Small foreign vintners can still find success in China's growing market for wine

Sales of wine in China reached 8.5 billion euros ($11 billion) in 2012. In recent years, sales have grown by more than 20 percent. This year, total sales are targeted at 10.5 billion euros; in 2018, it's estimated to shoot up to 24 billion euros.

But in China, the average person drinks a bottle a year. In France, a person drinks 10 bottles. Though wine is getting more popular in China, it is the nation's massive population that will push new heights of consumption. This presents a golden opportunity for every wine business in and out of the nation.

And international wine companies are listening to the rising market demand in the Middle Kingdom. Besides the traditional wine powers of France, Italy and Spain, the United States, Chile, Australia, South Africa, New Zealand and Argentina have been expanding in China.

But behind the opportunities lurk competition and challenges. Many international wine businesses have set up shop in the Chinese market, giving any new brands wishing to enter a crush of competition. Coupled with the established presence and performance of Chinese vintners, it isn't easy to thrive in China if you are not familiar with the rules of the game within the Chinese wine market.

The majority of the nation's wine drinkers do not regularly partake in the inebriant, but when regular drinkers become the norm, the nation's market will likely grow exponentially.

In my research on wine drinkers in five Chinese cities, I found that nearly 40 percent drink wine because of its health benefits, 30 percent enjoyed its taste and low alcohol content, and less than 10 percent said they love the culture of drinking wine.

The results from my research are nearly identical to research done by a Chinese liquor company, my former employer.

The company divided Chinese wine drinkers into three categories: those in poor health, those with low alcohol tolerance and wine lovers (most of whom were just learning about the culture).

Many regular drinkers in China, however, mostly partake of Chinese liquor, consuming large amounts each time. They are the foundation of China's liquor sales, which tallies more than 60 billion euros a year. Statistics for annual sales of liquor are hard to obtain, but its retail market is estimated to be double the amount that is produced.

Fortunately, more regular drinkers are increasingly beginning to realize the importance of a healthy life and most young consumers regard red wine as a healthy beverage. They'd rather choose wine instead of traditional Chinese liquors. This means that the number of drinkers of foreign wine in China will increase. If wine brands want to attract these young drinkers, they should market their wines as closely connected to a healthy life.

The Chinese wine market is expanding and Chinese brands account for a large share of the market but their growth has been sluggish. While foreign wine continues to flow into the country, counterfeits flooding the market have made it difficult for drinkers to trust foreign wine brands.

The current dominant Chinese brands are Changyu, Great Wall, Dynasty, and Grand Dragon. Combined, they sell more than 4 billion euros of wine, accounting for half of the Chinese wine market. In the middle of last year, due to an investigation into pesticide residues in bottles of Changyu wine, the company lost about 3 billion euros in market value in three months. In 2012, its revenues totaled about 700 million euros, down about 6.8 percent compared with the previous year.

The impact drove down annual performances for other Chinese wine enterprises last year. Sales for Great Wall and Dynasty in 2012 both declined.

But the negative news was good news for foreign wine brands. Wine consumers who lost confidence in Chinese wines are starting to reconsider foreign ones. Foreign wines are coming into China rather cheaply and that has prompted many Chinese wine dealers to abandon low-profit Chinese wines. They are choosing to import wines by the bulk and then refill and package bottles in China so that the cost of each bottle can be controlled to cost less than 3 euros. They are then resold anywhere from 10 euros to 100 euros.

This shoddy method destroyed the good impression of many consumers on foreign wine. What's more, some unscrupulous dealers even replace foreign wines with cheap local ones.

The dealers' reckless pursuit for profits is the main reason why there has been a recent prevalence of low-quality foreign wines in China. This deceit won't be eliminated anytime soon and it tramples on the interests of drinkers. I do suspect, however, that this dealer-dominated market won't last long.

Wines ranging from 20 euros to 80 euros sell well in China. Chinese drinkers prefer Old World French and Italian wines, believing that they have higher brand value, although high quality is what most counts.

Chinese consumers are still not familiar with foreign wine brands. They prefer to choose brands with high visibility and exposure and they'd rather stay loyal to a few trustworthy brands than try other brands and varieties. My suggestion to a brand is choose a good Chinese name so you can enhance your visibility.

Except for Lafite and Castel, there isn't a third well-known foreign brand in China. This is a rare opportunity. Those who first establish a reputation in China will gain a big share of the market.

What is also tough for foreign brands is that a majority of Chinese people know little about European languages. Major European wine regions and brands are all labeled in French, Italian or Spanish, but Chinese drinkers are unable to read them. An acceptable Chinese name should be the first step an unestablished foreign brand takes.

The Chinese are highly attached to famous brands. Lesser-known brands, even if their quality is high, are not popular. Many Europeans do not understand why Lafite bottles are highly sought after by Chinese drinkers, but the company should thank the Hong Kong films of the 1990s, which were very popular on the Chinese mainland. In many of the films, the wealthy would often take pride in drinking a bottle of Lafite wine. It was free publicity for the foreign wine and it established the Lafite brand long before its entry in China. When a Chinese person become rich, he or she will buy Lafite wines.

Castel's popularity in China is partly because of Changyu. Castel worked with Changyu from 2000 to 2006, with Changyu helping to promote the Castel brand at a cost of more than 100 million euros. When they ended their deal in 2006, Castel sales dropped temporarily, but it had already established its brand in China by that time. Many dealers in fact contacted Changyu to continue the partnership.

In only a few years' time, Castel has sold more than 30 million bottles in China. Although it mainly sells low-end wines, they are not cheap because they are packaged by Chinese distributors.

The Chinese market for wine, like any industry, is wide ranging and complex. But within that structure, there is a divide between big distributors who control main retail channels (such as supermarkets and wholesalers) and small wine dealers. Wine producers and distributors work as partners, but they also constrain each other.

The Chinese market is huge and for many small wineries, a strong dealer in a small or medium-sized city will be able to sell thousands of bottles of wine. But both sides need to build trust and consensus. My advice for a winery is to select a trustworthy, strong dealer in a small city and stay away from focusing on a wider market at the outset.

For bigger wine companies, preliminary market research, high quality branding and a strategic channel expansion with Chinese dealers will help them move steadily through the Chinese market. Following these guidelines, it won't be difficult to achieve solid results in three to five years.

The author is director of Beijing Vogue Glamour Brand Marketing Inc, a consultancy firm. The views do not necessarily reflect those of China Daily. Contact the writer at voguead@163.com.

(China Daily 03/15/2013 page9)