Wine and spirits producers looking to sell in the China market need to be well prepared and carefully weigh up market entry options with sound market research and intelligence.

There are a few important points to note when thinking about entering the Chinese market. As you can see in one of our previous insight posts here, the imported wine market in China contracted in volume in 2018 but grew in value and imported spirits are slowly gaining market share, taking small bites out of the enormous local Baiju market. The sheer numbers that have been published in recent years are tantalising for producers who can see the opportunity amongst the more general global stagnation. However, it can’t be stressed enough that if something seems too good to be true…it most likely is!

Importers and distributors can be disloyal to brands particularly when the market demand for the brand is dependent on the importer and not on consumer pull for the brand. There is regular ‘chopping and changing’ of brands on both the importer and the brand side. The importer because they may get what they perceive to be a ‘better offer’ and from the brand side because the numbers they were promised are not being delivered and another company claims they can surpass it.

The drinks Marketeer James Espey says, ‘it takes 10 years to build a brand’ and China is no exception to that rule which is why it is important to work with a strong partner or partners in China that can collaborate on building your brand. It is also important to note in this context that strong brands are predicated fundamentally on consumer pull not on trade push, hence the long term health and stability of your brand in China will depend on building genuine consumer brand franchise, not trade deals and push.

Therefore, in order to get distribution, you have to be tenacious and willing to invest ahead of the market. A common way to meet potential importers is through large international trade shows such as Prowein in Germany or more localised ones such as the Chengdu Wine Fair, Whisky L, Vinexpo or Prowine in Shanghai. However, for many producers, these platforms often prove unreliable to meet genuinely capable and serious partners, and can be costly and inefficient, particularly if a considerable amount of pre-planning has not been factored in (setting up translators, reaching out to contacts and setting meetings ahead of the fair etc). Working with an agent or agency to help make introductions to well suited buyers can be a good first step towards meaningful market access. Be prepared to invest a lot of time and effort in securing your distribution. Discussion periods of one to two years are not uncommon with Chinese buyers and you will be expected to visit the market often to build trust with potential import partners.

Do not hesitate to demand the credentials of your potential import partner as opposed to simply believing everything that they say. There is a lot of boasting and exaggeration in the market, and unsubstantiated claims of customers, volumes and networks should be distrusted. The following is an initial checklist that may prove useful in vetting a potential partner in Mainland China:

Copy of business license – this will identify their Legal Representative and registered capital
Copy of food distribution license
Actual examples of Chinese back labels for their other imported wines
A copy of their downstream sales portfolio or their book of prices, either digital or hard copy
The exact size and shape of their team, including management, sales, logistics, marketing, and accounting
Photos or even visits to primary warehouse or warehouses
A credit application with all necessary credit and financial information
A reasonably precise explanation of their downstream distribution network

Reluctance or inability to provide any of the above should be a red flag for the importer as a serious and legitimate partner.

According to Nimbility China Import Statistics 2018, the number of importers of still bottled wine under two litres numbered around 9,000.

Entering the market (a general introduction)

More than possibly any other in Asia, the China market is fraught with pit falls. Similar to the United States which is officially one country but made up of 50 distinct states, China likewise is a collection of distinct regions and provinces. Similarly in China each region will have different routes to market, channels and ways of working. The time it takes to meet an importer and get the first order can be in excess of 6 months, so patience and tenacity is key. It is important to note that it is very difficult to send commercial samples into China via air freight. Therefore, you will either need to take them with you when you go and visit (note the maximum allowance is 2 bottles per person) or the importer may ask you to send them to an address in Hong Kong or other parts of the world where they may be travelling.

In wine and importer spirits terms there are four primary geographic regions in China which breakdown as follows:

· Pearl River Delta (cities: Guangzhou, Shenzhen, Dongguan, Zhuhai)

· Yangtze River Delta (cities: Shanghai, Hangzhou, Suzhou, Nanjing)

· Greater Beijing/Tianjin Area (cities: Beijing, Tianjin, Shijiazhuang)

· Sichuan Province (cities: Chengdu and Chongqing)

Routes to Market

National Importer

These are generally large companies who will ask for exclusivity and claim to have national coverage. Many are foreign owned entities and will hold many of the well-established brands. Tough to penetrate, these companies will have multiple regional offices and a large sales force selling into multiple channels including the on trade, off trade (independent and large retailers), private customers, online and to local wholesalers. Historically, working with one of these companies it could be argued was the ‘safe’ option. The senior management will most likely be English speaking and culturally they would perhaps be more straightforward to deal with. The large national importers also tend to employ significant marketing teams and engage in brand planning and brand building activities. However, it is becoming increasingly considered that these companies cannot offer ‘full’ coverage and for some brands they will not provide sufficient distribution across all channels and regions. A very public example of this is TWE who started in China with single National Importers, moved to others when expectations were not met, then started spreading brands across different importers before finally setting up their own WOFE (wholly owned foreign enterprise) to cut out the importers entirely and sell directly to wholesalers.
The National importers maintain large diverse portfolios of brands so the risk is that smaller brands may not get the attention they require.
Nevertheless, national importers still represent a great opportunity for many brands if you are lucky enough to be considered for their list!

Local/Specialised Importer

Localised importers tend to be smaller entities and focus on a specific region, channel or product mix. Often these companies will also ask for exclusivity but it is worth negotiating as they know they cannot provide full coverage to China. If you do decide to work with multiple localised importers and have a kind of ‘patchwork’ distribution in China, your main concern, and that of your importers, will be that of pricing, which is harder to control with a multi-importer strategy. If you decide to go this route, your strategy must be very well planned to avoid pricing issues and it is highly advisable to have someone based on the ground to manage these relationships and ensure that agreements are being adhered to. The leaders of these localised companies are often not English speaking but will usually have a member of staff who can communicate directly.
If you are approached by a local Chinese importer who tells you that they can sell ‘containers’ of your wine into China, beware! Take your time to do comprehensive due diligence on them as a company. There are countless examples of companies being set up to sell wine by people with limited experience. They commit to buying a large amount of stock (ALWAYS insist on payment upfront), ship it to China and then realise that they do not know how to sell it. The good result in this scenario is that your wine ends up sitting in a warehouse moving slowly. The more common and troubling outcome is that the company ‘dumps’ the wine into the market at a very low price thus rendering the brand ‘untouchable’ by other importers. The Chinese consumer is incredibly price sensitive and if they can find a wine online at a significantly reduced price it will be extremely difficult to raise the profile of the brand. The kind of due diligence recommended is as follows:
Find out how many year’s they have been selling wine, to whom, the size and experience of their sales team, their warehousing and logistics set up etc.
Ask for a reference from at least two other brands they work with and call them to discuss their experience.
Even if you are not going to offer credit it would be advisable to use a reputable trade credit agency, such as COFACE, to access their rating.

E-commerce

It is impossible to talk about route to market in China without discussing e-commerce. The media is chockablock with the ‘explosion’ of online and the data backs this up.

Mobile payment transactions in China reached a record 81 trillion yuan (US$12.8 trillion) from January to October 2017, driven by the vast number of consumers across the country who have looked beyond credit cards to more convenient, cashless systems.

This transition has occurred at a much faster rate than expected. Notably, it is rural areas that are leading the revolution. Seven provinces have a ratio of mobile payments of 90 percent or above.

However, this is also an area to approach with caution. While it is relatively easy to ‘position’ your brand on a platform such as T-mall and JD.com the reality is that unless you are willing to place significant investment into marketing the products through these sites then actual sales will be nonexistent. Sources working closely with these platforms have claimed that in order to sell a 100 RMB bottle of wine you need to spend around 300 RMB promoting it!

In addition, the statistics for wine and e-commerce are hard to get to the bottom of. There are reports that indicate online has been a huge success particularly on days such as 11/11 and the China Wine Festival which is a 10 day ‘sale’ that culminates on the 9th September (09/09) but when you look at who has published the data it is directly from T-mall or JD.com whose interest it would be to portray favorable results. In 2016, for example, Alibaba said that 100 million people ‘took part’ in the wine shopping festival but refused to release actual sales figures.

It is also worth noting that if you launch your brand through one of the online platforms it may be difficult to penetrate offline channels due to the pricing transparency the online RTM brings.

Cross-border E-Commerce

Defined as buying overseas products direct from foreign retailers and suppliers via the internet, without the specific need for an intermediary business entity in China.

The main reasons for buying via CBEC are ‘product quality’ and ‘product price’. CBEC offers Chinese consumers protection against counterfeit goods as well as significantly lower pricing due to the exemption or reduction of import taxes.

As a result CBEC is growing exponentially in China and is expected to continue to grow steadily over the next few years. CBEC avoids the need to establish a legal or physical business presence in Mainland China preceding e-commerce ventures. Costs can be 20-30% lower and product clearance, and dispatch times at the border considerably faster.

CEBC can access online consumer market directly and more quickly thereby running smaller financial risks.

How it works

1. Direct import of goods from outside Mainland China territory via CBEC platforms and based on the preferential policies of bonded zones

2. An overseas legal entity exports the product to a bonded warehouse (B2B2C) or via direct mail (B2C) model.

3. The overseas legal entity clears customs only when there is an order from an online customer

4. The e-consumer pays all duties & taxes over the shelf retail price at the moment the product is sold (vs a legal entity in China e.g. trade agent/subsidiary paying duties and taxes over the CIF price before the product is sold)

5. Different taxes and duties apply to CBEC trade and products have to comply with a different set of regulations than via normal trade.

6. Products can then only be sold on e-commerce platforms

7. In sum, with CBEC the consumer takes the lead, the value chain is shorter, and there are fewer risks for the overseas merchant

Misconceptions & Realities

Just making your brand available via e-commerce in China will NOT automatically lead to sales.
Just because your brand is popular in Western markets, doesn’t mean it will have immediate traction in China
Building brand awareness and demand for niche products in China takes efforts that should not be underestimated
A brand’s success in China is not based entirely on the availability of its products
There is no single ‘Chinese consumer’
CBEC should be viewed as an entry-level strategy, a stepping stone to establishing initial brand presence in the market before selling via traditional channels
Although a comparatively low-cost entry method, CBEC does still require high investment – experts estimate a minimum of US$160,000 in expenses (branding, logistics etc.) per annum
Research MUST be conducted into target consumers and product demand before investing
Including - browsing through e-commerce marketplace websites & visiting offline stores in China to determine similar product availability
Brand awareness, consumer preferences & competitor’s presence should also be looked into
CBEC is focused on large online platforms rather than standalone sites

Logistic Companies

In recent years there has been a number of logistics companies established who will import your wines or spirits but will not distribute. The positives of this are of course that you get the wine into market without using an importer which saves margin and may make your product attractive to local wholesalers and distributors (especially if you are in the entry level price range). On the flip side you will need to have a person on the ground to sell your product. This person would need to have a strong wholesaler network. There are also the upfront costs involved to consider as you would be bearing all logistics, customs clearance and storage fees until the wine is purchased.

Go-To-Market Strategies - Summary

Look out for next week’s article which will focus on the practical steps required for getting into the China market. Stay tuned and follow us for more industry insight across APAC!

China Market - Route To Market Options & Go To Market Strategies