Dragon wine: developments in the Chinese wine industry
The Authors
Per Jenster, China Europe International Business School, Shanghai, People's Republic of China
Yiting Cheng, China Europe International Business School, Shanghai, People's Republic of China
Abstract
Purpose – The purpose of this paper is to provide an evolutionary view of the emerging wine industry in China.
Design/methodology/approach – Research on industry evolution provides a background for the historical evolution of the Chinese wine industry. Case studies are used to illustrate the different strategies of the leading wine producers in China, and to identify the major concerns and challenges in the Chinese wine industry. Growth potentials and ongoing trends are supported with statistics from authoritative databases and Chinese wine industry associations.
Findings – The Chinese wine market is characterized by an increasing concentration where the top four domestic producers dominate with 50 per cent market share. The lack of a wine culture makes brand marketing crucial to business success. Limited international efforts have been made by Chinese wine producers, although one winery has embarked on capturing 50 per cent of the global ice-wine industry.
Research limitations/implications – The paper provides a historical overview of the Chinese wine industry and its current situation, which could not elude generalization and simplification. Enormous regional diversity in China compels differentiated regional studies in terms of production, consumer behaviors and marketing strategies.
Practical implications – The historical evolution of the Chinese wine industry reveals different settings for wine business in China. The dominance of domestic wine companies and ignorance of foreign wine brands among the general public imply a tough setting for foreign wine makers and distributors to enter the market.
Originality/value – The paper provides some insight into the historical and ongoing development of the Chinese wine market.
Article Type:
Research paper
Keyword(s):
Evolution; Wines; Competitive strategy; China.
Journal:
International Journal of Wine Business Research
Volume:
20
Number:
3
Year:
2008
pp:
244-259
Copyright ©
Emerald Group Publishing Limited
ISSN:
1751-1062
Vintners of the world are continuing to observe the changing market landscape, with developments in consumer habits, redistribution of production capacity, employment of new technology, and evolution in channel structure, as they are struggling with general over-capacity, substantial price pressure, inability to pass on cost increases, costing peculiarities, currency fluctuations, and meager profitability. In such an industry which economists would denounce as structurally unprofitable (Peter, 1967), China's wine industry is suddenly emerging as a very unusual candidate for foreign direct investments, enterprising firms and eager capitalists. To most observers and practitioners in the wine industry, the questions about the Chinese wine industry remain: what is going on in China, how is this transformation happening, who are the players and why are causes of the growth-spur?
As industries evolve
Concerns about the changing nature of the competitive landscape are not unique to the players in the wine industry. However, an understanding of how industries change is believed as essential to the development of profitable strategies (McGahan, 2004). In traditional industries such as the mature wine sector, the patterns of change have not been sudden but been formed over time, allowing for scholars and other savants to wax over the various forces of change and threats to firm profitability. These factors include:
- overproduction of grapes;
- consolidation forces amongst producers, distributors, and retailers;
- shift in consumer behavior patterns; and the
- evolving international trade (Cholette et al., 2005).
Others have argued that industries follow similar patterns of evolution, and that predictability can help firms understand future opportunities and options (Deans et al., 2002). Yet, what happens in new markets such as the emerging Chinese wine industry? Will we observe a rush of entrepreneurial endeavors, with thousands of small vineyards emerging, how will they sell their products, or undergo consolidation, as consumers are enticed to embrace new purchasing and consumption patterns? Can we anticipate an evolution of slow consolidation, where survival of the fittest will let the stronger firm devour to smaller firm in a process that will take years? And will the developments shaping the Chinese industry have wider implications for the global wine industry?
As vines are being scrapped and production is moving out of the traditional wine base of Europe, to Australia, the USA, South Africa, Chile, Argentina, and New Zealand, the wine business has started to see new business models with larger entities exploiting economies of scale and scope in order to match the changing nature of the retail trade. The slowing growth and even displacement of demand in many markets have encouraged dynamic players to cast an eye to the new markets of the former Soviet countries, Asia, and particularly India and China (Cholette et al., 2005).
China, with a population of approximately 1.3 billion people, can titillate the imagination of any entrepreneur, and has certainly also done so in the minds of some enterprising vintners. What most of their colleagues around the world do not realize is that some Chinese wine producers have established international visions that are already changing some segments of the wine industry. This article attempts to describe the opportunities and threats of this dynamic country, and hopes to reveal some interesting and possibly some surprising insights into the development of this market and the Chinese vintners' possible role in the international wine market.
History of the Chinese wine industry – the origin
Wine was not the major alcoholic drink in the ancient China. However, abundant historical records have revealed that there were three periods in the Chinese history when wine production and consumption were notable, Han Dynasty (206 BC-8 AD), Tang Dynasty (618-907 AD) and Yuan Dynasty (1279-1368 AD) (Xu, 2000).
Wine was first recorded in writings of Shiji (Records of the Grand Historian), authored by Sima Qian, the first major Chinese historian of the Han Dynasty. In 138 BC, Emperor Han Wu sent an envoy, Zhang Qian, to the West Region (today's Xinjiang Province and its westward regions) on a diplomatic mission, where Chang Qian discovered a popular local alcoholic drink made by grapes. Zhang Qian brought back to Eastern China the techniques of grape-planting and wine-making (Xu, 2000).
Wine-making did not prosper in China after the Han Dynasty, partly because grape harvest was seasonal, and partly because wine-making techniques were not well-developed at that time. Wine was confined to serving as a tribute to the emperors. In the beginning of the Tang Dynasty, Emperor Tai Zong occupied Gaochang (an ancient city along the Silk Road, which was burned in fourteenth century) and collected Maru grape seeds there to be planted in the Imperial Gardens. Thus, wine-making were resumed in the ancient China. Gradually, wine gained popularity in the capital city, Chang'an. Merchants from the minority nationalities came all the way to sell their wines in the capital city (Xu, 2000).
Emperors in the Yuan Dynasty were fond of wine and ordered that only wine could be used in supreme temple rituals (Xu, 2000).
Birth of modern wine industry in China
In 1892, towards the end of the Qing Dynasty, Zhang Bi-shi, an overseas Chinese businessman, returned to China and set up China's first wine company, the ChangYu Winery. From the very beginning, ChangYu drew on a wide international network of partners and specialists, which contributed to the upgrade of Chinese wine-making. Qingdao (Tsingtao) winery, more famous for its beer than wine, was established as Melco Winery by Germans in 1912. In 1937, Tonghua winery was founded in the Changbai Mountain of the Jilin Province. These wineries formed the embryo of China's modern wine-making industry despite their limited scales (Berberoglu, 2004).
Grape wine production in the early part of the twentieth century was largely consumed by members of the foreign concessions living in China during this period. However, the consecutive warring periods that followed made wine making as a national industry unsustainable and barely alive before 1949 (Sun, 2003).
Developments after the founding of the People's Republic of China
After China's change in leadership in 1949, all wineries were confiscated and turned into state-owned enterprises, under the auspice of the State Ministry of Light Industry. The governing norm for the economic development at that time was quantity-oriented and this also had an impact on wine-making. Due to lack of updated winemaking techniques, Chinese producers concocted various blended wines with water, fermented cereals, colorings, and sugar to imitate wine. Winemaking grape species were sometimes introduced from Bulgaria, Hungary, and the former USSR (Sun, 2005), but most observers view this as a dark period in the Chinese wine industry.
By the late 1970s, wineries numbered more than 100, and the wine output reached 64,000 tons in 1978, up from a mere 200 tons in 1949. Vineyards and production bases were found in Xinjiang, Gansu's dry areas, the plains around the Bohai Sea, in the former Yellow River bed, the Loess Plateau dry lands, the Huai River region, and in the Changbai Mountains (Sun, 2005).
In the 1987s National Conference on Wine and Spirits, the Chinese government issued an encouragement to the Chinese people, to drink grape wine in lieu of the sorghum-based white spirit, “Baijiu”. The government, in a struggle to feed its large population, attempted to switch public consumption from grain-based to fruit-based alcohols and to bring down the average alcohol content consumed by consumers. In 1993, consumption tax rate of Baijiu was raised to 25 per cent. Since then, government has further tightened tax rules for the Baijiu industry. These measures did not fully change consumption habits; however it did bring about an opportunity for the wine industry. The wine output in 1981, 1985, and 1988 were 100,000, 230,300 and 300,850 tons, respectively (Sun, 2005). Key figures are listed in Table I in terms of production, sales income and profit of the whole alcoholic drinks industry.
The credit for this transformation is normally attributed to Mr Guo Qi-chang, the chief architect of China's wine industry, who succeeded in introducing new wine-making technique from 1978 to 1983 and which ended the Chinese homespun wine blending methods and set China onto the new track of standardizing wine-making (Sun, 2005).
The so-called Opening-up Policy after the 1980s brought forth foreign investment into the Chinese wine industry. Notably, the Dynasty Winery was the first joint venture, established by Tianjin government and Remy Martin. The Huadong winery in the coastal city of Qingdao (Tsingtao) was established by Hong Kong investors. Pernod-Ricard established a winery in Beijing (1987) and Italians started the Marco Polo winery in Yantai (1990) (Berberoglu, 2004).
In summary, the history of wine is long, and while there have been commercial wineries in China since the end of the nineteenth century, production (see Figure 1) has only evolved into a serious industry in the past two decades.
Overview of the modern Chinese wine industry
Wine consumption: evolution and trends
Although wine-making in China dates back more than 2000 years ago, wine consumption in the past was quiet low and undifferentiated. To the Chinese, the most popular alcoholic drink is Baijiu, a potent Chinese distilled alcohol mostly made from sorghum, with and alcohol contents ranging from a mildly dangerous 20 per cent to a potent 60 per cent. Baijiu has been holding very strong roots in the Chinese society; drinking it, in a bottom-up way, symbolizes one's frankness, friendliness, and sociability. It is a common practice to deepen the bonds of friendship and settle business deals during bouts of Baijiu toasting.
Before the 1980s, few Chinese knew about grape wine. In the mid-1980s, some domestic producers and joint ventures began to produce red and white wines on a large scale and now most Chinese recognized wine as one of the major category of alcoholic beverages. The general economic prosperity of China has generated a group of successful businessmen, who adore imported goods, and who are eager to acquire an exotic and socially recognized taste. However, a wine culture is lacking. It has been estimated that 95 per cent of adult Chinese know that the best wines come from France, but they do not know where Bordeaux is located, and have no idea of a place called Napa Valley (Chen, 2003).
The general improvement in the Chinese living standard has sparked an increasing awareness of health. The healthful and nutritious properties of wine have been widely publicized to Chinese consumers. Most Chinese consumers are attracted to wine for its health benefits, such as cardiovascular effects, rather than taste or other properties (Workman, 2006).
Chinese wine consumers are generally found among people with higher purchasing power in the big cities, such as Shanghai, Beijing, and Guangzhou, where wine-drinking is a symbol of sophistication and social status (Fan, 2007). China's rapidly rising middle class are believed to offer great opportunity for expanding wine consumption. Chinese Academy of Social Science estimates that there are some 110 million people in the “middle stratum” (refers to as “middle stratum” in stead of middle class to avoid negative political connotations). Taking into account the factor in the “grey” economy, the figure is likely to be bigger. By 2015, this number is estimated to approach 500 million. According to the latest report released by VINEXPO, China will become the most puissant driving force for global wine consumption by 2010 (followed by Russia and the USA), likely to record a growth rate of 35.91 per cent from 2005 to 2010 (Wang, 2007).
Among all the wines consumed in China, still red wines are the most significant products (see Figure 2), representing 77 per cent of the total retail sales value in 2006. Still red wine retail sales have grown by 104.32 per cent since 2000, and are the main growth driver of the whole market. Red wine is consumed almost exclusively by Chinese consumers as a table wine, to accompany a meal (ISI Emerging Markets Database, 2006). The popularity of red wine is explained in its healthcare functions as well as the symbolic associations of the red color with happiness and celebration in Chinese society. Chinese female consumers prefer white wines and are known to also make spritzers by mixing white wines with soft drinks (Buckalew, 2005). Sparkling wine sales have increased in value over recent years, as more and more Chinese drink sparkling wines on the occasions of celebration, especially weddings.
Industry structure and dynamics
Production
According to China Alcoholic Drinks Industry Association, 93.76 per cent annual wine production comes from ten provinces, namely, Shandong, Hebei, Tianjin, Jilin, Xinjiang, Beijing, Hebei, Gansu, Ninxia, and Yunnan (Figure 3). According to Euromonitor database, grape wine produced in Hebei, Shandong, and Tianjin accounted for 70 per cent of the total volume. Southwest (particularly Yunnan) and Northwest China (particularly Xinjiang) have abundant grape supplies but are undeveloped in terms of wineries and wine brands (Euromonitor, 2007a).
By 2007, China had over 500 wineries in operation. The top ten wineries represented 60.71 per cent of the total production (China Alcoholic Drinks Industry Association, 2007). In Figure 4, wineries have been classified into three groups according to the annual production volume.
Currently, most Chinese wine producers are wineries only. They do not own or manage vineyards. One explanation is found in China's land ownership and management regulations. Most agricultural products in China are grown by numerous small, individual farmers under the guidance of the local government, which afterwards organizes the purchase of crops. Purchasing of land for commercial use is not allowed and long-term access to land is costly.
Instead of owning vineyards, most wineries buy grapes from individual producers or brokers. To secure a quality of grape supply, big wineries, like ChangYu, sign contracts with local farmers, in which the contractors are obliged to supply exclusively to the wineries, and in turn, the wineries promise to purchase the grape at a pre-agreed price, provide capital, and technical assistance. Fierce competition has also rendered less competent companies into bottling centers for imported bulk wines, contract bottlers who serve the needs of many foreign wine companies to lower the production and transport costs. Figure 5 indicates that few Chinese producers have significant vineyard resources.
So far Chinese consumers have acquired little awareness of grape varietals. Cabernet Sauvignon is the favorite grape varietal, accounting for 40 per cent share of total sales volume in 2006. This market shares has to be taken with some skepticism; according to one industry participant, Carbernet Sauvignon, is difficult to grow in China, and many producers substitute it with Carbernet Franc, but “forget” to include this on the lable. Merlot and Cabernet Franc each shares around 10 per cent of the market[1]. “Jiebaina”, made from the grapes of Cabernet Sauvignon, Cabernet Franc, Cabernet Gernischt, and Merlot, is a prevailing wine variety in the China's medium to high end dry red wine market. It was developed by the ChangYu company. At the beginning of the twenty-first century, more than 20 wineries were producing this product under the name of “Jiebaina”.
Distribution
In China, the on-trade (clubs, pubs, bars) channel used to lead wine sales, but off-trade (supermarkets, discounters, other outlets) sales are catching up as people seek attractive prices in boutiques, supermarkets and on the internet, as many purchases are used for gifts; thus, consumption starts to transfer to the home or as bring-along bottles in restaurants. Consequently, the off-trade accounted for a dominant 55 per cent share of overall volume sales in 2006. With a rapid expansion in China since 2000, supermarkets/hypermarkets have achieved an off-trade volume share of 60 per cent in 2006, up from 50 per cent in 2000. Big retailers such as Carrefour and Metro began to sell imported wines in their outlets during this period, which has helped to increase retail sales and boost interest in wine (Euromonitor, 2007b).
A wine sale via the off-trade channel seems to reach the peak every year during Spring Festival and mid-autumn festival. The gift-buying part of the wine market has grown in significance, taking away from the likes of domestic spirits and imported brandy, due to wines being more affordable to buy, compared with the prices of spirits and brandy (ISI Emerging Markets Database, 2006). This has led to creativity in developing attractive gift-packs by wine companies to an extent rarely seen elsewhere in the world. For example, the ChangYu company has established a major department exclusively working on specialty packaging, corporate sales and trade marketing promotions.
As in other parts of the world, distributors play a vital role in wine sales in China. Chinese local wineries are building up their own sales teams as well as cooperating with distributors in major cities and hard-to-access locations. For example, ChangYu, China's oldest winery has around 1,500 sales staff and up to 3,900 distributors, covering 29 provinces, autonomous regions and municipalities. This sales force is said to be equivalent in size to the rest of the major players, and has resulted in ChangYu's self-reported attainment of approximately 20 per cent market share and an estimated 45 per cent of the industry profit pool.
For most foreign wineries, Chinese distribution channels are more confined and the process of getting an import license is quite complex. The traditional channels are (Gu, 2003):
- China National Cereals, Oils and Foodstuffs Import and Export Corporation (COFCO), the state monopoly wholesaler and distributor of alcoholic beverages;
- joint venture and foreign-owned hotels;
- duty-free stores under China Travel Services;
- the “Grey Channel” of Hong Kong and Guangzhou.
Foreign wineries rely even more on local distributors, though there is also trend showing their efforts to set up distribution networks of their own. Torres, the biggest Spanish wine producer, has set up its own sales and marketing networks while at the same time making use of Great Wall's distribution channels by establishing with it a joint venture. The success of these efforts is still to be judged.
Competitive strategies of different players
According to the China Alcoholic Drinks Industry Association, four domestic wine firms produce 51.49 per cent of Chinese wine. The top three are ChangYu, Great Wall, and Dynasty. Chinese wine industry is featured by high level of market concentration, thus making analysis of major players crucial to the understanding of the whole industry.
ChangYu
Yantai ChangYu Group Company Limited (Table II) was the first industrialized winery in China. Its predecessor, Yantai ChangYu Winemaking Company was established in 1892 by a well-known overseas Chinese merchant, Mr Chang Bishi. It was headquartered in seaside city of Yantai in Shandong Province (Jenster and Cheng, 2007).
In the century old development, ChangYu went through several changes in ownership. It was founded as a private, family-owned company and was turned into a state-owned company after the founding of the People's Republic of China. In 1994 ChangYu underwent an ownership restructuring and was re-named as Yantai ChangYu Group Co. Ltd, in preparation for the imminent public listing. In 1997 the company completed an initial public offering of 88 million shares of its common stock on the Shenzhen Stock Exchange under the B shares (for foreign investors), followed by another 32 million shares under the A share scheme in 2000.
The group was privatized via a two stage process: an Employee and Management Buyout of 45 per cent of the Group, which was concluded in October 2004; sale of a further 43 per cent stake in the Group to foreign investors, in two separate tranches of 33 and 10 per cent each.
ChangYu's wine business comprises four sectors: wine, brandy, champagne and healthcare liquor (Figure 6), totaling an annual production of 120,000 ton. Before the mid-1990s, ChangYu was predominantly engaged in brandy production which represented up to 50 per cent of its total production volume. After 1997, when the consumption of red wine became popular, ChangYu's product structure also underwent a great change.
Since 2000, ChangYu has been moving up-market, increasing focused on mid-range and high-end wines (costing>RMB 100 per bottle). It strives to benchmark itself with the world top brand league, targeting top 10 wineries in the world in 2008.
For years, ChangYu has been leading the château-building boom in China. In 2001, ChangYu formed a strategic alliance with the well-known French wine group, Castel, and founded its first chateau. In 2003, ChangYu-Castel chateau launched “barrel ordering” sales mode, which was new in the Chinese wine industry, at a price of 88,000-120,000 RMB per barrel (255L).
In September, 2006, ChangYu entered the ice-wine business by cooperating with Canadian Aurora Ice Wine Co., Ltd to build the biggest ice wine chateau in the world with about 1,000 ha of acreage in dedicated production (out of a total production capacity of 8,000 ha); this is estimated to be the equivalent size of the world production outside China. The world-wide volume of ice wine is decreasing due to changing climate conditions. The scarcity, together with the peculiar sweet and acid taste, renders ice-wine an attractive segment for ChangYu to build market strength.
In New Zealand, ChangYu has set up a golf chateau in New Zealand, named “ChangYu Kely Estate of New Zealand”, partnering with Karikari Estate of New Zealand. Output from the golf chateau is limited and the selling price per bottle is around NS $200 (around ¥ 1,000). ChangYu is also collaborating with Karikari to build a wine-distribution network in 100 golf courts across China.
In early 2007, ChangYu started to build its AFIP chateau in Beijing, a joint investment of 200 million RMB by China, Italy, USA, France, and Portugal. The new chateau aimed to be another premium wine producing center, with an annual production of 1,000 tons, as well as a tourist and wine-culture club. With the launch of the new chateau, ChangYu brought in a new sales and marketing mode: wine futures. ChangYu released 100 casks of 2006 AFIP wine futures for 180,000 RMB each, 20 of which were bought by TXB, one of the largest European wine distributors. The new Beijing chateau also released cellar spaces for personal or corporate storage, and owners were entitled to a cask of AFIP chateau's best wine and long-term access to the storage spaces.
ChangYu has been the leading domestic winery in the Chinese market and acknowledged as a savvy brand developer. Based on its four chateaus, ChangYu is now marketing aggressively touting its century-old brand image of Chinese supreme culture both at home and abroad to mark itself in the premier wine category. To support this strategy, ChangYU recently opened a new production with state-of-art tank facility in Yantai.
It is cooperating with big international wine groups to expand its domestic market share in the fast-growing Chinese market, while exporting the best of its bottled wine under ChangYu brand to the overseas market. ChangYu is now selling wine in 14 European countries and over 3,000 supermarkets, and has had its Ice Wine featured in Lufthansa's first class section. Some observers are assessing ChangYu as one of the single largest wine brands in the world, likely only surpassed by E&J Gallo. This is a winery with expressed international ambitions.
Great Wall
“Great Wall”, another well-known wine brand in the Chinese market, is owned by COFCO, a large Chinese state-owned food trading enterprise (listed in Fortune 500), and is managed by COFCO Wines and Spirits Division. Great Wall wine is exported to 20 countries around the world, including France, Germany, UK, and Japan. Its export volume ranked first among its Chinese competitors (Jenster and Cheng, 2007).
The Great Wall brand used to be represented by three independent companies under the major shareholder COFCO, namely, Great Wall Wine Co., Ltd in Chacheng (Hebei Province), Huaxia Great Wall Wine Co., Ltd in Changli (Hebei Province), and Yantai COFCO Winery Co., Ltd (Shandong Province). When Great Wall Wine Co., Ltd was founded in 1983, COFCO held 50 per cent of its stake. Huaxia Great Wall, ever since its founding in 1988, has been wholly owned by COFCO. In 1999, COFCO controlled 60 per cent of the shares in the newly established Yantai COFCO Winery. The three Great Wall wineries were fierce competitors in the past, differentiating from one another by tastes, producing areas, and distribution channels.
In 2002, COFCO decided to integrate the three Great Wall firms to enhance brand strength and competitiveness. In 2003, it bought the remaining 50 per cent stake in Great Wall Wine Co., Ltd and the rest 40 per cent in Yantai COFCO Winery, rendering them into wholly owned COFCO subsidiaries. Then COFCO began to centralize its functions, gradually turning the three companies as producing centers while COFCO as the management center, taking care of R&D, sales and marketing. New Great Wall products bear the same COFCO logo, yet with different labels for the various producing areas. A COFCO quality control committee was formed to supervise the wine-making process.
In August, 2006 COFCO Wines & Spirits was designated as the exclusive wine provider for the 2008 Beijing Olympic Games. As an exclusive wine sponsor, COFCO Wines & Spirits (Great Wall Wine) would provide funds, wine products and related services to the Beijing 2008 Olympic Games. Accordingly, COFCO Wines & Spirits is entitled to use the Olympic marks and other rights to develop various Olympic-themed activities. Great Wall's Olympic strategy is intended to enhance its brand value by bringing wine culture closer to Chinese people as well as by displaying to the world making of Chinese wine.
Dynasty
Established in 1980, the Sino-French Joint-Venture Dynasty Winery Ltd. was one of the earliest joint ventures ever set up in China, since China's opening-up policy in 1978. It is headquartered in Tianjin. The joint-venture was created by the Chinese government, in association with the French brandy producer, Remy-Martin, and Hong Kong International Trade and Technology Investigation Organization. In January, 2005, Dynasty was listed on the Main Board of The Stock Exchange of Hong Kong (Jenster and Cheng, 2007).
Dynasty possesses six wine production bases, and control more than 2,000 ha of vineyards, with a grape production capacity of 50,000 ton per year. Dynasty's product range includes wine, brandy, and sparkling wine. Cooperating with the prestigious French producer, Remy-Martin, Dynasty has been specializing in the premium wine production from the very beginning.
For years, Dynasty wines have been served in the State Banquet and are used by about 170 China's embassies and consulates around the world. Remy-Martin Group takes care of the exportation of the Dynasty wine. Dynasty wines are exported to over twenty countries and regions including USA, Canada, UK, Germany, France, Swiss, Denmark, Sweden, Finland, Iceland, Japan, Singapore, Malaysia, Hong Kong, and Macao. In the domestic market, half of its sales revenue is concentrated in the Yangtze River Delta.
In the face of the growing wine market in China, Dynasty is actively seeking partnership to expand production and improve wine quality. In 2006, Dynasty acquired shares of an Australian winery to offset the seasonal factors of product shortage. It signed a strategic cooperation agreement with the biggest Italian wine equipment manufacturer to update its facilities. Meanwhile, the Dynasty Group cooperated with the world's largest producer of oak barrel, SEGUIN MOREAU to import oak barrels. In 2006, Dynasty signed global sales agreement with the French wine vendor, Les Grands Chais de France.
Challenges in the Chinese market
Educating the consumers
It takes time for a wine culture to develop in a country where people have strong preference for tea, beer and hard liquor. The per capita volume of wine consumption in China is only 6 per cent of the world's average.
So far, most Chinese people have little knowledge about food matching, as well as the serving and storage of wine. Many Chinese still like guzzling rather than sipping wine (Chen, 2003). Some are also still looking for the alcoholic impact in wine. And ordinary Chinese food, with it spicy flavors, is not particularly suited to the taste of western wine. Therefore, the traditional drinking habit and modest sophistication wine drinking keep common people from appreciating wine in a proper way.
Some Chinese wine companies are organizing lectures and activities to popularize wine drinking. For instance, every year, ChangYu delivered about 160 lectures all around China coaching people how to appreciate wine. Dedicated wine shops are emerging where tastings and education also are part of the promotional pallet. Foreign organizations are also holding promotional activities to promote their wine and wine culture. For example, the French Food Association, SOPEXA stages food festivals with wine tasting activities, wine for sales training and cooperates with the Chinese government on technological and legal issues (Chen, 2003).
While old wineries like ChangYu is forging the chateau wine concept, displaying elaborate grape-growing and careful wine making, newly sprung wineries, particularly based in the west part of China, adopt large volume, low price strategies to access the common consumers. Suntime in Xinjiang province and Mogao in Gansu province both launched Tetra-Pack wine (wine in a box), which largely reduced the price. Where a wine culture is missing, price is a significant concern for common consumers. But the strategy has achieved little success. In addition, this industrialized mass production of wine is likely to damage the image of wine as a sophisticated drink. With failing financial performance, Suntime and Mogao have become significant sellers of bulk wine to other brand carriers in China.
Competing with imported wine
Chinese wine consumption is only above 1 per cent of the total alcoholic drinks consumed domestically. Wine consumption in 2006 was 0.43 l per capita, while the world average is around 4.5 l per capita (ISI Emerging Markets Database, 2006). This low consumption has led foreign wine companies to see great opportunities in exploring China's huge market potential. However, Chinese wine market continues to be dominated by domestic wine producers. Foreign wine companies met with difficulties in entering the Chinese market, initially with higher tax rates, including value-added tax, consumption tax and business tax.
In the wake of China's entry into the WTO, import tariff rates of wines were lowered. In the beginning of 2005, import tariff for bottled wine was lowered from 43 to 14 per cent and comprehensive tax rate from 85.9 to 48.2 per cent; the tariff for imported bulk wine decreased from 43 to 20 per cent and comprehensive tax rate from 85.9 to 56 per cent (China Alcoholic Drinks Industry Association, 2007).
Despite the tariff decline, the prices of imported wine remain high in the market and provide a useful pricing umbrella for local producers. In addition to the various tax rates, imported bulk grape wine is also subject to other fees and costs, such as transportation fees and considerable entrance fees for both on-trade and off-trade channels (Gu, 2003). Currently, distribution is still the main difficulty faced by imported vintners. Consequently, in spite of hundreds of imported wine brands being present in China, there is little cohesion the retail portfolios and no leading imported brands (Euromonitor, 2007a).
To most Chinese wine consumers, price and brand familiarity are the two priorities influencing consumers' purchasing decisions (Gu, 2003). Therefore, some wine importers have taken steps to reduce cost by moving part of the production in China (particularly, bottling) as well as to enhance brand image by selecting better distribution channels. In order to reduce cost and minimize wastage, wine importers cooperate with local distributors to have wines bottled locally, which can be an extraordinary advantage if the local bottler also has a strong distribution network of its own.
Imported wines dominate the small but profitable high-end market, but competition is becoming fierce (Table III). Early market entrants, known as “Old World Wines” have high market recognition, and France is the traditional market leader. Wines from later market participants like Australia, Chile, and the USA, known as “New World Wines” are perceived as less prestigious but more value-for-money wines. The international market share of French wine in China was 33 per cent in 2005, a decrease by 4 per cent from 2004. In 2005, overall sales growth rate of imported wines was 46 per cent, while that of French wine was 34 per cent, lower than the average. Australia, America, and Chile have become France's major competitors. In 2005, sales of Australian wines increased by 59 per cent and its market share rose to 22 per cent compared America's 10 per cent and Chile's 8 per cent (Sugar and Alcohol Bulletin, 2006). New world wines are showing an uptrend in the Chinese market.
Improving wine quality
Accelerated competition from home and abroad has compelled Chinese wine producers to improve the wine quality to meet international standards. The bottom-end wine market used to be filled with low-quality wines produced from domestic grapes blended with cheap imported bulk wine. In the end of 2003, production of blended wines was legally forbidden and ready-made blended wines were forced out of the market before June 30, 2004 (Liang, 2004). However, with the rapid expansion of domestic grape production and upgraded wine-making techniques, the growth in bulk wine imports for blending has diminished. Domestic producers are increasingly aware of the importance of grape-growing techniques in making better wines. International oenologists are now employed in the larger firms. Similarly, upgrading of Chinese production facilities is being aided by equipment purchases from major international suppliers.
Domestic wine producers used to grade wine quality by their own standards, which confused the consumers and made quality supervision hard to apply. The rapid expansion of the wine industry has urged the Chinese government to form new rules and regulations to standardize wine production. Still, observation of widespread fraudulent vintage labeling in the market is a good illustration of a missing standard in the wine industry. Massive expansion of grape-growing did not begin until 1998, but the wine market is full of bottled wines with a 1992 or 1993 vintage labels. Besides, counterfeit and blending also endanger the enfant wine industry.
During the past 20 years, China has formulated three series of wine standards. In 1984, the former Ministry of Light Industry drafted the first wine product standard (QB921-84). In 1994, two major industrial standards were announced, one on wine regulations (GB/T15037) and the other on half-juice wine regulations (QB/T1980-94). Production of half-juice wines was prohibited after May, 2003. In 2002, wine standards were placed on a schedule to be amended by China's Standardization Administration. New sets of wine standards were formulated at the end of 2006. The new standard clarifies the definitions for vineyard grape wine, varietal grape wine and original grape wine. Different from the old one, the new regulation is compulsory rather than recommendatory, aiming at eliminating bad quality wine out of the market. In April 2005, the China Food Industry Association launched a wine quality evaluation system. Twenty-four grape wine products were awarded A-rank in quality classification. This classification was based on the raw materials used, the fermentation process, hygiene standards, as well as the quality of the products. The use of quality classifications aims to help consumers distinguish high-quality grape wine (Euromonitor 2007b).
Future prospects
The recent evolution of the Chinese wine industry is likely to surprise many international observers. Emerging changes to consumer habits has spurred a dramatic surge of capacity, quality improvement and the application of sophisticated marketing and branding techniques only anticipated by few savants. The ability of a few Chinese wine companies to control major shares of the wine market has been a tough match for international firms, many of whom have only had a late recognition of the potential of the Chinese market.
According to a note issued by ISI Emerging Markets Database, the total market for wine in China is forecast to reach around RMB 16.95 bn by 2011, growing by about 39 per cent on the expected value for 2007 (ISI Emerging Markets Database, 2006). Thus, the Chinese market will continue to be of interest to international vintners. The Chinese wine industry is likely to further consolidate in the main segments, as national and international retailers are broadening their reach from so-called tier one cities into tier two-, three-, and four cities. Improved penetration of organized retail chains in more rural towns and cities will help to raise per capita consumption in regions outside the main urban centers. As such, the developments are likely to mirror that of the USA. China is also seeing the development of specialty wine stores, dedicated internet-based wine sites, and wine clubs. These new channels are a good indicator of the small, but growing number of wine enthusiasts that are likely to desire choice and new experience – again, the parallel with the developments in USA is tempting.
For academics, the evolution of the Chinese wine industry does lend support to earlier writers' contentions about industry evolution and successful criteria for the global competitiveness. It does have a strong and evolving market, with very good growth prospects, strong economies of scale characteristics recognized by key players, high degree of adaptability, and ample ability to attract both financial and capabilities as needed – all these points were raised by Cholette et al. (2005) and seem to be amply matched by China's evolution.
As the large Chinese wine producers are cementing their hold on the domestic market, their role on international markets remains in question. ChangYu's likely dominance of the world's ice-wine segment is a good indication that Chinese wine makers cannot be discounted pre-maturely; both as an importer of wines, exporter to new markets such as India and the rest of Asia, and as eager acquirer of vineyards, brands and distribution channels in the old world.
Note
- It is our judgment that these percentages are questionable; although, many Chinese wine companies write Cabernet Sauvignon on the wine label, experts often believe that Cabernet Franc is used because of the difficulties in growing the former successfully.
Figure 1.Chinese annual wine production, 1980-2006, in thousand tons
Figure 2.Retail market value by sector in 2006
Figure 3.Wineries by location
Figure 4.Three divisions within the industry
Figure 5.Vineyard size vs production volume (20 major producers)
Figure 6.Chang Yu's product structure by revenue
Table I.2006 key figures of China's alcoholic drinks industry
Table II.Financial highlights and share information
Table III.Financial highlights and share information
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Further reading
Bisson, L.F., Waterhouse, A.L., Ebeler, S.E., Walker, M.A., Lapsley, J.T. (2002), "The present and future of the international wine industry", Nature, Vol. 4118 pp.696-9.
About the authors
Per Jenster is Professor of Strategic Management and Marketing at China Europe International Business School. Per Jenster is the corresponding author and can be contacted at: pjenster@ceibs.edu, pjenster@gmail.com
Yiting Cheng is a Research Assistant at China Europe International Business School.