Few months ago, I received a marketing assignment from WSET – for Unit 1: ‘Opportunities in the Chinese Wine and Spirits Market (in Mainland China)’. I very much enjoyed working on this topic – although it was challenging to keep up with the ever changing developments. China is such a dynamic market that I had to update the pages every week until I completed the assignment.
I have been reading about China for time now with excitement and curiosity. Many wine producers I’ve spoken to in Europe expressed their interest in the market. However, although there is an incredible increase in consumption, it is really not easy to enter and even if you can it is not easy to be successful in this market.
From poems and myths to the new millennium…
First of all, alcoholic beverages have been a part of Chinese culture for centuries, as can be seen in their poems and myths. Baiju, a grain based alcohol has been the most popular spirit. It contains around 40-60 % alcohol by volume and it is consumed during traditional events, holidays and business meetings. Apart from baiju, other spirits such as brandy, whiskey and vodka are also consumed. Wine and spirits account roughly for 10% of the consumption – the rest of the 90% includes beer, hard cider and flavored alcoholic beverages.
The beer segment has been improving rapidly, especially since 2014. The domestic brands still dominate the market. However, the imported beers have also shown an incredible rise. Czech Beer doubled in one year and reached 22.6 hectoliters of consumption. Belgian beer had a similar experience by increasing its sales by 140%.
Although wine accounts for less than 10% of country’s alcohol consumption, China is currently the world’s biggest red wine consumer due to its population. Its consumption keeps on increasing every year. Furthermore, China is also a young wine producer country and it will very likely become one of the well-known regions in the world in a few decades. Chinese investors have been dreaming of making top quality wines and selling to worldwide markets. They are working on creating the know-how to achieve this goal. In 2013, Chateaux Lafite Rotschild has planted 25 hectares vineyard and opened up a winery in Penglai. Another foreign investor in China is LVMH group from France. They have also been investing in two wine regions: Ningxia and Yunnan.
Dynamics of the market
If we look at the drivers in consumption in China, the economic growth comes first. Due to this growth the eating and drinking habits have changed in China. Before the economic boom, people could buy only domestic alcoholic drinks. Today, they are interested in foreign-made drinks. Furthermore, the number of big cities has increased and many bars/pubs provide a venue for consumption. Women also started taking place in social events and began consuming more alcohol.
Apart from the economic and social effects, the government has always had an effect on alcohol consumption in the country. During 90’s, government promoted fruit-based alcohol instead of grain-based alcohol by claiming that it is more healthy. This led to a significant increase in wine industry and has become an important item especially for the politicians. The politicians started buying premium wines especially from Bordeaux with very high prices and gave these wines as a gift to show their wealth and respect. The sales within the government have become remarkable part of the wine trade in China. However, in 2013, the government finally banned giving luxury items as gifts and this crackdown affected the fine wine industry deeply.
If we look at the opportunities in the Chinese wine market, we still see a potential for premium wines. Although the government banned gift-giving, Chinese people still pay more than 10 US$ for a bottle according to a report in China Morning Post. They still prefer brand names such as Bordeaux, Burgundy as they go through a discovery period and educate themselves in wine and spirits.
There is also a potential for imported and middle price range wines. It seems like people in their 20’s and early 30‘s are shaping the trends in the market and the consumption is becoming more open to wines with different prices or styles. For instance, after Australia and France, South African wines have been selling increasingly in China. The wine producers keep their wine labels classic, similar to France for the taste of Chinese consumer. Australian wine sales are still increasing in the region, but slower than before. Chinese retailers are seeking for various inexpensive New World Wines. As a result, these middle level wines are competing with local brands such as Changyu or Great Wall.
E-commerce is also growing rapidly. One of the biggest wine importers; ASC Fine Wines sell wine online and state that people are willing to pay up to 100 yuan. For instance, according to recent news, the e-commerce retail shop Alibaba started selling Robert Mondavi through online shop Tmall.
In order to develop wine business in China, many companies prefer to open up their own subsidiaries in the country and this gives the opportunity to control their products better in the market. The industry allows foreign companies and joint ventures. Many companies prefer to have a partner in China to understand the dynamics of the market better.
What about the challenges?
China offers ultimate opportunities for the key players of the industry. However, there are many challenges and unknowns in the market as it is still developing and going through changes. As I have already mentioned, the government has a crucial role in shaping the wine and spirits industry. The PRC government has been promoting drinking habits and has been successful with their campaigns until now. This approach has increased consumption of low alcohol such as wine and beer. However, it has negatively affected the spirits market. In 2009, the government increased the base tax and consumption tax on high-alcohol and launched a campaign to promote healthier beverages. And even though the government supported wine consumption, it has also hindered the consumption of spirits. The changes that took place therefore didn’t emerge inherently from the society’s needs but were shaped by the government.
In 2013, the crackdown over gift giving affected the industry significantly. The wine market still grew. The increase in demand maintains at consumer level but it is not enough to compensate the loss of gift giving.
The growing wine market in China brought a booming counterfeit as well. The spirits companies tried to avoid this by using tamper-roof caps and authentication technologies. Some people break the wine bottles so nobody can refill them. For instance, Diageo has special teams at on-trade points to check the bottle.
China is a potential market for many international companies but it is also very different in terms of culture and drinking habits. For this reason, an important challenge is to ‘localize’ the brands in order to be successful in the market. Pernod Ricard SA shows a very important example in terms of localizing their Chivas Regal Scotch by promoting green tea to mix with whiskey products because Chinese like mixing green tea in their spirits.
In conclusion China has a crucial role in the wine and spirits industry. With the economic boom, it has become one of the most important markets for luxury industry. However, following the crackdown, the premium brands have lost their sales significantly. Due to this situation, the entry and mid level wines from Europe and New World had a chance to enter the market. China is still going through a learning process and ready to discover new products. It seems like diversity will increase in the market and I think those who manage to understand the culture and adopt their products accordingly, will succeed in this market in the long term.