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China’s Wine Market in 2018

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Executive Summary

As China’s middle-class population continues to grow, so is the demand for higher quality products. Changing lifestyles also shows a major shift in alcohol consumption, especially in wine. China’s wine market is expected to become the second largest in the world by 2021. Imported brands have been showing significant growth, with sales mainly concentrated on large urban and coastal areas. However, less developed cities are steadily catching up due to rapid urbanization and economic development.

In 2017, China experienced almost 17% and 18% year-on-year growth in wine imports by volume and value, respectively. Still wine is the most popular and fastest-growing product category, with red wine accounting for about 80% of total sales. There is a growing demand for imported aromatic white wine, while volume sales for sparkling wine show a 4.5% rise. Drinking wine is undeniably becoming integrated into the Chinese’s lifestyle, with more and more people purchasing bottles for personal consumption.

France remains the top exporter of wine to China, with total imports reaching up to 218 million liters in 2017. Australia and Chile are still taking advantage of the lower import tariffs. Their import volume has increased by 33% and 25%, respectively. Spain, Italy, USA, New Zealand, Africa, Portugal and Argentina complete the list.

To succeed in China’s wine market, businesses should: 1) determine how to feasibly sell in China, 2) localize their brand and product(s) as needed, 3)deploy an effective marketing strategy, 4) find reliable distributors and establish diversified sales channels, and 5) find a professional local partner help navigate common challenges and carry out necessary due diligence and preparation in order to reduce costs and maximize long-term returns.

The experience of Robbie Bird Wines Ltd. – a wine producer – demonstrates the value of investing in determining feasibility and testing China’s wine market.

Market Overview

China's Wine Market

China’s wine market remains one the world’s largest. Its total wine imports reached 746 million liters, worth about US$2.789 billion, in 2017. By volume, the year-on-year growth is at 16.88%, while import value is at 17.96%. This is almost double the numbers from 2013, according to the Chinese General Administration of Customs.

The Chinese’s changing lifestyles and increasing disposable incomes, coupled with rapid urbanization, are being attributed as the catalysts for the major shift in the country’s wine consumption. An increasing number of consumers are purchasing wine for personal use, rather than as gifts. The market is evolving as younger, more experimental and open-minded consumers take over.

Mainland China, with a population of 1.38 billion, is a huge market for imported wine. The “Big 4” – Beijing, Guangzhou, Shanghai, and Shenzhen – accounted for 53% volume of imported wine sales in 2017. Due to the improved distribution channels and easier accessibility to imported products brought about by the economic development in the region, lower-tier cities have also begun showing growth in sales.

Chinese Wine Culture Goes Mainstream

There are more than 48 million regular wine drinkers in China. The number is expected to balloon to 70-80 million by 2020. Currently, 11% of the adult urban population aged 18 to 54 drink wine. These individuals belong to the upper-middle class sector of the population. Armed with more disposable income, they can purchase imported brands without worrying about cost.

In recent years, however, Chinese people in general, regardless of social class, are consuming alcohol more often compared to older generations. As wine consumption becomes part of the Chinese’s lifestyle, more opportunities are opening for importers in the country. In fact, there is a growing demand for higher-priced and middle-priced wines foreseen in the next five years.

Wine in China

In terms of the types of wine, China’s wine market is still dominated by still wines, reaching sales value of more than US$55 million in 2016. Red wine is still the most popular with consumers, while white, rosé and sparkling wines barely account for 20% of the market. In 2017, over 155 million nine-liter cases of red wines were consumed by the Chinese.

White wine is anticipated to attract more consumers as the market continues to mature. Currently, there is developing demand, particularly among aromatic whites. About 56% of imported wine drinkers claim they drink white wine at least once in a while. On the other hand, sales of sparkling wine are showing signs of recovery after two years of decline.

Top Wine Exporters to China in 2017

Despite stiff competition among wine producers, France remains the largest source of imported bottled wines in China. In 2017, imports were up by 14% in volume (218 million liters) and by 8.8% in value (US$1.05 billion). Bordeaux is still at the core of the French’s domination in China’s wine market, but other regions like Rhône Valley’s Languedoc are steadily gaining recognition.

Australia and Chile are gaining grounds, largely due to the lower import tariffs on wine with China. Australian imports increased by 33.3% in volume and 25.8% in value, while Chile’s wine shipments rose by 25% last year.

Common
Challenges in China's Wine Market

Determining Feasibility in China's Wine Market

Measuring Affordability & Geographic TargetingProperly measuring the affordability of your product in China will enable you to determine if there really is a consumer base that can afford to buy your product and, if so, where they’re located. This allows you to employ accurate geographic targeting and focus your resources on those areas most likely to bring commercial success.

The AUA SpectrumThe Awareness – Understanding – Affordability (AUA) Spectrum tells you who to sell to, where, and at what price. Many firms fail in China because they haven’t accurately measured the feasibility of selling their product in China and, if feasible, where their product falls along this spectrum, so they can effectively target and invest resources.

Deploying an Effective Marketing Strategy

Although demand for imported alcohol is rising in China, Chinese consumers still have lowbrand loyalty and awareness for foreign alcohol.For example, Chinese’s awareness of wines is often limited to those from Bordeaux or other famous wine-making regions, though there are many other companies and regions that produce world-renowned wines. Their knowledge of different tastes and varieties of wine, spirits, and beer is still limited.

China’s media market, online platforms, and way of consuming advertising is unique and evolving quickly. Foreign companies that want to communicate effectively with Chinese consumers need to master Chinese social media, and understand what will and will not work in China.

Localizing a Brand & Product

In China, brand loyalty is low, but the value placed on products that project high-quality, unique/novel and luxury is high. Foreign companies often struggle to communicate or alter their brand to accommodate Chinese culture, ways, of thinking, and consumer values. It is essential that your brand resonates with Chinese consumers so that it will stand out in their mind as distinct as they’re faced with ever-increasing options when shopping.

Localizing your particular beverage’s blend, flavor, portion size, and the like are also often important for balancing novelty with familiarity. While some products require little or no localization, others do. Making sure you determine this need and properly localize is important.

Consumer Awareness & Understanding

Awareness and understanding of the different brands, qualities, applications, and other key factors for personal care products in China varies considerably compared to mature consumer markets, such as the United States or Japan. Variation is mostly based on geography and income—which tend to be interlinked. Large urban areas and coastal provinces, generally, are typically the wealthiest local markets in China, with greater exposure to foreign markets and cultures and the disposable income necessary to try new, often expensive (by local standards), foreign goods. Smaller cities, towns, and interior provinces, tend to be in contrast to this—often starkly so. Knowing where your product fits along the AUA spectrum is a major contributor to success or failure in China.

Choosing Suitable Sales & Distribution Channels and Partners

Working with a distributor is often viewed as a quick and easy way to start selling in China. However, foreign producers have difficulty assessing the true capabilities of individual distributors and their suitability as a partner in China.

Large distributors usually have a regional or national reach and focus on distributing through supermarket chains. However, these chains prefer to sell well known brands and products from countries already known for a particular type of beverage. For example, German beer, Jack Daniels whiskey, and French wines. Such distributors typically also require guarantees of large volume, prefer established brands, and are risk averse. This poses problems for small or medium producers; the distributor may not be interested or will demand terms unfavorable to the producer.

Although information exists online or in government databases regarding large distributors in China, little or no information is available on smaller distributors. This is important because most distributors in China focus on a specific local area and distribute to bars, restaurants, and other local establishments likely to be interested in offering foreign beverage options to customers. They also tend to be the most receptive to working with small or medium sized producers. However, conducting due diligence is critical and difficult; some distributors are informal or do not understand their obligations and the best way to check is by investigating locally.

Selling Online

Online sale is often a good option—both as an option for selling independently or through a distributor. Chinese consumers are comfortable buying online and it offers greater transparency. The key in this case is creating an effective online shop or your own website, securing warehousing and finding a reliable fulfillment company.

The Case of the Rutherglen Estates

Company Profile

Rutherglen Estates started operation in 1996, when demand for Australian table wine was increasing both in the country and overseas. Located in the small town in north-eastern Victoria, the company owns 185 hectares of vineyards, the largest in the region. It has earned various accolades for both traditional regional varietals and more innovative wines and has become a major exporting producer to markets in Singapore, Thailand and China.

The Case

In 2013, its director, Simon Cheung, decided to enter the Chinese market with a brand solely created to export wines overseas – Rayah. Rutherglen Estates’ success in China is due to multiple factors. The first one is timing. They began exploring the market when demand for wine in China was growing and competition was low, giving it an advantage as an early mover in an underdeveloped market.

Second, they correctly assessed the Chinese’s preference for the types of wine they purchase. Rayah wine products are specifically designed to fit the Chinese palate. After determining that red wine accounted for the lion’s share of the market, the company decided to focus on selling varietals including Cabernet Sauvignon, Merlot, Shiraz and Cabernet Merlot.

Third, they recognized the changing consumer market in China and planned their marketing strategy accordingly. Cheung’s people discovered that more and more young people on the mainland are beginning to develop the habit of drinking wine. By taking part in local trade fairs, they learned what the clients expect in the wine they drink, enabling the company to offer products that suit their tastes best.

Finally, working with a Chinese partner, they were able to establish effective sales channels and develop a marketing strategy that resonated with Chinese corporate buyers and end consumers.

Despite huge and growing demand for wine in China, most foreign wineries do poorly because they fail to understand the market, assess consumer demand and preferences, localize their branding and marketing, and work with suitable partners to establish reliable sales channels. Rutherglen Estates not only produced a good product but also did everything needed to adapt and thrive in China.

The Case of Robbie Bird Wines Ltd.

Company Profile

Robbie Bird, the founder of New Zealand’s Wishart Estate Winery, was forced to declare bankruptcy of his subsidiary company, Robbie Bird Wines Ltd., after a failed attempt to break into the Chinese wine market. He is the grandson of one of Hawke’s Bay’s wine pioneers, Robert Bird, owner of the award-winning Glenvale Winery (now Esk Valley).

Over the course of its 20-year history, Wishart Estate Winery has imported a range of wines to Australia, China, Denmark, Germany, Hong Kong, Japan, Netherlands, Russia, United Kingdom and the United States. Robbie Bird Wines Ltd.’s sole market was China.

The Case

Robbie Bird Wines Ltd. Was put into liquidation in 2015, leaving unpaid debts of US$132,000 to preferential creditors. The owner banked on the booming demand for red wine in China. The winery’s entire 2013 vintage was supposed to be shipped to the Chinese market, but a change in policy regarding imported wines by the then newly-elected president Xi Jinping ruined Bird’s plans.

Immediately after the change in policy, New Zealand wine exports to China went from 2.2 million liters in 2013 to 1.8 million L in 2014 due to reduction in demand. Hawke’s Bay’s red wine producers were mostly affected. Robbie Bird Wines Ltd. took the brunt of the hit, with China as its only market. Negotiations of its 105,000 liters of wine meant for export fell through as buyers backed out of the deal. Eventually, due to lack of cash flow, production in the winery stopped.

The company’s business plan was created after consultation with a prominent New Zealand winemaking expert. They did not have a Chinese partner who could have helped in navigating common challenges and carry out necessary due diligence and preparation in order to minimize risks. A local associate could have guided them in finding reliable distributors and establishing diversified sales channels.

Solutions

Determining Feasibility

China’s large population and rising disposable incomes, coupled with increasing demand for wine and more preference for better quality, means stiff competition in the market. This makes assessing feasibility all the more important, which includes several components.

First, assess affordability. It’s important to have hard data showing whether or not Chinese consumers can afford your product and, if so, which ones and where. This will allow you to focus time and resources on areas where you have a high probability of achieving commercial success.

Second, measure the level of consumer awareness and understanding of your product. This will provide a good indication of how much time and resources you will need to invest in order to familiarize customers with your product, demonstrate how it fits into their lifestyle, and why they should buy it. This is a necessary precursor to budgeting for and developing your marketing strategy.

Third, determine the regulatory burden and risks; how that will impact your costs and customer price, lead times, importation process, and warehousing.

Fourth, understand existing competition, market growth potential, barriers to entry, and how you will need to price your produce if you want to be competitive.

Finally, you need to know to what extent- -if any–you should localize your brand or product to make it more readily understood and attractive to Chinese consumers and how that impacts the financial feasibility of entering the market. Even world-famous brands– such as Coca Cola–have adapted their brand for the local market and altered their product to local preferences.

Doing all of these things will save you time, money, and headache, enabling you to enter the Chinese market with confidence and a clear idea of how to grow your business there.

Localizing a Brand & Product

To ‘watch and learn’ is often a good strategy for those who want to succeed in life. However, watching and learning in China offers limited lessons. Many foreign firms have not properly localized their brand and products, with many companies exiting the market annually—not understanding why their product failed to take off in China. Even some of the largest brands in China apply a blunt force strategy, merely relying on Chinese consumers to recognize their brand name and make purchases solely on this basis. This can deliver sales, but is not sustainable—particularly as competition and the subsequent need for differentiation and clear messaging increases.

Invest the time and resources necessary to understand how Chinese consumers are likely to enjoy your beverage(s), their motivation for purchasing, and values so you present your brand and communicate your message in a way that both stays true to what your company stands for and resonates with local consumers. This will pay dividends in the long-term and allow you to more easily differentiate yourself in an increasingly crowded market.

Deploying an Effective Marketing Strategy

Full market strategies will vary by product and firm; however, some ideas are applicable across all products.

 

Educate Consumers Although more Chinese consumers are becoming more knowledgeable about imported alcoholic beverages, the majority of them remain unfamiliar. This makes educating Chinese consumers important to sellers. Many organize tasting events or other events that teach them about the product’s quality, varieties, history, and culture. This helps build a good first impression, increase demand and familiarity, create brand awareness, increase the perceived value of the brand, and eventually build brand loyalty.

Adopt an Online Strategy It is important in any market for companies to adopt a marketing strategy that focuses on their target consumer segment. Most consumers of imported wine in China are wealthy, urban, and young (born after 1980). They often research about wine online and frequently use social media as a source of information about their wine choices. This makes online marketing critical to succeeding in China. Although most producers sell via distributors in China, marketing is still a must, and making use of online platforms and channels is the most cost-effective way of developing the brands in China.

Choosing Suitable Sales and Distribution Partners

Large producers are going to focus on developing relationships with large distributors in China with regional or national reach. Given the ability to deploy large volumes, this is sensible. Such companies also have the internal resources to conduct proper due diligence and navigate China’s legal landscape, though most large distributors are known to foreign government agencies, making their authenticity easily confirmed. As well, these tend to be experienced outfits well aware of their obligations and with expansive and established distribution channels.

Small and medium producers, by contrast, are going to find more interested partners in local or provincial distributors. Although many such distributors are experienced, reliable, and have wellestablished distribution channels, many are not and confirming which is the case with a particular distributor is difficult. Any government records which might exist, are likely to be solely in Chinese.

Although producers can try to carry out proper due diligence on their own, it’s best to work with a local third party to do this, taking advantage of their understanding of the Chinese market, legal landscape, language, regulatory system, and way of doing business. Once a company has identified a suitable local distributor which has passed inspection, the third party can assist with establishing a formal relationship with the distributor and ensuring all agreements are fair, transparent, and legal.

Work through a reliable local partner who knows the market, culture, can carry out due diligence, facilitate communication, and ensure all agreements are fair transparent and legal.

John Doe

China’s wine market continues to enjoy strong year-on-year growth, with the high-end segment seeing particularly strong demand; younger and wealthier consumers are demanding better-quality premium brands because of the association with success, wealth, and modern lifestyles.

Companies wishing to sell in China should: 1) determine how to feasibly sell in China, 2) localize their brand and product(s) as needed, 3) deploy an effective marketing strategy, 4) find reliable distributors and establish diversified sales channels, and 5) find a professional local partner help navigate common challenges and carry out necessary due diligence and preparation in order to reduce costs and maximize long-term returns.

Feasibility can be determined by measuring the affordability of your product, creating an appropriate pricing strategy, understanding existing competition, assessing consumer awareness and understanding of your product, and geographic targeting.

Localization can be addressed by assessing to what extent your brand and/or product(s) ought to be adjusted to fit the Chinese consumer market and how this can be done within a defined budget.

Educating consumers needs to be a key part of any effective marketing strategy. This should be combined with clever use of Chinese online platforms and social media, which are often the primary gateway for consumers to learn about products.

Finding a reliable distributor can be challenging—particularly for small and medium producers. This can be solved by working with a reliable local partner who knows the market, language, legal framework, and way of doing business to carry out due diligence, facilitate communication, and ensure all agreements are fair, transparent, and legal.

China’s Wine Market in 2018

Insight’s, Challenges and Solutions

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