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  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!
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  • Thanks so much everyone! Agreed, this is a super specific question, but I chose it because I think it's important to consider China given its market potential for any P4 paper, and figured why not just dive in the deep end! Again, many of these aspects can be utilized in other discussion (e.g. the strength of the digital and DTC market in China for consumer-oriented questions). And for privacy purposes, I've not included some specific examples I've received from brand directors as that's proprietary data and this is a public forum, but hopefully this provides some thoughts starters and resources. 

    So to wrap up the week's discussion: Given that these are both essentially supply chain questions, I'd likely tackle them in similar ways, but to be illustrative, here goes my attempt at an intro and outline for the question from 2017. I've taken a SWOT approach from an organizational POV. Looking forward to any additional feedback!

    - Sarah

    Introduction

    While wine consumption in most Western countries is leveling out, China has again grabbed the world’s attention with the high growth of its wine market. Wine exporting countries such as France, Australia, Chile, Italy, Spain, US, and South Africa have had a strong presence in China for years, and while the market is still underdeveloped, it presents opportunities for long-term growth, thus presenting brands with undeniable benefits once they enter the market. However, in order to do so effectively, it is crucial to understand the routes to market, customers and their buying habits, risks. This essay will provide an overview of the strengths and weaknesses of the Chinese market, as well as opportunities for and threats to success for imported wine brands in the market.    

    Strengths – The State of the Market 

    • World’s largest population (1.4B by 2020) and second largest economy
    • Total alcohol consumption on the rise (+21.6% between 2009 and 2014)
    • 2019: wine market expected to be worth almost USD$70B 
    • Growing middle class with disposable income (~48M upper middle-class drinkers): Savvier, more educated, well-traveled, with a greater interest in/demand for imported wine
    • Long-term growth: 89% of imported wine drinkers are between 25 and 55
    • Established import/distribution agents (national like Summergate; smaller regional players like Ruby Red)
      • On-premise leads: 67% of total market volume for imports
      • Off-premise: 32% (Supermarkets: 17%; Specialty retail: 15%)
      • Rising importance of digital to be discussed further in Opportunities

    Weaknesses 

    • Red wine dominates preferences (98%) – could also be an opportunity
    • Inefficiency and quality control issues within distribution networks (can lack climate-controlled storage, refrigerated trucks for shipping)
    • Bureaucracy:
      • Customs issues (find a port that clears a small portion of your wine before sending a pallet; then always use that port)
      • Batch labelling – CIQ (China Entry-Exit Inspection and Quarantine Bureau) considers every harvest a different batch and thus a winery must reapply with each new vintage even if label is otherwise the same
    • Import duties/VAT/consumption taxes amount to 48%
    • Language and cultural barriers

    Opportunities 

    • Digital/DTC/e-commerce: 21MM online wine buyers according to a 2017 WSET study
    • Opportunity to leverage digital platforms outside of the fragmented distribution network (but must invest in building digital presence in channels like Weibo and WeChat)
    • Large multi-product online platforms (think Amazon): Tmall/Alibaba and JingDong– both brands and shops set up e-storefronts (from YellowTail to Penfold’s, Lafite-Rothschild) 
    • Specialty wine sites: 1919.cn (online storefront, also operates 1,500 offline stores in 500 cities across China); Vinehoo styles itself as a social network for wine connoisseurs as much as a B2C wine e-commerce play. As a result, there are features available on Vinehoo such as “Flash Purchases,” in which wine consumers can team up to get the best possible price on a wine purchase.  
    • Importance of peer reviews/social networks and celebrity endorsements
    • Physical Presence: tasting rooms, sales outlets in major cities, Joint Ventures with a Chinese business partner, employing Chinese native-speaking and wine-trained staff – offers an ability to penetrate the market more intimately
    • Wine Appreciation Courses: alternative to sommelier or WSET courses, it’s more popular to align with the palate of the consumer and provide more information about their preferences (not looking for certification)  

    Threats 

    • Counterfeiting and Smuggling
      • Counterfeiting an issue for well-known brands/weak intellectual property laws (especially affects highly valued wines like Bordeaux and Burgundy)
      • Smuggling from Hong Kong to Mainland, or clients having private cellars in Hong Kong (small importers may try to focus on niche wine hard to get/education on importance of shipping the wine in the best condition)
    • Trade wars (e.g. US and China)
    • Market saturation will one day be a factor, and there’s also a growing premiumization of the domestic production (AoYun/LVMH making wine to be sold at $300/bottle) 
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