China’s economy has experienced huge change in the past 40 years or so. Having spent some time researching the development of the consumer goods market in China, the current position of the drinks market together with opportunities that exist and challenges that we face in both marketing and exporting to China, I look to the future. After a period of significant growth, has the bubble finally burst?
Since 1972, there have been a number of key events which have led to China opening up as a market for consumer goods. The first - US President Richard Nixon’s visit that year which claimed to have normalised relations between the two countries and kicked off Beijing embracing western culture. The US is still reputed to be the most influential foreign country in China.
Following on from this, former Chinese President, Hua Guofeng, introduced an open-door policy
in 1977 later incorporated into Deng Xiaoping’s “Four Modernisations” program in 1978/1979, which led to economic reforms. From 1986 to 1990, Deng Xiaoping boosted the open-door policy to encourage international trade, which in turn led to a fast growing private sector and unprecedented economic growth.
By 1992, the International Monetary Fund (IMF) ranked China the 3rd largest economy in the world, after the US and Japan.
In 2001, China joined the World Trade Organisation (WTO) which required it to relax over 7000 tariffs, quotas and other trade barriers, the result of which was China enjoying one of the best decades in its global economic history. China’s Dollar Gross Domestic Product (GDP) quadrupled whilst its exports increased almost five times.
In 2002, China signed trade agreements with the Association of South East Asian Nations that will result in the abolition of tariffs on all goods this year, creating the third largest free-trade zone. In addition, China and Hong Kong entered into a Closer Economic Partnership Agreement in June 2003, removing import tariffs between the two.
In 2007, as we will all remember, the global financial crisis hit. To counter the impact, in November 2008, the Chinese government announced a US$586 billion plan to stimulate the economy. Former Chinese President, Wen Jiabao, was quoted as saying that the impact of the global financial crisis on China was worse than he had expected.
Despite concerns, exports continued to grow and by December 2009, China had overtaken Germany as the world’s largest exporter. In 2011, it overtook Japan to become the world’s second largest economy.
By February 2014, China’s trade surplus had increased to US$31.9 billion, up 14% on the previous year, easing concerns that the world’s second largest economy might be slowing.
China’s GDP increased from c.5% in the 1960s and 1970s to 10.4% in 2010. This growth has led to more affluence amongst the urban population and an emerging middle class with increased spending power. Greater exposure to western lifestyles and habits has resulted in Chinese consumers desiring and acquiring luxury goods and premium international brands.
Let’s look at the Chinese Drinks Market…
The Asia Pacific region consumes more than 60% of the world’s spirits. Per capita consumption of alcohol is increasing and China is expected to consume 7.7 billion litres of spirits this year alone; up 8% from 2009. All this, despite government attempts to encourage lower alcoholic consumption and conserve grain for food!
Cognac and Scotch whisky are the largest selling imported spirits closely followed by vodka. Hennessy Cognac, Martell Cognac and Chivas Scotch whisky controlled 43% of the import market in 2011. Sales of imported spirits in China have increased by 250% over the last 10 years and premium brands are often purchased to self-promote wealth, success and sophistication. It should be remembered however that imported spirits account for only a small percentage of the market despite sales increasing from membership of the WTO and a reduction in import duties.
The demand for spirits suffered a huge downturn in October 2012, when Chinese President, Xi Jinping, cracked down on the use of public money for funding expensive gifts and lavish banquets. On a more positive note, June 2013 saw the removal of an import ban on premium blue 100% agave tequila. (China had previously only permitted spirits with 2mg/litre of methanol; 100% agave tequila contains up to 3mg/litre.)
The demand for all premium alcohols continues to remain subdued due to the crackdown on gifts and entertainment. Pernod Richard blamed the slump in China as one of the key contributors to its 7% fall in sales, when publishing its full year results for 2013/2014.
So what do they drink?
Baijiu – the world’s biggest selling spirit and a global market worth US$23 billion. Global consumption of baijiu was forecast to increase 14.7% from 2012 to 2016. Its luxury range has historically accounted for 70% of its profits and for reasons mentioned above, growth looks likely to slow.
Cognac - sales grew 71% between 2009 and 2010. In 2013, China was the largest importer of Cognac after the US and Singapore but Cognac sales has also been affected.
Tequila - becoming popular. Since the ban on importing 100% tequila was lifted, Mexico has exported almost 520,000 litres of mainly premium tequila to China.
Vodka - offers growth potential and appeals to the younger generation (the Millennials or Generation Y) who are the driving force embracing western culture. Market share of the international producers remains low, but luxury brands are being developed for the Chinese market, notably Absolut 72 and Diageo’s Shanghai White.
Scotch whisky – sales have slowed. In 2014, exports to Singapore fell by 39% in value to £200m partly due to the ongoing austerity campaign in China, the final destination for most Scotch shipped to Singapore. In addition, direct exports to China fell by 23% to £39m. Whisky faces stiff competition from baijiu but in its favour, is considered a drink for successful individuals. Diageo’s Johnnie Walker is no. 2 to Pernod Ricard’s Chivas Regal. The Chinese have been exploring alternatives such as bourbon, particularly single barrel and small batch bourbons.
Brandy, Rum and Gin - exports to China are increasing but numbers are difficult to obtain as many of these products are not exported direct. Armenia is increasing its exports of Armenian brandy to China, its second largest trading partner. It shipped 100,000 litres of brandy to China in 2013.
Wine - China is the world’s 5th largest consumer of wine and bought 1.86 billion bottles of red wine in 2013. China is the largest consumer of red wine in the world, red is considered lucky and red wine perceived to have health benefits. In comparison, white wines are considered insipid and chilled beverages are shunned at dinner where there is a preference for warm drinks. The colour white is also commonly associated with death!
The popularity of wine received a boost in August 2009 when taxes on high strength alcohols were increased to promote healthier lifestyles. Women in particular have become increasingly interested in imported wines that fit their new aspirational lifestyles.
Domestic wine producers control more than half the market. Quality is improving and producers include Changyu Pioneer Wine, Great Wall Wine and Dynasty Wine. Overseas companies have been exploring the potential for wine production in China, and a number of joint ventures have been established, including Martell and Remy Martin.
France is the largest exporter of wine to China, and China the largest market for Bordeaux. However, sales of Bordeaux fell by 28% in the first half of 2014. This is largely attributed to China and the decrease in corporate gifting. Most consumers will choose red wine or if they have some wine knowledge, they will likely opt for Bordeaux. In terms of bottled wines, Australia is the second-most imported followed by Italy. For bulk, Chile is the most imported followed by Australia and Spain.
Overall wine consumption in China is still extremely low; only 1.5 litres per person (compared to France at 51.9 litres). Wine accounts for only 5% of all alcohols consumed in China and domestic production accounts for 82% of that.
Champagne and Sparkling Wine - whilst extremely small, the Chinese market for Champagne is the fastest growing amongst the top fifteen importing nations. 1 million bottles of Champagne were sold in China in 2011; 2 million in 2012. It is becoming popular in bars and as an aperitif.
Sparkling wine imports to China increased from 2.7 million litres in 2010 to 6.3 million litres in 2012. France enjoyed a 73.2% market share with Champagne accounting for the majority of this. Italy was second, followed by Australia, Spain, Germany and the US. The popularity of Cava has increased and this has also proved popular in nightclubs and bars.
So what opportunities exist to expand sales of wines and spirits in China?
China has experienced unprecedented economic growth in recent years which has created an increasingly affluent population with higher disposable incomes. China’s policy of one child per family has also served to preserve incomes whilst an affluent middle class can now afford to buy premium products, which includes international wines and spirits.
With producers and exporters initially focusing on China’s Tier 1 cities, opportunities exist to market to China’s Tier 2 and Tier 3 cities. Suzhou, a relatively unknown city in Jiangsu Province, Eastern China, is one such example. In 2009, Suzhou had a population of approximately 6.3 million and a GDP of $774 billion.
China is forecast to have 322 billionaires by 2023 and add $1 trillion annually to its global GDP between 2013 and 2023. Ultra High Net Worth Individuals (worth $30 million or more) are also forecast to increase by about 80% in the next 10 years, all of which will create a vast market for premium wines and spirits.
There are significant opportunities to sell wines and spirits online as China has 618 million internet users and 500 million mobile web users. It is anticipated that almost half of Chinese consumers will buy wine on the internet by 2020.
As for spirits, vodka and gin are well positioned. Sales have been less impacted than Cognac and whisky and the Chinese are already familiar with white spirits. Vodka appeals to Generation Y’s desire for western products and Beefeater 24 gin contains two tea botanicals to appeal to the Chinese, whilst the bottle is red.
China is expected to become the second largest market for tequila within four years. Demand for five year old Añejo is expected to increase significantly due to the popularity of barrel-aged spirits. Patrón is another premium brand attracting interest in bars and clubs.
Further education, brand development and design will be necessary for the Scotch whisky market to turn around. Diageo launched the Johnnie Walker house to educate Chinese consumers about Scotch and, having observed that the Chinese enjoy green tea, Pernod Ricard has been selling a canned version as a mixer for Chivas Regal. Johnnie Walker Blue Label introduced twelve crafted bottles representing the animals of the Chinese zodiac.
As for wine, imports must compete with China’s increasing domestic production, however, the forecast rise in consumption of wine in China will not be met by local producers alone. Brand recognition is increasingly important to Chinese consumers, the majority of whom possess a limited knowledge of wine.
Opportunities certainly exist to promote wine and food pairings and to market white wines to the hotter southern cities where seafood is popular. Rieslings and Gewurztraminers for example both work well with spicy Chinese foods.
Women in China are increasingly interested in international wines and consider them fashionable. Women are becoming better educated, spending more of their surplus income and increasingly key decision-makers when it comes to the household budget.
Champagne and sparkling wines also offer potential. Rose Champagnes are popular with women due to their colour and residual sweetness, and Champagne sits comfortably with a desire for luxury goods and all things French. Whilst it is not yet recognised as a drink for celebrations in China, the potential is there with good marketing. Russian sweet sparkling wines also attracted interest at the Hong Kong International Wines & Spirits Fair in 2013.
So what are the major challenges when exporting or marketing to China?
Historically, wines and spirits were mostly consumed during festivals or exchanged as gifts. The crackdown on lavish gifts and entertainment is one of the main reasons for a fall in the sales of premium spirits and Bordeaux. Pernod Ricard, Remy Cointreau, Diageo and LVMH have all suffered. In addition, in February 2013 a ban was implemented on advertising luxury gifts on television and radio.
The way in which alcohol is consumed in China differs too. High strength spirits such as baijiu are traditionally shared with others and often drunk as a toast. Alcohol is never casually sipped and eating generally takes place without drinks that distract from the taste of the food. Much of the domestically produced wine in China has been of poor quality in the past and as such, mixed with Coca Cola or Sprite. Education is a challenge and very few consumers appreciate the value of imported wines – the majority still buy according to price or label. Until recently, there were no regulations around the production of wine, but in June 2014, the China Alcoholic Drinks Association introduced new standards which should improve quality.
Another challenge for exporters of wines and spirits to China are the high import duties and taxes they have to pay, which make their products expensive compared to those of domestic producers. Duties and taxes are calculated on the shipping value of the product and imported alcohol is subject to Consumption Tax and Value Added Tax. Customs procedures can be extensive and overbearing, and trademark applications can take around sixteen months to process.
Then there are foreign exchange restrictions. When foreign currency is exchanged into or out of the Renminbi, Chinese distributors must register with the State Administration of Foreign Exchange (SAFE). Payments on imported goods have to be reported, and SAFE can conduct investigations at any time.
Exporters need to understand the business culture in China. The Chinese prefer to deal face-to-face and establish relationships before undertaking business. They are cautious about making commitments, and time and money needs to be spent on identifying the right partner. Once a relationship is established though, a business partner can be for life.
Then there are the various laws to consider. China’s contract law requires that parties adhere to the principle of fairness or equity. The anti-monopoly law prevents companies having a monopoly on products, the anti-unfair-competition law encourages fair competition, and the price law seeks to standardise prices. There are also anti-corruption laws.
In addition, China imposes legal obligations on dominant players in wholesale and retail markets. It has strict rules on how large retailers transact with suppliers, rules on sales promotions, and numerous other regulations relating to contracts, distribution agreements and tying of products.
China is a vast nation and a collection of individual sub-markets. The pace of development within the different provinces highlights the economic and social differences, and China’s infrastructure is still being developed. Outside of the major cities, it is inefficient and expensive. Storage facilities are also an issue; both quality and lack of temperature control can create problems.
Not being able to speak the language is obviously a huge challenge and the importance of a local contact and a good Chinese lawyer should not be underestimated!
A significant problem in China continues to be the range of fake and counterfeit products. In the July 2014 edition of Decanter magazine, it was reported that “At least half the Chateau Lafite-Rothschild sold in China is fake”. With high prices being paid for Bordeaux this obviously creates problems. The increase in counterfeit products could potentially lower sales and damage reputations of prestigious brands. Whilst China has been the world’s leading consumer of Bordeaux since 2009, interest in Bordeaux en primeur appears to be waning and the Chinese were noticeably absent from the 2013 futures market.
Finally, not having a recognisable brand, or even a name that the Chinese can pronounce, can be a barrier to marketing and selling in China. Exporters will need to develop brands specifically for the Chinese market. Having a Chinese brand name is one of the critical keys to success.
So, what about the future?
It will be interesting to see how the market for premium spirits develops in light of government restrictions on gifts and entertainment or indeed whether the rules are relaxed. I would expect to see sales of premium spirits level out in the next few years but demand for tequila is forecast to boost Mexican exports by about 20% within a decade.
I can see vodka experiencing increased demand; it is already considered desirable by Generation Y and a market for flavoured vodkas could also develop. Hennessy VSOP Cognac is attracting interest in nightclubs, along with Armagnac. The Chinese already associate XO with quality and Armagnac’s heritage/provenance will appeal.
The quality of locally produced wine in China should continue to improve. In an interview with Qingyun Ma, owner of Jade Valley winery, from the August 2014 edition of Wine Spectator, Ma is quoted as having a “unique vision for Chinese wine” and has based his winery on the Napa Valley. He believes that with only a “few high-end wineries” in China, consumers have had little choice for quality domestic products, and, as such, turned to Bordeaux. He is hopeful that his winery will help “create a new wine culture within China”.
Chinese wine production and exports looks set to increase and China is forecast to be the world’s largest wine producing nation within the next five years. Berry Bros & Rudd has recently become the first UK retailer to stock Chinese wine and the consumption of wine per capita is increasing particularly among the middle class. As domestic production will not be able to meet demand, imports will need to increase.
Burgundy is beginning to attract some interest, whilst Spain, Argentina and Chile gained considerable ground in volume terms in 2012. China is increasingly important to New Zealand and a promising market for Portugal. Australia and Italy have also reported increased demand. The USA looks set to increase exports to China, however education and branding need to be considered.
The Champagne and sparkling wine market will increase if marketed correctly. History has shown that inexperienced wine drinkers start with red wines and move onto white and sparkling. Brand recognition will be key in engaging Chinese consumers.
Over time, interest in the product should begin to take preference over branding as knowledge improves. There is clearly a thirst for knowledge as evidenced by the January 2014 launch of the Wine & Spirit Education Trust Level 3 accreditation in Chinese, and the new Chinese language WSET website.
Copyright of suerayuncorked.com - March 2015
Opportunities in the Chinese wines and spirits market