Enter the Flagon

With its wine consumption increasing by almost 17% annually, China has become a hot topic of industry conversation. Kelsey van Musschenbroek asks how foreign wine companies can tap the potential

Canadean’s team in China, living in Beijing and Shanghai, are young, well-educated, ambitious and aspirational. Yet, none of them likes wine. They may not be a representative focus group, but their taste for wine (or lack of it) is an indicative measure of the job that needs to be done if the huge volumes that investors anticipate from China are ever to be more than a strategic day-dream.

What is it about China that is again attracting international wine companies from Castel to Constellation? Basically, the same old thing – its huge population. Of course, the Chinese economy has been growing faster than anyone thought, and the communist government and its agencies are learning the virtues of controlled capitalism in a way that would embarrass many a European social democrat. But fundamentally it is the thought of 1.3 billion potential consumers that is the real magnet.

Per capita statistics can be meaningless, so it’s worth taking a closer look at the underlying data that makes up the largest population in the world, because even a superficial analysis suggests that more than 80% of the population lies outside any meaningful concept of “consumer market” as understood in the West.

Officially, China is divided into five main metropolitan areas (Shanghai, Beijing, Tianjin, Guanzhou and Chongqing), 31 Urban 1 areas (capital and large cities), 199 Urban 2 areas (other cities and counties) and 427 towns – about 110 of which have populations of less than 100,000, the smallest being some 15,000.

Out of reach
Of these 662 “urban” locations the aggregate population is 224 million, or 17% of China’s total. This implies that more than 1bn people live in very small towns, villages and more remote rural areas and can be taken out of any marketing budget for years to come.

Furthermore, about 28% of this urban population live in the 427 towns and villages and are hardly likely to trigger an explosion in wine consumption. In fact, these are the sort of lower-end towns which other fast-moving consumer goods companies such as Coca-Cola and Unilever are trying to unlock by pricing and sizing down products to very low (affordable) levels.

That leaves nearly 160m people within the top three tiers of China’s urban population as a potential wine market, with males the most realistic target. There have been numerous recent consumer studies indicating that it is mainly aspirational men, working in the major conurbations, who are the country’s potential wine drinkers. When compared with China’s total population of 1.3bn, these 90m men are a far cry from the mind-boggling numbers so often bandied about when looking at China’s consumer potential.

The growth story
So the real story about wine in China is more about growth than it is about  population. Wine consumption is still tiny: depending on which population figures you care to look at, per capita statistics can be made to vary from 0.3 litres to more than 2.7l – a more realistic number which relates to the top three tiers of the urban population. This compares with about 9l per head for the US.

In this context, it is worth remembering that the two most important beverages in China are tea (50bn l) and beer (30bn l). Soft drinks come fairly close behind (23bn l), and milk and yoghurt drinks are catching on fast (8bn l, increasing at about 15% a year) and have long overtaken more traditional soy and rice drinks.

Wine consumption is just 440m litres but growing fast. Having increased at 14% a year between 2000-04, wine consumption to the end of 2005 was expected to reach 50m nine-litre cases – an increase of nearly 17%. To put this into perspective, China’s wine consumption in 2000 was 13% lower than the Netherlands’. By 2004 it
was 55% higher.

A domestic business
Although the reduction in import duties from 65% (according to value) to 14% in January 2004 triggered a 47% leap in imports that year, followed by another 21% increase in 2005, imported bottled wines still have a mere 2% share. Wine in China remains a domestic business and is surprisingly concentrated. Just three wine companies dominate the industry: Great Wall/COFCO, Chang Yu, and Wang Chao (Dynasty), with a combined market share of 52%.

There are estimated to be 450 wineries in China, of which 118 are officially classed as large and medium sized. The Shanghai Securities News recently reported that by the end of the third quarter of 2005, 31 of those were loss-making – the overall loss being RMB110.6m (£7.9m), a year-on-year increase of RMB48m (£3.4m). However, this was in the context of a 45% jump in total sales revenue for the wine industry to nearly RMB7.4bn (£530m). More intense price competition kept the rise in overall operating profits to less than 34% at RMB850m (£61m) – still a fairly respectable 11% operating margin. However, cash profit per tonne was up by less than 18% pre-tax at RMB3.022bn (£216m).

According to the national Alcoholic Drinks Industry Association, the annual output of China’s wine sector is expected to reach 800,000 tonnes (87m cases) by 2010, a projection which anticipates a continuation of current high double-digit growth trends.

Where the grapes are
China has 300,000 hectares of grape growing areas, but only 20% are planted with vines for wine making.
Tonghua (Jilin province) – The region produces 50,000 tonnes annually of predominantly V.amurensis and has increased its area under vine by 8% since 2000 to 4,500ha. The Changbaishan and Tonghua wine companies are

based here.
Bohai Gulf (includes Hebei province and Shandong province) – With 16,000ha under vine, this is China’s largest grape production area. Varieties include Chardonnay, Riesling, Cabernet Franc, Cabernet Gernischt, Merlot and Carignan. The companies Chang Yu, Dynasty and Great Wall are based here.
Northwest of Hebei (Huailai and Zhulu) – This hilly region of 7,600ha mainly produces Cabernet Sauvignon, Merlot and white wine grapes.
Northwest China (Shanxi province) – A mountainous area of 2,000ha which produces Chardonnay, Cabernet Sauvignon and Merlot.
Yinchuan (Ningxia Hui Autonomous Region) – This region has increased its area under vine by 10% since 2000 to 2,800ha. The Wangquanying, Guangxia, Minhua and Yuma wine companies are based here.
Gansu province – 1,800ha of Merlot, Pinot Noir and Chardonnay.
Turfan Basin (Xinjiang province) – 6,500ha of Cabernet Sauvignon, Merlot, Cabernet Franc, Syrah, Grenache.
Shihezi (north Xinjiang province) – The region has increased its area under vine since 2000 by 10% to 12,000ha, mainly planted to Cabernet Sauvignon, Merlot, Chardonnay and other white wine grapes. Suntime, the largest wine company in northwest China, is based in this region.
Mile County (Yunnan province) – 2,400ha of Cabernet Sauvignon and Merlot, produced mainly by Yunan Red, the area’s leading wine company.
Yellow River (Anhui and Henan province) – 4,000ha under vine.

Leading companies
The state-owned COFCO (China Cereals, Oils & Foodstuffs Corp) owns Hua Xia Great Wall Co. Ltd. and Sha Cheng Great Wall Co. Ltd., as well as 60% in Yan Tai Great Wall Co. Ltd. (the remaining 40% is held by private investors). All three companies can use the Great Wall brand for their wines, and it this umbrella brand which is China’s market leader.

The Chang Yu Group is almost fully privatised, with only 12% remaining in state hands. In October 2004, 45% was sold to privately held Yuhua Investments, and, in February 2005, another 33% was sold to Illva Soronno of Italy, with 10% going to the International Finance Corporation in Washington DC. In turn, the Chang Yu Group owns nearly 54% of the Shenzen-listed Yantai Chang Yu Pioneer Wine Co., with the remaining shares being openly traded. Chang Yu’s compound annual growth rate has reportedly been 12% for the past 10 years, and Illva Saronno has already expressed a wish to increase its stake in the parent company. How this will be reconciled with Chang Yu Pioneer’s five-year-old joint venture with Castel of France – Chateau Changyu-Castel – remains to be seen.

The Wang Chao (Dynasty) Wine Co was established as a Sino-French joint venture with Rémy Cointreau in 1980 (Rémy owns a 25% stake). In January 2005 a proportion of Dynasty’s shares were listed on the Hong Kong Stock Exchange – the issue was oversubscribed 625 times.

Other key players are Suntime, the largest winery in west China, Yantai Weilong Grape Wine Co, as well as Grace Vineyard and Bodega Langes.

Surveying the market
A European palate might expect Chinese food to reflect a preference for white wines; traditional rice wine is also pale in colour, as are the oceans of local beer. But nothing could be further from the truth; 94% of wine drunk in China is red, compared with 70% in Spain, normally regarded as the world’s premier red wine market.
Canadean’s recent report, Still Wine in China, tracks the volumes of 38 brands, of which the top 10 are Chinese and

account for nearly 54% of the market – the equivalent figure for the US market is only 38%. The third- and fourth-ranked brands are Weilong and Dynasty, with the former adopting an aggressive pricing strategy and seemingly about to surge ahead in the rankings.

Meanwhile, China’s crowded imported wine segment includes many of the rising global brands such as Mondavi, Jacob’s Creek, Wolf Blass, Gallo and Rosemount. French wines lead this small segment, followed by US wines, then Australian, Chilean, and Spanish.

As might be expected, imported wines tend to be at the premium end of the price spectrum. Supermarket price checks on 750ml bottles found Louis Latour Burgundies at RMB170–RMB200 (£12-£14), with the Jacob’s Creek range averaging RMB104 (£7.50), while most Chinese wines cost from RMB14 to RMB35 (£1 to £2.50). Local wines in one-litre bottles were even cheaper, from RMB11 (80p). More surprising, however, were some of the prices being asked for premium Chinese wines: a Chang Yu 1992 Cabernet Gernischt at RMB259 (£18.50) and a Great Wall red at RMB376 (£27).

Applying the Canadean global price segmentation model to China shows that inexpensive wines (less than £2.90/l equivalent) account for 60% of the market, while super-premium (more than £11.50/l equivalent) represent less than 2%.

As is increasingly the case in other new wine producing countries, packaging is beginning to move away from the 750ml non-refillable glass bottle. Latest Canadean estimates suggest that the standard bottle has seen its market share eroding, albeit slightly, from 94% five years ago to less than 90% in 2005, as smaller and larger sizes of glass bottle find regular niches. Also, there are early signs that one- and two-litre PET plastic bottles are starting to grow quickly, but from a very small base.

Significantly, Owens-Illinois, the world’s largest glass bottle manufacturer, has just announced the acquisition of its fourth production facility in China, with the US$9 million (£5.2m) purchase of Tianjin New World Glass Containers, 120km southeast of Beijing. O-I already has factories in Guanzhou, Shanghai and Wuhan, making bottles not just for beer, but increasingly wine. Its continuing investment in China is a clear endorsement for the future of the country’s wine industry.  db

Kelsey van Musschenbroek is chairman of Canadean, the leading global beverage research specialists. Canadean’s Wine Service covers 22 countries, including China. For more information please contact Kevin Baker on + 44 (0) 1256 394220 or e-mail kevin.baker@canadean.com