifically American wines; 2, Releasing marketing materials on both this web site and other popular e-commerce web sites, as well as on microbloggings (weibo) [2] ; 3, Organizing “wine tasting” events emphasizing high-end; or Co-organizing wine tasting events with well- known American luxury brands; 4, Sending free wines as sophisticated souvenirs to media associates when launching new brands or tasting events; 5, Annually organizing “interactive get-together” with media and VIP wine customers; Advertising 1, Advertising on publications via Print Media; 2, Stepping up product proliferation activities in TV shows, and running television commercials located in high- end residential and commercial elevators; Brand Exposure & 1, Participating in Wine related Exhibitions in Shanghai, Beijing, and Guangzhou on a yearly basis. Promotion 2, Assisting leading domestic wine companies like COFCO and Dynasty in purchasing wineries in the United States; using this news to obtain optimized brand exposure through the media platform; partnering with Dynasty to develop distributorships and brand promotion; 3, Participating or sponsoring on social events especially high-end oriented; 4, Sponsoring ceremonies or PR events of American (accessible) luxury brands like COACH to promote American wines; etc. Source: KateChanResearch Brand Promotional Activities: American wine companies will need to strategically support their local partner(s). Activities should support marketing activities, especially those focused on enhancing brand awareness, exposure and promotion, in order to assure success in China. We recommend that marketing and brand promotion related activities should be carried out, ideally by (a) third party (parties) on behalf of American wine companies for the first five years, while the local partner should focus on the sales. (Note: Marketing expenses are absolutely necessary, especially in China.) Local Partnership: American wine companies will need to initially focus on strengthening and/or finding successful and strategic long-term partners to establish a strategic, solid and harmonious partnership with. Theses partners should have extensive knowledge of the Chinese wine market as well as an extensive distribution network. Additionally, the ideal partner is expected to have sound cash flow and branch offices ideally located in the major cities of China such as Shanghai, Beijing, and Guangdong. The offices should be effective in developing their markets as well as sub-tier distributors. These support the ultimate goal of covering as many locations and profitable channels as possible in China. Customer: American wine companies will need to consider how to create good customer relationships with the target Chinese (luxury/wealthy) consumers. American wines not only need to give a very good first impression, and wine experiences, but the brand and wine need to be sophisticated The wines need to make their luxury/wealthy consumers feel special (especially feel like a VIP), and strengthen the high-end brand image of American wines in China. Marketers should strive to create benefits that can allow luxury/wealthy consumers to feel that they are receiving “VIP/membership benefits”.. Competition: For the time being, KateChanResearch recommends that American wine companies avoid entering competition directly with its major competitors, but rather position American wines as a unique alternative (in high-end image, luxury conceptual-driven consumption, U.S brand for instance) as American Wine’s entry strategy. American wine companies’ major concern should be related to access and visibility, marketing and brand promotion, customer relationship activities, and cooperative partnership development. Note: End executive summary. For detailed research findings, please see the following sections. Industry Overview Production Output & Gross Industrial Output Value According to statistics of the China Alcoholic Drinks Industry Association (CADIA) and the National Bureau of Statistics of China (NBSC), in 2010 annual production output of domestic wines reached 1.09 billion liters, an average annual growth rate (AAGR) of 21.78%, an increase of 119.92% from 2006 to 2010. Gross industrial output of domestic wines reached 30.95 billion RMB, an increase of 29.85%. In 2011, annual production output of domestic wines is expected to reach approximately 1.3 billion liters, achieving the gross industrial output of approximately 40 billion RMB. We anticipate that annual production output of domestic wines will reach approximately 2.7 billion liters and 115 billion RMB in both volume and value by the year 2015. Graphic 1: Current Status of China’s Domestic Wines Industry (2010-2015) Source: the CADIA, the NBSC and KateChanResearch Table 1: Current Status of China’s Domestic Wines Industry 2010 AAGR Est. 2011 Est. 2015 Annual production output volume of domestic 1.09 billion liters 21.78% Est. 1.3 billion Est. 2.7 billion liters wines liters Gross industrial output value of domestic wines 30.95 billion 29.85% Est. 40 billion Est. 115 billion RMB RMB RMB Source: the CADIA, the NBSC and KateChanResearch Import & Export The findings reveal that in 2010 the import volume of grape-based alcoholic beverages [3] reached 304.85 million liters, an increase of 62.57%, and the import value of grape-based alcoholic beverages reached 1.33 billion USD, an increase of 53.44%. Among approximately 93% of which are still grape wine (wine), reaching 283 million liters and 770 million USD, an increase of 60% to 70%. Over the same period, the export of domestic wines reached 3.93 million liters, which accounted for 0.36% of the annual production output of domestic wines, an increase of 30.16%, and the export of domestic wines reached 88.81 million USD, an increase of 159.5%. In 2011, imported wines are expected to reach 454 million liters and 1.3 billion USD. It is anticipated that by the year of 2015, total imported wines are expected to reach 3 billion liters and 11 billion USD. Graphic 2: China’s Imported Wines (2010-2015) 9 Source: KateChanResearch Table 2: Import & Export of Wines in China 2010 Growth Est. 2011 Est. 2015 Import volume of wines 283 million liters 60% Est. 454 million liters Est. 3 billion liters Import value of wines 770 million USD 70% Est. 1.3 billion USD Est. 11 billion USD Export volume of wines 3.93 million liters 30.16% Est. 5.1 million liters Above 10 million liters Export value of wines 88.81 million USD 159.5% Est. 115 million USD Above 220 million USD Source: the CADIA, the NBSC and KateChanResearch Current Market Size In 2010, the wine market size reached 1.37 billion liters and 36 billion RMB in China, of which domestic wine accounted for approximately 80% and 86% in both volume and value, reached 1.09 billion liters and 30.95 billion RMB, which increased between 20%-30%. The imported wine, on the other hand, accounted for approximately 20% and 14% in both volume and value, and reached approximately 283 million liters and 5 billion RMB, which increased between 60%-70%. Graphic 3: Domestic Wines and Imported Wines in 2010 Source: KateChanResearch Table 3: The Current Market Size of Wines in 2010 2010 Total Domestic wines Imported wines Growth rate 20%-30% 60%-70% Volume Market size 1.37 billion liters 1.09 billion liters 283 million liters Market share 100% 80% 20% Value Market value 36 billion RMB 31 billion RMB 5 billion RMB Market share 100% 86% 14% Source: the CADIA, the NBSC and KateChanResearch Regional Market Statistics of the China’s Industrial Information Web site and the China Customs Bureau, show that the highest-producing provinces of domestic wines in China are, in order of preference, Shandong, Jilin and Henan. In total, they produced approximately 734 million liters - accounting for approximately 67% of total wine production- in 2010 (Shandong 34%, Jilin 19%, and Henan 14%). The biggest import ports/regions of imported wines in China are, in order of preference, Shanghai, Shandong, Hebei, Guangdong and Tianjin. They totally reached 222 million liters. This equivalent to 565 million USD and accounted for approximately 78% of the total imported wine in 2010 (Shanghai 19%, Shandong 18%, Hebei 16%, Guangdong 14%, and Tianjin 12%). Due to special geographical reasons, most imports and exports of Beijing are transported through Tianjin and Hebei. Table: Production Output and Import of Wines by Region (2010) Source: China’s Industrial Information Web site, the China Custom & KateChanResearch As seen in the table above, market sizes vary vastly across the different regions of China. The largest regions are East, North and South China. East China is the largest by both volume and value, holding a retail value of approximately 430 million USD. Consumption in the Northern regions is comprised predominately of domestic product, whereas the East consumes much more imported wine. Beyond the wine sector, the East and Northeast China have the largest gross regional production, accounting for over 67 % of the country’s gross domestic product. Not surprisingly, the two regions contain China’s two largest metropolitan cities: Shanghai and Beijing. The South China market, especially Guangdong, has maturated for imported wines in the recent 3 years, reaching imported wines of approximately 40 million liters and 175 million USD. South China is regarded as the third largest market of imported wines in China. Wine Consumer Overview Demographics of wine consumers At present, Chinese consumption of wines reached approximately 1 liter per capita, an increase of 300% from 2006 to 2010. This accounted for one seventh of the world’s average level - 7 liters per capita. The future wine market is expected to reach approximately 9.8 billion liters, among 86% will have vacancy available for market development. According to the following Graphic-5, the total number of Chinese wine drinkers reached 328 million. They are urban Chinese at the age 18 to 50, which accounts for 25% of the total population in China. Graphic 4: Demographic of Chinese Wine Consumers Source: Wine Intelligence 2011, modified by KateChanResearch Notes: 1) Middle class: personal annual income RMB 33,755 to RMB 56,130; 2) Upper middle class: personal annual income RMB 56,131 to 75,000; 3) Highest income class: personal annual income RMB>75,000. Source of notes: China Statistic Yearbook – This figure was provided by calculation per capita. The major domestic wine consumer is the middle class, at the age 18 to 50, which has a population of 303 million, and accounts for 23% of the total population. Their annual consumption of wines individually reached approximately 3.6 liters, equivalent to 5 bottles. The major imported wine consumers are, on the other hand, mainly the upper-middle class and the highest income class, which at the age 18 to 50, reached 25 million Chinese people and, accounts for approximately 2% of the total Chinese population. The annual consumption individually reached approximately 11.3 liters, equivalent to 15 bottles. Table 4: Information of the Chinese Wine Consumers Domestic Wines Imported Wines Major consumer group of wines 1) Urban 18-15 average; 1) Urban 18-50 upper middle class; 2) Urban 18-50 middle class. 2) Urban 18-50 highest income class. Total number of the typical consumers (people) Approx. 303 million [4] Approx. 25 million Annual consumption per capita Approx.3.6 liters Approx.11.3 liters (or 5 bottles) (or 15 bottles) Source: KateChanResearch Graphic 5: Chinese Wine Consumers & Consumption Source: KateChanResearch Annual disposable income and wine consumers With the rapid development of China’s economy over the last few years, average salary growth of employed urbanites in Beijing, Greater Shanghai, and Guangdong increased more than 9 % annually. The rate of growth in disposable income in 2010 was 21.9%, 15.9% and 12.2% in Beijing, Shanghai, and Guangdong, respectively. . According to the NBSC (February 2011 data), annual disposable income of urban households reached RMB 19,109 per capita in 2010, an increase of 7.8%. Consequently, annually disposable income per capita of Chinese urban households reached approximately RMB 20,000 in 2011 and is forecast to reach approximately RMB 22,000 in 2012, an increase of approximately 7%. Graphic 6: Annuall Disposable Income per Capita of Urban Households (2006-2010) Source: China Statistic Yearbook At present, the major domestic wine consumers had an annual disposable income of approximately 20,000 RMB to 56,130 RMB. On the other hand, the major imported wine consumers individually had an annual disposable income of above RMB 56,130. Table 5: Annual Disposal Income of the Chinese Wine Consumer Domestic Wines Imported Wines Major Chinese consumer Urban 18-15 Urban 18-50 middle Urban 18-50 upper Urban 18-50 highest group average class middle class income class Annual disposable income Ave. RMB RMB 33,755 to RMB RMB 56,130 to RMB Above RMB 75,000 20,000 56,130 75,000 Source: China Statistic Yearbook and KateChanResearch Graphic 7: Annual Disposable Income of The Chinese Wine Consumer (RMB) Source: KateChanResearch We anticipate that by the end of 2015 the wine consumer is expected to have an annual disposable income of approximately 28,000 RMB to 78,582 RMB, an increase of 140%. High-income sectors in China According to the latest China’s Statistics Yearbook, the ten highest income sectors in China are, in order of rank, finance, software, air transport, tobacco, professional technical services, research and experimental development, and services of science and technology exchange. Graphic 9: Top 10 Sectors Based on Average Earning of Employed Persons in Urban Units by Sector Source: China Statistic Yearbook and KateChanResearch Note: Other Financial Activities (except banking, foreign currency exchange and insurance) These are identified as the upper-middle class, which, including the highest income class, are the target customers of imported wines. 48% of which prefer well-known and international brands for any products. Relevant expenditures are therefore higher than the average Chinese citizen. Annual expenditure on wines Based on our findings and the Table 6 below, at present the average retail price of domestic wines is approximately 43 RMB to 46 RMB per bottle, and that of imported wines is approximately 77 RMB to 155 RMB per bottle. An annual expenditure on domestic wines and imported wines individually reached approximately RMB 210-230 and RMB 1,160- 2,330 respectively, and accounted for approximately 1% of an annual disposable income in most cases. Table 6: Annual Expenditure on Wines (2011, 2015) Domestic Wines Imported Wines Average price per bottle 43.2 RMB to 46.3 RMB 77.3 RMB to 155.4 RMB Annual consumption per capita Approx.3.6 liters Approx.11.3 liters (or 5 bottles) (or 15 bottles) Annual expenditure on wines per consumer in 2011 Approx. 210 RMB to 230 RMB Approx. 1,160 RMB to 2,330 RMB Est. Annual expenditure on wines per consumer in 2015 Est. 300 RMB to 320 RMB Est.. 1,600 RMB to 3,300 RMB Source: KateChanResearch We anticipate that by 2015 the Chinese wine consumer will individually increase purchasing to 2 bottles each year, an accordance with their increasing disposable income. Market Trends Reduction of import duties on high-end goods In June 2011 China’s Ministry of Commerce (MOC) announced a planned reduction in tariffs on some luxury goods, including imported wines [5] . It stated that China would basically be reducing, step by step, 2% to 15% of import tariffs on high-end alcohols and other commodities as a priority. The implementation procedure and the timetable are being finalizing at the current time and will be eventually promulgated by the MOC and the National Bureau of Tax (NBT) in the near future. Graphic 9: Average Retail Price of Domestic Wines and Imported Wines per 750ml Bottle Source: KateChanResearch Notes: 1) Price (excluding taxes) of RMB 21 is estimated price based on the formula of “(Total gross industrial output value/Total production output volume)*0.75”; 2) CIF price of RMB 21 is estimated price based on the formula of “(Custom value/imported volume)*0.75”; 3) The above mentioned price is the average retail price in most cases in China like hypermarkets; however, in some cases the final (retail) price is much higher than the average like in hotels, etc., in the Chinese market. 4) For detailed custom tariff formula, see Appendix 7.2. Import Market Grape based alcoholic beverages According to statistics of the China Custom Bureau, from January to December 2010 China’s total imports of grape [6] based alcoholic beverages reached 304.8 million liters, an increase of 63%, and gained 1.33 billion USD, an increase of 53%. Among the imported wine accounted for, 93% reached 283 million liters and 770 million USD, an increase of 60% to 70%. Table 7: Status of Imports of Grape Based Alcoholic Beverages in 2010 Product name Volume % Change Value % Change (million liters) (million USD) Total 304.8 63 1,333 53 Sparkling wine 2.7 64 28 79 Wine (bottled) 146 61 656 74 Wine (bulk) 137 71 114 77 Vermouth 0.09 11 0.23 25 Spirits 19 30 535 30 Source: the China Custom and KateChanResearch Notes: 1) Vermouth: Vermouth and other wine of fresh grapes flavored with plants or aromatic substances; 2) Spirits: Spirits obtained by distilling grape wine or grape marc. Graphic 10: Status of Imported Grape Based Alcoholic Beverages in 2010 Source: the China Custom and KateChanResearch Still grape wine (wine) China imports wines from 58 countries and regions, 6 of which accounted for 90.7% of the market of imported wines. They are, in order of preference, France (45%), Australia (19%), Chile (10%), Italy (6%), Spain (5.9%) and the United States (4.8%). France has a dominant position in the imported wine market, and exported wines valued at 346 million USD, an increase of 86%. It is the largest and oldest wine exporter to China. France is followed by Australia and Chile, whose exports to China reached approximately 147 million USD and 77 million USD respectively in 2010. For details, please see the table below. Table 8: China’s Imported Wines (million USD) Total value Value % Change % Share Rank Country 2006 2007 2008 2009 2010 09/10 2010 0 -World- 139 258 381 442 770 74 100 1 France 29 98 150 186 346 86 45 2 Australia 27 45 59 96 147 53 19 3 Chile 21 47 57 55 77 40 10 4 Italy 12 20 27 28 46.3 65 6 5 Spain 20 17 19 16 46 188 5.9 6 United States 7 11 19 26 37 42 4.8 Source: the China Custom and KateChanResearch Graphic 11: Imported Wines - Market Shares in 2010 Source: KateChanResearch U.S. wines reached 37 million USD in 2010, an increase of 42%, a total growth of 428% from 2006 to 2010, and accounted for 4.8% of the Chinese imported wine market. The United States is ranked as the number 6 wine exporter to China. Bottled Wine In 2010 bottled wine accounted for 51% of the total imported wine, reached 656 million USD and 146 million liters, went up 74% and 61% respectively. Among which 90.5% is accounted by France (51%), Australia (18%), Italy (5.9%), Chile (5.6), the United States (5%), and Spain (4%). French and Australian bottled wines in total seized 70% of the market share in 2010. Their exports together totaled 455 million USD, and went up 87% and 45% respectively. France and Australia are the two biggest exporters of bottled wine to China. Exports of U.S. bottled wines, on the other hand, reached 32 million USD, an increase of 52%, and a total increase of 540% from 2006 to 2010. The Unites States is the 5th largest exporter of bottled wine to China. Table 9: China’s Imports of Bottled Wines (million USD) Bottle [7] value Value % Change % Share Rank Country 2006 2007 2008 2009 2010 09/10 2010 0 -World- 77 184 276 377 656 74 100 1 France 29 83 127 181 339 87 52 2 Australia 17 26 55 80 116 45 18 3 Italy 8 18 22 23 39 70 5.9 4 Chile 4 8 14 24 37 54 5.6 5 United States 5 9 15 21 32 52 5 6 Spain 6 12 12 14 26 86 4 Source: the China Custom and KateChanResearch Bulk Wine In 2010 imports of bulk wines reached 137 million liters and 114 million USD China, increases of 71% and 77%, respectively. Bulk wine imports grew 115% from 2006 to 2010. Out of this, 96% was seized by Chile (35%), Australia (27%), Spain (18%), Italy (6%), Spain (6%) and the United States (4%). 1) Import value Chile is the largest exporter of bulk wines to China, and accounts for 35% of the market share. Its’ exports reached 40 million USD, an increase of 29% in 2010 and a total growth of 135% from 2006 to 2010. Chile was followed by Australia and Spain, whose total exports reached approximately 31 million USD and 20 million USD respectively. In 2010 Chinese imports of Australian bulk wine increased by 94%. But this was dwarfed in percentage terms by the 900% increase in Chinese imports of bulk Spanish wine. Spain became the third largest exporter of bulk wines to China, right behind Chile and Australia. Table 10: Import Value of China’s Bulk Wines (million USD) Bulk [8] value Value % Change % Share Rank Country 2006 2007 2008 2009 2010 09/10 2010 0 -World- 53 60 84 65 114 75 100 1 Chile 17 38 43 31 40 29 35 2 Australia 10 8 4 16 31 94 27 3 Spain 14 5 6 2 20 900 18 4 Italy 4 2 4 5 7.3 46 6 5 France 2 4 7 5 7 40 6 6 United States 1 2 4 4.7 4.9 4 4 Source: the China Custom and KateChanResearch U.S. bulk wines, on the other hand, reached 4.9 million USD, an increase of 4%, and total growth of 390% from 2006 to 2010. However, the current growth (4%) is less than the AAGR of 78%. This implies that the growth of U.S. bulk wines slowed down last year. 2) Growth of Import (Volume) In 2010, the 6 largest exporters of bulk wines to China were Chile, Spain, Australia, Italy, France and the United States. These countries accounted for 99% of the bulk wines shipped to in China. Chile, Spain and Australia are the Top 3 exporting countries of bulk wines. Spanish bulk wine imports reached 38 million liters, up 850%, and surpassed Australia to become the number 2 importing country of bulk wines to China in 2010. This is mainly attributed to its low pricing, as the average price of Spanish bulk wines (0.54 USD/liter) is 75% less than the average price of Australian bulk wines (0.96 USD/liter). Graphic 12: 2009-2010 Major Exporters Past and Present (million liters) Source: the China Custom and KateChanResearch Table 11: China’s Bulk Wines Import Volume (million liters) Bulk volume Volume % Change % Share Rank Country 2009 2010 09/10 2010 0 -World- 80 137 71 100 1 Chile 43 45 5 33 2 Spain 4 38 850 28 3 Australia 19 33 74 24 4 Italy 6 9 50 7 5 France 3 6 100 4 6 United States 3.7 3.5 -5 3 Source: the China Custom and KateChanResearch The U.S. only exported 3.5 million liters of bulk wines, a decrease of 5%. Some believe that the decrease was attributed to the import price of U.S. bulk wines (1.39 USD/liter), which is 45% higher than the average price (i.e. 0.96 USD/liter), and is almost 100% higher than the Spanish pricing. The market share of U.S. bulk wine shrank marginally this year. Regulatory Market Entry Barriers Major regulations and standards There are basically five (5) Rules and Regulations and two (2) National Standards that are directly related to imported wines that U.S. wine companies should comply with. They are as follows: Relevant Rules & Regulations Relevant rules and regulations People’s Republic of China on Import and Export Commodity Inspection Law [9] People’s Republic of China Food Hygiene Law [10] Frontier Health and Quarantine Law of People’s Republic of China [11] Rules for the Implementation of Frontier Health and Quarantine Law of the People’s Republic of China [12] Laws of People’s Republic of China on Product Quality National Standard: GB 15037-2005 [13] : General Standard for the Labeling of Prepackaged Alcoholic Beverage National Standard: GB9685 2008: Hygienic Standards for Uses of Additives in food containers and packaging materials [14] Source: KateChanResearch In terms of Articles of 8, 12, 13 and 30 of the People’s Republic of China Food Hygiene Law states that imported foods, food additives and containers, packaging, utensils and equipment used for food must conform to the national hygiene standards [15] and the hygiene control regulations. The above-mentioned imports shall be subject to hygiene supervision and inspection by the customs agencies for hygiene supervision and inspection of imported foods. Only those proved to be up to the standards through inspection shall be allowed to enter the territory. The Customs authorities shall grant clearance of goods on the strength of the inspection certificate. In the absence of the national standards for such imports, the importer must provide the hygiene evaluation data prepared by the health authorities or organization of the exporting country (region) to the custom agencies for hygiene supervision and inspection of imported goods for examination and inspection and such data shall also be reported to the administrative department of public health under the State Council for approval. Registration Procedure: No. Authority Procedure Time 1) Municipal Entry-Exit Inspection and Quarantine Hygiene supervision and inspection of imported goods. 5 working days Bureau 2) Municipal Custom Bureau Clearance of goods on the strength of the Inspection 1-5 working Certificate days Source: KateChanResearch Notes: 1) In practice, the degree of enforcement and specific benchmarks may differ from the written regulations. U.S. exporters are suggested to allow Chinese importers to coordinate customs and other regulatory requirements. 2) For contact information of The Entry-Exit Inspection and Quarantine Bureau and the Ministry of Health please see appendix 7.7.1. Furthermore, imported wines are also subject to specific National (chemical) Standards - < GB 15037-2005 [16] : General Standard for the Labeling of Prepackaged Alcoholic Beverage> under the Chinese law. Note that at some points the National Standard is slightly different from the international standards, especially on labeling requirements that are outlined in the Chinese National Standards of GB7718-2004 and GB10344. For detailed information, please see Appendix 7.1. Custom regulations and tariffs Two Regulations are related to the China Custom tariff for imports to China, they are as follows: Relevant Rules & Regulations Relevant rules and regulations Regulations of People’s Republic of China on Import and Export Tariff [17] Custom Laws of People’s Republic of China [18] According to the Customs Tariff of Import & Export Commodities of People’s Republic of China, custom tariff is based on not only the nature of the product but also on its country of origin. It is necessary to know that the United States falls under the Most Favoured Nationals (MFN) Tariff Rates [19] . Relevant tariffs are listed as follows: Table 12: Custom Tariff on Wines Tariff Product Name Import Export VAT Consumption Unit Item Tariff Tariff Tax M.F. N (%) (%) (%) (%) 22.04 Wine of fresh grapes, including fortified wines; grapes must other than that of No. 20.09 – Fruit juices (including grape must) 2204.1000 -Sparkling wine 14 0 17 10 Litre -Other wine; grape must with fermentation prevented or arrested by the addition of alcohol; 2204.2100 -In containers holding 2L or less 14 0 17 10 Litre 2204.2900 --Other 20 0 17 10 Litre 2204.3000 --Other grape must 30 0 17 10 Litre Source: Notes: 1), M.F.N: The Most Favoured Nation (MFN) Tariff Rates 2) For contact information of the China Custom, see appendix 7.3.2: The total duty paid on wine is calculated using a compounding formula that involves all three taxes, as opposed to simply adding the rates together. The three rates are the consumption tax, the value added tax (VAT), and the import tax. For bottled wine, total duties equate to 48.2 %; for bulk wine duties are 56 %. Additional information on import duty and tax calculation can be found in Appendix 7.2. Other relevant regulations and standards Additionally, there are seven relevant regulations and seven standards related to the wine exports to China, they are as follows: Relevant Regulations Relevant rules and regulations Food Safety Law of the People’s Republic of China [20] Law of the People’s Republic of China on Protection of the Rights and Interests of the Consumers [21] Advertising Law of the People’s Republic of China [22] Standardization Law of the People’s Republic of China [23] and its Implementation Regulations Measures for the Administration of New Varieties of Food Additives [24] Provisions on the Supervision and Administration of Production of Food Additives [25] AQSIQ’s Decision on Changes [26] Source: KateChanResearch National Standards Standards GB 2758-2005: Food Safety Standard on Fermented Alcoholic Beverage [27] GB 2760-2011: China New Food Safety National Standards for Use of Food Additives [28] GB 2762-2005: Maximum Level of Contaminants in Foods [29] GB 7718-2011: Labeling of Prepackaged Foods [30] GB 10344-2005: Labeling of Prepackaged Alcoholic Beverage [31] GB 12696-1990: Hygienic Specifications of Factory of Wine [32] GB/T 4789.25-2003: Microbiological Examination of Food Hygiene-Examination of Wine [33] Source: KateChanResearch Distribution and Consumer Research Distribution Channels of Wine In the Chinese wine market, there are basically 7 main distribution channels. They are hotels, restaurants, bars & clubs, institutional foods, hypermarkets and supermarkets, specialty stores and others (i.e. online stores). In most cases, the major four in these seven distribution channels totally consumed (domestic and imported) wines of 1.2 billion liters and accounted for 84% of the total sales volume of wines in China. They are (in order of preference) hypermarkets and supermarkets, hotels, restaurants and bars & clubs & karaoke bars (BCKs). They are the four most important wine distribution channels in China. Table 13: Distribution by Channel Source: KateChanResearch In addition to the seven main channels, there are also additional channels that are growing rapidly in the Chinese wine market. (Note: We cover two channels additional channels in the appendices.) Relevant fast growing channels: The gray channel, please see Chapter 7.4. The group-buying channel, please see Chapter 7.5. Traditional Distribution Structure of Imported Wine While marketing and sales activities are important, it is commonly believed that the distribution structure and network are critical to success in China. This is especially true in the foreign wines business. Top-notch wine importers & exclusive distributors are commonly characterized by having established (or are establishing) an optimized distribution structure (see below ideal structure) with an extensive distribution network. This allows them to yield better sales performance on behalf of their represented brands and to navigate business successfully and effectively in China. Graphic 15: Traditional Distribution Structure Source: KateChanResearch Note: “d” stands for sub-tier distributor In the case studies of three largest wine importer companies in the following chapter, our findings show that they adopted this distribution structure. These players strategically chose fine wine exporters and act as their exclusive distributor for all of Chinese. They use branch offices located in major cities to individually develop regional markets and sub-tier distributors. These strategic branch offices then partner with strong local companies (sub-contracting) to have sufficient distributors to reach end customers in third tier cities as well as more remote places. Subcontract distributors are provided with specific sales target and location coverage of designated distribution channels - such as speciality stores, hypermarkets, supermarkets, e-commerce online stores, hotels, restaurants, bars & clubs, etc. This serves the ultimate end goal of covering as many locations and channels as possible in China. Each-tier of distributors has at least two (2) main responsibilities. One is to develop sub-tier distributors to cover other geographic locations. The other is to market and sell the products in its own territory market through as many designated channels as possible to finally reach the sales target specified by the top-tier distributor or the Company. In this structure it is crucial for the company to strategically optimize its retail pricing in accordance with the cost structure of each channel. For the same wine there shouldn’t be a big difference in the retail price between physical stores and online stores. Similarly within China, while there are huge differences in general price levels between different cities (east- west, rural-urban), the prices should be somewhat uniform, otherwise arbitrage opportunities could arise and the Chinese are very good at exploiting these through internet channels such as Varied pricing can easily create competition and conflict between different sales channels for the same product. Eventually, this will negatively affect sales in general. Therefore, to better ensure maximized benefit and profits among the company, the distributors and the channels in the market, strategic pricing is a must. (Note: strategic pricing can be used as a incentive to motivate sub-tier distributors.) According to interviews with a number of successful wine importer companies, the three main sales/distribution channels in China are, in order of preference, hotels, bars, clubs & karaoke bars (BCKs), and restaurants, which all belong to the on-trade sector. Taking ASC, Summergate and Aussino as examples (see below table), more than 20% of the sales revenues are actually yielded in hotels. ASC alone sold 60 million bottles (10% are American wines) through hotels. Followed by the channels of BCKs and restaurants, approximately 30% of the sales revenue of each company is yielded in these two channels. Table 14: Percentage of Revenue Yielded by Channel in 2010. Company On-trade Sector Off-trade Sector Hotels Bars, Clubs & KTVs Restaurants Hypermarket Specialty Store & others ASC 70% 30% Summergate 20% 35% 20% 15% 10% Aussino 25% 30% 25% 10% 10% Source: KateChanResearch Consequently, roughly 80% of the effects come from these three channels of the on-trade sector, becoming the present 80-20 rule or the Pareto Principle [34] . In addition, it is important to note that the on-trade sector is mainly characterized by corporate consumption. (See table below). Table 15: On-trade Sector & Off-trade Sector at Present Most Profitable Current 80-20 Consumption Type Customer Sales Approach Channels Rule Type On-trade Hotels, BCKs, Restaurants 80% Corporate B2B & B2C “One to all” sector consumption approach Off-trade Hypermarkets & 20% Individual B2C “One to one” sector Supermarkets consumption approach Source: KateChanResearch In China, corporate consumption is often associated with concepts like “Sophisticated,” “Generosity,” “Professional Corporate Image,” “High-end,” etc. In many ways, the nature of imported wines, together with these three channels, provides a great combination and image, enabling corporate clientele to better enjoy the benefits underneath the products or services of these venues, even if it’s costly. In contrast to the off-trade sector, online stores and hypermarkets & supermarkets are no longer key target distribution channels for a number of successful market players for imported wines in China. There are basically two (2) main reasons: First of all, these two channels are the main target distribution channels to wine players positioning in the low and/or medium market, thus competition to get into these places is fierce. Second of all, due to pricing factors, especially of comprehensive online stores, high-end wines don’t seem to have much advantage in competitive pricing as compared with low-end and/or medium-end wines. Due to budget restrictions, the typical consumer (mainly individuals) in the hypermarkets and supermarkets and comprehensive online stores is looking for cost-effective solutions. Thus high end/priced products seem less appealing. These findings support the concept that the three most profitable distribution channels for imported wines are, in order of preference, high-end hotels, BCKs and restaurants of the on-trade sector. Corporate consumption should be regarded as the priority, followed by the off-trade sector in general. This is because Chinese consumer relationships are often achieved by “word of mouth,” the basis of development of individual consumption. Thus, prioritizing distribution channels is important to success. Emerging/Alternative Channel of Imported Wine With the rapid development of the wine industry in China, the sales and distribution channel of specialty chain stores (of online and offline [35] ) has become one of the most important channels for marketing and selling imported wines in China. Additionally, it is commonly believed that the evident advantages of specialty chain stores are: 1) Diversified varieties of wines and brands; 2) Quality assurance; 3) Professional services of wine introduction, selection assistance and tasting; 4) High-end image; 5) Wine oriented, 6) Available for both B2B corporate and B2C individual customers, etc. These specific features seem more competitive as compared with traditional retail channels like hypermarkets and supermarkets that are certainly lacking in services at this moment. Table 16: Information of Visited Nine Specialty Store of Wine in Shanghai, Hangzhou and Ningbo (2011) Source: KateChanResearch In 2010, China’s specialty wine stores sold 26 million liters of imported wines, an increase of approximately 50%, and accounted for approximately 10% of the total consumption of imported wines. A number of wine market players, including wine importers and the top 3 domestic wine producers, decided to further develop specialty chain stores of wine (either online stores or offline/physical stores) across the country. As of late, brand awareness of wine stores have been increasing, especially in central and western regions (including both second and third tier cities). Regarding specialty chain stores of wine in China, there are basically 4 typical models. They are equally segmented into two groups: one group is exclusive – in that the stores sell their represented wines only. Typical models in this group are SWIEDO and SWIEDS (see below). The other group is non-exclusive. The stores are allowed to sell all wines including unrepresented wines and other alcohols like spirits, li
Posted: 03 June 2012

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