China’s Economic Trends
China is an emerging economy with a GDP of $13.98 trillion and a per capita income of $10,165 (2016). The Chinese economy the biggest after U.S.’s by GDP and the largest by purchasing power parity. China is considered a tiger economy because of its rapid economic growth during the past three decades and has recorded an average growth rate of 9.91% between 1979 and 2010. Currently, the economy is growing at an average annual rate of 6.7% (Wildau and Mitchell). In the past few years, China’s market for wine has expanded dramatically. Wine consumption is a many-century-old practice cherished by many cultures of the world. The majority of the countries with an established wine culture are in the west and as such, they form the primary market for Canadian wine. However, these traditional wine markets have stagnated, and wine producers are now eyeing the non-wine consuming economies that have recorded exponential economic growth such as China.
The rapid economic development has created a huge lower-middle and upper-middle income population in the urban regions that have proved to be a ripe target for wine products. The country has the largest middle-class population in the world (109 million) that has recently outnumbered that of the United States (92 million) (Davies 3). This population is mostly found in the urban centers across the country. For that reason, sales of imported wine are high in urban settings because the population has higher income, is more sophisticated and are more receptive to western products. Conversely, the vast income gap between the urban people and the rural population means that sales of the imported wine are lower in the countryside. Urban income is three times that of rural; richest 20% who control 50% of consumer income in the country are found in cities while the bottom 20% who control only 6% are found in rural areas (Berry 7). Cities with the highest disposable income include Shenzhen, Beijing, Guangzhou, and Shanghai.
Business Target Market
My business targets the growing middle-class population in the urban regions of China. The country is the fifth leading consumer of wine in the world where every adult Chinese consumes an average of one bottle of wine per year. Conversely, China is the world leader in consumption of red wine, having consumed 1.86 billion bottles in 2013 alone. Currently, the estimated value of the grape wine market in China is more than US$10 billion. The market prefers red wine more than other types of wine (80% of wine consumed is red, 16% white wine and 3.3% rose wine). White wine is slowly becoming popular among women and young people. Still wine accounts for 90% of all sales of red wine followed by fortified wine at 45 and sparkling wine at 2%. Non-grape wine accounts for 60.6% sales, grape wine 39.4%, and sparkling wine is the list sold. Premium wines are mostly consumed in restaurants and in occasions and less in homes. They are popular in dining out events as a show of wealth, affluence and social class to business partners, relatives, and friends.
The country’s huge population and the growing middle-income class means that the market for imported wine will continue to grow. The demand for wine in China has experienced an annual average growth rate of 30% in the past 15 years. The economic recession and anti-corruption measures have significantly affected the growth of the wine industry. After a decade-long uninterrupted growth, the Chinese wine market started slowing down in 2013 at the onset of the economic recession. Local brands are most hit compared to imported wine whose growth is at 3.3%. Consumption of red wine has fallen by 5% from 139 to 131 million cases in 2015 (Lyons 1). The Global Mintel predicts that the Chinese market will stabilize at 5% annual growth rate up until 2020. However, there has been a considerable interest among Chinese to invest in Canada’s wine industry. Canada is still behind the leading exporters to China that include France at 42%, followed by Australia, Italy, and pain.
Factors Driving Demand
There is a booming market for imported wine among the growing sophisticated Chinese middle-class population who has a greater appetite for high-quality foreign wine. By 2013, the country’s consumption of red wine had increased by 136% in five years (Cattaneo 8). About 90% of globe’s ice wine is produced in Canada, and most of it (46%) is sold in China (Lawrence p4). Currently, there are 20 million regular consumers of wine in China, and this number is expected to grow to 80 million by 2020 (Cattaneo 12). Therefore, the market space is large enough to accommodate new players.
Conversely, the market for high-end international wine among the wealthy is increasing exponentially. The local brands have failed to satisfy this demand due to their persistent low-quality wine, hence living it to the imported brands to cater for this category of consumers. It is estimated that in ten years the number of middle-income earners will increase from 100 million to 200 million. Therefore, there is a big gap in supply, which the resident producers cannot meet; local production is capped by the short growing season in China.
The local wines are of poor quality and taste, hence elevating the demand for high standard products from countries such as Canada in many years to come. Gradual increase in income, the level of sophistication, and the urban population is a prediction of a growing market in the future. Equally, the Chinese population is not very familiar with wine products, which means that there is a huge market prospective that can be tapped through brand promotion and marketing activities. Canada’s product will gain market presence by exploiting the advantage of market growth and the shortcomings of the local brands.
Demographics
Three factors define the consumption trends; 1) level of income, 2) location and residence, and 3) urban centers. Imported wine is widely consumed by the high-income earners who have a greater appreciation of wine and are status-conscious. This trend explains why Still grape wine is popular among the middle class because of its relatively low prices. People in the coastal and southern cities prefer sweet wines while those from north and east prefer full bodied wines. On the same note, consumption of imported wine is significantly higher in urban areas such as Beijing, Guangzhou, and Shanghai, and low in the countryside (FPTI 11).
Eastern China and coastal cities have the highest concentration of imported wine because of their extensive distribution networks, wealthy consumers, and a large number of resident foreigners and expatriates. Therefore, this is the best strategic location to launch a distribution center for imported wine from Canada. It is well positioned close to the ports and has a large progressive economy with a population that values western products (Berry 8). The population is more receptive to new products, making it a suitable place to introduce new wine products such as fruit wine. The south has a promising consumer base because of the high level of disposable income among the dwellers. Although rice wine dominates the market in the region, red wine is recording a significant growth.
The north is more cultural and conservative, which explains the reason why local wine brands are more prevalent. They drink more alcoholic beverages than the south, but their income is lower and prefer local brands over foreign. Demand for imported wine is driven by few expatriates living in the region, hence making it the least suitable place to set up a premium wine business. These trends are replicated in the northwest and central China, where rice wine is also popular. The Northwest has the lowest level of growth in sales because of its low-income population.
Social-Political Trends
China has a record high consumption of luxury products, accounting for about one-fourth of global purchases of luxury goods. They spend 20% of their income on fancy personal materials compared to the world’s average of 4% (Yu 9). This aspect is influenced by the collectivists-self culture that judges an individual based on their group identities. The increased level of consumption of luxury material has an impact on the wine industry. The Chinese consume wine to symbolize the transition to a higher social status and for its perceived medicinal properties. Therefore, the brand name behind a bottle is as important as the quality of the wine. Consumption of premium wines by the rich will continue to rise as the middle-class strives to move away from the low-quality local products.
The population in urban areas is more open to new experiences than the traditional rural population. Cities such as Shanghai and Beijing exhibit a high level of maturity and intricacy and are the top consumers of imported wine (Berry 6). The government’s one-child policy has created a young population that has less financial responsibilities and more money to spend on luxury pursuits. This breed of young Chinese consumers is more receptive to products from western cultures (Berry 6). Conversely, the rapid growth in income level is increasing demand for imported beverages and foods. More Chinese are now consuming processed foods from western countries than any other time. Although Chinese consumers are relatively new to wine culture, there is a kind reception for imported wine products. Therefore, there is a great need for brand education to inform and educate the market.
Technological Trends
Creating Value for the Chinese Market
Red wine is popular in China because of the cultural significance of the color red that symbolizes happiness, luck, and fortune. Therefore, using the color in branding and marketing activities will help create brand significance among the target market. Conversely, Chinese consumers are largely price sensitive, which means that they tend to go for the cheap locally produced wine. Unfortunately, wine from Canada is significantly expensive compared to other producing countries such as Italy. This is due to the high cost of labor, transportation, and the effect of middlemen on the price.
There must be a major focus on adopting a lean supply chain system that will help reduce costs of production and cut out middlemen. There are so many fake red wine products in China attributed to the lack of a counterfeit check-system that makes it difficult to control quality. For example, in 2012, 10,000 bottles of fake Rothschild wine was discovered in an abandoned house in China (The Telegraph 1). The proposed business will carve its product niche by focusing on exporting high-quality premium wine to satisfy the needs of the highly selective and sensitive Chinese market. This approach will exploit the perception that imported wine is of a higher value compared to the locally produced products. The length of vintage and packaging are among the tools that should be used to communicate quality in China (FPTI 12).
As a conclusion, the feasibility identifies China as a ripe market where wine from Canada can be exported. An analysis of the factors to consider while determining whether wine should be exported from Canada shows that China can create a required level of demand for an investor to gain a return on investments. For instance, the Chinese population has preceded that of the US and demographic factors are among the top considerations when an organization is making a decision to establish their operations. The country has had a rising number of middle class, which is a major determinant in the demand of wine. For instance, it is estimated that more than 20 million people consume wine in china and the number is expected to rise to 80 million. The projection indicates that the organization needs to fulfill the rising demand by exporting the wine to China. The social, political and technological advancements are favorable for any business seeking to establish operations in the country, which makes China a favorable country.
Works Cited
Berry, Ben. The Wine Market in China: Opportunities for Canadian Wine Exporters. Toronto: Agri-Food Canada, 2011.
Cattaneo, Claudia. The new face of B.C. wine: Why Chinese buyers are pouring into the Okanagan’s vineyards. 1 November 2014. Web <http://business.financialpost.com/news/economy/chinas-growing-thirst-for-wine-draws-chinese-investors-to-okanagan-valley>. 24 July 2016.
Davies, James. China's middle class overtakes US as largest in the world. 14 October 2015. Web <http://www.telegraph.co.uk/finance/china-business/11929794/Chinas-middle-class-overtakes-US-as-largest-in-the-world.html>. 25 June 2016.
FPTI. "A Global Export Market Overview For British Columbia's Wine Industry." n.d. GOV.bc. Web <http://www2.gov.bc.ca/assets/gov/farming-natural-resources-and-industry/agriculture-and-seafood/statistics/exports/global_export_market_bcwine_industry.pdf>. 24 June 2016.
Heritagevine. How Technology is Impacting the Wine Industry. 2016. web <http://heritagevine.com/technology-impacting-wine-industry/>. 25 June 2016.
Higgins, Lindsey M., Marianne McGarry Wolf and Mitchell J. Wolf. "Technological change in the wine market? The role of QR codes and wine apps in consumer wine purchases." Wine Economics and Policy (2014): 19–27.
Lawrence, Daina. Canada hopes Chinese consumers warm up to ‘cool-climate’ wines . 26 May 2015. Web <http://www.theglobeandmail.com/report-on-business/international-business/canada-hopes-chinese-consumers-warm-up-to-cool-climate-wines/article24602283/>. 24 June 2016.
Lyons, Matthew. Chinese Wine Market Continues to Contract. 14 January 2016. Web <http://www.harpers.co.uk/news/chinese-wine-market-continues-to-contract/530159.article>. 25 June 2016.
The Telegraph. 10,000 bottles of red wine found in abandoned Chinese house. 8 November 2012. Web <http://www.telegraph.co.uk/news/worldnews/asia/china/9665023/10000-bottles-of-red-wine-found-in-abandoned-Chinese-house.html>. 24 June 2016.
Wildau, Gabriel and Tom Mitchell. "China GDP growth slips to 6.7% as stimulus eases slowdown." 15 April 2016. ft.com. Web <http://www.ft.com/cms/s/0/faa4576c-0203-11e6-9cc4-27926f2b110c.html#axzz4CXSWLRA8>. 25 June 2016.
Yu, Danqing. "Motivation of Luxury Consumption in America vs. China." Iowa State University (2014): 1-71.
