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. “Enter the Dragon” Page 1 Exporting to China 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 - $1.00 higher than UK. In the past 12 months, Australia has shipped lots of bulk wine to China, but this is now dropping off very rapidly. The future will be in bottled wine. Chinese wine industry is very strong and improving all the time – but there will always be a role for imports at higher quality level. Australia’s share of the market is growing at a faster rate than France, due to: • flavour profile, • relative proximity – smaller time zone difference by phone; “quick 12 hour flight”. Campbell Thompson (CT) Bottled Wine. The leading countries are: o 34% France - No. 1 o 23% Australia - strong No. 2 – up from 20% 3 years ago. o 9% Italy, Spain Chile is the fastest mover, but mainly at lower price points “Enter the Dragon” Page 2 Exporting to China Currently 90,000 Chinese students in Australia. 300,000 Chinese visitors here in Australia last year. Australia topped list of desirable destinations among Chinese US$ 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 “Enter the Dragon” Page 3 Exporting to China 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 “Enter the Dragon” Page 4 Exporting to China 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.