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| April 23rd 2009 |
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| Does China add up? |
by Chantal Chi in China
Excited by the prospect of China’s enormous population, producers are eyeing the fledgling wine market with interest. But while some international companies are doing well, this market can lay traps for unwary players.
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China, with its vast population, makes people fantasize about their potential sales. The wine industry dreams of it as the new El Dorado. But is it a reachable dream or just an illusion? The consumption of wine per capita in this Kingdom is less than one bottle per year. Even so, with such an amazing demography, China seems to be a super market. “But wine producers often forget that China itself is a wine producing country,” said Steven Sarle, international sales director of Trinchero Family Estates, who has been in the wine business in Asia for more than 15 years.
According to statistics, imported wines have only 20% of the market share, which means 80% of wines are ‘made in China’. So in fact, China is not as big a market for wine imports as people believe. “The big volume of bulk wines give a false impression, along with the Grand Crus and prestigious brands in high demand. These combined factors lead outsiders to believe an illusion,” says Simon Zhou the sales and marketing manager and also co-owner of a young importer, Ruby Red.
Before the current economic crisis clouded our lives, there were indeed more good wines at consumers’ disposal than few years ago. But now, it has become much harder to push wines beyond the 150 RMB ($22.00) wholesale price. Apart from the top Grand Crus, the realities of the Chinese wine market are the 80-100 RMB ($11.70-$14.50) for the on-trade and 50-70 RMB for the off-trade price points. “Those most easy to sell are $2 per bottle FOB wines from South America and €3 per bottle coming from Europe,” said Alberto Fernandez, general manager of Torres China.
Then what is the real future of the Chinese market?
China under the microscope
China is not just one country, but rather a continent with fragmented ‘countries’. Geographically, China is divided into several provinces by natural or historical boundaries and ethnic groups. Each province acts as a country, just as on the European map. Each province has its own characteristics – dialects, mentalities, and culinary specialties, which drive differing preferences of taste. For instance, Shanghai cuisine is sweeter, while the Sichuan is famous for its spiciness. Likewise, people in the south of China often like full-bodied red wines, while people in the eastern part prefer wines that are more elegant in style. Overall, China is still very red wine-oriented, with 80% of vineyards planted to red, which is the same proportion consumed; however, people show more interest in white wines in the eastern cities.
This fragmentation also creates a distinction in consumption from the north to the south. “People in the south are more influenced by the brands which are popular in Hong Kong, due to the geographical proximity and frequent travels to that city,” says Simon Wang, vice president of sales for ASC Fine Wines. “Due to the CEPA agreement (Closer |
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Economic Partnership Arrangement) between Hong Kong and the mainland, the southern cities get more of this impact, including the selection of wines.” Meanwhile, people in Beijing are willing to spend on expensive wines, because this is where officials and diplomats gather. A pricy wine shows respect and gives face. ‘Face’ has a very important effect on Chinese behaviour—more than foreigners can imagine. Almost everything is related to it, from relationships and business negotiations to daily conversations. For the ranking of ‘face’ in terms of business entertainment, Beijing is number one, followed by Shanghai and then GuangZhou, according to Simon Wang. To penetrate the Chinese market, knowing about ‘face’ is the equivalent to the key to the gate of heaven.
Fragmentation exists within cities
In the first tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, “wine is trendy and shows sophistication. It is something common to order for business entertainment,” says Carrie Xuan, the general manager of ASC Beijing. “Consumers also drink at home for good health.” She explains further: “In those second tier cities of northern China, people still prefer traditional distillated alcohol called Baijiu and Chinese local brand grape wine. Few people really understand wine, in fact. They just followed the first tier cities to buy Grands Crus as a gift and they drink it in the way of Ganbei (bottom up) as they treat Baijiu.”
Anna Song, brand manager of DBR Lafite in Summergate, says that “consumers of the southern cities were in contact with wines earlier than in the north, therefore they have more knowledge about wines and the Ganbei is much less frequent down there.”
Of all the mega-metropolises discussed, Shanghai is the most international and also the most advanced market for wine. Expatriates, and elite Chinese from around China and beyond, as well as international business people and tourists, all assemble in this booming city. While it makes Shanghai over crowded, it also gives it an invincible power. “Around 70% of imported bottled wine first touches Chinese territory in Shanghai’s port,” says Alberto Fernandez.
How did Shanghai become the locomotive of modern China? This is probably thanks to its historical background, when it opened its doors and minds to Westerners earlier than other major cities in China. It is gradually overtaking Hong Kong, year by year and has become the place to be, which is also true for its wine market. All the big players, such as ASC, Torres and Summergate, have their head offices in Shanghai. But while Shanghai leads in terms of both wine quality and quantity, it’s not as mature as either Hong Kong or Taiwan.
Getting to the right market
“To get your wine on a client’s list in the first tier city, you need to have a great brand or an |
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elevated marketing budget, because these top places are saturated,” advises David Chow, the GM of Mercuris. “Therefore, the key to China is that you have to be aware of the positioning and target for your products.” For instance, Alberto Fernandez suggests “smaller wineries can think about how to start in the second tier cities; however if you are a super Tuscan, then you’d better stay in the first tier cities because people don’t understand and won’t buy your wine out of those zones.”
Most wine producers dream about entering the best channels, restaurants and luxury hotels, but to be listed in powerful supermarkets, chain hotels or high-end restaurants here may cost you heavily. The form can be a rebate, in percentage of sales, in supporting events supporting, sales materials and so on – but none of these ‘sponsorships’ guarantee sales. In fact, you have a target to reach in order to stay on the list. In most Chinese-owned restaurant and off-trade outlets, the situation is even more complicated. They may ask an ‘entry fee’ in cash, starting at six figures, plus personal gifts. To land a bigger account, the package per year could reach more than half a million RMB.
Therefore using the right strategy from the beginning is step number one to success in China. A successful example is Torres China, one of the top five importers in China, as well as being a wine producer. Having a direct control in distribution in China is a genius concept, as it’s not only better for development and sales, but also offers a way to survey the whole Asian market. Another similar story is EMW (East meets West), co-headed by Edouard Duval, from the Champagne house Duval-Leroy. “Don’t hurry yourself to export to China. You need to take the time to do investigations as complete as possible – for example, questioning those who already export to China,” he advises.
Simon Wang suggests asking distributors about “their key market, client list, portfolio and their strong points,” while Steven Sarle strongly advises producers “to visit your potential candidates locally. You have to be there and see who they are and what they are doing on the spot.” Not only will it help secure a partnership, it’s also a good way to avoid bad surprises.”
This is an essential point because, as Alberto Fernandez estimates, “there are more than 2,000 importers at the present stage. Only about 10% have volume, but merely 50 of them are reliable.”
Because wine is a fashionable business, it attracts many opportunists, who care nothing for brand image. All they see in wine is profit, so they want to make the biggest money in the shortest time, not build a long term relationship. One possible way to spot such an opportunist is if they order a large quantity in a single order, or boast that they can take care of your products throughout the whole of |
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China without doing too many negotiations with you. Contrary to the way business is done in the West, “in China, getting a contract signed does not mean the deal is closed,” explains Simon Wang. “It is like a letter of intention, just a beginning. To get full payment is the accomplishment.”
Brand fever
“It was very hard to start our business because Chinese are very brand oriented,” says Edouard Duval. Three years ago, when the Union de Grands Crus Bordeaux did their tasting, the hall was about 80% of Westerners employed in F&B. There were 50 Chateaux owners and the tasting room was not very warm. But last year, double number of Chateaux came and there were more than 1,000 tasters, with more Chinese faces in evidence, which caused a traffic jam. I can imagine that Bordeaux people now must feel China is a charming country to visit.
But how long can the Grands Crus remain on top? Thanks to China’s fragmented market, even if Grand Crus fever was to cool in the first tier cities, it will in any case ignite in the second tier cities. “The fever for Grands Crus or branded wines will not cool down at all, but will become hotter!” says Simon Zhou. Apparently, the belief that the second tier cities are the future is also shared by Edouard Duval:“Less competitors out there, but lots of thirsty people.”
Eric Chen, the director of food and wine in Changzhou Trader’s Fudu hotel, remaks that people in his third tier city are not drinking wines, but rather the brand. But to build a compelling brand takes years.
China is magnetic. It appeals to everyone. It has great potential because there are always new consumers taking up wine and entrepreneurs jumping to serve them. But China is also a confused market at the moment. If you are already in, cherish your position and consolidate with your partner. Patience, commitment and cooperation are crucial. “As wine, the good harvest comes after a long investment,” says Simon Wang. But if you’re oustide, then watch every step, because there could be landmines before you reach your destination.
This article appeared in Issue 1, 2009 of Meininger’s Wine Business International, accompanied by data not shown here. The next issue of the magazine will appear at the end of April and is only available by subscription. To subscribe, go to http://www.wine-business-international.com/130---en-top_navi-subscription-subscription.html
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