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China’s love affair with wine, and how SA can benefit

www.farmersweekly.co.za by MM Agrivestment24/08/2017  

Chinese consumers’ growing affinity for wine, particularly imports from international premium wine producers, presents a growth opportunity for the South African wine industry, according to research conducted by Buyambo Mantashe of agriculture investment company, MM?Agrivestment.

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e-commerce in china is a huge and growing potential market for sa wine exporters, with 21 million chinese consumers buying their wine online in 2016 Photo: Dr Jack

An increase in the number of high and middle income earners in China has fuelled the desire for ‘exclusivity’. This trend has been dubbed the ‘premiumisation of Chinese consumerism’ – the increasing demand for products that are expensive and fashionable.

This has included an increase in the consumption of wine, which is relatively new to this market.

In 2015, China’s per capita annual consumption of wine was estimated at 1,2?, which is relatively low compared with Portugal’s estimated 42,6? per capita, the highest in the world.

Despite being in its infancy, the Chinese wine market is experiencing dramatic growth, with wine drinkers having increased from 38 million in 2014 to 48 million in 2016.

In the first three-quarters of 2016, China imported bottled wine to the value of US$1,66 billion (about R220 billion), which was 93,4% of the country’s total wine imports. This represented a 19,1% year-on-year increase. Based on this growth, it is predicted that China will become the second-largest consumer of wine after the US by 2020.

Chinese wine market

The Chinese wine market is currently defined by two segments: the low-priced market, which is led by Chinese wine producers, and the high-priced market, which is largely the preserve of international premium wine producers.

China’s import market, in turn, is dominated by French wine, which has a 40% market share. Other top performers are Australia, Chile, Spain, Italy and the US.

SA market share

Globally, South African wine competes in the mid-priced market. As the world’s eighth-largest producer, South Africa has a comparatively small presence in China at only 2% in 2015. South Africa ranked seventh among international exporters, with a volume of nine million litres at a value of R460 million.

This is in comparison with France, which exported 191 million litres to China at a value of US$965 million (R12,7 billion) and the second-largest exporter, Australia, which exported 79 million litres to China at a value of US$542 million (R7,1 billion).

Chile, which was South Africa’s strongest competitor in terms of unit price, was the third-largest exporter of wine to China, exporting 60 million litres at a value of US$209 million (R2,7 billion). The average unit price of Chile’s wine exports to China was US$3,48/? (R45,84/?), compared with South Africa at US$3,62/? (R47,68/?).

The highest unit price was for Australian wine at US$6,83/? (R89,97/ ?), and the lowest was for Spanish wine at US$1,97/? (R25,95/?).

Between 2011 and 2015, Australia (30,7%) and Chile (28,3%) achieved the highest growth rates in the Chinese market, with South Africa in third place at a rate of 24,7%. In 2016, China became South Africa’s sixth-largest export destination, accounting for 5,44% of total packaged wine exports.

Potential for growth

There is a growing need for the South African wine industry to focus on the value of its wine rather than the volume exported. South African wines have been criticised for failing to maintain an image of premium quality in the international market, which is attributed mainly to the fact that wineries have traditionally focused on bulk exports at comparatively low prices.

The potential for further growth in the Chinese market depends on three factors: branding, pricing and distribution.

Branding

The vast majority of South African wineries have a rich history, unique production techniques, and a reputation for making wines of quality and ‘personality’. This story fades, however, as the wines leave the farms for international shelves, compromising the premium reputation of the products.

Educating Chinese consumers about the premium quality of South African wines is crucially important as part of the industry’s growth strategy to capture the high-priced Chinese market. This will stimulate interest in the overall South African wine brand and increase brand loyalty, which will ensure a sustainable future for South African wines in a highly competitive market.

Pricing

One of the characteristics of ‘premiumisation’ is sensitivity to pricing. To this end, Chinese consumers, particularly those active in the high-priced wine market, will hardly consider low-priced imported wines; the higher the price, the more exclusive the product is perceived to be.

However, as the demand for wine in China grows, many consumers will not be able to afford high-priced wine. With a growing taste for imported wines, the potential for a third-tier, medium-priced market is emerging and is set to grow as demand increases.

South African exporters should target this market, as it presents the greatest prospects in terms of volume, while providing exporters with the incentive of higher returns as a result of advantageous pricing.

Distribution

Three distribution avenues are available to South African exporters: on-trade, off-trade and direct sales using online channels.

The off-trade distribution channel involves selling wine through major supermarkets and convenience stores; the on-trade method involves selling wine in bars, restaurants and hotels.

These two traditional methods could be partially successful if the wines are well branded and correctly priced. However, Chinese consumers are becoming increasingly sophisticated and these traditional methods may not be sufficient to capitalise on this growing market.

E-commerce in China is growing at an exponential rate and has become an integral part of many businesses. The Alibaba Group, for example, is the largest e-commerce business in the country, and South African wine exporters should investigate the group’s online retail shopping website, Tmall. com, as a potential distribution channel. To place this into perspective, it should be taken into consideration that more than 21 million people opted to buy their wine online, using both large and small online platforms, in 2016.

JD.com is the leader in wine distribution in that country, with 35% of branded wines being sold through this online store last year.

Hein Koegelenberg, the owner of wine brands such as La Motte, Leopard’s Leap and L’Huguenot, is a good example of the potential that exists for South African wine in China. Through a joint venture with Chinese company, Yangzhou Perfect China, a brand was created called Perfect Wines of South Africa, which now accounts for 25% of all South African wine sales in China.

China’s wine consumers are maturing, and now is the time for South African wine producers to take advantage of this expanding market segment.