The size of China's population and it's potential market size, is of increasing interest to the international wine companies as the industry takes on a more global focus. However, this market also poses many problems. In the first place, many businessmen are concerned with how these potential consumers will react to a product which has a rich tradition in the west and is very different to their own fermented and distilled wine products. Further complications are the sheer size of the potential market, the cultural diversity of the population, the rapid economic changes, the inherent business culture and the disorganised nature of the distribution chains.

The following article is based on research carried out in the Shanghai wine market in the first six months of 1998. Shanghai was chosen as the research location for several reasons. It is the largest city in China and representative of the Han people, by far the largest and most dominant culture in China. Shanghai is the port city of China, where business culture and drive is currently the most tangible. The municipality also has a rich history of dealings with foreigners and foreign influences plus an unrivalled domestic financial and business acumen which has manifested itself in the extraordinary growth that the city has witnessed over the past fifteen years. Therefore it seemed sensible to ask the Shanghainese themselves about their attitudes to wine, the distribution of wine in their city, the factors that they believe have lead to the recent interest and subsequent increase in wine consumption by their fellow city dwellers and their ideas about the future development of a wine drinking culture.

Most of the Shanghainese interviewed were either involved in the distribution of wine or in distribution of a related beverage. They included, wholesalers, agents, restaurateurs, retailers and hoteliers.

A picture of wine distribution in Shanghai was constructed that showed that the market was rapidly changing and developing into an industry that will have many similar characteristics to those that are in operation in both the UK and Australia. However, while this metamorphosis of the distribution network mirrored the economic changes that were happening in the city as a whole, it has also unleashed a number of business characteristics such as commodity trading, parallel exporting, counterfeiting and smuggling with which the global wine industry has little experience.

Many of the distributors interviewed, did feel that this was an inevitable consequence of the rapid economic transformation from a planned to a market economy. Many also ventured to suggest that this would be a short term phenomenon and that as the market evolved, a more western-style distribution system would emerge.

The present chaotic state of the distribution network, as it is commonly referred to in western circles was sparked (in part) by the reform of the alcohol wholesale licensing system in the last two years. This created the opportunities for many new and non-wine related businesses to enter the market. This has lead to an industry structure that includes foreign owned agents and wholesalers competing with former state owned (monopoly) distributors, wholesalers from other industries and businessmen/entrepreneurs motivated by what they see as quick profits.

The influence of the new entrants and the foreign owned companies on the distribution channels in the commercial segment of the Shanghai wine market is much smaller than their influence in the premium segment. The influence of foreign firms, investment and personnel in the premium segment has and is continuing to push the old distributors and the freewheeling entrepreneurs into the commercial end of the market. The members of this commercial end of the distribution system often also carry large ranges of fast moving consumer goods as well as wine and sell to a variety of distribution channel members such as large and small retailers, restaurants, hotels and bars. Successful distributors in this segment can often be identified by the strength of their business relationships (guanxi) with their customers, to virtual exclusion of all advances from other industry competitors.

The wines at this commercial end of the market are predominantly in the US $5 - $7 bracket and are dominated by domestic brands (ie Dynasty). There are wines available from a few major suppliers, made from imported juice which is then finished and bottled in Shanghai and these sell for a few dollars more. Imported wines such as Jacob's Creek start at the US $12 -$15 range and go all the way to the premium end of the pricing scale and the specialist end of the distribution chain. In order to compare these prices with other alcoholic beverages that are widely consumed then you have to look at beer, rice and yellow wine. These beverages are either consumed with food or in other compatible wine consumption situations (ie toasting). Beer is the best comparison and is marketed aggressively with the emphasis on the fundamentals of image building and brand management. There is also a marked price difference (due to tax benefits from domestic production) with premium branded brands (such as Budweiser and Becks) at around 75 cents a litre and local brands at 25 cents a litre. The average weekly wage in Shanghai is US $3- $5.

What these rather rudimentary figures illustrate is that the current wine drinkers in Shanghai appear to fall into segments. Broadly speaking the wealthy upper class together with the expatriate communities and visitors/tourists appear to frequent the premium end of the market. There is also an emerging middle class that are also engaged in wine experimentation and appear to frequent mainly the commercial segment of the market. However, the majority of the population of Shanghai are not in a financial position to consider wine purchasing.

This rather complicated picture of distribution in Shanghai is best illustrated by the following diagram (fig 1). This diagram is the result of the interviews with members of the wine distribution channels in Shanghai. Many of the respondents were asked for their opinion on the diagram during a second interview. In the diagram the suppliers to the market of Shanghai are illustrated by the colour pink, the wholesalers by the colour green and the retailers by the colour blue. The businesspeople/entrepreneur category was given the colour orange as it appears a uniquely Chinese phenomenon.



In terms of the wholesalers, I have found six general categories. The specialist wine companies are usually 100% foreign owned or joint ventures. They have professional attitudes, modern wine storage, sell only foreign wines and spirits. These companies have foreign and Chinese staff and use both Western and Chinese sales strategies. Agencies are Western companies who have a sole agent or distributor (ie Gallo and Moet). They are a small but growing category and many aggressively trying to control their own channels with similar strategies to those employed in their Western markets.

Importers/producers are companies that source their juice or wine in the international market place, import the juice and finish and package the product in Shanghai. This dramatically reduces the tax bill, however not to a level that allows price parity with the domestically produced brands. The wine is then usually distributed through the general wholesalers. The businesspeople/entrepreneur category concerns the new market entrants, motivated by quick profits, good relationships (guanxi) with potential customers and access to an alcohol license. These players are characterised by little interest or knowledge of wine, heavy use of cash incentives and commission to get product listings, access their wines through the overseas Chinese networks and the international wine markets. Can leave the channel as quickly as they entered.

The large wholesalers tend to operate all over the channel dealing with almost all category members. They are usually long established state-owned firms and Shanghai is divided geographically amongst them. At the time of the research there were four in this market. They have very good, long established relationships with major prestigious customers in the trade (ie top hotels and restaurants). They also carry imported wines, beer, spirits and catering goods and some own their own retail outlets. They have their own delivery teams. The local wholesalers are much smaller organisations, usually family owned. These wholesalers do usually specialise, supplying either the restaurants, street sellers or local small supermarkets. They carry everything their customers need, from toiletries to beer. These usually carry wine, but rarely more than one or two domestic brands. Competition here is very price sensitive.

The retailers are much easier to define. Corporate business is greatest during Spring festival (Chinese New Year) and these and the prestigious hotels are the domain of the specialist wine supplier or a wholesaler with good long established relationships. The high class restaurant has been the major growth sector, but many respondents here said that good guanxi was the key. Supermarket chains and joint venture retailers include companies like Carrefour (France) and Makro (German) with large ranges of premium wines, but few outlets. There are some Hong Kong joint venture supermarkets that have many outlets in the city and the suburbs. Hua Lian is one, with over 100 branches and wine available in most. However many of these Hong Kong joint venture appear to use their contacts in the SAR to access wines. The following diagram shows the sales breakdown of wine brands over a ten month period in 1997 at the Hua Lian supermarkets.



Nightclubs, karaoke bars and luxury clubs offer good access to the affluent classes in a range of age groups and the specialist suppliers are targeting these groups. The spirit, beer and soft drink companies regularly run promotions in these places. Local restaurants and street sellers are really only a market for domestic brands and are a relatively small market, where the owner usually buys.

Many of the respondents felt that the Chinese brands and other brands at the lower end of the market were being consumed by predominantly the younger generation from these emerging middle classes. The respondents also added that they saw this segment's motivation as being the western image of wine and the perceived health benefits. Rather worryingly, many respondents added that due to their lack of understanding, product confusion and brand proliferation in the market, these consumers may well only treat wine consumption as a passing fad.

Currently, the image of wine is very positive. It is not only viewed as a premium western beverage, but as a healthy one which fits in nicely with the Shanghainese preoccupation with healthy foods. Its relationship to western food is also very attractive to the Shanghainese. Consequently, red wine is now starting to replace Cognac as the beverage of choice for the after meal toasting.

The extremely influential local media have also played a major role in the construction of an image for wine, with extensive coverage on the health benefits, wine's prestige and the listing of the international prices for wine. Other products have benefited from similar coverage in the past and have noticed just how important was the influence of the media, when it was discontinued (ie New Zealand Kiwi fruit).

The current levels of interest in wine in the market of Shanghai has led to trade and consumers desiring to learn about the product, the culture of wine drinking, its production and its evaluation. However as yet, these needs are not being met and many of the interviewees felt that the resulting confusion in the marketplace, would condemn wine to the status of a fashionable product, whose bubble will eventually burst. Furthermore, this lack of knowledge about the product has in part contributed to some of the unique business practices employed by some of the distribution channel members here.

Many of the people interviewed stated that for the Shanghainese and the rest of China to maintain a level of interest in wine, especially at the non-premium end of the market, then considerations such as education and the price of wine must be taken into account. It is also important that fundamental marketing practices such as those used by the beer companies in Shanghai (ie brand management) are used to develop and exploit the interest shown by the younger generation and the emerging middle class.

This picture of the distribution of wine in Shanghai offers would be exporters the opportunity to target their particular market segment through their choice of distributor. Bearing in mind that the average weekly wage is US $3-$5 and that most Shanghainese are not in a position to consider wine purchases, the premium segment, occupied by the specialist wine distributors, supplying corporate customers, prestigious hotels, high class restaurants and upmarket retailers would appear to be best suited to small/medium producers wanting to export to Shanghai. For larger producers (depending on their specified target market), more control of the distribution channel may be essential to facilitate positioning and brand image control. Therefore a more active role may have to be an agency or similar joint venture agreement. If these suggested strategies are familiar (like the UK entry market strategies), then lessons learned in the experience of exporting to other countries around the world, should still be applied to a country as culturally different as China.

Each interviewee was also asked for their views on the future development of wine distribution in Shanghai. The views given here were much more diverse. There was a general consensus that the number of companies involved in the distribution of wine would reduce. Some felt that there would be a much greater degree of specialisation, with a great deal of change amongst the large wholesalers, including mergers and more aggressive strategies. Some felt that to be more successful in the market, wine companies/producers must take a more active role in the distribution and management of their products in Shanghai. Their will be an increasing acceptance of the importance paid to brand management in this environment. Marketing strategies must also take into account that wine is not a traditional beverage for the Chinese and successful companies will develop strategies to deal with this. Finally most respondents believed that the businesspeople/entrepreneur category would eventually disappear as most left the channel or committed fully. The other point of consensus was a general admiration for the foreign beer companies, and their brand development, positioning and aggressive distribution strategies. It was interesting to see that most respondents in Shanghai argued that basic marketing strategy and principles could achieve the desired effect.

There is now in Shanghai an opportunity to build on the interest in wine shown by some of these consumers. This article has attempted to outline some of the areas that need attention and some strategies that can address current problems exporters to this important potential market are experiencing. The scale and the potential of this opportunity could facilitate a more collectivist approach by the wine producing countries of the world to tap this much talked about 'China potential'.

Rupert Dean

Rupert Dean is a Masters graduate in Wine Business and Marketing from Roseworthy College, University Of Adelaide, Australia and now works as a freelance journalist. He has had articles published in Australia, New Zealand, Great Britain and France.