The Chinese Wine Market an Industry Analysis

by Dr. Stephen Reiss, Ph.D., C.W.E. Member first US Wine Delegation to P.R. China China has a 6,000 year history of grape growing, and a 2,000 year history of wine making, and yet until this century the wine that was made in China was not of a style that would be recognized in the West. I can not over stress the importance of the fact that in Chinese the word for alcohol "jiu" is used to mean all types of beverages, from beer 'pijiu" to liquor of all sorts (just called "jiu") to grape wine, called "putao jiu", literally, "grape alcohol". This lumping together of all intoxicating beverages gives us great insight into the traditional use for alcohol, intoxication. Even in modern China alcoholic beverages are generally classed by the general population by how much intoxication it delivers for the money. From this point of view table wine is at the bottom rung of the consumer preference list, with brandy being much higher. This has not escaped the official notice of the Chinese government who in 1987 began to encourage the Chinese people to drink grape wine over the sorghum based "baijiu" (almost a pure alcohol white

liquor). This would switch public consumption from grain based to fruit based beverages, very important in a country struggling to feed its masses; as well it would bring down the average ethanol content consumed in the market. This program has met with limited success, but what success it has found has been in the younger markets, which bodes well for the future. The desire to embrace western products is the single most important driving force in the adoption of wine as a viable import in China. Alas economics, as usual, is the final arbitrator. With a 750 ml bottle of beer costing around US$.60 it is difficult for the Chinese consumer to spend even the $2- $4 that a bottle of Chinese wine fetches. Imported wines with their average price around US$10 a bottle and up, is far beyond the reach of most consumers. As the cost of living and the economic growth of China continues to skyrocket, there will soon come a day when this price resistance is less dramatic. The Chinese people have a sense of brand loyalty that almost borders on the fanatic. Once a brand name is established, anything with that name is sure to do well. Coca-Cola is often held up as the perfect model for breaking into the Chinese market. First established in the early 80's, Coke could not at first be given

away, although that is exactly what they did. In time the Chinese began to develop a taste for Coke, and now, more than 15 years after its introduction, Coca-Cola has a stronghold on the Chinese market. Any wine brands in China would do well to follow a similar model. Alcohol related regulations, as far as distribution and labeling, are almost non existent; although the bureaucracy in China being what it is, this may change at any given moment. This climate of relaxed standards is a mecca for unscrupulous importers and bottlers, and it should be considered that legitimate concerns will have to compete with falsely labeled and adulterated wines as this market explodes. One of the single greatest barriers of exporting wines to China is the duties. As of spring 1996, the last time I had a meeting with the Chinese government, the duties for wines imported into China were an exasperating 70%, down from 80% the year before. This high duty makes it especially difficult to compete at the under US$5 retail level, where most wine is now being sold. The distribution system for wines in China is currently chaotic. Once the domain of the government, distributors have now found themselves out on their own with no support from the central

government, who still expects their cut. There is no such thing as a wine cellar or refrigerated storage in China, a major obstacle. In fact Seagrams who's failed attempt to market fine wines in China point to the lack of proper facilities and distribution as their main cause for failure. It can also be pointed out that Seagrams entered the Chinese market early, looking for quick returns. Because of the lack of regulation, any new wine venture in China would do well to consider their own distribution system. This system is unheard of in other countries and so is slow to be adopted in China. The main competition for imported wines in China comes not from the Chinese wines, but rather the other forms of alcoholic beverages. The French Cognac houses, who are the main players in China, usually in the form of a joint Franco/Sino venture (e.g.,. Dynasty and Great Wall Wineries), have discovered that brandy, and not table wines are the current top sellers in China. Because the consumer is looking for the effects of the ethanol, rather than the taste of the beverage, the lowest grade brandy's, most of which would be below the regulations of most nations, are in the greatest demand. These brandies, when produced or bottled in China (bringing in bulk alcohol, adding caramel color and water, and calling it brandy, is a successful model in China), often sport

such terms as VSOP and other designations that have no legal meaning in China and therefore are only used as means of recognition, not a designation of quality. By far and away the most compelling aspect of the Chinese market is the demographics. While there is not currently any portion of the market that would be likely to drink table wine on a regular basis, the shear numbers are staggering. If each of the 1.2 billion people of China bought a single bottle of wine a year, they would outrank most of Europe as consumers. Even when you take just the upwardly mobile youth of the cities, the traditional wine market of other countries, you are talking about a population of over 300 million, more than 10 time the potential market of the US and many more times that of other Western countries. In summary any venture to export wines to China must be prepared to establish their brand over a long and potentially unproductive period. They must be able to price their product, after paying 70% duties in such a way as to compete with other alcoholic beverages, especially beer. They must be willing to create or support a distribution system in each major urban area. They must create not only their own storage facilities, but help their customers learn about storing, and even opening bottles of wine.

With perseverance, and deep pockets, the potential to market wine to 1.2 billion people is a staggering concept with great potential for profit, in the long run. Education above all else is required before the Chinese people will become a wine drinking nation of even the most meager sort.