Uncorking China's wine market(1)
Although China's bustling metropolises and staid Bordeaux may seem worlds apart, the two are becoming increasingly intertwined. Indeed, China recently overtook the traditional strongholds of Germany and the United Kingdom to become Bordeaux's largest export destination. This transformation is particularly remarkable given the country's short history of mass wine consumption. Historically, beverages such as sorghum-based baijiu and beer have dominated Chinese alcohol consumption, with wine only recently gaining wide acceptance.
Bubbling to the Top
In the past few years, China, the world's second largest economy, has risen to become one of the world's most important wine markets, offering both high growth potential and generous profit margins. By volume, the country is currently the seventh-largest consumer of wine, with expected sales of 1.6 billion bottles in 2011. In contrast, the U.S. and France, the first and second largest consumers of wine, are expected to consume 4.0 billion and 3.9 billion bottles, respectively. Since 2006, the Chinese market has experienced more than 20% annualized growth, and experts predict it will further double by 2014 to become the world's sixth largest.
Collectively, three major domestic producers account for nearly half the total wine sales in China. The largest brand, Changyu Pioneer Wine, is a unit of the major state-owned conglomerate China National Cereals, Oils, and Foodstuffs Corporation (COFCO). Changyu and the other two primary producers, Great Wall Wine and Dynasty Wine, focus on domestic consumption, with 98% of their production remaining in China.
Foreign wine imports are also growing rapidly. In 2010, imports grew to more than 20% of total wine consumption, a four-fold increase since 2005. Reductions in tariffs following China's accession to the WTO have been one factor in this growth. Currently, an estimated 20 million adults drink imported wines on at least an occasional basis. Given that this figure is a fraction of the overall estimated 200 million plus people who have the purchasing power to buy imported wine, the future for foreign wine appears bright.
In China, domestic wines are sold primarily at the lower end of the pricing spectrum, while imported wines are sold at the mid-to-higher end. The average retail price at the lower end is RMB20-30 (US$3-$5) per bottle. Mid-range wines sell for RMB30-80 (US$5-$13) per bottle and are aimed at consumers with higher disposable incomes and more exposure to wine. Premium wines sell for RMB80 (US$13) and up per bottle. Imported wines typically range from RMB80-400 (US$13-$66) per bottle and are in direct competition with high-end domestic wines.
A Chinese Taste for Wine
Numerous factors have driven the growth of the overall wine market in China. In particular, the government's promotion of wine as a healthy alternative to baijiu and other spirits, declining tariffs on wine imports, and consumers' increasing purchasing power have given rise to an increased interest in wine.
Consumption still centers around entertaining and gift-giving occasions, with two major holidays -- the Chinese New Year and the Mid-autumn Festival -- accounting for about 60% of annual wine sales. As one customer in a wine store in Beijing noted, "I'm not too familiar with wine, but I know it makes a great gift." Consequently, consumers are interested primarily in purchases that convey a suitable level of prestige, status and respect, all of which are important components of Chinese culture. Pairing wine with food is still a developing concept, especially given the family-style custom of Chinese dining.
Despite rapid growth, however, the Chinese market remains fairly immature. Customer preferences are driven heavily by advertising, with top producers running extensive mass-marketing campaigns to build brand awareness. This brand-driven environment, with a lack of emphasis on taste preferences, has also affected the market for foreign wine. Regardless of brand or vintage, Bordeaux and Burgundy wines enjoy strong recognition among Chinese consumers. High-end consumer demand for first-growth French wines, such as Lafitte and Latour, has caused a tremendous jump in prices. Although consumer appreciation and knowledge of wine have improved in recent years, purchases continue to be driven primarily by brand-conveyed prestige and status.
Beyond the emphasis on brand, consumer preferences have also driven the market to supply a narrow range of products. Given the limited consumer appreciation for white wine, red wine accounts for more than 90% of the wine consumed. This preference is related to numerous cultural factors, including associations with sophistication, heritage and health.
Regardless of the product category, Chinese customers often have enduring "country-of-origin" biases, and wine follows this pattern. The association between wine and France is particularly strong, with domestic brands mimicking French imagery on packaging and vintage naming conventions. On the import side, French labels account for almost half of all wine imported into China. When pressed about their perception of brands and vintages, many consumers said their perception of France as the leading wine country is a primary factor in their purchase decisions. According to the manager of Scarlett, a prominent wine bar in Beijing, "The Chinese are big fans of Bordeaux and not very curious about other wines."
In response to changing customer perceptions of wine, domestic firms have begun to adjust their marketing strategies. While domestic wine brands have traditionally focused on lower price tiers, producers are increasingly looking to move further up-market, investing in world-class equipment and seeking out international best practices. Some Chinese-produced wines have already received international recognition for their efforts, with one producer recently winning Decanter magazine's "Middle East, Far East & Asia" category for red wines. At the same time, with the increasing spread of wealth beyond the largest coastal cities, China's wine market is now expanding into smaller markets across the country.
Both Chinese nationals and foreign investors are seeking ways to capitalize on the booming Chinese wine market. Within this market, the relative unsophistication, yet increasing purchasing power, of the Chinese consumer presents tremendous investment opportunities with multiple means of entry. Recent examples of entries into this sector include Chinese purchases of foreign vineyards, full-service distributors catering to the unique qualities of the Chinese market, and high-net-worth Chinese investing in wine as part of their wealth management strategies.
Investing in Terroir
Most attention-grabbing among these modes of market entry, however, has been Chinese investors' acquisition of foreign vineyards. Among the first was the 2008 purchase of a Bordeaux chateau by the Cheng family of Qingdao, China.
