China Grows Interests in Wine

by Robin K. Cheung
          
Last month, I wrote about China's growing leisure boat industry.  Somehow, it seemed appropriate that I write little about the growing interest in grape wine in China as well.  As in the west, China's growing wealthy class is also seeking the same expressions of their affluence by embracing yachts and wine.

Western products, particularly branded goods are gaining sales and market share in the world's largest consumer economy.  At the top of luxury scale, products like cars and yachts with the made-in-the-U.S.A label are a badge of success for the image conscious yuppie and newly minted millionaires.  European clothing and apparel brands are the rage.  Imported specialty-food products from gourmet coffees to smoked salmon to wines from grape vines are making their way into the life styles of the urbane consumer.  Wine has become an alcoholic beverage of choice for the wealthy elite.  The ability to show a taste for things western is a status symbol in today's urban China.

Not surprisingly, consumption of wine is on the rise in China.  Since 1997, the Chinese government has actually played a role in encouraging wine consumption.  Reportedly, this was motivated by health concerns because consumption of distilled spirits and rice wines at banquets and celebrations tended toward excessive drinking behavior, rooted in the tradition of "bottoms up" challenges between host and guests.  Studies touting the health benefits of red wine and it's relatively lower alcohol content helped the government's campaign in winning the consumer's interest to try wines.  There were also economic motives as well.  The same Chinese government also has an interest in fostering the development of another potentially profitable component of their agricultural industry.

The average wine drinker is young and male - between ages 25 to 35.  However, female professionals with higher income have also added their numbers into this group in recent years.  The per capita consumption of wine in China is 0.3 liter per year, compared to a world average of seven liters (24 liters in Western Europe).  The expectation is that there is more room to grow.  The fledgling Chinese wine sector now has only 130 wineries, eight of them joint ventures, with only about 163,000 hectors under grape cultivation.  Only 20 of these wineries make more than 100,000 hector-liters of product per year.  The wine market in China grew in value by 58% between 1996 and 2001, accelerating by doubling within the last five years.  In some cities, there has been a reported seven-fold increase in the past couple of years.  Despite strong tariff and non-tariff barriers, U.S. wine exports to China rose from just under $200,000 in 1995 to over $1.2 million in 1996, an increase exceeding 500 percent.  The Chinese government has forecasted that demand by 2007 will top 26 million hector-liters.  To meet this domestic demand, about 1 million hectors of land would have to be brought under grape cultivation by 2007.  This is unlikely because China is very much still a planned economy when it comes to agriculture.  Reallocating productive lands that grow more daily staples to a specialty crop would be studied carefully in a country that has to feed millions.  There lies the opportunity for global wine exporter to China in the coming years.  Currently, rising demand is outstripping domestic supplies and foreign imports are picking up the slack.

 Competition is growing for this vast consumer market.  Spain, Chile, Portugal, U.S., and France have the largest market share in the foreign import market in China.  Market penetration strategies vary.  The French, who tend to focus on the high-end price market, sees a combination of traditional label and domestic label through joint ventures the way to go.  Not content to wait three years for the vines to mature and produce grapes, some joint ventures have also begun importing bulk wine or juice, to be bottled in country.  Some U.S. exporter have also begun to establish bottling plants in major cities like Shanghai and Beijing to gain a foot hold into this market.

US wine exporters should be aware that there are some downsides to this market.  The consumer is still relatively unsophisticated and connoisseurs are few.  Product positioning is a major challenge for all wine importers.  The Chinese still regard European wines as being more upscale and are prepared to pay the relatively higher prices for their labels; not so for U.S. wines.  U. S. wine promoters will have an education hurdle to get its wines accepted in the higher price point category.  The cheapest import is priced at US$3 per bottle.  There is plenty of competition from domestic producers at this price point.  With import tariffs and non-tariff barriers like labeling requirements, a bottle of wine on the shelves at a Chinese store can be as much as 120 percent higher than in the U.S.  Moving up the pricing curve to gain greater profitability can be tricky within such an immature market.  Tastes and consumption habits differ from the west.  Promoters need to understand these differences before embarking on a venture.  Importers into China also face the likelihood of encountering knock-offs of their brand should they find initial success.
Wine from grape vines will become increasingly popular at the dinner tables of the young and increasing older Chinese citizens.  The potential market for sales of U.S. wines to China in the future is great.  Those who can find the right marketing strategy will win a profitable share of this import world market.

Mr. Robin K. Cheung is an international business consultant.  He is currently serving as the executive director of the Washington State International Trade Fair.