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Everyone wants it but only a few make it

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Everyone wants to sell their wines in China.  As Damien Wilson, director of the MSC in Wine Business, puts it “The (Chinese) market appears like a commercial oasis in a global wine desert”. Ask any producer about their export wish list and the Chinese market is likely to be somewhere close to if not at the top. Ask them again why and how they plan to target China and the answer is less clear. Many have been seduced by the promise of easy money. However, as the transition from a producer economy to a consumer economy is taking place, the Chinese wine industry is no longer what it used to be and is changing very rapidly.

The Chinese economy is thriving and with it the wine industry is also growing. According to official government statistics, the Chinese economy is the fastest growing in the world (only second to the US) and Chinese middle class household incomes have risen tenfold in the last 30 years. Even though the rate of volume increase has slowed slightly in the last two years, wine exports to China are still rising significantly in comparison to other markets. A 10% rise in volume has been reported from 2011 to 2013 (to round 31 million 9L cases) and imported wine now accounts for 15 – 17% of the market. Furthermore, its value is already worth 1/8 of the biggest global importer, the US, which has been estimated at €4 billion (OIV 2013).

Understanding current and future wine consumption is less clear. According to somewhat questionable figures from the IWSR, current wine consumption has plateaued since 2011 from 156m to 155m 9L cases in 2013. Furthermore, the same source is very optimistic about the future, predicting a 40% rise by 2016 but does not offer much explanation for this forecast. If this were all true, the Chinese would be consuming nearly as much wine as US consumers were in 2013 (297m 9L cases according to Wine Market Council’s annual report on US Wine Consumer Trends).

On the one hand, Chinese government encourages wine drinking as it is healthier than the local baiju spirit. At the same time, however, the government’s on-going anticorruption campaign is cracking down on official wine gift giving and wine spending, following the recent leadership change. Many top luxury brands such as Chateau Lafite and Penfolds Grange are reporting lower demand. Despite the large Chinese appetite for luxury goods (China accounts for 7% of global luxury goods consumption), wealthy Chinese spent 15% less in 2013 than the previous year and 25% less on gifts according to The Hurun Report, the Annual Luxury Consumers 2014 Survey. Fewer people are expected to give expensive gifts and many luxury brands are preparing for a disappointing year of the Horse.  “Overnight, the perfect deal-lubricant became a career-blemishing gaffe” Andrew Jefford reflects. One conclusion is clear – if demand does not match the imported supply – stock will start pilling up in warehouses (if it is not already doing so) making it an even bigger challenge for newcomers to enter this market.

Originally, the majority of consumers got introduced to wine through business dinners and karaoke. However, the growing power and the scope of Chinese blogger groups and social networks are now having an important impact on how stories are spread and shared. The Internet generation is not only mimicking Western drinking habits but also engaging with wine more enthusiastically than consumers in more mature markets. Since Google started to provide uncensored search results from its Hong Kong base, now used by people in mainland China, the use of internet has quadrupled according to Human Rights in China. Despite the government intensifying its control and censorship over social media content since new president took charge in March, audience growth is unstoppable. According to IB Intelligence, two out of the five largest social networks in the world are solely Chinese (Qzone with 712m users and Sina Weibo with 500m users). Despite Facebook being blocked in China, it has 95 m users nearly matching the 100m Facebook users in the US.

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As more people are moving to urban areas as part of government policy, changing demographics are bringing a new type of Chinese consumer interested in all price points and hungry for knowledge and education. Big cities such as Shanghai, Beijing and Guangzhou all have populations greater than 10million. Moreover, the growing number of second and third tier cities is further driving the consumer economy and the growing distribution of luxury goods. McKinsey & Co 2009 estimated that by 2025 “there will be 221 Chinese cities with a population greater than one million compared to only 35 cities in Europe”. Also wine is no longer only consumed by expats, tourists and urban business professionals with high disposable incomes.

Despite the Chinese consuming a mere one litre per person, the nation is ranked as the fifth largest wine-consuming country in the world as there are 1.354 billion people living in China. Traditionally wine in China was not drunk but given. Sometimes a single bottle could pass several hands before the cork was actually popped. Image was very important. In fact, this is still true but now many people are buying wine for themselves and paying with their own money. It is also becoming more of a regular activity as opposed to just a one off treat. Sales used to be driven mainly by men but as more women are claiming their place in the workforce and gaining more confidence and independence, they are also becoming more interested in wine. Yesmywine.com, China’s biggest wine online retailer, reports that males only represent 55% of their customers.

Wine consumption particularly red wine is no longer only associated with health benefits. While this is still the biggest selling point in China according to Jared Liu, co-founder of Yesmywine.com, wine is more increasingly being seen in a social context as it helps you to relax, relieve stress, creates a friendly atmosphere and tastes good (findings of China Wine Barometer and Wine Intelligence research headed up by Dr Justin Cohen).

The biggest selling wine is still red Bordeaux (rather tannic, earthy, bone dry red with subtle fruit flavours) although tasting experiments by AWRI (2008) indicated that what Chinese drinkers enjoy are fruit-driven, soft, slightly off-dry reds, unsurprisingly, like many consumers elsewhere. Sparkling wines are now starting to be in demand with imports increasing from 300,000 9L cases in 2010 to 700,000 9L cases in 2012.  However, they share similar limitations with white wines. Lacking the cachet that red wine has, issues with temperature (a preference for hot water and room-temperature beer) and taste (the bubbles, flavour and high acidity can be viewed as unusual and sometimes unpleasant) and tradition (no health benefit link as with red wine).

French wines still dominate the market with nearly 50% share of volume, Bordeaux being number one with 6 million cases imported since 2000. Chinese consumers buy French wines because they believe they should do so but they are also becoming more price conscious, less brand loyal and generally harder to please. With growing availability of wine information online, drinkers are expected to become more confident about the wines they choose.  The new trend is already turning towards exploration of new wines and countries such as Burgundy, Italy, Australia (13% share), Spain (10%), Chile (8%), Italy (7%) and the US (5%) according to the International Wine and Spirit Research The Wall Street Journal.

The most common mistake that people make is treating the whole of China with the same brush. As Damien Wilson says ‘China is misunderstood by European wine producers”. The wine trade structure is very complicated and increasingly fragmented. According to Rabobank, it is estimated that there are anything from 4,000 to 25,000 importers while only 50 odd bring a sizeable volume. Tastes, traditions and regulations vary widely between regions and cities. According to Canadian International Markets Bureau research into Chinese Consumer Trends (2010), spirits are very popular in Southwestern China as the largest domestic producers are situated here. Northwestern Chinese consumers are more concerned about their health and well-being with Beijing’s biggest trend being fruit wines and low-alcohol beers.

Both Guangzhou and Shanghai attracts the most sophisticated drinkers but if you want to import your wines here you should be ready for a lengthy procedure going through Chinese customs, sometimes requiring things that are either impossible or very difficult. For example, each wine requires a health certificate. It takes up to six week to receive it and many samples are needed. Sending samples however is officially forbidden in Shanghai and therefore producers have to send them to Hong Kong (with simpler wine regulations and taxes) and then have someone carry them into mainland China or try sending them as a gift.

Indeed, China has its dark side too. Smuggling, bribery, trademark hijacking and widespread wine counterfeiting clouds the reputation of the market. Hong Kong is still perceived as the most trusted place with a good reputation for buying wines by collectors. But many still believe that any wine below $25 might be fake and nobody really knows how much counterfeit wine stock is circulating globally. The global fine wine market is now estimated to be worth £2.5 billion. In order to solve this issue, the government is increasing pressure on the wine industry and consumers to work together as there is fear of people dying from fake wine. Since the death sentence has been handed out to forgers of the most expensive bottles, fake bottles are in decline (reported by Decanter 2014). However, counterfeiting is not only for premium luxury products as pretty much anything and everything can be counterfeited in China.

Another issue is that if you want to build your brand in China you had better register your trademark now as you may find that someone has already registered it. Claiming your origins can be timely and costly due to local bureaucracy.  To tackle this issue, China is re-enforcing a crackdown against trademark hijacking through the new Chinese Trademark Law that should enter into effect from May 1, 2014.

Regardless what you may have heard or think, the Chinese wine market is taken much more seriously now than 20 years ago with a growing number of Trade Fairs (Vinexpo in Hong Kong where close to 20,000 visitors are expected and ProWine in Shanghai). And the Chinese can also start to be proud of their own wines.  Both the volume and quality of their domestic production is rising (quality less so), creating tough competition for imported wines. Probably the most famous awarded wine was He Lan Qing Xue’s Jia Bei Lan 2009 Cabernet blend winning the Red Bordeaux Varietal Over £10 International Trophy at Decanter World Wine Awards (DWWA) chosen out of 12,000 wine entered. When the results of DWWA 2013 were released, 20 out of 49 Chinese entries received an award including Domaine Helan Mountain, Great Wall or Chateau SunGod.

China produced 14.8m hectoliters of wine in 2012. In comparison, France and Italy each turned out 40 million hl. The high demand for local wines in order to battle against alcoholism (as wine offers a lower-alcohol alternative to the domestic white spirit baiju) and the push for economic growth of poor regions explain the rapid increase of newly planted vineyards. France’s National Centre for Scientific Research projects that China will be the world’s biggest wine producer within five years.

The Chinese may lack the skills and expertise of well-established vine growing regions but they are keen to learn and they are investing a lot in winemaking and viticulture. The top wineries to watch are Great Wall, Changyu, Weilong and Dynasty. Ningxia is one of the rising vine production regions with 26,000 ha of vines.  Due to relatively moderate winters, a long growing season and available irrigation from the Yellow River, this dessert-like region can grow grape crops with success. Despite many challenges, genuine international interest and investment in local wineries and regions is growing. Similarly, wine giants such as Pernod Ricard and Moet Hennessy are starting to invest in Ningxia.

China’s biggest challenges with domestic production range from lack of water and labour, disease (leaf-roll) and extreme climate pressure (severe summer monsoons and freezing winter temperatures) to quality pressure from imported wines. For example, due to the increasing difficulty finding seasonal labour in winegrowing regions, producers are forced to resort to a combination of manual labour and mechanisation according to Li Demei, consultant of Wang Zhong winery based in a remote part of Northern China. He calculates that protecting vines from severe winters by covering them with soil and then uncovering them in spring every year represents up to 30% of their total expenses and requires 200 to 300 workers. Specifically designed machines are available as an alternative but despite their efficiency the cost is high (equivalent of £26 per row) and smaller producers cannot afford them.

China is an exciting yet daunting market opportunity and if you plan to invest in the wine market here it is worth investigating thoroughly as easy sales and high margins are things of the past. What ever you do and what ever product you have to sell, understanding Chinese social media is one of the most effective ways to engage with your target audience here. Global oasis or not, Chinese consumption and production is changing the equilibrium of the world’s wine industry.

 
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Posted by on February 20, 2014 in Uncategorized

 

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Things are looking up again for the Australian Wine Industry in its international markets – or are they?

AustraliaChina is a lucrative market for Australian premium wines.

Australia is not only the second largest bottled wine exporter to China with a 15% market share in value and 13% in volume but exports “are expected to rise by 50% over the next three years” (The Drinks Business, Oct 2013). This projection would make it surpass the current biggest export market, the US. Annual Chinese consumption growth (+59%) is way ahead of its production (+24%) and China is expected to become the sixth largest consumer of wine in the world by 2014. With a growing middle class interest in premium wines in particular and decreasing demand for EU imports, Dean Person the National Australian Bank’s head of industry analysis is predicting a huge potential for Australian winemakers.  Australia’s First Families of Wine visited China this year in a bid to highlight the quality and diversity of Australian wine and Mitchell Taylor, AFFW chairman proudly announced “Our Chinese launch was an overwhelming success”.

Opening high-end tasting rooms and cellars in China has proven to be a successful way to engage and penetrate this new market for wineries like Yabby Lake. This Mornington Peninsula winery has a presence in eight provinces with five cellar doors offering wine education experiences. Having a cellar door in the current market saturated with cheap and often counterfeit wines, offers confidence to the consumers. “There is a lot of scepticism about wine in China… that cellar door base gives the wine some credibility” says Duane Roy, winemaker of Glandore Estate.

Despite the love-hate relationship with the UK, Australia knows it can sell volume here.

The UK with its discount culture and consumption driven by brands is an opportunity and challenge for Australian big brand owners, if they are willing to listen and invest. Paul Schaafsma, UK and European head of Accolade Wine with its number one UK brand Hardys, believes that producers need to “closely engage with retailers and understand what their consumers want to drink” (Harpers, Oct 2013) to succeed. Accolade Wines has just signed a three-year deal with the UK’s largest retailer, Tesco. This may well bode well for Accolade, but it raises questions for that company’s Australian competitors that have yet to sign that kind of agreement.

Australians know how to throw a party.

Savour was one of the biggest marketing initiatives undertaken by the Australian Government and Tourism Australia. The event attracted 750 of the world’s leading wine trade professionals offering a potential economic benefit to Australia of AU$2.8 million according to The Advertiser. It demonstrated two key things. Firstly that Australian producers are aware of the current unprofitable situation. Exports have dropped visibly from AU$3 billion in 2007 to AU$1.8 billion in 2012 according to the Winemaker’s Federation of Australia. Secondly they are committed to innovation and willing to listen to the world. Paul Schaafsma praised the event’s “appropriate focus on Australia’s regional and premium wine offer” and highlighted its necessary balance. One of the positive outcomes was a three-year joint food and wine campaign between Tourism Australia and Wine Australia. The fact that both small and big producers got together to promote their wines shows an important commitment to the Australian future as a whole.

The weakening Australian Dollar is helping to stimulate sales again in the US.

The fact that “the single most important economic factor in the last 20 years affecting Australian wine has been the exchange rate” as suggested by wine economist Mike Veseth, shows how fragile both margins and retail prices can be. Prayers for exporters were answered early in 2013 when the Australian dollar started to depreciate. No one was more pleased than Casella Wines, whose brand Yellow Tail has 75% of its sales in the US.  They experienced their first ever-financial loss (AU$30 million) last year due to the exchange rate after 20 years of trading. According to The Drinks Business, Yellow Tail is now looking to regain its lost profit. Yalumba from the Barossa (Australia’s oldest family-run winery) has already achieved 300% sales growth in the US after the favorable exchange rate enabled the retail price of its Y Series to be lowered by $2 to $10.

However Australia is finding it tough to make a come back in the US.

Despite the promises of growth and restored quality reputation, there remain some doubts. Will Australia be able to grow its market share in the US? Will it be able to reclaim its profitability yet again? According to The Drinks Business, Treasury Wine Estate anticipates shipments to the US will fall by up to 2 million cases in its 2014 financial year. Further more, Paul Rayner, the chairman, suggested “the company may look to offload its US business after chief executive David Dearie was shown the door over a AU$160 million loss” (The Australian, Sep 2013). The business also revealed a 53% drop in profit, down to AU$42 million in 2013, causing the shares plunge from AU$6.50 to $4.45. Larry Gandler, a Credit Suisse analyst, echoed this saying that “The underlying problem in the US is the health of the brand because of underinvestment in marketing” (The Australian, Sep 2013). Mike Veseth also pointed out during his Savour speech that “US market is so fragmented with at least 52 wine markets and the consumers are so diverse with more than 40% of adult Americans not drinking any alcohol at all, it is a maze to find your consumers and the right distribution.”

The real test is whether Australia can learn from its mistakes.

Overproduction and overreliance to selling the volume through the UK and the US are still haunting the Australian Wine Industry.  Treasury Wines Estates was forced to pour AU$35 million worth of excess wine down the drain in the US (the equivalent of 500,000 cases) in July 2013. According to Bloomberg, a bumper grape crop this year is threatening to encourage further price cutting that could damage Australia’s quality image abroad (The Drink Business, Aug 2013). This calls for a review of Australian strategy.

Despite the fact that the industry has observed that the commercial grape oversupply causes distortion of the price and potentially the image, no effective solution has been find to tackle this issue. Muray Valley Winegrower chief executive Mark McKenzie lashed out after the outcomes of the Expert Review of the Wine Industry and said “It is ironic that the wineries blame fruit oversupply from independent growers for much of their woes, but they have not advocated any direct action to reduce excess production either through cool climate commercial wine grape production, or through the removal of excess wine production capacity” (Sunraysia Daily, Oct 2013). Whereas Mike Veseth spins more positive view and suggest that “Australia has come a long way toward alighting supply and demand in the markets and removing its excess capacity which various by regions yet there is still work to be done.”

Combination of all these thoughts justify the conclusion that yes things are, for many producers, looking up. Growing markets such as China are opening doors to Australian premium wine producers. UK thirst for promoted big brands will guarantee sales, even if margins will remain poor, for big brand owners. Savour has demonstrated that Australia has a good story to tell and is engaging with its customers. Yes exchange rates cannot be controlled, are hard to predict and have crucial impact on the margins but the current weakening of Australian dollar is stimulating sales. However, changes and strategy reviews are also due in order to tackle the wine surplus and falling prices. With the global consumption of wine exceeding global production of wine for the last 6 years, the new world is full of rising opportunities.

 
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Posted by on October 21, 2013 in Australia

 

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