Changyu is not only China’s oldest wine company, but one of its most successful wine producers. In 2002, it partnered with Franceʼs Castel to create Chateau Changyu- Castel, China’s first ‘chateau’. Today, Changyu has six tourism-focused ‘chateaux’, vineyards collectively approaching the size of Burgundy, and a 17m-case annual production. Altogether, it’s the tenth-biggest wine company in the world. Its newest project is the building of the ‘International City of Wine’ in Shandong province, close to Yantai. The complex will include a winery covering 22 ha, a national wine research institute, a wine trading centre, a European-style ‘village’, and two more ‘châteaux’. Sun Jian, deputy general manager of the company, joined Changyu 26 years ago after studying for an MBA at Tongji University in Shanghai. Alongside Zhou Hongjiang, the company’s general manager, he is acknowledged as having spearheaded a recent evolution that has included annual sales growth of more than 40%.
MEININGER’S: Can you tell me something about Changyu’s history?
SUN: Over the last 122 years, Changyu has been an important part of industrial development in China. But that history has been quite up and down. We had the Qing dynasty, the republican period, confused fighting between warlords, wars of resistance against Japan and other wars, and the establishment of the People’s Republic of China. All of these are reflected in the company. But the real development for Changyu was over the last 15 to 20 years.
This period can be divided into several stages. The first, from 1989 to 1992, was a very tough time for Changyu. The bottles piled up like a mountain. It could take two to three years to sell it. We struggled to pay employees; turnover was only €10m ($11.25m). We only had two or three sales staff who just sat in the office, not going out to look for customers. Their main job was trying to sell our storage facilities to other companies. The market economy was still at an incubation stage; all Chinese companies were working like this.
MEININGER’S: That was the first phase of Changyu’s recent development. What happened next?
SUN: For the second stage, from 1992 to 1996, we were enlarging and increasing our sales team. From two or three to 400. At the same time, we began to spread across the map, from provincial capitals to prefecture cities, to county towns. Then it developed very fast. From 1996 to 1999, from the south of China to the north, the trend of drinking dry red wine grew very rapidly. Changyu grabbed the biggest slice of the cake. Wine started to overtake brandy.
Dry red, the most popular wine style at that time mostly sold at 30 RMB to 40 RMB ($4.80. to $6.40) per bottle; Changyu red was 30 RMB. We sold out.
From 1999 to 2002, we developed a new strategy, to promote our Jiebaina brand at a higher price. Moving from 30 RMB to 40 RMB to promoted prices of 80 RMB to 90R MB made us a fortune. Other companies, including importers, didn’t do a good job at this price range, so Changyu developed a lot and earned a lot of money. Production of the Jiabaina brand wine has reached 30m bottles.
MEININGER’S: When did you begin to work with Castel?
SUN: That was the next stage in our development. Starting in 2002, we had a joint venture with Castel to set up the first [wine tourism-focused] ‘chateau’ in China, with wines priced at 300 RMB per bottle. At the time, the Chinese market was so big – and we had some niche markets, including government, that needed that kind of wine and price – that sales of Changyu-Castel were much higher than chateaux in France. They produced 200,000 to 300,000 bottles per year; we sold at least 10 times more. But we had to admit that that period was special.
MEININGER’S: Outsiders often get the impression that decision-making can be quite slow in China.
SUN: At one time it was like that at Changyu, but for the last 20 years maybe we’ve benefitted from good timing, but we were also helped by our ownership system. Other big wine businesses belonged to the state, but 11 years ago, Changyu began to change from local government-controlled capital to ‘dynamic ownership enterprise’. The government now only has 12% of the shares.
MEININGER’S: How many bottles do you now produce?
SUN: Two-hundred-million bottles, including wine and brandy: 72% wine, 25% brandy, plus some health drinks.
MEININGER’S: In the past, a lot of Chinese wineries used bulk wine from Chile, France and so on. How has that evolved?
SUN: There’s no question that five to ten years ago in China – that special period – there was a big demand in China, but harvests weren’t big enough and almost all companies had to import bulk wine and package and sell it as their own wine. We used to buy bulk wine from Chile and Spain, some from France. Right now, the percent of bulk we use is small – no more than 10%. Sometimes, when our harvest is very good, it’s only 3% to 4%. For us, it’s a matter of grape varieties that are not suitable to grow in China.
Over the last two years, the Chinese market has changed a lot. We expanded the Changyu vineyards, but we have a problem, maybe, a small crisis which is not that obvious. We are growing and ripening more grapes than the market needs. We try to harvest all our own vineyards, but where we rent vines from farmers, they are thinking of switching to other forms of agriculture.
MEININGER’S: Do you know how many hectares of vines there are in China? Everybody has a different number.
SUN: Experts have received statistics that suggest the number is bigger than they perhaps believe themselves. Each local government likes to exaggerate, and if we add up all their numbers, the total would be scary. But Changyu has vineyards in almost every wine production region. We not only study our own vineyards, but we see what others are growing and harvesting. Only by studying the whole picture can we calculate the best price to pay for grapes (though we don’t buy many). We know that we have 20,000 ha at Changyu. For the rest of China’s vineyards, some say it’s 80,000 ha; I’d say that it’s no more than 47,000 ha.
MEININGER’S: You have Changyu-Castel [France] and Changyu Moser [Austria]. How do your relationships with Western producers work?
SUN: With the exception of Castel – where we take 70% and Castel takes 30% - there is no shareholding relationship. We see the role of our other partners as being focused on technical and branding support.
MEININGER’S: Changyu has a wine production company, a cork business, an import company, shops and e-commerce. Are they all separate businesses?
SUN: We have more than 10 companies. First, we have six chateaux and over 10 other wineries. Each has its own budget. Apart from the chateaux, the wineries are not involved in sales. They just produce and deliver the wine.
MEININGER’S: How many wines do you produce?
SUN: We have had 700, but are now trying to reduce that number by about half. We discovered that every item needs to be treated as a brand and some sell much better than others. But apart from these Changyu brands, there are also 200 to 300 imported wines.
MEININGER’S: Now there seems to be a move to innovative brands like your ViniPanda wine. Is that a new trend?
SUN: We have come to realise that a brand is like a big family. We prefer to talk about the panda family – just like Yellow Tail. They have 16 labels. We hope our pandas have just as many sons.
MEININGER’S: The Changyu Pioneer shops I saw looked like rooms in eighteenth-century French chateaux. How did you decide on the appearance of these shops?
SUN: The look of some of the first shops varied quite a lot, depending on the franchisees. That was a mistake. We didn’t standardise, which made it difficult to recognise that they were part of the Changyu family. We are trying to slow down the development of franchisees; we’re only encouraging them to open shops in the three southern cities, because we need to leave the space to develop our own Changyu shops.
MEININGER’S: How about e-commerce. Is that growing?
SUN: We have a separate e-commerce company we established at the end of 2013. It’s increasing very fast. We did some e-commerce before, but just a small amount. On ‘Singles Day’ [11 November, the equivalent of the US retail ‘Black Friday’], we went crazy. Even, the general manager was working in the warehouse. In one day we did 22,000 deals: 5m RMB. We got one-twelfth of that day’s national online total of 60m RMB.
MEININGER’S: Retail shops and online selling are new for China. Historically most wine has surely been sold to be served at banquets or presented as gifts.
SUN: There are two big sales peaks: the Spring Festival and Mid-Autumn Day. It takes over half a year to prepare for these, and we have 10 dedicated sales teams. But more of those sales are going through shops. In Shanghai, supermarkets can represent 50% to 60%. We learned a lot about distribution from Tesco in Europe and set up a distribution company called KA to supply retailers, including one chain that has 2,600 shops.
MEININGER’S: How much have the recent government austerity measures affected Changyu?
SUN: Our target consumer group has changed. In the past, we had four sets of consumers: first and biggest were government officials. Next were companies [including state-owned firms]. Third were rich individuals. Fourth and last was the public. Sales to officials have stopped and we don’t expect them to start again. So now we need to grab the second group – the privately and foreign-owned, rather than government-owned companies, and the wealthy. And we have to develop the general consumer market. We have to go on adapting our products. We used to have retail prices in hundreds or even thousands of RMB. Now we need to focus on cheaper products to sell at 60 RMB.
MEININGER’S: That must have a financial impact?
SUN: Over the last 15 years, Changyu created a miracle, with a very good net profit of as much as 35% – the highest in the world. We know that for some companies in Europe, it’s only 10%. The CEO of Diageo wanted to learn how we did it. But the market has changed. The good days are over. Those profit margins are no longer possible.
MEININGER’S: China has now signed a trade agreement with Australia like the one it has with Chile. Is the availability of those countries’ cheap wine a threat or an opportunity?
SUN: It’s definitely a good thing. The arrival of large amounts of wines with a good price and quality forces Changyu to adapt quickly to the changing market. We have a very good distribution network with 3,000 sales staff in China, and good production facilities. And the public has accepted the Changyu brand for many years. So we have to try to give them better quality and lower prices. And for our second strategy, we realise that unlike Baijiu spirit, which was created in China, wine is an adopted product, invented in other countries. Chinese customers don’t just drink local wine; they know that those countries have very good wine and they also drink wines from them. We will have to take bigger steps to help them. The biggest wine companies in the world such as Treasury have wineries all over the world. In the future, Changyu will do the same, purchasing companies and distributing other producers’ brands. If we apply both strategies and take advantage of the cheap wine from Australia, we are well placed to win the race.
MEININGER’S: Chinese wine production costs can be high – especially when you have to bury the vines in the winter.
SUN: Yes, if we had a winery in another country we might have the same quality at a lower cost.
MEININGER’S: Can you afford to invest in your International City of Wine and buy companies in other countries?
SUN: If you look at our assets, we have borrowed capital at 10%, so our debts are low. But we may slow down the speed of the development of the City’s wine tourism project. We are talking to Disney. We need to discover more, and find out what fits the current situation. But we are continuing the building of the winery at the projected rate so as to have it ready by June, because at the peak season, there is not enough product. If we bottle during the low season, we don’t have enough storage; it’s not economic. So the International City of Wine facility will need to be ready as fast as it can. But in June 2015, we may buy a company overseas; we have a plan to have 10 overseas wineries.
MEININGER’S: You already have Château Changyu Kely in New Zealand.
SUN: Small chateaux like that are about technical and branding cooperation, not the kind of investment we are planning. We need to buy production facilities, but their operations team, sales network and brand are the main consideration. The companies we are considering are already good businesses with two-to-three ton production and 5% to 15% profit. We will keep the existing management who have already built overseas sales. We will provide what Changyu’s management and sales teams do well in China, and we may sell as much as half of their current output, allowing them to increase production. For other companies this kind of investment is risky, but we are confident that we can do it.
MEININGER’S: How long will it take to recoup your current investment in the International City of Wine?
SUN: For the production facility it will be a good investment, repaid in as little as five to ten years.
MEININGER’S: President Xi Jinping is looking to create an ASEAN [Association of Southeast Asian Nations] open trade area. Do you see a possibility of exporting Changyu wine to your neighbours in the near future?
SUN: For the Changyu brand, we have a very clear idea of our advantages and disadvantages, so we’re not exporting to get too many overseas exports. But we could do well in the Asian market with ice wine and our health-wine, which would not sell in Europe. And, of course, if we buy overseas companies, their wines may already sell well in export markets and developing those sales could be very important for us.
MEININGER’S: How do you see the company developing over the next 25 years?
SUN: The three OIV presidents all told me something we don’t dare think of ourselves. They said that Changyu would eventually become the world’s biggest wine company. Why? The biggest companies are now in the US, because it’s the biggest wine-consuming country. The OIV presidents said China will unquestionably become the largest wine consuming country. When that happens, there will be a biggest wine company in China and if everything goes well, that wine company will be Changyu. To achieve this goal, many factors will be involved and we’ll have to go through many difficulties, but we’ve made a good start. A good thing about this company is that although it’s over 100 years old, Changyu isn’t an ‘old’ company. As our company mission statement says, we will always continue to be a ‘pioneer’.
