Introduction
Ever since the founding of the People's Republic, China has been under the Communist rule. During the Mao era and the cultural revolution, China severely restricted its foreign trade and the Communist Party of China exercised tight controls of the economic development. In 1972, President Nixon of United States visited China. In the middle of the Shanghai Communique, there were two sentences on economic issues: “Both sides view bilateral trade as another area from which mutual benefit can be derived, and agreed that economic relations based on equality and mutual benefit are in the interest of the peoples of the two countries". Based on this contract, China slowly opened the gate and allowed the market transactions with other countries. Encouraged by Nixon's positive attitude, western counties provided loan, investment and new technology to China. Many Chinese students used their knowledge and training from their studied abroad, and established a basic system for the fast economic development in the next decades. It is also the starting point for China to joint World Trade Organization (WTO).
Chinese economic reform began in December 1978. It was led by Deng Xiaoping and other reformists within the Communist Party of China (CPC). Private businesses were allowed to operate for the first time since the Communist takeover, and they gradually began to make up a greater percentage of industrial output. The country was opened to foreign investment for the first time since the Kuomintang era. Since 1984, controls of private businesses and government intervention by the CPC continued to decrease, and there was small-scale privatization of state enterprises which had become inevitable. In 1992, Deng also reopened the Shanghai Stock Exchange closed by Mao 40 years earlier and privatizations began to accelerate. In mid-1990's, the private sector surpassed the state in share of the GDP for the first time. Despite Deng's death in 1997, same year that Hong Kong was returned to China, reforms continued under successors, Jiang Zemin and Zhu Rongji , both ardent reformers. Jiang and Zhu reduced tariffs, trade barriers and regulations, reformed the banking system, dismantled much of the Mao-era social welfare system, forced the People's Liberation Army to divest itself of military-run businesses, reduced inflation, and joined the WTO in 2001. In 2005, China was able to surpass Japan as the largest economy in Asia. Economists estimate China's GDP growth from 1978 to 2013 at between 9.5% to around 11.5% a year (Herston, Alan et al. 2008, "China and Development economics", in Brandt, Loren; Rawski, G. Thomas, China's Great Transformation, Cambridge: Cambridge university press).
The Chinese drinks market
Since China entered the WTO, the CPC has implemented the policies of the removal of tariff barriers and the liberalization of imports of goods, and this presented a great opportunity for the sales of imported liquor. Meanwhile, since 2000, the Chinese economy has experienced rapid development, creating a booming domestic market and increased the number of wealthy class. This results in the huge price and volume growth in China's luxury goods sales. Imported wines and spirits are still considered luxury goods and therefore also benefit from this growth.
For the wine market. According to"The Wine and Spirits Market in Asia-Pacific and Worldwide with Prospects Until 2017", VINEXPO), China will be the largest wine importing country in Asia by 2017, and the Hong Kong Trade Development Council projects that Mainland China alone will import USD 870 million in 2017. Wine importers have invested a lot of advanced technology and capital to achieve substantial market share in the Chinese market. Now China is the biggest market for Bordeaux imports of Italian wine doubled in value in 2010 (Italian Central Statistics Institute), and China imported 260 million liters of wine in 2010 with a year-to-year growth rate of 58% (China Custom data).
As a wine-producing country, China produced about 85ML per year in the 1970's. China wine production increased from 437.3 ML to 810 ML (85%) from 1996 to 2009. And in 2011 the total wine production further increased to 1450 ML. The total market grew 58% between 1996 and 2001, 98.8 % between 2001 and 2006, and 192% between 2006 and 2011. With strong agricultural potential and a labour force of 795.5 million, China has a huge economic advantage in wine production, as there is an abundance of potential labourers at low wages. Government policies focus on enhancing technical knowledge and improving the capabilities. Private sector capital investments in the sector are assured at US$3.3 trillions of dollars of Chinese reserves available in the private and sovereign financial holdings.
For the spirits market, Spirits dominates the beverage market with market share that was 7.2 times bigger [than the wines in 2011 (VINEXPO / IWSR 2012, 2013, 2014). Spirits sales have grown by 250% in China over the last 10 years. Per capita alcohol consumption in China is increasing rapidly, suggesting that growth in the size of the Chinese spirits market is outstripping both the economic and population growth. Baijiu & rice wine are by far the most popular alcoholic drinks in China with 90% of the spirits market, while imported spirits are still only a fraction of the total market. Cognac & blended scotch are the biggest selling imported spirits (Drinking to the Future: Trends in the Spirits Industry, IPSOS, March 2013).
China is the largest consumer of spirits in the world with shares of almost 40% of the total worldwide spirits consumed at 1.201 billion 9-litre cases in 2012. Between 2008 and 2012, the Chinese consumption of spirits rose by 82.7%, with growth mainly focused on locally produced spirits. Between 2013 and 2017, the VINEXPO/ IWSR study forecasts further growth in Chinese spirits consumption but at a slower rate of 8.69%.
In 2012 total sales of imported spirits in China were 250% higher than 2001 and 16% higher than 2011 – this is faster growth than in any other market. The Chinese use premium spirits brands to flaunt wealth as a luxuries purchase also push up the price and consumption (Drinking to the Future: Trends in the Spirits Industry, IPSOS, March 2013). China is now the largest Brandy/Cognac/Armagnac market in the world by value, 70% larger than the USA, and is still growing fast. No doubt, China attracts all the spirits brands and competitions are ferocious now.
Opportunities in China
1. Consumers’ need is increasing.
China will be the largest wine importing country and will import USD 870 million in Asia by 2017, according to the Hong Kong Trade Development Council (HKTDC). Now China is the world’s 2nd largest and Asia’s largest economy ("China's Foreign-Exchange Reserves Surge, Exceeding $2 Trillion". Bloomberg L.P. 15 July 2009. Retrieved 19 July 2010.) surpassing Japan in the 2nd quarter of 2010. Younger generation with increased earning power and westernized taste in food and beverages is changing the consumer landscape. (P44, WSET® Level 4 Diploma in Wines and Spirits Unit 1: The Global Business of Alcoholic Beverages, August 2013, www.WSETglobal.com)
In the Wine market, the worldwide wine consumption in 2010 was 7L/year per person on average, but only 0.5L/year per person in China. This means a lot of potential market growth. Together with the expected boom of middle class in the next decade, expansion of the wine knowledge by the consumer base and the awareness of the potential health benefit of wine to an increasingly health conscious population the lower alcohol content wine expect to grow and have bigger portion in total alcohol consumer market in the near future.
Representing 14 percent of China’s alcoholic beverage sales and expanding at a compound annual growth rate (CAGR) of 20 percent over the past five years, the Chinese wine market, 85 percent of which is red wine is commanding the attention of the world’s exporters. The aftermath of the global financial crisis, where spending on wine in traditional markets slowed substantially, has only sharpened the wine world’s focus on China. France continues to be the lead exporter to China, representing 44 percent of imported bottled wine by volume followed by Australia at over 20 percent, growing at a CAGR of 67 percent over the past five years.
Furthermore, according to VINEXPO/IWSR 2013, wine represents just 5% of total alcohol consumption in China. It is estimated that 90% to 95% of the wine drunk in China is of domestic production, this means the growth of national wine production and international wine imports for the hungry China wine market.
In the Spirits market, Baijiou dominates the spirits market in China both in production and consumption. With the traditional Baijiou market actively support the industry, other imported spirits also share the growing market, especially in young generation.(P30, Cognac & Brandy, The Millionaires’ Club, 2012 June).
According to the table#2, Baijiou will continue to dominate the China spirits market at about 99% till 2016. We also see the speedy growth of Cognac/Armagnac, could means lots of potential of imported spirits after 2016.
2. Improving production technology backed by the drinks industry.
3. Extending and growing of the diverse support of the drinks industry.
4. Wine market expansion from #1 and #2 tier cities to other local cities.
5. Local government encouragement of grape wine consumption rather than rice-based Baijiu make sure your spelling is consistent consumption.
In the late 1980s and 1990s, the PRC government took measures to promote responsible and healthier drinking habits among Chinese consumers and reserve more grain for food consumption by encouraging fruit-based alcohol instead of grain-based alcohol. In the late 1990s, the government also increased the tax rate for imported spirits, limited the import of high-strength alcohol into China, and refused to extend new production licenses for domestic and foreign spirits manufacturers. These lead to a decline in China's spirits market during that period. China's 2001 WTO entry led to reduced import duties on foreign alcohol, together with the rising consumer demand led to increased imports and sales of imported spirits and wine. (Opportunities in China’s Alcoholic Beverage Market, China Business Review, Saritha Pingali, http://www.chinabusinessreview.com/opportunities-in-chinas-alcoholic-beverage-market/)
Challenges in China
1. Foundation of industry still need greater improvement.
2. Food safety and control is an important concern.
With the improvement of living standards and health awareness, food quality and safety issues become the focus of attention. Factors affecting the quality of the wine include the cultivation, brewing/vinification, storage, and packaging. Between 2006 and 2010, the domestic producers have a stable source of raw materials, the number of enterprises and the quality and safety management system is still small, there were doubts about the wine quality and safety. China "Food Safety Law", published in February 2013, defines rules that govern the production control of beverage industries. Over the past decades, there have been several food safety incidents in China. In addition, China lacks many of the critical components that contribute to safe, quality driven manufacturing environments common in the Western economies such as an independent legal system and a robust civil society that represents the interests of consumers and manufacturers. China is further challenged by decentralized manufacturing and distribution systems and weak government capacity at local levels. Despite these challenges, high-level political attention in both China and importing countries suggests that mutually agreeable safety regimes are possible and the trend towards expanding international trade in food products is probable.
3. Globalization influences that result in excess supply of foreign wine into China.
In 2012, local wine accounted for 70 percent of the Chinese wine market. Market globalization, making Western liquor sales increasing year by year, impacting the local wine industry. Taking advantages in international capital funds, technology, products and other aspects, foreign producers gain quick access to the Chinese wine market. Meanwhile, with the lowering of import tariffs on wine, wine imports increased year by year, accounting for an increasing proportion of China's wine sales further impact the local wine industry. Strengthening competition of cheap imported wine at the low end segment will be the an unavoidable issue in next decade. Fierce competition is expected in the following 3-5 years and 2nd tier domestic wine brands with short history and less brand equity will have difficulty competing with entry-level imported wines.
Conclusion and personal commentary
1. Wine and spirits made in China are in large quantities but the quality still has considerable room for further improvement.
2. The market information transparency, knowledge spread to popularity.
3. Marketing devotion will be the key of the sales for China beverage market.