Alberto Fernández
Managing Partner – Torres China
Torres first started targeting China’s Tier 2 cities in 1997. We set up a network of sales representatives in Nanjing, Chengdu and Wuhan when we created our first joint venture in China. At that time these secondary cities showed the most promise for imported wine. However, in the late ’90s, Tier 2 markets were very much dominated by French/Bordeaux wine brands. Today, most of the secondary cities have changed substantially. In terms of where brands should be looking, Zhengzhou, Chongqing, Xiamen, Changsha and Xi’an have all been cities where we have enjoyed good growth over the past few years. Yet Tier 2 markets present many challenges, not least because many regional agents in these markets are wine importers themselves, and also many retail (chain) stores sell their own private label wines. Torres has observed a massive rise in the number of retailers creating their own-label wine brands, and a concurrent increase in the number of agents importing wine directly. Nonetheless, ecommerce is rapidly becoming an important avenue for sales of Torres wines in Tier 2 cities – we distribute our major brands through ecommerce players like TMall, JD.com, etcetera. In addition, our margins are far higher than, say, ten years ago. But equally, it is harder to sell lesser-known styles of wine in Tier 2 cities compared to, say, Beijing or Shanghai, and the level of wine knowledge is still generally low.
Overall, I would say the retail segment is driving growth in China’s Tier 2 markets. In many Tier 2 cities a strong BYOB culture prevails in the on-trade, and therefore many traditional restaurants have to live with the fact that many consumers are bringing their own wines or spirits to restaurants, or even to banquets in hotels! However, consumers display little brand loyalty in my experience, and price is always key to sales.
So my final advice to hopeful brands is to make sure that you have a good knowledge of those cities, but above all find the right partners. Furthermore, invest in people and roadshows, otherwise it will be hard to grow in these smaller cities. Moreover, you will often get pressure from the agents, as they want to see results within four to six months. Starting is always easy, but growth is the key.
Chuan Zhou
Research Director – Wine Intelligence
China’s Tier 2 markets started to become really important in 2011, driven by the nation’s rising economic prosperity. These markets have grown significantly in recent years, although from a small base. Today, some of the most important Tier 2 cities for imported wine are Chengdu, Chongqing, Wuhan, Shenyang and Hangzhou. During a recent research trip, I was told the analogy that if Chengdu is considered three to five years behind Shanghai, then Chongqing is three to five years behind Chengdu. Even within Tier 2 cities themselves, there is a distinctive hierarchy of growth. So while all Tier 2 cities have developing wine markets, some are more immature than others. Overall though, Tier 2 cities are less developed than Beijing and Shanghai, so there is still a focus on direct sales to large enterprises and groups, rather than targeting individual consumers. For example, most retailers utilise their personal connections to sell directly to corporate customers in large quantities or with special packages.
In terms of distribution channels, without a doubt online retail has grown the fastest. Websites like Taobao and paying methods like Alipay and WeChat Wallet cut out the middleman and allow consumers to buy based on their own agenda and preferences.
However, the challenges and barriers to entry are considerable. Brands looking to enter Tier 2 cities should be wary of sizing, staff, and retail structure. Individual retail is still small, so you should have realistic expectations of sales and the volume that you will move. Current staff in retail stores seem to lack basic wine knowledge and appear disinterested in the products. Poor customer service can be detrimental and off-putting for consumers who are inexperienced and intimidated by wine. Well-trained staff are important, as well as the ability to communicate with them in a common language. Retail space is more affordable in these cities compared to Shanghai, but shelving and store displays are disorganised. Less professional stores have wines arranged haphazardly and pricing does not appear consistent with the product offerings. Logistically, importing wine into most Chinese cities is not very different as they go through similar administrative processes. However, there are some exceptions, such as free-trade zones and ports. For instance, Shanghai, an international port, may have easier access when transporting wines. This is also true for many cities on the eastern coast. New trade agreements are created often, both domestically and internationally, so keeping up to date is key. But above all else, remember to exercise due diligence when approaching China’s smaller markets. As a foreign company, it is best to have a trusted partner who knows the local market well and speaks the language. Local physical presence, be it a representative or an office, is more advantageous than any secondary research and proves that you are a serious player. Lastly, without a clear strategy, success is difficult, especially when there are so many other competitors looking to expand in the market as well.
Ivy Ye
Brand Ambassador – Villa Maria Estate
Villa Maria started expanding into China’s smaller cities in the mid-2000s and it has been something of a rollercoaster ride since then. Initially, it was common to see wholesalers trading in commodities such as cigarettes or Chinese rice wine (for gifting) – imported wine was still a rare commodity. But increasingly, we see great potential for Villa Maria in Tier 2 cities such as Chengdu, Wuxi, Nanning, Dalian and Sanya. The growth of Chengdu and Chongqing in Southwest China in the past year has been significant. Cities such as Dalian and Harbin in the northeast also have more opportunities for growth. In addition, consumers’ buying power and their consumption habits have changed a lot in Tier 2 cities over recent years. Some wholesalers have started to directly import wine products from wineries in New Zealand. Wine consumption is predominately driven by middle-class drinkers, with more young, and especially female, wine drinkers purchasing white wines such as New Zealand Sauvignon Blanc. There is a trend from gifting to everyday consumption. However, in general, gifting is still one of the main driving forces of wine purchasing. Above all else, having an online presence is vital – ecommerce continues to grow in importance and we are seeing the majority of the rise in wine consumption coming from China’s youth. They are a highly connected online community who rely on the internet for research, purchase decisions, transactions and advocacy. Nonetheless, be prepared for hard work. In a mature market like Beijing, the business environment is much more established. For example, logistic and warehousing services are highly efficient, and the pricing structure is stable. People are more knowledgeable about wines, and with fierce competition between international wine brands, there are more options available in the market. In Tier 2 cities, more effort and support is needed to build brand awareness and to educate consumers about wine.
Carlos Serrano
Commercial Director – Montes
Montes is still a relative newcomer to China’s Tier 2 cities – we began doing business outside of Beijing in 2008, when our importer started their national expansion. Cities such as Suzhou, Chengdu, Harbin and Nanjing were very much at the early stages of development back then and there wasn’t really a widespread culture in these societies of consuming imported wine. But, as is the case in all emerging markets, they are becoming more sophisticated and developed. Indeed, there are definite advantages to doing business in China’s smaller cities – these markets are less saturated with imported brands than, say, Beijing. Generally speaking, the retail sector in the Tier 2 markets has been growing consistently over the past couple of years, in addition to the internet segment. However, competition is still intense for listings, and price control is a big issue nowadays.
But on the plus side, the infrastructure in China’s Tier 2 cities has come on in leaps and bounds and now compares to the capital. There is simply more room to breathe here, although, as the market develops, so too will it become harder for brands to establish themselves and grow. So companies must invest heavily if they want to see results – visit the Chinese interior, then visit again, and again. The best method of getting a handle on these markets is to talk endlessly with local businesses and to keep your ear to the ground.
