Building Wine Brands in China is Complex and Costly

Atlas Wine Group - Wednesday, June 13, 2012
The conditions for building international wine brands in China aren’t as propitious as many think, according to Rabobank’s Marc Soccio.

Following the release of the Dutch bank’s first research document on the world’s most talked-about wine market, Soccio told the drinks business: “Branded wine companies need to be reminded that the overall potential for grape wine in China is not what they might believe.”

As previously reported by db, the report has been dubbed “Mind the Gap” by Rabobank, and marks the first standalone piece of printed research by the bank on the Chinese market.

The “gap” refers to the difference between the headline volume figures for imported wine in China and the actual market where wine brands may safely operate.

Soccio, who is Rabobank’s senior analyst responsible for food, wine and horticulture, said that the latter, traditional market was actually around 40% of the total 361 million litres of bottled and bulk wine imported into China last year, or 144.4m litres.

When asked about the other 60%, Soccio said there was a significant volume of wine, often buyer-own-brands, coming into the Chinese market through “unconventional channels”.

Such channels, he explained, comprise small-sized importers with “business and political interests in China” who may have decided to add wine to other goods they distribute due to the demand from their clients.

“The wine is imported and distributed directly to contacts in businesses and the government in China and it’s not a channel where well-known brands tend to thrive, and such distributors don’t crave transparency,” commented Soccio.

Although such wines bypass the brand building opportunities available in the retail and restaurant sectors, the possibility for shifting large volumes of lesser-known labels through this route are impressive.

“A lot of wine is consumed in business and government channels for entertaining and a lot of the demand is coming because the business and government are switching from baiju to grape wine – it is a way to show sophistication and success.”

However, for brand owners who want to position their labels in restaurants and retailers, Soccio stressed that they “have to rely on a smaller number of bigger distributors which rely on traditional channels, mostly HoReCa.”

“But it is harder to distribute through those channels and some of these distributors don’t have the reach the big brand owners would want,” he added.

In essence, Soccio identified a gap in terms of distribution capabilities between the select few large national distributors (such as Nanpu, ASC Fine Wines and Shanghai C&D) and a number of small regional distributors and sub-distributors.

Indeed, he pointed out that as many as 97% of the 3,863 companies importing wine into China handle less than 500 tonnes.

Furthermore, he said that there is also a gap in terms of brand owners expectations: “Brand owners are frustrated by their distributors because they see this volume coming into the market but they are not seeing the growth.”

Summing up, Soccio said, “As a brand owner there are relatively few distributors who can build a brand in China and you have to invest a lot of resources to support them – it is a costly market to develop as a brand owner.”

Key findings from the Rabobank report:


Market

  • Chinese grape wine market: 1.4 billion litres in 2011 (up 14%)
  • Foreign bottled wine: 241m litres (17% of the total market).
  • Foreign bulk wine: 120m litres (but much of this can be accounted for in domestic production)
  • As bulk wine is an input into the production process, Chinese wine companies are highly cost-conscious in sourcing their foreign bulk wine requirements according to Rabobank. (And hence, currency movements can have a strong bearing on where supply is sourced).

Taxation:

  • Bottled wine is subject to a 14% import tariff (20% for bulk wine)
  • Bottle wine is also subject to a 17% VAT and 10% consumption tax

Consumers:

  • There are 1.34 billion people spread across 5 tiers of economic development and 31 provinces with diverse cultures, record Rabobank.
  • Almost 70% of the population live in low-tier cities (below tier 3).
  • In 2011, each grape wine consumer drank on average 6 bottles of wine, according to Sinomonitor’s 2011 China Marketing and Media Study
  • Half of heavy grape wine consumers (4 or more bottles in the last 6 months) lived in tier 1 cities.
  • Wine is more likely to attract either younger, better-educated, wealthier and/or female consumers than baiju or beer.

Distribution:

  • Total number of wine importers: 3,863 companies in 2011 (up 73% from 2010 and up 200% in 5 years). This figure is from estimates by China Customs.
  • The 3 largest importers of wine into China and the three largest Chinese wine companies (due to high demand for foreign bulk wine).
  • 97% of the importers handled less than 500 tonnes of wine in 2011, and accounted for almost 40% of the total import volumes. (Wine is measured in tonnes by China Customs).

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