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A market on the rise - Part II of Denis Gastin’s China series
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This is the second part of what was intended to be a two-part series by feature writer Denis Gastin on the emerging wine scene in China. It is a more substantial subject than initially thought and, accordingly, we are now presenting it as a three-part feature.
In the first part, Gastin presented the process of emergence of the wine industry in China. The second part now presents a picture of the market – how and where it is growing, and where domestic and imported wine are positioned.
In the third part, Gastin will look at the domestic wine industry in an international context, past and present. This will include Australia’s own China wine story.
By any measure, China’s market for wine is significant – and it is growing rapidly.
Per capita consumption may be well below international benchmarks: depending on the source, at somewhere between 0.2 litres (a recent People’s Daily Newspaper report) and 0.91litres per person (as recorded in the Organisation Internationale de la Vigne et du Vin’s (OIV) international statistics series). But there are lots and lots of persons so, even at these levels, consumption is anywhere up to double the size of the market for wine in Australia (in volume terms). And yet this represents considerably less than 2% of total alcohol consumption in China, so the potential for further growth in this market is enormous.
Alcohol statistics in China are problematical. Wine is a heavily taxed item (import duties, value-added tax and consumption tax account for just under 50% of the retail price) and therefore declarations can be unreliable – understated for tax purposes and, sometimes, overstated for marketing purposes. This is in addition to the usual problems in data collection in a country such as this – including definitional issues.
The word ‘wine’ is used for a broader range of alcoholic beverages than this term implies in the Western context. Rice-based alcohol is colloquially referred to as ‘wine’, so are various fruit alcohol concoctions and even, occasionally, the local distilled white spirit (baijiu): these are not separated from grape wine in some analyses, creating even more confusion.
The OIV records grape wine consumption at 1,158m litres in 2003 (the latest available year). This would put it at more than double Australia’s domestic consumption of wine, as recorded by the OIV (419m litres in 2003). Market research agency Euromonitor takes a much more conservative position, based on the sales data it collects, and puts total “still light grape wine” sales at 498m litres in 2004 (latest available year). Extrapolating from Euromonitor sales data and retail price data from various sources, the total value of wine sales would have been somewhere in the range of A$4.4 to 7.5 billion in 2004 – but there are publicly available figures from various sources both above and below this range.
Market growth figures are even more dramatic and cannot fail to impress. The Euromonitor statistics, for example, show grape wine sales almost doubling in the period between 1999 and 2004 – equal to a cumulative annual growth rate of 13% in volume terms and 12.3% in value terms. In 2004 alone, sales grew 12.3% and 11% respectively on their measure. Euromonitor sees this growth as an ongoing proposition – forecasting high growth continuing through to 2009, at 10.6%in volume terms and 9.6% in constant value terms.
China is red
Sales of still red wine currently represent almost two-thirds of total grape wine sales – and Euromonitor expects this to increase to over 70% of wine sales by the end of 2009.
To the ‘Western’ mind this is somewhat incongruous: a cursory assessment of what Chinese people eat would intuitively indicate a stronger performance for white wine and, indeed, during the early 1980s when the Chinese wine renaissance kicked into its new phase, it was almost entirely white wine that wineries were focused on – other than for the very traditional red wines made from the native wild mountain grape.
There are a number of explanations for this. The first is a cultural consideration: red is the colour that represents happiness, celebration and good luck for Chinese. So a natural tendency to prefer red wine was further underscored when the ‘French paradox’ started to receive publicity in China in the mid 1990s.
But, despite Euromonitor’s conviction that red wine will increase its share of total grape wine sales by the end of the decade, there are signs of a modest white wine revival. White wine now represents just over a quarter of total wine sales. It is more popular in South China than elsewhere, perhaps because of the higher profile of seafood in the regional diet, and increasingly among women generally. Winemakers have supported a demand for improved white wine styles with the introduction of classic European varieties (especially Chardonnay) and vastly improved handling of the traditional local varieties — especially the iconic Longyan (Dragon’s Eye). Prices for white wine grapes have, accordingly, accelerated in recent years as winemakers jostle to capture the relatively scarce available supply.
Rosé accounts for just under 10% of total sales. Sparkling wines are much less popular, at just a fraction of one per cent of total sales by volume.
Imports, a minor role
China must be on any serious wine exporter’s list of markets to take seriously – not so much because of what the market represents at present, but where it is heading. Wine may comprise, at a maximum, just 2% of alcohol sales by volume at the present time, but all the industry forecasts indicate a steadily rising proportion in the years to come and some share of that increase will certainly flow through to imports.
In any case, China is already the second largest importer of wine in Asia, behind only Japan. China’s wine imports in 2004 totalled 43.8m litres, representing only one third of Japan’s total imports, but way in front of other markets in Asia which the Australian industry has taken very seriously for many years – like third ranked Korea at 14m litres, Singapore at 12m litres and Hong Kong at 11m litres (some of which, in any case, is re-exported to China).
Overall, however, the domestic wine industry profoundly dominates the market and imports account for only a small proportion of total wine sales. It is difficult to see this changing significantly in view of the huge expansion commitments of the local industry, their significant cost advantages and the strides made in matching imported wine’s notional quality and status appeal.
Again, statistics are imprecise, due to re-exports from Hong Kong and the so-called ‘grey trade’, where imports are frequently under-declared or not declared at all. Even so, imported wine is generally estimated to account for not more than 5% of total wine consumption at most (and, officially, less than 1%). It also has limited market penetration, being mostly sold in the higher income and more internationalised major cities on the east coast — particularly Shanghai and Guangzhou/Shenzen — and in Beijing.
In any case, it is bulk wine that accounts for the majority of China’s wine imports. According to China Customs statistics, 84% (36.7m litres) of total imports in 2004 was bulk wine. Most of the larger domestic winemakers are importing bulk wine (and, indeed, other grape supplements such as juice and concentrates) to maintain their share of the rapidly growing market while domestic grape supply catches up, or to augment local grape material for quality enhancement.
Labelling regulations are sufficiently vague to permit wines containing significant proportions of imported material to be presented as ‘domestic’ wines. A number of prominent domestic labels consist of entirely imported wine. One example is the widely distributed Imperial Court although, commendably, the origin of the contents is fully declared on the label on the bottle.
Chile dominates the imported bulk wine market, having overtaken Spain in 2001, accounting for over 80% of recorded imports in 2004. France and Spain were the other significant suppliers of bulk wine in 2004.
Australia should also be a logical source of imported bulk wine for China, especially with large disposable volumes in excess of immediate market requirements. Exports to date have not been significant, however, though this is in the process of changing. AWBC export approvals of bulk wine for China in calendar 2005, at 1.6m litres, were more than treble 2004 approvals. Approvals in the four months to April 2006 (at 4.7m litres, almost 90% of which is red wine) are ten times approvals in 2004 and quadruple approvals in 2005. This is likely to put Australia in second ranking, but it is likely that Chile will maintain its leadership position, due to the Free Trade Agreement that was recently concluded between the two countries.
France accounted for just under 40% of bottled wine imports in 2004. Australia ranked second, with 20% (1.4m litres in a total of 7.1m litres). More recent AWBC data suggests that this ranking is likely to have been maintained in 2005, with AWBC export approvals totalling 2m litres (at a value of A$11.7m).
All of this combines to make the Chinese market notionally an attractive proposition for international wine majors, including Australia, and a considerable promotional effort has been expended by some countries — principally by Australia’s European competitors, most notably France and Italy.
Not surprisingly, however, given traditionally low incomes, the majority of wine is sold at prices that most exporters (and especially Australian exporters) would find totally infeasible – especially given that taxes account for roughly 50% of the retail price of imported wines. Euromonitor, for example, estimates that in 2004, 57% of all red wine, 61% of white wine and 74% of rosé sold in the off-trade at a retail price of under Rmb 50/litre (around A$10). Anecdotally, it would appear that probably half of this would be sold at less than Rmb20/litre (around A$4). Wine above Rmb 90 (just under A$20) represents less than 10% of the total sales value and is accounted for principally by foreign expatriates and, at present, only a very small number of local winelovers.
That does tend to dampen exporter enthusiasm, but there are positive factors at work too. Since China’s accession to the WTO import duties on wine have been phased down in a major way — to 14% on bottled wine, to 20% on bulk wine and to 30% on ‘other’ grape products, such as grape must. The modest appreciation of the currency (Renminbi) is another positive factor.
The new consumer
Fortunately, also, there has been a steady upward trend in the number of people able (and willing) to afford wine as the economy continues to post record economic growth and the degree of consumer sophistication rises accordingly. Not surprisingly, the higher the consumer’s income and educational status the more likely they will be to drink wine: various estimates put the current potential wine drinking public now at between 100 and 250 million people.
Most China wine watchers have their accounts of drinkers at banquets adding Coke or Sprite to priceless wine to make it palatable to them. Undoubtedly there are still instances of this, particularly among the so-called ‘old carats’ who represented the first wave of imported wine drinkers. But the ‘status drinking’ phase is progressively waning and seriously discerning drinkers are taking their place, particularly among the burgeoning affluent younger professional class who are now making up the greatest share of the wine drinking public. Euromonitor estimates that the 25 to 44 year age group now accounts for 60% of wine drinkers.
The launch of serious wines in contemporary packaging, such as the tetra-pack and bag-in-the-box ranges released by ViniSuntime and aggressively promoted to a younger buying public by leading media personalities, is more indicative of the contemporary Chinese consumer than the apocryphal tales from the ‘status’ era.
Banqueting a feature
For the most part, though, wine is still an ‘occasion’ drink. Banqueting is a common feature of the business environment, both traditionally and contemporarily, and toasting is the standard fare on such occasions. Traditionally it is considered poor form to just pick up a glass and drink, rather than drinking when the (usually copious) toasts are proposed, and the traditional practice has been to obey the ganbei exhortation of the toaster (which literally means ‘bottoms up’).
Sitting and sniffing at a wine glass over a meal is not yet all that common – either at home or in company. Increasingly, though, there are food establishments and wine bars that are specifically providing the opportunity for consumers to relax and enjoy wine in a more western-type context and these are increasingly the choice of the growing lifestyle-focused consumer category.
One measure of the extent to which the newly affluent and increasingly discerning local consumers can relate to wine is the long waiting list for the US$3,000 per head wine dinners periodically held at the Shangri-La hotel in Shanghai’s Pudong commercial district. Wines featured at recent dinners have included virtually unimaginable options such as 1906 Chateau d’Yquem, 1928 Chateau Latour and 1928 Chateau Cheval Blanc.
That is, without doubt, the very top end of the market and might represent just a couple of hundred consumers. But there is also strong patronage of events a little further down the totem at the Shangri-La, such as recent vertical tastings of Ch Pichon Longueville and Ch Suduiraut, at US$165 per head, that sold out in days, with a long waiting list for cancellations. This style of appreciation is gradually gaining traction more broadly in China as wine appreciation takes further hold of the emerging consumer’s imagination.
Market structure considerations
Modern retailing systems have been very effective in taking wine consumption to a wider public.
Supermarkets and hypermarkets account for a rising share of off-trade sales and are increasingly the focus of both domestic producers and distributors handling imported wines. By some estimates they now account for over half total sales. The other major outlets are hotels, clubs and restaurants. Specialist wine stores, by contrast, are rare and generally focused on the expatriate trade. Increasingly, quality-focused local wine producers are promoting direct selling models and member clubs for their premium wines.
It is important, though, not to make too many generalised assumptions about the Chinese market on a national basis, because it is extremely fragmented geographically.
For the considerably more expensive imported wine the market is, as indicated above, concentrated essentially in a couple of cities. Even for domestic wine, the majority is consumed, not surprisingly, in the more affluent Eastern Region, incorporating the city of Shanghai (which the US Department of Agriculture declares as the largest market in China, with consumption at 1.25 litres per person), and the provinces of Jiangsu and Zhejiang. The other centres of consumption are South China (principally the city of Guangzhou and the Shenzhen Special Economic Zone) and North China (principally Beijing and Tianjin). The rapid expansion of the number of wineries in other regions is progressively creating a more diverse geographic distribution of demand for wine – almost exclusively locally produced wine, however. This is especially the case in northwest China where production in the Xinjiang Autonomous Region (home of the rapidly growing Vini Suntime wine corporation) and in Ningxia and Gansu Provinces. It is also emerging in the southwest province of Yunnan where two wineries, Yunnan Highland Wine and Shangri-La Wine, are growing rapidly.