MW Topic of the Week: China and Paper 4

Hello!
This week, we're diving into Paper 4: the business of wine. A reminder – I'm studying along with you (as are  and ), so below are my notes and analysis as a thought-starter to this conversation, not the key to the castle Slight smile Two out of the last three years' exams have included a focused question on the Chinese market, and examiners have noted that a good understanding of that market would benefit any P4 question.
 
2017 focused on the potential and risks for exporting to China as an export manager: You are Export Director of an established large wine company producing in excess of one million nine litre cases (standard case 12 bottles/750ml). How would you seek to capitalise on the potential of the growing Chinese market for imported wine? What are the risks and how can they be managed?  
 
2019 meanwhile took more of a Chinese consumer point of view, and the impact consumer preference has on the channel: How do wine consumers in mainland China decide what wine to buy and what are the implications of their choices for producers and distributors?
 
Fundamental to both is an understanding of:
  • Strengths of the market
  • How distribution works in China (national/regional)
  • How consumers learn about – and most importantly buy – wine (here, an understanding of direct-to-consumer/DTC and digital sales matters immensely)
  • The impact of taxes and trade deals on the wine market (e.g. As of Aug 2019: 93% tax on American wines imported into China re: the US trade war versus free trade agreements with Australia and Chile)
How would you tackle this question and define your scope? Do you have any statistics to share? Any specific experiences you personally have had to bring up as an examples? Hard numbers always appreciated if they can be shared in a public forum.
 
Here are some resources my study groups have pulled together; others always appreciated!
  • This is potentially a dumb question but does the new 93% tax include Exports to Hong Kong?

  • Not a dumb question! The Hong Kong-China situation is a fascinating one, and it's a huge driver for smuggling (and why border regions like Guangzhou are more difficult in terms of distribution). HK has 0% tax on wine (liquor is a different ballgame, at 100%), which is why it's such a strong wine market. 

    Read more from Debra Meiburg MW's 2018 analysis.

    Also interesting to read this report (2018) about how China is such a large export market for HK.

    Another quick note as to why I keep dating articles – this stuff is changing ALL OF THE TIME, so you have to have current statistics and numbers for this year's P4 exam. 

  • Another great resource is a look at the $50 million support package that the Australian government is investing in its two major markets – China and US – over a four year period: $1.2bn in exports from Oz to China, HK, and Macau; $432 mn in USA; total exports up 4% as of June 2019

    https://www.wineaustralia.com/whats-happening/export-and-regional-wine-support-package

  • A key aspect to consider is that in China, there is no three-tier system. To enter the China market, it's likely that an export director started with meeting a Chinese person/company called an "importer". That importer can import and sell wines to anybody in China - to wholesalers, to distributors, to retailers and direct to consumers. As an export director, it's necessary to identify the business nature, the business structure and the potential of the Chinese importer that help sell and promote your products.

    Regarding the potential of the market, it’s of course complicated because China is big and diverse. In MW essays, it’s important to use reliable information and data to back up the arguments, and also put some analysis and original thoughts. For example, when they say Australian wines are performing extremely well in the Chinese market nowadays, maybe it’s worth to consider what kind of Australian wines are doing well? Which Australian brands performed well? Where (in which cities/provinces) do they sell Australian wines that well in such a big country? Do people actually consume the wines for sensory pleasure, or do many people still buy most Australian wines for gifting purposes (maybe relevant to the 2019 question)?

    Now it's 93% tax on American wines to mainland China. But will it slow down the importation of ultra-premium American wines to China?

  • I visited a winery in Napa Valley this past weekend that translated all of their wine club and other literature available in Mandarin. By 11am a family was in the tasting room with the 20-something year old daughter saying to the tasting room associate that they were visiting from China. I was not expecting to see wine tourism from so far away, but I guess it still occurs.

  • Thank you ! Can either you or explain Chinese gifting culture and its recent changes? Is there a way to statistically separate wines purchased as gifts and those purchased for consumption? In other words, is this tracked in any way?

  • Hi Kelli! Unfortunately, there is no data on this. China works differently. Even if you get some data in the wine trade, some of them are not very reliable. It's more about understanding the culture (see the movie Red Obsession, also, the recently Obama sponsored movie American factory can give people some ideas on the Chinese working culture). Since it's so complicated, I would actually avoid answering China related topics in the exam, even if I'm a native Chinese... Either I cannot give enough data and examples, or I may write too much on certain aspects and lose the focus and structure.

  • Hi All! Newly a Stage 1 MW student as of last Monday, and hoping to join the conversation here weekly. Thank you , , and for bringing your studies public!!

    Very happy you chose this topic. On my entrance exam, I was given the 2017 question as an option (which I quickly ruled out, and opted for one on vine pests and diseases). I want to say, the question they asked me, though, was about a 500,000 case/year brand. Which leads me to one of my questions here. How should that portion of the question inform your response? How might a a 1 million vs half million case/year vs much smaller enterprise strategize differently when it comes to the Chinese market? How would that affect importation and distribution channels? DTC sales/target markets? With one million cases/year being high production, would you make any assumptions about your product itself? Would you presume you have lower priced wines that could reach a larger audience?

    Obviously completely new to the program here, and just getting my feet wet - but questions like these terrify me! Excited to see you breaking them down here.

  • Hi! Thanks for jumping in! I think you're getting a little into the weeds here. A 500,000 case/year brand is going to pursue similar strategies in many ways to 1 million (versus a 8,000 case brand, like one I represent, which is going to have more of a niche approach and without the deep pockets of larger brands). Price point matters as well, as well as the fact that, while you'd want to increase your presence in a market with such potential, you're not selling 1 million cases in one market. So for the purposes of answering your other questions, I'm going to speak about volume brands and niche brands. 

    1. How should that portion of the question inform your response? With one million cases/year being high production, would you make any assumptions about your product itself? Would you presume you have lower priced wines that could reach a larger audience? Absolutely. There's likely to be a broad range of SKUs in such a portfolio, with drivers at low price points. Given standard tax rates of about 48% (this includes import duties/VAT/consumption taxes, excluding the countries I've explicitly highlighted), volume brands with lower price points may have the ability to have a broader reach to the growing population of middle class drinkers looking for wines to consume in a daily capacity (v. gifting).

    2. How might a a 1 million vs half million case/year vs much smaller enterprise strategize differently when it comes to the Chinese market? How would that affect importation and distribution channels? DTC sales/target markets? Here, I'd bring into the discussion an understanding of national (Summergate) v. regional (RubyRed) distribution partners, as well as show an awareness of how product for import brands moves: 67% on premise; 32% off premise with half of that in supermarkets, important for a volume brand; the rest online via large portals like Alibaba and Tmall where you can, with marketing dollars that a volume brand would likely have pay for a digital storefront (Yellowtail has done this for example), to other smaller sites like 1919.cn for niche brands – DTC has a broader definition in this case than direct from winery's point, there's no 3-tier system in China.

    You could also choose to identify within your scope your point of origin as export manager, bringing in statistics about what sells well (98% of sales are red wines; 45% imported wines are French, with travel driving increased interest about wines of other countries like Italy where sales of Piedmont and Tuscan wines dominate).

    I'll dive into my approach at the end of the week, but I think a SWOT structure is a strong way of approaching this kind of question. 

  • Enotourism is a huge driver worldwide; I work a lot in Italy, and the major groups from China and Japan are massive drivers of this side of the business. 

  • I don't know if would agree with this, but with some of the brands I work with, which are more niche than volume (16,000 cases v. 1 million), the price points are higher and thus a lot of our marketing work is for premium placements and from a retail perspective with gifting. I think the question helps with defining your scope here – a 1 million case brand is going to be massively volume-oriented and thus geared more toward consumption.

  • I totally agree with you Sarah. It's definitely a large volume handling that the question is about. But is it still not that straight-forward in China in terms of how they sell and how consumers perceive the mass volume brands. That's only one of the many things that make the Chinese market complicated and fascinating.

    Large volume brands form the US is definitely losing their competitiveness in the Chinese market. Meanwhile, the life of large-volume Australian brands exported to China seems to be so easy. Analyzing these things should help with the answers and the examples to the question.

  • Great point. I passed over this question immediately in the exam as it is hyper specific and you must be on point with reliable data. From a candidate position these are dangerous questions. I do love the idea (and greatly appreciate the access created here) to add to global examples from the Chinese market perspective. They will show insight and relevancy. Great stuff!

  • Same. I was like, um, yeah... no. I wouldn't be surprised to see that most students didn't choose this question when the examiner's report comes out. It seems impossible to answer with just anecdotal information rather than hard data and figures, marketing case studies, etc. and yet, other than the excellent Wine Australia export reports, there doesn't seem to be much out there. And so many of the numbers and stats conflict. It's hard to know what's correct.

    That being said, the USDA's GAIN reports often have some useful information too. This is a very good recent report on Chinese wine production that wine tourism that has some good background into on the growing wine culture in general:

    https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Lessons%20Learned%20from%20China%e2%80%99s%20Wine%20Producing%20Regions_Beijing%20ATO_China%20-%20Peoples%20Republic%20of_11-20-2018.pdf