Foreign beer and wine consumption is increasing significantly in China. In 2016, Chinese consumed 567.5 million liters of imported wine, with bottled wine leading the total imports, followed by bulk wines and sparkling wines, according to statistics from the China Association for Imports and Exports of Wine and Spirits. During the same period, beer imports grew by 18.7 percent in volume to 598.5 million liters.
The rise of global consumer culture in China and consumers’ increased desire for premium liquor has largely driven this growth. Rising disposable income, increased exposure to Western lifestyles, and growing distrust of domestic liquor are among other factors that have contributed to the changing trend.
Market entry considerations
Consumer behavior in China is decidedly different compared to Western markets. To be successful in China, it is therefore necessary for foreign companies to conduct in-depth market research, and understand the objectives and demands of the Chinese consumer, regional differences in consumption, and the internal dynamics of the market structure.
Identify the right market
The nature and make-up of regional markets varies across China. For instance, first tier cities along the east coast such as Beijing, Shanghai, Guangzhou, and Shenzhen have higher incomes, population, and a more Western lifestyle than western provinces. As a result, these regions occupy the largest share of the imported alcohol market in China.
However, with increasing penetration of foreign brands, first tier cities have begun to show signs of saturation and over-service, which has resulted in higher operational costs and stiff market competition amongst foreign brands. With economic expansion and changing lifestyles, entering lower tier markets has now become a more viable alternative for new entrants. Apart from lower setup and operating costs, lower tier markets also offer first-mover advantage that can help gain greater long-term market success.
The Danish brewer Carlsberg successfully implemented this strategy by prioritizing lower tier cities in 2002. Their market share in Western China is now more than 60 percent, where beer consumption is growing at 12 percent annually, compared with four to five percent nationally.
Localize to capitalize on changing tastes and preferences
China has seen a dramatic change in its social and cultural concept of alcohol consumption in recent times. Traditionally, it was customary to only drink alcohol during formal occasions and celebrations. This is no longer the case. “Exposure to Western culture and increasing expendable income means that consumers are drinking more and more for leisure; in fact, it is seen as an indicator of social status. As a result, the demand for premium brands has soared, especially amongst young brand conscious consumers in first tier cities”, said Kat Lim, Client Strategist of food and beverage brand consultancy, The Silk Initiative.
To capitalize this trend, Jacob’s Creek – Australia’s largest wine brand – tailored its brand image specifically for the Chinese market. It altered its packaging, which now includes labels with gold embossing, and charged a more premium price point. It has now established itself as a high quality, luxurious wine brand in the Chinese market.
Select a suitable distribution channel
On-trade channels such as hotels, restaurants, clubs, and bars, and off-trade channels including supermarkets, convenience stores, and grocery shops form key distribution channels for imported alcohol in China.
In terms of consumer reach, sales through different distribution channels vary across different regional markets. For instance, the share of on-premises sales is higher in eastern and southern coastal cities than inland regions. Foreign investors can gain information on suitable distribution channels by connecting with local agents and channelling their links in China.
e-Commerce is also rapidly emerging as an alternative channel for liquor brands to penetrate deeper into the Chinese market. It represents a cost effective, convenient, and trustworthy platform through which brands can directly connect with millions of users.
Reports indicate that online sales of alcohol beverages in China will double by 2020 as more consumers look for product information online before buying. For example, when purchasing wine, consumers like to have information on the grape varieties, the maturity, the makers and their history, and the production process in order to make an informed decision.
For the import of alcohol into China, exporters must work in collaboration with a local import entity that is in possession of a valid import business license, and personal and company customs and CIQ certificates. Once conditions are agreed upon, a contract can be signed with the Chinese import agent and registered with the General Administration of Quality Supervision (AQSIQ).
Then, the beverage for import must be labelled according to China’s food labelling standards, in this case those for pre-packaged foodstuffs and pre-packaged alcoholic beverages. Both the original and translated labels in Chinese are required, and a digital version of the Chinese label registered with the China Inspection and Quarantine (CIQ) on the first instance of import. After approval, the labels can be printed.
At customs, a country of origin certificate, health certificate, product ingredients list, product sales approval registration document, packing list, invoice, contract, and bills of lading will be required. Accuracy of information provided is important as any delay at customs may affect perishable goods.
Once customs receives the documents, customs will release the goods to the agent. Imported goods must comply with relevant standards, and once passed, the CIQ will pass a commodity inspection document to customs, which passed to the agent. Once received, the labels can be applied to the products by the importer.
Customs will then levy customs duties and other taxes, and will release a customs clearance document. At this point, the importer can collect the goods and proceed to deliver to the distributor.
Localization of alcohol manufacturing is an effective way to reduce costs and improve competition. This is achieved by circumnavigating import and shipping costs and warehouse rental, and making use of lower labor costs. It can also help to adjust products to the local market and lead to faster response times.
As exemplified by Carlsberg, the local production method is especially popular for the beer industry. China’s beer manufacturing market is regionally fragmented, with local producers dominating smaller markets. In recent years, it has been common for larger beer manufacturers to acquire smaller local manufacturers in order to improve their brand quality.
For these reasons, and because of strong support for domestic manufacturers, foreign manufacturers may find it hard to invest in the beer manufacturing segment. Therefore, joint ventures (JVs) and acquisitions are the best way to enter the Chinese market.
This case study shows the above procedural aspects for both import and manufacture of alcoholic beverages in China in practice.
A foreign company importing wine and producing cider in China formed a JV with a domestic company. It imported its wines in larger cities such as Shanghai and Guangzhou where they are more popular, while conducting its cider production in lower tier cities.
From this case, there were many considerations for the company’s operations. As the company entered into a JV with a local firm, it needed a dedicated JV agreement governing operation, financial, and legal aspects. It was also essential to make clear the responsibilities of both parties, and the distribution of profits.
Because the partners shared every aspect of their business, IP protection, including technology of product, recipe, brand, and other trade secrets, were of high importance. In cases similar to this, some overseas companies choose to keep the core of their key IP overseas, so that the local partner has no access to it.
As the company engaged in trading has a greater exposure to stock and inventory, it was imperative to put in place a competent internal controls (IC) system. The company also implemented an enterprise resource planning (ERP) system including financial and operational aspects, and for supply chain management purposes, in addition to a quarterly financial and IC review.
For trading for wholesale, both a food circulation license and a liquor license are required. In order to obtain these, a proper warehouse facility with standards kept to properly store the products must be used, and will be subject to inspection.
Such considerations explored here are essential for the smooth operation of import and production of alcoholic beverages in China, and should be executed by a professional service provider that understands the Chinese market and manufacturing environment.
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This article was co-authored by Dezan Shira & Associates and the Silk Initiative:
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The Silk Initiative is a business strategy and marketing mix innovation consultancy specializing in the food and beverage space. They provide a range of brand strategy, consumer insight, business intelligence and creative execution strategies to clients ranging from global food and beverage giants to SMEs. Need help making sense of the complexities of the China and Asia market? Contact them at email@example.com or visit www.thesilkinitiative.com.
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