Baseline distribution metrics for Australianwine entering the Chinese marketBy Johan Bruwer''^, Martin Hirche^•^ Chang Liu^ Hao Yang^ Xiaocen Chen^ and Supasit Peanchitlertkajorn^'Associate Professor of Wine Business, School of Agriculture, Food and Wine, The University of Adelaide.Email: johan.bruwer@adeiaide.edu.auiVlaster of Wine Business student. School of Agriculture, Food and Wine, The University of Adelaide.

Email: martin.hirche@student.adelaide.edu.auBusiness Group, School of Agriculture, Food and Wine, The University of Adelaide

The Australian wine industry faces many challenges on several fronts, none more so than to successfullypenetrate 'new markets, including China, to help ensure its long-term sustainability. This articlehighlights some of the problems unique to the Chinese wine market, and how Australian producers mightuse the results of a recent survey of Chinese importers and distributors to plot a course to success.

INTRODUCTION

Sales values of Australian wine to its mainstream export markets(UK, US, Canada, etc) have been almost in freefall in recent times,making finding alternative destinations no longer a choice, but

an imperative. China has been widely touted as the 'saviour market'of the Australian wine industry. Whereas all indications are that mostof the global wine market's growth will occur in China for the next 10years or more (Euromonitor 2011) this market is not without its uniqueproblems. At, or near the top of, this list is a lack of knowledge, amongother things, of distribution issues facing prospective Australian wineexporters. As an integral part of their Global Wine Market course.Master of Wine Business students at The University of Adelaideconducted a survey in 2011 of Chinese wine importers and distributorsin collaboration with Wine Australia. The survey examined the natureand main barriers of Australia's access to the Chinese wine market.Some of the most interesting findings are outlined in the followingdiscussion.

There has been more hype about China than any other Australianwine export market. In 2011, exports byvalue grew at an impressivemoving annual total (MAT) of 23%, despite the fact that volume fell by26%. Australia exported 40.9 million litres of wine to the value of $201.6million to China in 2011. The average free on board (FOB) value of $4.92per litre was a massive 93% above the average value per litre ($2.55)of all other Australian wine exports (Wine Australia 2012). Clearly,China has changed from being a low-value niche market for Australian(bulk) wine exports [albeit very important in times of oversupply) to amedium-to-high-level value market. In the process, Australia cementeda 16% volume share of China's import market, is well-placed in secondposition behind France, and is the leading New World wine exportingcountry to China (IWSR 2011).

Entering the emerging Chinese market and having continuedsuccess is far from straightforward, in 2011, on-trade sales of wineaccounted for 48% of total wine sales volume in China. For grapewine, increasing numbers of Western-style, full-service restaurantsstimulated the on-trade sales. In 2011, the average wine price wasonly RMB 30/litre and RMB 82/ütre in the off-trade and on-trade,respectively, which is much cheaper than in most developed countries.Consumers are increasingly accepting standard and premium winesthat will result in direct price increases, as well as product portfoliorestructuring to get rid of low-end wines and focus on developingmid- and high-end wines (Euromonitor 20111. These trends presentchallenges of a different kind to the Australian wine industry.

Given the high future growth prospects, wine industries and researchorganisations around the globe are continuously monitoring thismarket with the greatest amount of interest. The distribution landscaperepresents an important marketing element that needs to be paid closeattention, especially given the dimensions of China's market.

EXECUTING A SURVEY OF WINE IMPORTERSAND DISTRIBUTORS IN CHINA

The main purpose of the survey was to determine the distributionbottlenecks and other barriers to export for Australian wine to China'smarket. A total of 2015 potential respondents were contacted byemail and asked to participate in a web-based survey They receiveda reminder e-mail after seven days and, finally, the survey wasclosed after 14 days. The survey resulted in a final sample size of 87respondents (±4% response rate).

The companies that participated in the survey were predominantly100% Chinese privately owned. Few businesses were operating underforeign joint venture or were completely foreign owned. It is important to

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Table 1. Number of Australian producersimported from into China in 2011.

Number of Producers

1-3

4-8

9-15

79.3

17.2

1.7

1.7

Table 2. Perception of main difficultiesfor wine imports into China.

Price FOB

Volume

Quality '- •" ^^^^Ê

No difficulties

Time

Costs of siiipment

Language

Other

40.3

22 4

19.4

17.9

14.9

11.9

10.4

Table 3. General import frequencyfrom Australian exporters to China.

Frequency

Just-in-time (JiT)

Every quarter

Every month

Every half year

52.7

25.5

14.5

7.3

Table 4. Average time required forcustoms clearance in China.

1-10 days 41.5

11-20 days 24.4

Average days

7.4,|

15.2

21-30 days

30-90 days

OverallAverage

24.4

9.8 56.5

19 days

Table 5. Options for obtaining physicalpossession of wine after customs clearancein China.

Options for obtaining physicalpossession

Direct from customs agent at port 69.3

Via a private logistics 26.5management business from theport

Delivered from a store/warehouse 20.4

to own/other warehouse

Via a PRC authority from the port 16.3

Direct at the own store/warehouse 12.2

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note that the majority of surveyed companiesare multi-functional operators, meaningthey operate as importer and/or distributor,wholesaler, retailer, agent or other types ofbusinesses. These companies are mostlylocated in the first-tier cities, such as Beijingor Shanghai, but also in other cities andprovinces. This aspect should be consideredwhen interpreting the collected data.

SURVEY FINDINGS

Exporting to China requires a carefulmarket analysis in line with marketingstrategies to find a pool of potentialdistribution partners. Building trustingrelationships with a Chinese distributionpartner and being able to fill a gap in thepartner's portfolio with wines that matchthe nature of the portfolio, are crucialrequirements.

The survey yielded information about thenumber of different Australian producersfrom which the Chinese companies importwine. The vast majority (79%) of respondentsare importing fmm only between one to threeAustralian producers (Table D.This leadsto the deduction that getting into a Chinesewine importer's portfolio is actually quitecompetitive. It is possible the few companiesimporting from nine or more Australianproducers are either specialised operatorsand/or distribute their products through avariety of channels. Otherwise, the numberscould suggest that the Chinese companiesgenerally import fmm only a select fewproducers who offer a diverse range ofpmducts and brands.

Knowledge about important criteriaa Chinese partner will consider whennegotiating future trading relationships,and the potential difficulties that exist whenexporting wine to China can be helpful toreduce perceived risk and strengthen theoffer's attractiveness. Table 2 shows whengiven multi-choice answer options, around40% of respondents regard the FOB priceoffered to them as an obstacle to trade.Volume and quality are the second andthird highest rated issues, in combinationaccounting for 43%. Cther difficulties includeexchange rates, which is an increasingthreat to Australian wine imports. Somewhatsurprisingly, language problems and freightcosts only accounted for 12% and 15%,respectively. The high importance of theprice issue ties in with the fact that Chineseimporters are striving for higher margins,while also trying to increase the retail (andwholesale] prices of imported wine.

As the market develops further and marketparticipants learn to evaluate and comparepmduct offers and prices, the source priceissue will grow in importance. Nearly half ofthe respondents prefer a FOB price of RMB20 maximum for the off-trade sector, whichrepresents more or Less $A3.95/litre. On theother hand, higher FOB prices are acceptable

WINE & VITICULTURE JOURNAL MAY/JUNE 2012

for the on-trade sector. In summary, it isimportant to maintain a reasonable price-quality ratio, as these are the most importantattributes forAustralian wines in China. Civenthat the quality of Australian wine is generallyperceived as consistent and high, price seemsto play a very important role in negotiations.

The good news is that, in general, theimport process of Australian wine is perceivedoverall as 'easy' by Chinese importersand distributors. Moreover, 60% plus ofthe surveyed companies do not require aminimum volume of Australian wine whencontracting with them with a view to export.This suggests a relative flexibility of mostChinese partners concerning wine volumelimits.

As most Chinese import companies ordertheir wines on a just-in-time (JIT) basis (Table3), this aspect needs to be carefully consideredwhen planning and organising the shipment.

Another potentially limiting factor forwine exports to China is the time needed forcustoms clearance after arriving in China. Theaverage time of custom clearance is 19 days(Table 4).

Table 5 shows the pathway by which theimporter or distributor receive their wines.The vast majority of nearly 70% claim theirwine direct from a customs agent at the port.Private logistics (27%) and having it deliveredfrom another store/warehouse (20%) are thesecond and third most used options. Only 12%claim their wine from their own warehouse ator near ports.

The ways in which the Importers anddistributors obtain physical possession of theimported wine brings into play the issue oftemperature control facilities and their use atvarious stages of the export wine distributionchain (Table 6).

Clearly, temperature control duringthe long overseas voyage is important, asconfirmed by 47% of the companies. Oncethe importers have claimed their wines,temperature control while in their custodybefore delivery to their customers is almostessential (64%). It is insightful that 20% did notuse any temperature contrôlât any step of thewine delivery process.

Furthermore, the application oftemperature control seems not to cover thewhole process of transport, which includes thestorage before clearance. Only 29% indicatedthey use temperature-controlled storage atport. Storage at port and transport from theimporting company to the final customerare the weakest parts of the distributionchain where temperature control can beleast assured (Table 6). This issue requiresa circumspect approach by Australianexporters.

The most common methods of paymentare cash in advance and letter of credit (LC)which account for approximate 35% and 31 %,respectively (Table 7). Normally includedin an agreement or contract, the payment

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• Very good

Market share2010 (volume)

Figure 1. Chinese perception of wines' sales performance by country of origin. (Source: IWSR 2011)

conditions are based on negotiations betweenboth parties. The most preferred methodsof cash in advance and LC both requiretrustworthiness, on the one hand, and reducerisk on the other, especially for the Australianexporter It can be assumed that the paymentof cash in advance is a common way to startan export business with a Chinese partner,whereas other methods are more relevant forwell-established relationships over time, whichincludes Long-term contracts.

The average time allowed for the paymentof imported wine is 46 days (Table 81. Whereasthis is 'only a number', any such comparisonwith other export markets will highlightwhether this is shorter or higher than 'normal';this also applies to the 19-day customsclearance period (Table 4). Given the fact thatmost wine sold to Australia's largest exportmarket, the UK, is to large retail chains, suchasTesco, Sainsbury, Marks & Spencer, etc,and that a payment period of 60-90 days iscommon in this trading environment, onecan cautiously deduce that in the case ofChina, this is on the shorter side, which isanother incentive for exporting there. Finally,comparing all exporting countries, France,Chile and Australia play the most importantrole for Chinese traders. Figure 1 showshow Chinese companies evaluate differentcountries in relation to their sales in themarket. As mentioned, French wine is verydominant. Nearly all participants perceivedthe sales performance of wine from Franceas 'good' or 'very good'. Australia and Chileseem to strongly compete with each other,and although Australia has twice the volumemarket share of Chile, both are perceived tosell well. Despite the fact that Argentina plays aminor role on the Chinese market at this stage,the country's wines apparently sell well andare more positively perceived than those of thetraditionally big players, such as Italy and Spain.

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Cabernet Sauvignon and Chardonnayare the two most familiar grape varieties toChinese consumers, and are still the bestselling red and white wine. Chinese peopleare becoming more curious with regard tonew flavours, leading to a greater presenceof other grape varieties (Euromonitor 2011 ].This plays right into the hands of Australianwine exporters with an abundance of stylesand volume available at different pricepoints, especially when it comes to CabernetSauvignon and Chardonnay.

CONCLUSIONS

It is predicted that wine sales growth inChina will slow down, but will still continueto post double-digit percentage growthfigures in the five-year period 2012-2016.The reason for the growth slowing downwill be saturation. Non-grape wine is losingits attractiveness among young consumers(Euromonitor 20111. Whereas all indicatorsare positive for Australian wine exports toChina, a lack of knowledge about China'sdistribution landscape can quickly lead toan exporter's downfall. Although our surveyconcentrated on identifying only the mostbasic of baseline indicators and involvedno sophisticated statistical analysis of thecollected data, it should be of interest toAustralian wine producers contemplatingexports to China. It is important that furtherstudies similar to this one, but probing certainaspects more deeply, be executed and madeavailable to the Australian wine industry.

ACKNOWLEDGEMENTS

The financial support for this projectprovided by the Wine 2030 ResearchNetwork and Wine Australia is gratefullyacknowledged.

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Table 6. Temperature control at differentstages of the delivery in China.

stages of delivery process

During storage in your care 63.6

During shipping from overseas to port 47.3

During storage at port 29.1

During transport to your customers 9.1

None 20.0

Table 7. Method of payment-typeagreements in Chinese contractualarrangements.

Payment type

Cash in advance

Letter of credit

Bani< draft

Consignment

Other "• "

1%)

34.5

30.9

20.0

5.5

Table 8. Time period of paymentagreements in Chinese contractualarrangements.

1-30 days

31-60 days

61-90 days

91-120 days

Overall Average

42.9

23 2

10.7

46 days

REFERENCES

Euromonitor [201i) Wine in China 2011: Country Sector Briefing,Euromonitor International, December.

Institute of Wine and Spirits Record (20iil The tWSR Global WineHandbook 201Q. IWSR: UK.

Wine Australia (2012) WineFacts database, accessed 18 January2012. available at; http://www.wÍneaustralia.com/austraüa/Defeult.aspx?

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