Bright prospect for China's wine market
China's wine industry is still in its infancy. The current per capita wine consumption is 0.38L, while urban per capita consumption is 0.7 L, which is far behind the global per capita consumption of 6L. In terms of China's beverage consumption mix, wine is only 1.5% of total annual alcohol consumption.
There are two reasons for China's low wine consumption level: One is the short introduction period, and the other is low income level. So population income growth as a result of economic growth will be the basis for high wine consumption growth in the future. Take the example of Shanghai. As the most prosperous and highest income city on China's eastern coast, Shanghai's wine consumption level is very high, with per capita consumption of 2.5L back in 2001. In 2006, per capita GDP in Shanghai reached US$7000, while per capita GDP nationally was only US$1700. It is obvious that income difference is the main reason for consumption difference in China, so rapid economic growth and population income improvement in the future should ensure the long term prosperity of wine industry in China.
China is the world's fastest growing wine consumption market. Consumption level in the world's traditional consumer countries have remained flat in the last 10 years, with the Chinese market being an exception. China's wine sales continue to increase, leading to a stampede from global wine producers.
Research data from British research institute ISWR / DGR showed that by 2010, total global wine consumption will reach 240 million HL (100 L). Among them, Chinese wine consumption will reach 5.58 million HL. Experts have long estimated that from present to 2010, China will be the world's most active market with a 36% growth. Over the same period, total global consumption is expected to grow at only 9.15%.
Status quo of China's wine industry
China's wine industry entered a smooth development period in 2006. The industry maintained its fast growing trend, with revenue of US$1.7 billion, up 25.04% on pcp, and profit of US$180 million, up 18.4% on pcp. Wine output grew 14.1% from 434,000 KL in 2005 to 495,000 KL in 2006.
From Jan to May 2007, national wine output and sales income were up 15.3% and 18% on pcp respectively. The industry had maintained its high growth rate, average gross margin and profit before tax grew 1.6% and 18.4%. Although imported volume increased significantly, import of small package wine was still less than 7% of total domestic output.
The wine industry in China is more concentrated than the beer and distilled spirit industries. The 3 biggest brands Chang Yu, Great Wall and Dynasty control 50% market share and 67% industry profit share. The 3 brands have been expanding through multi-channels such as supermarkets, and reached dominant positions among consumers. So these top 3 leaders have been fully enjoying the benefits of industry growth.
Key aspects for developing China's wine industry
Grape supply. Wine brewing has long been called "70% ingredients and 30% techniques", which means grape ingredient largely determines the wine quality. Grape growing areas in China mainly concentrate in Shandong, Hebei, Ningxia and Xinjiang provinces. China's grape ingredient supply is relatively scarce, which has created a high entry barrier for the wine industry, so only companies with strong resources can achieve stable developments. Similar to international (such as French) wine development experience, China's wine companies are mostly located close to grape supply areas. Among the top 3 Chinese wine brands, Chang Yu has 71,000 acres of vineyard in Shandong Province and 30,000 acres in Ningxia Hui Autonomous Region. Chang Yu can satisfy 80% of its ingredient needs, being one of the most self-sufficient companies in China.
Control of sales channels. Chang Yu has been implementing a vertical distribution system since 2002, in order to address the previous problems of low income growth and high bad debt levels arising from powerful distributors. The vertical distribution system has broken the dominance of distributors and returned the control of channels to Chang Yu, achieving an effective result. The vertical distribution system breaks the control of sales terminals by large regional distributors, and instead sends regional representatives to major sales regions. It actually weakens the power of distributors and makes them smaller. As the system is perfecting, Chang Yu has basically achieved the control of terminal sales networks, with decreased account receivable outstanding days and improved sales growth rate.
Wine belongs to fast moving consumer goods, with little differentiation between product features, attributes and techniques. Therefore marketability and distribution channels have become key success factors, especially channels. Consumption channels in China are broadly divided into hotels/restaurants and retail chains. From industry statistics, restaurants capture 51% market share, while the other 49% belongs to retail channels. In the retail channel, 55% goes to supermarkets, while the remaining goes to convenience stores, specialty shops and independent food shops. Among the top 3 domestic brands, Great Wall and Dynasty use restaurant channels for over 55% of their products, while Chang Yu goes through retail markets for 55% of its products.
From the perspective of operating expenditures by the top 3 companies, they have all invested heavily in recent years. Their sales expense amounts to 60% of total industry sales expense, creating strong positions in channel areas, and proving the competition philosophy of "channel is king".
