A summary of two recent presentations:
Are you ready to ENTER THE DRAGON hosted by Australian Wine and Brandy Corporation and Austrade
and
EXPORTING TO THE US by Josh Raynolds , US wine writer, and judge at Royal Melbourne Wine Show Presented to the VWIA Industry Conference 2007
Summary prepared by:
JAMES OMOND PRINCIPAL, OMOND & CO
7 MartinStreet, South Melbourne Victoria 3205 Tel + 61 (0) 3 9682 6688 Fax + 61 (0) 3 9682 6466 [email protected]
The following are my summaries of (and personal commentaries on) these presentations which were held on 31 st July 2007 and 23 rd July 2007 respectively.
Any errors will be no doubt due to my mistake, and I apologise to the presenters for any incorrect representation of what they said. ARE YOU READY TO ENTER THE DRAGON? Hosted by Australian Wine and Brandy Corporation and Austrade
Melbourne, 31 st July 2007
Presented by:
• Anthony Davie - Managing Director Asia/NZ, Foster's Australia • Ross Brown – CEO, Brown Brothers • Campbell Thompson - Senior Associate, Beijing Consulting Group (BCG) • Julie-Anne Nichols - Senior Team Leader, Austrade, Shanghai and Austrade China Wine Team Leader • Ali Hogarth - Regional Manager - Emerging Markets, AWBC
Compered by Jeremy Oliver.
Background – Chinese Economic Conditions
Julie-Ann Nichols (JN)
There has been more than 10% real GDP growth in China over the last decade, which has led to the creation of a new middle class.
But there is still a huge gap between disposable income, and the amount required for increased living standards, and the ability to purchase western goods. The average GDP per capita is still only about US$2,000 pa. So there is still only a small proportion of people who can purchase products such as wine.
The wealth is still concentrated in the East of the country.
It is also still very challenging to do business in China. Inflation is still very high, as are costs of doing business generally. For example, one of the main wine companies, Dynasty , experienced a 30% drop in profit last year, because of rising costs of doing business.
China is Australia’s 2 nd -largest trading partner - $20.3 billion in 2006 – 12.5% of our total exports. $822.5M of this was food and beverages, of which $38M was beverages.
The Free Trade Agreement negotiations still have a very long way to go – the representatives have had the 9 th meeting, and are down to line by line discussions – but have not talked about wine yet – still on other agricultural products - may get to wine by October.
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2010 World Expo in Shanghai – Will see the largest investment by the Australian government to date – maybe 3x what has been invested previously.
Anthony Davie (AD)
US$4,000-$6,000 pa household income – only about 16 million households are at the level at which discretionary income becomes available for non-essential purchases.
Over the next 25 years that number could grow to 100M households.
Background - Chinese Market Conditions
Ali Hogarth (AH)
China does not have AC Nielson data – it is hard to track figures. Guess that the total wine market may be 70 million cases (9LE) • CT and AD think it is actually only around 45 million cases
Most of this is at very lowest prices – prices which Australian wine is not at, and never will be at, i.e. A$2.00-$5.00
Total imports are very small – only 5%.
Incredible growth over the last 12-18 months. In June 07 China overtook Japan – in bottled exports by volume and value - No.1 destination in Asia.
Last year 2.5 million litres; now 7M litres in bottle. Value $5.46/litre FOB for bottled - $1.00 higher than UK. In the past 12 months, Australia has shipped lots of bulk wine to China, but this is now dropping off very rapidly. The future will be in bottled wine.
Chinese wine industry is very strong and improving all the time – but there will always be a role for imports at higher quality level.
Australia’s share of the market is growing at a faster rate than France, due to: • flavour profile, • relative proximity – smaller time zone difference by phone; “quick 12 hour flight”.
Campbell Thompson (CT) Bottled Wine. The leading countries are: o 34% France - No. 1 o 23% Australia - strong No. 2 – up from 20% 3 years ago. o 9% Italy, Spain Chile is the fastest mover, but mainly at lower price points
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Currently 90,000 Chinese students in Australia. 300,000 Chinese visitors here in Australia last year. Australia topped list of desirable destinations among Chinese US$ millionaires. Needs persistence to get in, but some bigger groups are tied up with the 4 biggest Chinese producers, which could create opportunities for others.
Ross Brown (RB)
Imports comprise just 5-6% of total consumption – which equates to 2.5 million cases. 94% is domestic wine. Further, 85% of imports are in the hands of just 4 distributors.
However, the 94% of “Chinese” wine is mainly made up from imported bulk wine, added to local product.
JN Carrefour Shanghai – is the central buyer for all China – top selling Aussie wine is bottled in China ‘made from Australian wine’ A$6 retail (includes normal retail margin) – next wines A$12 – A$15.
AD Increasing size of domestic grape wine production in China is good for us, because it is developing a wine culture. Can’t worry about the over 40 generation - they’ve never had a wine culture, and it is already too late to try to convert / educate them.
RB By 2015 largest population segment will be 30 – 49 year old - 45% of the population, well educated and open to imported products.
AH AWBC has just finished its “3 year Plan For Emerging Markets” – 6 key markets – 3 greatest growth markets for Australian wine at higher price points are expected to be: 1. China 2. South Korea 3. Russian
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Chinese Market Analysis
Campbell Thompson (CT) is now with Beijing Consulting Group, but has been based in Beijing since 1998, and was the Marketing Director at ASC Fine Wines from January 2003 to March 2007, where he was directly responsible for brands including Penfolds, Wolf Blass, Brown Brothers, Leeuwin Estate and Torbreck. [email protected]
Distribution
6 main distributors covering China – maybe including Hong Kong and Macau.
It is very hard to get listed with any of them if you’re not already with them.
There are about 10-20 newer wine distributors with a narrower geographic focus - Shanghai, Beijing, etc
Then at the next level there are a couple of hundred traders – these may have experience in wine, but may not have any experience.
Wine is knowledge–intensive – many are now aware of the issues regarding storage, logistics for delivery, requirements of a sales team, etc. – these things are really only covered by the top 6 – the next 20 are trying to achieve this.
Payment is a big issue even with the big guys - 90 – 120 days is common. Non-payment - more likely with opportunistic traders, or those who don’t have wine industry experience
Don’t take the first offer that comes along!!
There are a massive number of companies trying to get into China: - ASC used to receive 4 enquiries a day – it never said yes. - Top 6 distributors are looking for: o famous, interesting, distinctive wines, o long term partnership o education of the market.
JN Whole new breed of importers / distributors are springing up – not necessarily from a wine background.
Profile of a typical new distributor will be a property developer or other successful business person who has personally become passionate about fine wine - this is part of a move by successful Chinese businesspeople generally into luxury goods.
AD Torres is building its own distribution focusing on second-tier cities – building to a specific model
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The new breed of wine distributor often have a successful business background – through this have developed a wine culture. Their personal patronage/wealth helps get in with sommeliers – will often have some key Bordeaux brands in their portfolio – which is not a bad thing.
AH Patience, and waiting for the right match, is the key and having a strategy.
Need to interact with wider groups of people than just expats and personal contracts when travelling in China. Not just preach to the converted.
Market Segmentation
CT Around 65% of the market is on premise. Brand building is mainly in on- premise.
Red is outselling white wine by a huge margin - about 80/20.
Straight varietals are outselling blends (although CAB/SHI blends from Australia are doing well).
Australian wine doing well at the house/by the glass pour, and in the mid range in on-premise.
Retail is different A$30 – A$50/case FOB is the most competitive – there is a psychological barrier at the RMB 90-100 retail price.
The gift market is another different category – quite a different price willingness – purchasers will pay a little more – double gift boxes and an add-on (opener, glass) are powerful selling tools. – gifts are popular at certain times of year - particularly corporations – wine is very popular as a gift at the moment.
There will be some faster growing categories going forward, particularly lighter bodied styles – white, rose, Pinot Noir – and increasing consumption by females.
A high proportion are new drinkers (like in the US) , so a sweeter profile is likely to be more successful - at least in the short term.
The younger generation sees wine as trendy, fashionable
There are 1,400 4-star and 5-star hotels in China, and this will double in next 5 years - There are 33 Shangri La’s alone, and they are planning/building another 30 - Unlike Australia, a lot of business and high level personal entertaining is done in 4- and 5-star hotels – conspicuous consumption (which is when wine is consumed) - Locals will drink/buy prestigious wine in public places, but often don’t drink any wine at home.
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Chinese restaurant chains are starting to recognise the benefits of foreign wine – allows for up-sell / added prestige.
Comes down to negotiating power and ability of your importer.
AD Forecast for next 10 years
– 2010–11 - 1 billion litres – including domestic. But every month the market changes!
– 2007 expect 9M litres,
- 2010 37M litres in 3 years.
Not sure about split between bulk and bottled – depend on size of our vintages.
AD Can you build brands in China? Beer is very low price – global FMCG companies have been good at building brands there.
AH Influence of Chinese wine media very embryonic. Some well distributed publications – Food & Wine magazine circulation has already reached 300,000 in just 12 months ( cf AGT 20,000)
CT Very little separation between advertising and editorial in China.
Labelling and compliance
CT Localising your label may look good but it doesn’t work, part of the premium is the fact that it is imported.
Strong visual image is good, in case consumer cannot pronounce the name.
Translating names is often left to the distributor – get a second opinion, and look at the number of Chinese characters – the first attempt may be very long and not actually mean anything. – 2-word names are often the most successful. – Or go with the Chinese expression that sums up the meaning of your brand.
JN Back labelling of imported products is still a difficult compliance issue. Requirement for Chinese back label and translated key details.
Far Eastern Economic Review recently published an article which claimed:
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– 50% of all contracts involved a fraudulent element. - Corruption is equivalent to 13% - 17% of annual GDP (and the problem is probably higher) - 2/3 of contract relate to Chinese government owned enterprises.
KPMG hired 600 new staff in forensic department just this month.
AH The Export Market Grid gives a good guide to doing business in China, and is being constantly updated.
Screwcap v cork
CT Corks probably outsell screwcap – Euro-trained sommeliers, plus the romance of opening at the table. Not to say screwcap won’t work. Talk to your distributor but beware of hearsay and looking in the rear view mirror.
AD Consumers are accepting screwcap – issue is the gatekeepers – who are sommeliers. So there is an opportunity here. Japanese gatekeepers have become far more accepting of screwcap in recent years.
Chinese Wine Production
Ross Brown (RB) Chinese wine/grape production is ¼ the size of the of Australian wine production – and growing at 20% per annum - 500,000 tonnes.
No regulation - production seems to have had no relevance to labeling. Cost of local fruit production is $300 to $400/tonne – so there is no point them expanding when they can buy bulk wine on the international market for that price or less.
The Exporters’ Experience
Ross Brown Got lucky – ASC just starting out, father and son. Targeting Western Hotels – Brown Brothers was in Hong Kong at the time and was approached by ASC – 10 years later ASC has over 300 employees.
If going into market like China you have to have long term view – it will be 5 – 10 years before you start making profits. You need a long term business plan and a strong relationship – some other markets in Asia much more volatile.
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Brown Brothers has had problems in other markets because it did not have the same aims as its distributor.
Worked with ASC to select specific products from the Brown Brothers range to suit the market and fill gaps – you need to listen to market intelligence, – you need to be in the face of distributors as often as you can (they may be carrying a large range, and can easily “forget” about you).
Anthony Davie Not all Foster’s brands are brands with ASC.
Foster’s packaging and wine styles for Australia are o.k. for China. - Anything with “Chinese wine” is seen to be a domestic wine – and regarded less highly. - Consumers would not pay the same price if it looks like it’s made for the (Chinese) domestic market. Thinks this will change over time.
Consumers do not have a great understanding of varietals
Those producers who are not yet in China have not missed the boat yet, because more distributors will come into the market.
Thinks distributors will move from Hong Kong to mainland China. Likewise with other Asian countries– leverage their existing experience and portfolio
Don’t go with a distributor who already has 50 – 60 brands, as you won’t get enough attention.
You also need to do due diligence.
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VWIA Industry Conference 2007
Melbourne, 23 rd July 2007
Presentation by Josh Raynolds, US wine writer, judge at Royal Melbourne Wine Show, and former wine importer
There is a significant demand shift to lighter bodied wines – for example, Merlot and Zinfandel vines are being grubbed up and replaced with Pinot Noir.
This reflects a change in lifestyle – there is a shift to Asian and lighter style foods – which is driven both by a demographic shift, and also is a factor of higher income – reflected in other food and beverage markets in a shift to water, health , Mexican beer. 24 hour grocery stores have sushi bars.
How are We Seen?
There is still a strong perception of Australia as ‘Crocodile Dundee’ - Brand Australia became Bland Australia.
To most Americans, Chile is $5 magnums – one of leading brands is $5/mag with a $2 rebate!
Trying to market your wine as “Single vineyard” requires great care – it is not enough to pursue such a marketing strategy simply because it is your own property. • Words such as ‘reserve’ etc have lost their currency on Australian labels.
Which US sub-markets to Target?
Follow the wealth: • Boston and Connecticut • metro areas of NY/ Philadelphia/ New Jersey • Washington DC • North Carolina • Chicago
It is tough to compete in areas that have their own wine production: • California • Seattle • Portland
Florida - a complete waste of time. (Not sure why!)
Need to choose importer very carefully – not go with those who cannot get appointments with important knowledgeable/educated customers.
Exporting to the US Page 9