China, The Next Big Thing In The Wine World??

Although China has had a high profile for several years already, it can be argued as to whether her true impact is yet to be felt in the world of wine. With a population of 1.3 billion and a super charged economy that has grown, and is expected to continue growing, at an extremely fast pace, it is no wonder that those with a product to sell have already thought of her as a potential buyer. Beyond demographics and economics, we will review key wine related factors to demonstrate that China has only begun to make itself felt and she is indeed the next big thing in the world of wine.

It is estimated that China’s middle class has rapidly expanded to between 200 and 300 million citizens within the past 20 years. The average yearly income for these individual is evaluated at US$4,000 per capita. Although well below standards of developed nations growth expected to continue for the foreseeable future. With time this economic growth will have an knock on effect that will improve income levels bringing them into line with the western world.

China is already the 5th largest wine consumer in the world yet, per capita, wine consumption is very low at 0.3L. While this is expected to grow by 25% from 2009 to 2012, it now represents only about 5% of country’s total alcohol beverage consumption. The market is currently dominated by rice wine, largely considered threat to food security and therefore social stability. The Chinese government is now driving efforts to lower its consumption and is highly encouraging the grape wine industry to replace it as the alcoholic beverage of choice therefore, increasing its market share.

Distribution channels, however, are still inadequate in the supply the market. Networks are complex, there is a lack of reliable storage, and product knowledge is generally low. By far the largest proportion of wine is now sold in the three so-called “first-tier cities” of Beijing, Shanghai, Guangzhou. Some market penetration has occurred in second-tier cities.. Combined this accounts for a population of over 4 million. Very little wine is consumed, however,in the third-tier cities and country side where the bulk of the population lives.

Within the wine consumption itself, there are signs of market polarization and immaturity. Wine purchases are now highly concentrated around the two important annual holidays of mid-autumn festival and the spring lunar New Year. This suggesting that wine in China is still perceived as a gift-giving opportunity or a drink for special occasions. Eighty percent of the wine sold is red mainly due to its perceived health benefits. 90% of the product is sourced from domestic production. This is mainly driven by price. Of China’s imports, above 50% comes from France and Australia.

China is already the world’s 6th largest wine producer, mainly imported bulk wines. The country is also the world’s 5th largest area under vines and the only top country in the top five to be actively increasing planting.

Of more than 400 wineries operating in China, the four largest dominate the market with a combined market share of over 50%. This is a further sign of market polarization. Few, however, emphasize quality and sales are driven by price. Largely lacking technical knowledge and a clear understanding of the various territories, China is now investing huge resources to develop capabilities and expertise in order to continue increasing production and quality.

Two wineries in particular, Grace Vineyards and Silver Heights, have attracted international attention and have put the world on notice for China’s potential to produce wine of high quality.

Further recognizing China’s potential, international wine concerns have established joint ventures in the country. Leading the way are Torres, Groupe Castel, Pernod Ricard, Sella & Mosca, and even Chateau Lafite.

Hong Kong
Since canceling import duties on wine in 2008, Hong Kong has become a powerhouse with dramatic effect on the wine trade in China. At just over 3L, Hong Kong’s wine consumption per capita is Asia’s largest . It is also the regions most sophisticated.

Recognizing Hong Kong as an important place to do business with China, several of the world’s most important wine merchants have established operations in Hong Kong . Farr Vintners, Berry Brothers, and Bordeaux Index are already leading the way.

The auction market has boomed and by 2010, it is estimated that Hong Kong will become the world’s largest Fine Wine Auction market. This is largely driven by Chinese purchases. In the last two years, Sotheby’s, Zachy’s, Acker Merrall, and Bonham’s have all established operations on the territory, further demonstrating the importance of being close to the Chinese market.

Other Factors
The influence of China in the world of wine is not limited to territory. Indeed, the massive economic growth has implications on markets abroad as China is also looking to purchase wine operations abroad to satisfy growing domestic needs. Over the past years, a large Chinese food company has shown interest in acquiring Foster’s wine division, Dynasty, and Great Wall, China’s largest wine operations have looked to buy vineyards in Australia, New Zealand, Chile, and other countries.

Despite current figures being large, China’s wine market has barely opened up. What is active is characterized by polarization and immaturity. As the affluence of the middle class increases and the professionalism of distribution channels improves, China is bound, not only to dramatically increase consumption, but also to adopt new habits and experiment with greater selection. This offers tremendous opportunities in all sectors of the industry. As China improves technical expertise and understanding of the available territory the country will reduce the reliance on bulk wine imports and eventually have the ability to export wine. The influence is not bound to borders and China is set to have a huge impact on the world of wine.

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