Thirst for Wine – Inside China’s Wine Industry: The Success Factors of Marketing Wine in China
©2014
Textbook
63 Pages
Summary
China is turning into one of the world’s largest, most lucrative food and beverage markets. Especially wine is in demand and has become fashionable as a symbol of social status. This trend is very likely to continue as wine consumption is closely related to income and China’s emerging middle class offers tremendous potential.<br>The market’s healthy value growth will further encourage newcomers from outside China. But how can a market entrance be successfully managed and what are the main challenges when bringing wine to China? <br>This book is an insiders’ guide to efficiently planning a market entry by taking a thorough look at the wine market of China. It surveys the typical behavior of the Chinese wine consumer and examines the relevant factors for a successful market entry. Distribution channels (off- and online), pricing models and marketing activities are scrutinized. Further, the reader gets insights into the challenges of this dynamic market, such as fierce domestic and foreign competition, policies and regulations as well as entry barriers.<br>The thirst for wine prevails, and this book will leverage your momentum.
Excerpt
Table Of Contents
1
1 Introduction
China is turning into one of the world's largest, most lucrative food and
beverage markets. With a growing middle class, the demand for premium
lifestyle products is constantly increasing. A new generation of consumers,
typically located in urban areas, is emerging, with more disposable income and
a greater awareness and willingness to pay for high quality, often imported
products including wine. Wine has become "fashionable" as a symbol of
social status and this trend is likely to continue. Further, the health benefits
associated with red wine in particular, have convinced some consumers to
switch from traditional Chinese alcoholic beverages to grape wine.
Although China traditionally is a rice-wine-consuming country and unlike in
many Western countries, grape wine is considered a luxury product, the grape
wine market
1
has grown rapidly since its emergence in the mid 1990s, with still
wine being the most lucrative. According to a recent survey, in 2009 the
Chinese wine market generated total revenues of US$ 7,2 billion which
constitutes a compound annual growth rate of 5,3% for the period from 2005 to
2009
2
. As wine consumption in China is closely related to income, there is no
end in sight to this positive trend.
However, the Chinese wine market is in its early stage. Not only is the annual
per capita consumption of wine still low compared to other countries
3
, also the
demand for information and education on wine is enormous: Many new wine
schools are opening, courses on wine tasting take place in the whole country,
wine tours to Chinese wineries are offered and countless wine exhibitions like
the "WINEXPO Guangzhou", "Wine and Spirits Shanghai" and "Best Wine
China" attract more and more visitors every year.
The market's healthy value growth will further encourage newcomers,
1
The wine market consists of champagne, sparkling and still wine, fortified wine.
2
Datamonitor (2010) Industry Profile: Wine in China, p. 8. Online: www.datamonitor.com
3
Pan, Suwen et. al. (2006), Alcoholic Beverage Consumption in China: A Censored Demand System
Approach. In: Applied Economics Letters, vol.13, p. 975
2
especially from abroad. But how can a market entrance be managed ideally
and what are the main challenges when marketing wine in China? This book
takes a thorough look at the wine market of China, the typical behavior of the
Chinese wine consumer and approaches the question whether the thirst for
wine will prevail and if so, what possible marketing strategies there are for
importers that want to enter this dynamic market.
3
2 A Brief History of Wine in China
The literature about wine in China is often imprecise about the usage of the
word "wine" in Chinese. In fact, the Chinese word for wine, jiu, is used for a
wide variety of alcoholic beverages, including beer (pi jiu), red wine (hong jiu)
and liquor (bai jiu). This evokes confusion. This study sharply distinguishes
between the different types of beverages in order to compare properly and
uses the term "wine" only for alcoholic beverages with low alcohol content and
made of grapes.
Despite missing written proof, it is assumed that the production of alcoholic
beverages started at least 3000 years ago in China. By 1000 BC, the
fermentation process was well established and the Chinese invented the chiu,
a strong beer with much higher alcohol content than its Western counterparts
4
.
Mostly grain was used for making it, as well as rice, herbs, corn, flowers and
wild mountain grapes. This strong Chinese beer never made its way to other
countries, except Japan
5
.
It is a rarely known fact that the distillation of alcohol in China started 500 years
earlier than in Europe. The Chinese invented the brandy ("burnt wine",
Chinese: shao chiu, German: Branntwein) in the 7
th
century BC, whereas the
distillation of European alcohol started first in Italy and only in the 12
th
century
6
.
2.1. Chinese Tradition and Alcoholic Beverages
During the Han Dynasty (206 BC 220 AC), when Western Regions were
explored and contacts with Hellenistic kingdoms were made, high quality
grapes came to China and Chinese grape wine was produced. However, wine
from grapes was considered exotic and was reserved mainly for the emperor's
4
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.23.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
5
Shanghai Finance (2003), Chinese Wine, Chinese Liquor, Chinese Alcohol and Chinese Culture.
Online: http://www.shanghaifinance.com/food/chinesewine.php
6
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.24ff.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
4
table
7
. The fact that rice wine was more common than grape wine was noted
even by Marco Polo when he was in China in the 13
th
century
8
. Not much has
changed until today: A rice-based alcoholic beverage literally called "yellow
wine" (huang jiu) is still among the most popular wines in China
9
.
The use of alcoholic drinks in China is intimately related with culture, i.e. with
the social, ethical, religious, economical and other aspects of life over all
periods of time
10
. In ancient times, drinking alcohol took place with certain
forms of etiquettes and strict rules, such as kneeling down first, then pouring
some alcohol on the ground to thank the earth for providing grains and food
and then start drinking
11
. Further, alcoholic beverages were incorporated into
religious ceremonies both as sacrificial offering for the gods or for the dead
and as a drink during festivals featuring divine states of drunkenness.
Moreover, alcoholic beverages have always been seen as a healthy beverage.
The Chinese have special medicinal wines that have been an essential
ingredient in Chinese medicine
12
. Just as in Europe, it is believed that red wine
as a beverage reduces the risks of cancer, arthritis and cardiovascular
disease
13
.
Today, wine is consumed during traditional festivals such as The New Year
Festival and at important social events such as weddings. According to a wine
importer in Zhuhai, South China, imported wine is mainly served to impress a
guest or business partner at a restaurant banquet dinner or to use as a gift on
a special occasion.
Chinese nationals returning from living and working abroad
or doing business with "Westerners" are more prone to selecting imported wine.
7
Rong, Xu Gan and Bao Tong Fa, Grandiose Survey of Chinese Alcoholic Drinks and Beverages.
Online: http://www.sytu.edu.cn/zhgjiu/umain.htm
8
Gernet, Jacques (1962) Daily Life in China on the Eve of the Mongol Invasion, 1250-1276. p.134ff.
9
The Hong Kong Tourism Board, 28 july 2010, Festive Food and Chinese Wine.
Online: http://www.discoverhongkong.com/eng/dining/chinese-festive-wine.html
10
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.7.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
11
Rong, Xu Gan and Bao Tong Fa, Grandiose Survey of Chinese Alcoholic Drinks and Beverages.
Online: http://www.sytu.edu.cn/zhgjiu/umain.htm
12
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.22.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
13
Guo, Hangyuan et.al. (2010), Chinese yellow wine and red wine inhibit matrix metalloproteinase-2 and
improve atherosclerotic plaque in LDL receptor knockout mice.
Online: http://www.ncbi.nlm.nih.gov/pubmed/20370796
5
However, at official governmental events and among older generations huang
jiu or the high proof bai jiu, literally "white alcohol" and sometimes mistakenly
translated as "white wine", is the preferred beverage. It is not a white wine in
the sense of a Western white wine, but rather a liquor.
Chinese people do not drink alcohol at home but only when in a restaurant or
bar and in company of others. Alcohol beverages are often downed in shots
with the objective of getting drunk rather than enjoying it slowly. Many Chinese
down small glasses of wine in one swig while making toasts and shouting
ganbei ("cheers") before they drink. Sometimes they drink fine quality wines in
this fashion.
Last but not least, a simplistic mentality exists in many parts of Asia: Eating is
for eating and drinking is for drinking. Eating is done traditionally without any
beverages that could distract from the pure taste of the food. This is true in
most cities in China, Korea as well as Japan. Tea is the only traditional
beverage served with food, more recently also beer
14
.
2.2. The Emergence of Wineries
The domestic wine making industry began about one century ago, when in
1892 Zhang Bi Shi, an officer in the Qing government, established the
Changyu winery in Yantai with an Austrian consul as wine-maker. He
introduced 150 European vinifera wines. Many other wineries run by foreigners
followed, all of which served mainly to produce wine for foreign delegates in
China: Melco winery (today: Tsingdao) was run by Germans, Shangyi winery
(today: Beijing winery) by French and Tonghua winery in Northeast China was
managed by Japanese
15
.
Since the late 1970s and early 1980s, foreign companies have been allowed to
invest into wine businesses in China. Cognac giant Remy Martin was among
14
Cho Lee, Jeannie (2007) China: An Elusive Market. In: Wine Business, 1/07, p.59
Online: http://www.wine-business-international.com/Market_Watch_China-_An_elusive_market.html#
15
Bretherton, Phil (2001), Market Entry Strategies for Western Produced Wine into the Chinese Market.
In: International Journal of Wine Marketing, 13(1), p.23ff
6
the first ones to set up a joint venture winery ("Dynasty" in Tianjin). Other
multinationals, such as Pernod Ricard with the "Beijing Friendship Winery" and
Seagram with the "Summer Palace", followed
16
. These companies brought
advanced vinification equipment and foreign wine experts, i.e. oenologists, to
China and produced the first 'Western style' grape wines
17
.
In 1996, grape wine was promoted even by the government: During a
presentation at the People's Congress, it was emphasized that the increasing
Chinese population makes the production of food vital. As mainly grain was
used for producing Chinese "wine", it was suggested to focus on the
production of fruit wine. Thus, grain could be preserved for food production
18
.
2.3. The Asian Crisis and Its Aftermath
The rising demand in the 1990s made domestic production and imports from
abroad necessary. Among imported wines, French wines dominated sales.
The high wine demand overheated the industry, which in turn resulted in an
over supply when the Asian crisis hit the country in the mid-90s. At that time,
there was an abundance of poor quality domestic and imported wines in
China
19
. The negative consequences of these critical days for the industry
lasted for a couple of years. Until the early 2000s, warehouses were still
stuffed with large amounts of unsold wines. Importers who sent the products
on consignment remained unpaid. For reasons of liquidity, stocks were sold off
cheaply to Taiwan and other regions.
Consequently, the Asian crisis changed the industry in certain ways. Experts
observed a "rationalization" of the industry, realizing that "the wine craze is
over and that's good", as Spain's regional sales commissioner Tomas Gomez
16
Bretherton, Phil (2001), Market Entry Strategies for Western Produced Wine into the Chinese Market.
In: International Journal of Wine Marketing, 13(1), p.24
17
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.31.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
18
Eijkhoff, Pieter (2000) Wine in China Its History and Contemporary Developments, p.32.
Online: http://www.eykhoff.nl/Wine%20in%20China.pdf
19
Bretherton, Phil (2001), Market Entry Strategies for Western Produced Wine into the Chinese Market.
In: International Journal of Wine Marketing, 13(1), p.24
7
stated in an interview in 2000
20
. Consumers in Asia became more aware of
value buys, many small to medium-sized wine enterprises had to close down
or reduce their product offerings and some domestic wine enterprises made
their way up to become the industry's leaders. The next chapter gives an
overview of China's wine industry today.
20
Kuen, Lai and Prudence Lui (2000), Wine Asia: What's Happening to the Market?. In: Wines and Vines,
july 1.
Online: http://www.allbusiness.com/retail-trade/food-beverage-stores-beer-wine-liquor/616346-1.html
8
3 China's Wine Industry: Facts and Figures
In 2009 China's GDP grew by 8,7% and ranked 4
th
in the world. Retail sales
rose 16,9%, according to the National Bureau of Statistics
21
. In terms of
purchasing power parity, China ranks second worldwide
22
. About 211 million
people are middle class in terms of income and over 300 million are middle
class in terms of their consumption behavior
23
. The strong economic growth is
the major force behind the increasing buying power of the Chinese consumers.
The market for domestic and imported wine developed rapidly and has grown
steadily. Due to rising incomes, an establishing middle class and a better wine
education, people are becoming more and more interested in wine. Moreover,
young urban professionals are keen on taking on the Western lifestyle and
tastes, and expensive high quality wine is as much considered a desirable
luxury good as a designer bag or a German car.
Year US$
million
%
Growth
2005 5.823,8
2006 6.130,6
5,3
2007 6.454,4
5,3
2008 6.805,8
5,4
2009 7.163,0
5,2
Compound annual growth rate
5,3
Table 1: Wine market revenues 2005 - 2009, in US$ million (Source:
Datamonitor (2010)
Industry Profile: Wine in China
)
21
China GDP Grows by 8,7% in 2009, CNN, 21 january 2010.
Online: http://edition.cnn.com/2010/BUSINESS/01/20/china.GDP.annual/index.html
22
Mitry, Darryl J. et. al. (2009) China's Role in Global Competition in the Wine Industry: A New
Contestant and Future Trends. In: International Journal of Wine Research, vol.1, p.2
23
Fewsmith Joseph (2007), The Political Implications of China's Growing Middle Class. In: Hover
Institute, China Leadership Monitor, vol.21, p.1ff
9
Year Million
liters
%
Growth
2005 445,3
2006 470,8
5,7
2007 497,0
5,6
2008 521,4
4,9
2009 545,9
4,7
Compound annual growth rate
5,2
Table 2: Wine market consumption 2005 2009, in million liters (Source:
Datamonitor (2010)
Industry Profile: Wine in China
)
3.1. Market Value and Structure
Today, China has the highest wine consumption growth rate in the world. Since
the 21
st
century, wine consumption in the traditional wine consuming countries
has more or less remained the same, whereas the Chinese wine market has
seen a prominent growth in wine sales. The entire Chinese wine market
generated total revenues of $7,2 billion in 2009, with still wine sales being the
most lucrative one, accounting for 90% of total wine sales with revenues of
$6,4 billion (cf. Table 1 and Fig. 1).
Consumption-wise, the market grew by 4,7% to a volume of 545,9 million liters
(cf. Table 2). According to a recent report, the market volume is expected to
rise to 673,2 million liters by the end of 2014
24
.
1% 3%
90%
6%
Champagne
Sparkling Wine
Still Wine
Fortified Wine
Fig. 1: Wine market by segments, % of share by value (Source: Datamonitor (2010)
Industry Profile: Wine in China)
24
Datamonitor (2010) Industry Profile: Wine in China, p.11ff. Online: www.datamonitor.com
10
Compared to the beer and liquor industry, the wine industry is much more
concentrated. The same report names the three top players in the wine market,
holding 49,2% of the market share by volume. All three, Yantai Changyu,
China Great Wall Wine and Tonghua Grape Wine, are Chinese companies, of
which Yantai Changyu is the market leader generating 20% of the market (cf.
Fig. 2).
China Great Wall
Wine Co., Ltd
17%
Tonghua Grape
Wine Co., Ltd
13%
Others
50%
Yantai Changyu
Group Company,
Ltd
20%
Yantai Changyu Group Company, Ltd
China Great Wall Wine Co., Ltd
Tonghua Grape Wine Co., Ltd
Others
Fig. 2: Wine market by share in % by volume (Source: Datamonitor (2010) Industry Profile:
Wine in China)
3.2. China's Domestic Wine Industry
Since China opened its doors in 1978, the domestic grape wine production has
expanded enormously: At that time less than 10.000 liters of wine were
produced annually. Two decades later, in 1998 the annual production was
about 315 million liters.
According to a recent wine industry analysis, the Chinese wine industry has
entered a high-speed growth stage in recent years. The international financial
crisis in 2008 did not place severe influence on the Chinese wine industry. In
2008, Chinese wine production totaled more than 600 million liters, a 5%
increase over 2007. In 2009, Chinese wine production amounted to over 1
billion liters, rising by 37,48% year on year
25
.
25
Research Report on the Chinese Wine Industry 2010-2011, China Research & Intelligence, may 2010.
11
Country Grape
Production
2009
% of World
Grape
Production
Italy 81.500
12,1%
China 72.000 10,7%
USA 63.766
9,4%
France 61.800 9,1%
Spain 55.434 8,2%
Turkey 39.184 5,8%
Chile 31.300 4,6%
Iran 29.000
4,3%
Argentina 21.816
3,2%
South Africa
17.000
2,5%
Others 202.523 29,9%
World Total 675.323
100%
Table 3: World grape producers (in thousands of hectares) and wine producers (in
thousands of hectolitres) 2009. (Source: Organisation Internationale de la Vigne et du Vin)
Grapes rank among the Top 5 fruits produced in China. From an international
perspective, China ranks 2
nd
in grape production, behind Italy (cf. Table 3)
26
.
With regard to wine production, China is on the 6
th
position, behind three
European countries (Italy, France, Spain), the USA and Argentina.
3.2.1. Wine Regions and Brands
The growth of Chinese wine yards has been remarkable, too, with an increase
of 113% over the past five years. There are several hundred wineries in the
country. 26 provinces produce wine. The main areas of grape and wine
production are in the Northern part of the country, around Beijing, in Jilin,
Henan, Hebei, Tianjin, Shandong and Shanxi, providing around 87% of the
entire domestic wine production
27
(cf. Fig. 3)
Online: http://www.researchandmarkets.com/reportinfo.asp?report_id=1236321&t=t&cat_id=
26
According to the yearly statistics of the Organisation Internationale de la Vigne et du Vin (OIV). Online:
http://news.reseau-concept.net/images/oiv_uk/Client/Communique_Stats_Tbilissi_EN.pdf
27
Mitry, Darryl J. et. al. (2009) China's Role in Global Competition in the Wine Industry: A New
Contestant and Future Trends. In: International Journal of Wine Research, vol.1, p.2
Country Wine
Production
2009
% of World
Wine
Production
Italy 47.699
17,7%
France 45.558 17,0%
Spain 35.166
13,1%
USA 20.600
7,7%
Argentina 12.135 4,5%
China 12.000
4,5%
Australia 11.598 4,3%
Chile 9.869
3,7%
South Africa
9.788
3,6%
Germany 9.180
3,4%
Others 55.140 20,5%
World Total
268.733
100%
12
Fig. 3: Regions of wine growing in China. Source: International Journal of Wine
Research 2009.
Traditionally, wine makers in these regions have operated vertically-integrated
businesses. They harvest and crush grapes from their own vineyards, then
make wine from them and bottle it. This model is still followed by large
companies to some extent. However, the major players also need to source
grapes and grape juice from independent growers. In some cases, the
company-owned vineyards are used for producing premium wines, while
third-party grapes are used for producing lower-priced products. The
independent growers are numerous, including some fairly small operations
28
.
Among hundreds of grape varities grown in China, the important ones for white
wine include Chardonnay, Italian Riesling, Ugni Blanc, Chenin Blanc,
Gewürztraminer, Sauvignon Blanc, Semillon, Riesling and Rkatsiteli. The main
varieties for red wine are Cabernet Sauvignon, Cabernet Franc, Merlot, French
Blue, Muscat Hamburg, Pinot Noir, Syrah, Carignan and Saperavi
29
.
28
Datamonitor (2010) Industry Profile: Wine in China, p.15. Online: www.datamonitor.com
29
Mitry, Darryl J. et al. (2009) China's Role in Global Competition in the Wine Industry: A New Contestant
and Future Trends. In: International Journal of Wine Research, vol.1, p.21
