Wine to China

The Next Great Gold Rush

John Gregg,

Principal

Navigate Consulting

March, 2015

Outline

Provide an overview of the Chinese wine market;

• The macro view of China

• Profile of the overall wine market

• An examination of the imported wine category

• A snapshot of imported wines

To provide even the Chinese ‘first timer” with a solidbaseline and understanding

from which to begin planning their entry into this unprecedented market.

50-60

40-50

30-40

10-2020-30

0-10

Population Scale(millions)

HUBEIANHUI

ZHEJIANG

JIANGSU

NINGXIA

TIBET

XINJIANG

QUINGHAI

CHONGQUING

YUNNAN

SICHUAN

GUANGXI

GUIZHOU

HUNAN JIANGXI

FUJIAN

GANSU

SHAANXI

INNER MONGOLIA

SHANXI

GUANDONG

HENAN

HEILONGJIANG

JILIN

HEBEI

SHANDONG

HONG KONGMACAU

SHANGHAI

LIAONING

BEIJINGTIANJIN

100-110

90-100

80-90

70-80

60-70

A Population of 1.4 Billion, spread throughout 34 Provinces – 10 With Populations of 50m+

Beer and spirits particularly “Baiju” still dominate China’salcohol market………but that situation is changing rapidly

• Sales of alcoholic beverages in China totaled 123 billion litres in 2014, valued at US$176B

• This is compared to Australia’s total alcohol market value of AUS$10.4 Billion

• Beer dominates by volume with an 85% share, with spirits on 8%• Beer’s share by value is much lower at 40%, just ahead of spirits with 38%• Wine fastest growing – 5 year volume CAGR of 18%, compared to beer at 8%, spirits at 3%

Source: Euromonitor International

Beer85%

Cider/Perry0%

8%

Volume share

RTDs

0%

Other Wine4%

Grape Wine

3%

Spirits

Value share

Grape Wine

Other Wine10%

RTDs0%

Spirits38%

12%

Cider/Perry

0% Beer40%

515

2,989

2,671

2,305

2,259

2,228

971

1,162

1,015

973

535

16,237

France USA Italy Germany China UK Russia Spain Argentina Romania Total Top10

Source: OIV; Wine Australia; Euromonitor; analysis

16,752

Per capitaconsumption,2014

China is a large wine market,but mostly consumes its owndomestic production

China now ranks 5th and is a whisker behind 4th Germanyamong the Top-10 wine consuming countries…but on a per capita basis has plenty of room to growVolume of consumption 2014Millions of litres

39.2 9.4 41.1 24.8 4.3 22.3 8.3 21.7 24.8 12.3

If current growth continues by 2018 there will potentially be 648 million wine consumers

• At 1.4 billion, China has the world’s largest population

• The Chinese population expected to peak at 1.49 billion by 2030

• Wine Intelligence research shows that 179 million adults currently drink wine in Chinabut only 84.3 million adults drink imported wines.

• Rabobank estimates that 248 million people in China have the purchasing power tooccasionally consume imported wines

Shijia-

Jinan

Zhengzhou

WuxiChangNingbozhouWuhan

Dongguan

000’ RMBper capita

Tier 1 cities Tier 2a cities4 highest GDP High GDP with big market

Tier 2b citiesRelative small market with high GDP per

capitaRMB bln

Tier 2c citiesHigh population

with relatively lowGDP per capita

Chengdu

ShenzhenZhongshan

Zhuhai

Tier 2a citiesTier 2b citiesTier 2c citiesCities covered

Harbin

Changchun

ShenyangHohhot

Beijing Tangshan

Baotou DalianTianjin

zhuang YantaiZibo Qingdao

Xi’anSuzhou

Nanjing Nantong

Zhen Shanghaijiang

ChongqingHangzhou

WenzhouChangsha Fuzhou

QuanzhouXiamen

Guangzhou

Tier 1 citiesFoshan

China: one country, but many marketsThe coastal cities in China represent the majority of the economy

China’s top 20 cities ranked by GDPSource: China Year Book, Respective cities’ year book 2014

Breakdown of GDP by cities tier systemSource: China Year Book, Respective cities year book 2014

The Macro View

China Wine Market Profile

Imported Wine Category

How We Can Help You

Distribution:China is relatively evenly split by sales channel

• Wine volume share in 2014: off‐trade 49%, on‐trade 51%

• Growth rates in both channels similar, therefore

• Very little change in off‐trade and on‐trade shares over the last decade

• Domestic mainly off‐trade, imported sector pre‐dominantly through the on‐trade

• Expansion of leading retailers will expand the off‐trade supermarkets (62% share) and smaller

specialised wine stores (18%) are gaining market share

Reds dominate …for now…, but watch for the coming White and sparkling surge

• Red wine accounts for just under three‐quarters of China’s wine market. Whites .>1/4

• Red sales growing at a faster rate (5 year CAGR of 21%) than whites (5 year CAGR of 14%)

• Rosé and sparkling small but growing segments

• The preference for reds relates to its image of vintage, sophistication, heritage, investment value

plus the colour red symbolises fortune and joy in China

However many females, especially when out with friends have started to switch to whites and sparkling varieties, which will boost white share of

the total market rapidly

Two holidays account for 60% of wine sales

• Chinese New Year and Autumn Festival account for 60% of wine sales

• Primarily due to family and business gatherings during these festivals

• Gift boxes are popular, while off‐trade sales are mainly for gift giving and family visiting

• Traditional packaging/labeling, communicates a “premium” image associated with “heritage”

• Cork is “necessary” (synthetic is also acceptable, but ideally real cork, especially for premium positioning) versus screw-cap

Creating Premium PerceptionsThe importance of packaging With limited consumer knowledge, packaging becomes an important proxy for wine quality

DistributorRetailerRestaurant hotel

71010

989

799

679

743

445

715

Preference of packaging from different stakeholders(High marks indicate favorable packaging style)Source: Rabobank, 2014

Scale 1-10with 10being mostpreferred

Don’t underestimate the scale and affinity for the domestic industry

• Domestic wine production reached nearly 211 million cases in 2014

• Production bases are concentrated in the North, with Shandong the major region

• The major 3 domestic players are Changyu, Dynasty and Great Wall.

• Each own domestic vineyards as well as source from growers and imports of bulk wine.

The Macro View

China Wine Market Profile

Imported Wine

How we can help you

Import sector is growing fast; France and Australia lead

• France (45%) is the leading importer followed by Australia (20%).

• Top six importers account for over 90% of imported volumes sold

2014

Growth in imports is outpacing domestic

• Sales of bottled imported wine are growing at nearly four times the rate of domestic

embracing of Western culture, products and lifestyles,

increasing disposable incomes,

healthy image of wine compared to other alcoholic beverages in China,

and the high quality perception of imported wines

Also cultural factors such as “Guanxi” face in a business context

Why?

Cu

mu

lati

vera

tio

for

Au

stra

lian

win

esa

les

(%)

• Strong presence about 20% of all imports in at the “high-end” retail pricing point in China, between RMB200-300 per 750 mL bottle

• RMB 300-400, Australia has a dominant position, selling 40% more than French wine• BUT THERE IS A CEILING - For the “icon” price segment (>RMB 400), Australian wines top out between

RMB 500-800, while French dominate all price points from RMB 1,000 to10,000

Retail price point (RMB per 750 mL bottle)

100

75

50

25

Size of bubble indicative of market size at respective price points% indicated market share by volume of AUS wine in respective price points

= 300,000 9L cases

Below 30 30-50 50-100 100-150 150-200 200-300 300-400 Over 400

PremiumHigh-end IconMid-rangeEntry-levelLow-end

7%

2013 Import bottled wine volume (9L cases)Total China: 15.1 millionTotal from Australia: 4 million (20.5%)

15%

11%

Australian wine has gained momentum in the “high-end”and “premium” segmentsThe penetration of Australian wine among China’s wine pricing points

Imported wine sales volume from all origins in China at defined retail pricing pointsSource: AUSTRADE, Morgan Stanley,IWSR, UN Comtrade, 2013

Growth of leisureClass in China

••••

Consumption boom.Life-style changes.Food and beverages as mainstream Self-medication.

• Local and imported.• Multinationals in China.• Traditional influences.

• Own consumption• Gift giving.• Restaurants/bars

• Supermarkets.• On-trade growth • Wine specialists• E-commerce

1

Urbanization

3

Diversity OfChoice

2

Evolution OfF&BCulture

4

ModernizationOf Channels

... The same drivers transforming China’s F&Bsector are driving wine consumption

Savvy wine exporters are capitalising on the rapid spread of F&B culture into secondary and tertiary cities

China’s Urban Landscape

The Macro View

China Wine Market Profile

Imported Wine

How we can help you

WHO ARE WE?: Navigate is a “Boutique” international management consultancy

Our team, all ex Tier 1 employees from market research or management consulting; either live or have lived extensively in China, speak at least Mandarin fluently and have extensiveexperience assisting Australian, US and UK winemakers successfully capitalize on Chinese market opportunities

Our work in China builds on our proven model of bringing together

research experts with wine market specialists to deliver actionable

insights

Clients – Australia &New Zealand

Clients – United States

Little Differentiation:Many small players failingto invest in R&D has ledto overcrowded marketsand undetectedopportunities.

False AdvertisingClaims: Even though thegovernment has crackeddown, the damage causedby years of false claimsremains.

Poor ProductQuality: Due to theshort term view ofmanufacturers cheapraw materials and oldequipment are used.

Fake/CopiedProducts: Widespreadproblem, some of Australia’s most prestigiouslabels are openly copiedAnd sold in legitimate trade channels

• In the 1990s, as thewine market beganto develop, many localmanufacturers entered.

• Unscrupulous practicesdepressed the sector, onlyrelieved when regulationwas introduced in theearly 2000’s.

• While progress has bemade, infractions ofcourse remain.

OngoingUnscrupulous Local

PracticesHistorical Development Ironically Creating A

“Vacuum” of trust that only imported brands can fill

• Public distrust means70% of consumers aredistrustful of wine retailers product offerings

• Many believe thatinternational products areof higher quality thandomestic products.

We help clients understand & avoid the risks inherent in the Chinese market

Effective brand names

HOW WE CAN HELP YOU: We provide evidence-based solutions for a wide range of business questions

Back label designand content

Pre and post-testingof advertising

… and more

Financial and business planning

Consumer and tradepreferencesPrice positioning

Evidence-based solutions

Market entry strategies andGeographic focus

Distribution

Understandingmotivations

What should my Chinese market entry strategy look like?

How do I grow top line revenue and bottom line profit.

How do we establish a successful positioning for winesfrom XXXX in the Chinese market?

Does the Chinese translation of my brand name reflectthe positioning we want?

How to Chinese consumers evaluate and interpret mylabel design?

What are the opportunities and barriers from the tradeperspective for my range?

What should my label look like for the Chinese market?

Strategic

Advice

Brand

development

Primary &

Secondaryresearch

Go to Market

Services –

distribution,

retailing and legal

Service areas Questions we answer include:

WHAT WE DO: A broad range of services tailored toindividual client needs

For each project, we assemble a project team with the right mix of research, management consulting and market expertise to give you an evidence-based answer to your business questions

STRATEGIC ADVICE: Using evidence-based approach tosupport key strategic decisions

Primary &secondaryresearch

Branddevelopment

Strategicadvice

Reports

When helping clients to tackle complex strategic questions, we

use a structured approach in order to deliver a strategy that is

evidence-based and achieves our client’s objectives

Questions include:

“What should my distributor strategy be for China?”

“How should I build my brand portfolio for China?”

A typical process will address the following areas:

Where arewe now?

1

What dowe want toachieve?

2

How do weget there?

3

Does ourproposedapproachwork forconsumersand trade?

4

How do weget tomarket?

5

We work with clients tocapitalize on top line growth

opportunities while alsoaddressing long-term profit

protection.

DevelopmentAssessment of the opportunity and

formulation of the strategy to enter newchannels, value segments, application

sectors and lower tier cities.

PenetrationListening to the voice of the customer to

improve customer segmentation &targeting, product & service offering, and

route-to-market.

Profit ProtectionUnderstanding of the cost curve and coststructure 5 years out, and developmentof the right response to protect profit

margins.

Government AffairsDesign of a modern, proactive and

customized approach to governmentaffairs and corporate social responsibility

to meet business objectives.

Primary &secondaryresearch

Branddevelopment

Strategicadvice

Reports

STRATEGIC ADVICE: We help secure top-line growth and secure bottom line profit

Distribution

DistributionBranded

PartnershipStrategicInvestor

Greenfield Acquisition

Importer/distributormodel, supported byin-country team (ROor FICE).

• Detailed

understanding of themarket opportunity.

• Modeling of organicgrowth scenarios,route-to-marketstructures, andnature of in-countrysupport needed.

• Search and selection

of distributionpartners.

Importer/partnermodel, leveragingexisting sales anddistribution platform,either F&B or pharma.

• Potential partner

assessment (interestin proposition andreadiness to sharedownstreammargins).

• Sustainabilityassessment (risks,next best use ofassets, alternativesupply).

A step further thanbranded partnership,offering to divest aminority share.

• Assessment of the

strategic significanceof the Chinesemarket, and thus therationale for astrategic investorfrom China.

• Identification ofsynergies with astrategic investor,supporting theirglobalization.

Investment in in-countryproduction capacity andfull business capabilities,either as a WFOE or JV.

• Full modeling of the

economics anddetailed businessplanning.

• Decision onwhether a JVpartner would benecessary, orpreferable andfeasible to goalone.

Acquisition ofexisting business inChina.

• Definition of theideal target profilethat fulfils the entrystrategy.

• Search and selectionof attractive andavailable targets.

• Design of acquisition

strategy andrelationship buildingwith vendor.

1 2 3 4 5

Entry Models

STRATEGIC ADVICE: Our goal is to help you find and grasp the optimum market entry model for your brand

Primary &secondaryresearch

Branddevelopment

Strategicadvice

Reports

Including the pros and cons of the myriad of legalPartnership models in China is you wish to link with a A well established player

PRIMARY & SECONDARY RESEARCH: The right method at the right point in developing your Chinese market position, brand platform and distribution network

Primary &secondaryresearch

Branddevelopment

Strategicadvice

Go to mkt plans

Quantitative

Bespoke quantitative surveys of Middle-upper middle class wineDrinkers in China.

Covering up to 35 cities and representative of 250 million consumers

Qualitative:

ConsumerFocus groupsIn-depth interviewsTremor panel (phone and

online)

Sensory testingPackaging and ad analysis

Trade Research

A key focus for our Chinawork is interviewingmembers of the Chinesewine trade, including:

Importers and distributorsMajor off-trade buyersHigh-end on-tradeJournalists and educators

Recruitment begins with ourown network of contacts inChina. For specificrecruitment needs, we use anetwork of locally-basedpartners to find the rightrespondents

Secondary research

Our in-house languagecapabilities and researchexperience allows us toquickly and effectivelyconduct secondary researchon the Chinese wine space.Platforms that we consultinclude:

Social media, includingWeibo, Renren, forumsetc.Press and mediapublicationsData sources, includingChinese Bureau ofStatistics

As a management consultancy whose team have experience across globe but more importantly in the Asia-Pacific region our strategy, research and implementation expertise allows us to draw on wide range of research methodologies.

BRAND DEVELOPMENT: Our proprietary Vinibrand®approach to optimize brands for the Chinese market

Primary &secondaryresearch

Branddevelopment

Strategicadvice

Reports

Brand development Pre-launch Post-launch

Brand strategy

Differentiated brand

positioning / brand audit

Brand specification

Optimised Chinese

brand name

Culturally appealing

label

Culturally relevant back

label

Brand communication

Effective

communicationscampaign

Vinibrand® provides a framework for assessing and developing a

brand for the Chinese market, with particular attention placed on

the unique demands of this market.

Based on individual client needs, we typically select one or two aspects of the

brand development process to focus on.

CASE STUDY:Vinibrand® market entry and positioning project

BUSINESS CHALLENGE

A consortium of Western Australian wines brands, led bythe Industry group Wines of Western Australia wantedTo explore the feasibility of entry into the Chinesewine market.

In particular they group wanted to avoid the increasinglycluttered array of Eastern Australian wines on offer inthe three Tier 1 Chinese cities of Beijing, Shanghai andGuangzhou and carve out a less crowded andcompetitive niche in other regions.

We were asked to develop and execute a completemarket entry plan for the wine consortium.

SOLUTIONStage 1:A three phase review of the Chinese market wasundertaken in order to select the optimum new venturelegal and organizational structure, geographic footprint,distribution strategy and retail channel selection andlaunch trade and consumer marketing campaign for theconsortium of WA wines. 21 Chinese provinces in Chinawere examined in depth from which a selection of 14provincial cities ere chosen for first stage distribution. Alimited joint venture structure was chosen as theoptimum structure.

Stage 2:Trade research to determine distribution options andgeographic reach. Then Primary consumer research todetermine the optimum product portfolio, pricingstrategy, point of sale communications and digital andtraditional media support.

Stage 3: Full market entry plan and implementationincluding years 1-3 financial and operations plan

Our team includes:

• Chinese based nationals, includingnative Mandarin and Cantonesespeakers

• With experience working across all provinces and regions

• Quantitative and qualitative market research expertise

• Experienced trade researchers

• Extensive experience in the wineindustry, including WSETqualifications

Our team is formed of some of the brightestand most experienced wine industry,marketing, research and branding experts inthe business.

RUI SUResearch Director

The Navigate CHINA Wine TeamMarket experts with research and consulting expertise

John GreggNavigate Principal

Kim WuDirector – Trade,

Francis LyDirector – Logistics

& Partnerships

Call + 61 402 493 278to speak to John Gregg

and discuss establishing your footholdin a never to be repeated wine marketing opportunity

www.navigateconsulting.com.au