Foreign winemakers face tough challenge as competition from domestic players intensifies

There are several reasons that are propelling the growth of the wine market in China. While the country's huge population and rising income levels are to some extent fueling the thirst for wines, it is also getting a lift from health-conscious consumers.

It is only a matter of time before China becomes the world's largest wine consumer. Vinexpo, the wine and spirits trade association, set up by the Bordeaux Chamber of Commerce and Industry, says in its latest survey on the Asia-Pacific and the global wine market that China overtook France as the world's largest consumer of red wine in 2013. Total consumption of red wine in China last year was 1.865 billion bottles.

China is also the world's fifth-largest wine consumer. Between 2007 and 2013, China's red wine consumption grew 2.75 times, while in Italy and France it declined by 5.8 percent and 18 percent, the Vinexpo report said.

Though China's wine consumption increased in 2013, falling imports are still a matter of concern.

China's wine imports increased seven-fold in the last six years with imported wine accounting for over 18.8 percent of China's total wine consumption.

However, statistics from China Customs show that in 2013, China's wine imports fell to 376 million liters, a 4.46 percent fall over 2012. The import volume was $1.555 billion, down by 1.64 percent.

Bulk wine imports at 89 million liters also showed a 26.75 percent fall over the levels seen in 2012. The import volume was $107 million, down by 25.12 percent. Imports were mainly from: Chile $66.63 billion (58.06 million liters) - $1.14 per liter; Spain $12.64 million (12.66 million liters) - $1 per liter and France $10.11 million (5.79 million liters) - $1.74 per liter.

However, bottled wine imports rose to 287 million liters, up 5.47 percent than in 2012. The import volume was $1.447 billion, up 0.7 percent. The top three import sources are: France $658 million (128 million liters) - $5.14 per liter; Australia $225 million (36 million liters) - $6.25 per liter, and Chile $100 million dollars (25 million liters) - $4 per liter.

There are several other reasons for the slowdown in Chinese wine imports.

Domestic wine companies score over their foreign counterparts in marketing and sales activities and as such enjoy better market share in China. In recent years, they have gone in for more quality tweaks and started promoting their brands more aggressively.

Unlike foreign winemakers, mostly small and medium-sized enterprises, Chinese domestic wine companies are large enterprises and possess a better understanding of China's market and consumers. They are more willing to invest in advertising and marketing, which in turn create more opportunities and boosts sales.

The austerity measures imposed by the Chinese government have hit the marketing and sales plans of foreign winemakers in China. Since most foreign winemakers are SMEs, they don't have the necessary resources to conduct aggressive market promotions in China, and hence rely more on local agents or importers.

Due to the small investments, these agents have opted for the less risky wholesale and group sales models, and their main customers are government, state-owned enterprises and government-affiliated institutions, subjects of the government restrictions on public spending.

Even some big foreign wine companies in China are no different from SMEs in terms of the basic marketing sales model. Hence sales of foreign wines in China remained lackluster for most of last year. Foreign winemakers must make adjustments to sales strategies if they want to do well in China this year.

Chinese consumers are also fast realizing that imported wine brands differ in quality and are no longer seen as a status symbol. This has to some extent contributed to the falling sales numbers of imported wines.

Due to the high cost of channel fees and promotion in China, foreign wine companies' market price systems and sales models are almost impossible to adapt to the Chinese market.

Foreign wine businesses hardly have any advertising and marketing support, and the disparity between wholesale and retail prices are not sufficient to cover the branding and channel development costs. Most of the dealers cannot expect any profitability in such harsh conditions. The better the wine business operates in Europe, the more difficult it would be for it find strong partners in China to jointly develop the Chinese market.

Foreign wine businesses are also unwilling to take risks and invest more in China. To meet Chinese consumers' demand for imported wine, the big dealers register brands outside China, buy out the entire product line or purchase wineries so they can have independent pricing and cost control.

They cut down costs further by bringing to the market the most popular wine with very cheap retail prices. In Europe, wine ranging from 15 to 40 euros a bottle is most popular. Due to import duties and logistics costs, the big dealers pick wines costing less than 3 euros a bottle. And these wines are poor quality. But the cost advantage has pushed these wines into the main channel, and their retail price is higher than the Chinese domestic wines. Many consumers have begun to prefer the high-profile Chinese domestic wines than imported wines of unclear origin.

Although the Chinese wine market saw a decline in imports last year, Chinese consumers' demand for foreign high-quality wine will grow immensely. Powerful and big foreign wine producers should pay more attention to the unique feature of the Chinese market, adjust and increase their investment appropriately and flexibly, and develop realistic branding and marketing programs in China, so that more Chinese consumers can enjoy high-quality wine.

The author is director of Beijing Vogue Glamour Brand Marketing Inc, a Beijing-based brand consultancy.

(China Daily European Weekly 03/07/2014 page19)