The Alcoholic Beverage Market in China:

The Alcoholic Beverage Market in China:
Opportunities for Canadian Wine ExportersMarch 2008


The Government of Canada has prepared this report based on primary and secondary sources of information. Readers should take note that the Government of Canada does not guarantee the accuracy of any of the information contained in this report, nor does it necessarily endorse the organizations listed herein. Readers should independently verify the accuracy and reliability of the information. This report is intended as a concise overview of the market for those interested in its potential and is not intended to provide in-depth analysis which may be required by the individual exporter. Although every effort has been made to ensure that the information is correct, Agriculture and Agri-Food Canada assumes no responsibility for its accuracy, reliability, or for any decisions arising from the information contained herein.

Please address any comments or suggestions you have on this report to:

Ben Berry - berryb@agr.gc.ca


--------------------------------------------------------------------------------



Overview
Increased purchasing power among the local population and subsequent demand for premium, high quality products offer huge potential for Canadian alcoholic beverage exporters looking to break into a dynamic and diverse market. Rice wine, beer, and local spirits, such as baijiu (literally, white liquor) remain the most well known and popular alcoholic beverages in China. However, grape wine, fruit wine and fermented beverages are also gaining prominence.

Key industry projections show substantial growth in this market, particularly for higher quality imported products. There is a definitive downward trend in projections for traditional beverages, while more western style wine, beer and spirits should see noticeable growth. The impact of a growing youth culture is one of the key factors behind this movement and opportunities abound for well placed promotions of targeted products.




Alcoholic Beverage Market
The growth of the middle class has resulted in a desire for more prestigious, high quality alcoholic beverage products for personal consumption or gift giving. Greater health awareness has boosted sales of traditional Chinese herbal spirits. Government campaigns discouraging heavy drinking and promoting more healthy alternatives, such as wine have led to increased demand for beer and wine. Niche products, such as cider, ready-to-drink products and alcoholic premixes (FABs) also have growth potential, although this is currently limited to major cities and on-trade sales.

The alcoholic beverage market is forecast to continue its strong growth. National players are expected to expand into mid-sized cities, having already established distribution and marketing channels in bigger urban cities. There is also a trend towards mergers and acquisitions in an effort to create nation-wide brands. This is most visible among beer industry players, who want to enhance their distribution network due to the high costs of transportation and lower returns per unit. Low-priced, traditional products are still the most popular choice for consumers but rising incomes and increasing sophistication should result in growing demand for both domestic and foreign premium products. The growth of supermarkets and hypermarkets will allow domestic consumers more access to foreign products.




Consumer Profile
China is a vast country with more than 1.3 billion people, making it difficult to generalize drinking habits. However, there are some common practices and traditions. In the past, consumption of alcoholic beverages was reserved for special occasions and celebrations. Alcohol was consumed with family members and relatives following certain rituals as a sign of respect. This practice still continues today among older generations.

However, drinking is now a less formal activity and is a means of relaxation as well as an excuse for friends to get together and socialize. As a result of China's one-child policy, the country has a sizeable portion of young people who, as only children, have less family obligations and financial responsibilities. Therefore, a greater proportion of their income can be spent on personal consumption. Young Chinese are also more receptive to Western products and willing to try out new drinks. These trends have opened up lucrative markets that Canadian exporters can target.

Although off-trade sales from stores for home consumption make up the greater percentage of overall sales, a majority of alcohol sold (by volume) is consumed in on-trade premises, such as in bars and restaurants despite higher on-trade prices. In many ways, alcohol consumption outside the home has become more of a lifestyle statement, especially for young people and the wealthy. Rising incomes, especially in urban areas, have led to greater demand for high quality prestigious products that can demonstrate wealth and convey higher status. In urban areas, there is also greater receptiveness to new types of alcoholic beverages, niche products and imported drinks. Alcoholic beverages accompany meals and are frequently served during business functions. High quality wines and spirits are also often given as gifts. Consumption of alcoholic beverages has also risen among women.

Nonetheless, living standards continue to improve and incomes are rising, offering opportunities for Canadian exporters to introduce upscale foreign imports to a greater portion of the local population.



Consumer Segments
As late as 1985, China had one of the narrowest income distribution gaps in the world. However, the gap between the richest and poorest in China is widening at an alarming rate—one of the quickest in the world. This gap is due in large part to the differences in income between urbanites and rural residents, but coupled with this gap, is a very noticeable income gap through various regions in China. The average income of an urbanite is roughly three times that of a rural resident and the average income of someone living in the East is 2.25 times higher than that of someone living in the West. A map of GDP per capita by province can be seen at:

www.shanghaienglishteachers.com/images/maps_china/map_of_china_prov_gdp1.gif

When identifying a consumer target the choice between an eastern urbanite and a rural westerner would seem obvious. However, income inequities have become even further complicated. Due in large part to the rural/urban income gap, rural Chinese continue to move to cities in search of higher incomes. This movement has led to further income inequities as the income gap between the richest and the poorest urbanites has exploded. The richest 20% of China's urban population control roughly 50% of the total consumer income while the lowest 20% control only 6%. Movement to the cities has also had an interesting effect on the overall income of the cities themselves. Cities in China that were once considered the richest or best cities for business have faded quickly. For instance a top-five city in 1999 would have now been overtaken by several cities that would not have been ranked in 1985.

At present, the four top-tiered cities in terms of income, GDP and population in China are Guangzhou, Shenzhen, Shanghai and Beijing. A second tier includes cities such as Chongqing, Tianjin, Hangzhou, Chengdu and Shenyang. Cities that have potential in the foreseeable future include Dongguan, Ningbo, Suzhou, Qingdao, Dalian, Harbin and Guiyang. Research by McKinsey & Company indicates that mid-sized cities are a great place to explore because they have a growing middle class, the fastest growing incomes in the country and lower business costs. Therefore up-and-coming markets, such as China's second-tier and quickly-developing cities, may offer Canadian exporters the greatest potential.

Some highlighted consumer segments within these cities include: the mid-range income group, the wealthy high-income class, returned overseas Chinese, and expatriates. Premium domestic and imported wine is mainly consumed by the high-income group, who are status-conscious and have developed a greater understanding of and appreciation for wine. Returned overseas Chinese and expatriates are also important segments. Having lived abroad, many appreciate good quality wine and demand wine produced abroad to be available in China. They are also able to educate locals on wine culture. However, current and up-and-coming middle class consumers are beginning to try out wine products, especially imported inexpensive still grape wine. This market segment is much larger than the aforementioned groups and presents a real opportunity for the growth of grape wine products in China.



Key Locations
Beijing, Shanghai and Guangzhou currently have the highest concentration of imported alcohol products, which are priced at the higher end of the market. On a regional basis, Eastern China has the strongest alcoholic beverage sales in the country; wine alone accounted for almost 50% of total sales in this region in 2006. The region benefits from the large number of residing foreigners and expatriates, whose demand for imports has helped introduce new products into the market. In addition, the coastal cities of Eastern China benefit from an extensive distribution network. This region is a good launch point for Canadian exporters due to its wealthy consumer base, solid infrastructure and strategic location. Many domestic and international distributors also have their headquarters here. The South is another promising market for Canadian alcohol exporters. Consumers here have a greater acceptance and knowledge of Western products and foreign imports are seen as fashionable. This region is supported by a robust economy and continued economic growth, and large populations are found in urban centres. Both on- and off-trade sales are strong. The South is also well-positioned with close proximity to major shipping ports (e.g. Hong Kong and the Pearl River Delta).



Regional Breakdown
North/Northeast
Key areas: Beijing, Qingdao, Dalian
As the political, economic and cultural centre of China, the Northeast is a very competitive market comprised of both international and domestic players. Foreign imports are quite successful in large cities but local brands also have a strong presence. Leading domestic wine producers include Changyu, Great Wall, and Dynasty. Dragon Seal caters to local Chinese but also has a following among foreigners. The North is also the traditional wine-producing region of China and still grape wine production has increased in recent years as a result of economic development in large urban cities like Beijing, Qingdao and Dalian. Consumers from Northern and Northeastern China are reputed to drink more than their Southern counterparts and local producers have always had high volume sales in this region. However, consumers have relatively low incomes and choose local products, such as low-priced lager and spirits over imported alcoholic beverages. There are some high-income local Chinese who purchase premium products or imports to display their wealth. Nonetheless, the Northeast is a potential market for exporters as disposable incomes rise and the Chinese palate evolves.

East
Key areas: Shanghai, Shandong, Zhejiang
Eastern China has the strongest alcoholic beverage sales in the country; wine alone accounted for almost 50% of total sales in this region in 2006. The consumer base is wealthier and more sophisticated, especially in large cities such as Shanghai. Other major cities include Qingdao, Hangzhou and Nanjing. Consumers in this region view wine as healthy and sophisticated. Overall, consumers have a greater knowledge of imported alcoholic beverages. The region also benefits from the large number of residing foreigners and expatriates, whose demand for imported products has helped introduce new products into the market.

The coastal cities of Eastern China also benefit from an extensive distribution network, making it easier for new products to enter the market. This region is a good launch point for Canadian exporters due to its wealthy consumer base, solid infrastructure and strategic location. Many domestic and international distributors also have their headquarters here, making it easier to network and establish business contacts. Despite these advantages, competition in this region is fierce.

Due to the proliferation of bars, night clubs and restaurants in urban cities, on-trade sales are booming and offer higher rates of return than off-trade sales. On-trade sales are also boosted by strong retail development. Nonetheless, off-trade sales continue to dominate as many consumers purchase alcohol for entertaining at home. Off-trade sales are also aided by the large number of supermarkets and hypermarkets in this region.

Central
Due to low income, consumers in this region prefer to buy local products, which are less expensive and cater to more traditional tastes. Rice wine is popular, although still grape wine is seeing some growth due to its associated health benefits. Nonetheless, consumers in mid-China have not adapted to the taste of imports. However, this market has the potential to expand due to its location along the Yangtze River, which provides a good transportation and distribution network. Dominant players in the region are Dynasty, Great Wall and Changyu. In a reverse trend, on-trade sales are stronger than off-trade sales. However, the growth of supermarkets has boosted off-trade sales of alcoholic beverages.

West/Northwest
The West/Northwest region of China sees the lowest volume sales and the slowest growth for a number of reasons. The population is of the mid- to low-income bracket and therefore cannot afford to buy expensive, imported alcohol. In addition, consumers prefer traditional, local products and have little awareness or interest in premium or imported products. Overall, local players dominate the small yet competitive market and the region is often neglected by international and national brands.

South
Key areas: Guangzhou, Shenzhen, Dongguan
The South is another promising market for Canadian alcohol exporters. Consumers in this region have the largest disposable incomes in the country, high living standards, and a willingness to spend money on luxury items. The region is supported by a robust economy and continued economic growth, and large populations are found in urban centres. Both on- and off-trade sales are strong; many consumers enjoy socializing and eating out, raising the demand for alcoholic beverages.

Rice wine continues to dominate the market as the traditional drink of choice but red wine and champagne are seeing healthy growth. Consumers tend to purchase premium products as gifts and not for personal consumption because they have a higher price. Imports from abroad have great success in this market due to the greater sophistication of the region's consumer segment. Consumers here have a greater acceptance and knowledge of Western products and foreign imports are seen as fashionable. The presence of large chain supermarkets, such as Wal-Mart and Carrefour, has helped boost sales due to better distribution networks. The South is also well positioned with close proximity to major shipping ports (e.g. Hong Kong and the Pearl River Delta). There is also potential for premium niche products to enter the market. Cider, sherry, ready-to-drink products (RTDs) and alcoholic premixes have seen steady growth, and producers of fruit wine and wine-related products have the potential to carve out a piece of the market.

Southwest
Key areas: Chongqing, Chengdu, Kunming
Local products garner strong demand in Southwest China, particularly in urban cities such as Chongqing, Guiyang, Kunming and Chengdu. Demand has also been boosted through promotions in supermarkets, night clubs and restaurants. Large cities, such as Chongqing, have a thriving nightlife, while the Yunnan region has many popular tourist attractions, bringing in large numbers of tourists who want high quality alcoholic beverages while on vacation. The rural population prefers inexpensive local products, but there is a market for high priced imports. Domestic products dominate the regional market, although international brands have had success in large cities. On the whole, consumers are price sensitive and are reluctant to purchase expensive alcoholic products, which they know little about. The region also suffers from a poor distribution network and a lack of supermarkets and hypermarkets. Despite this, consumption has seen steady growth in night clubs and bars, especially that of foreign brands. The region is expected to see a slight growth in alcoholic beverage sales in the near future, although there will be intense competition among foreign, national and local players.

Summary Region Top Cities Key Products Target Consumer Segment
North/Northwest Beijing Domestic and premium beer and wine High-income elite Middle-upper class
Central - Rice wine and Domestic beer Middle-upper class
West/Northwest - Domestic beer and wine Middle-upper class
East Shanghai Premium/ imported wine, spirits and beer, niche products High-income elite
Middle-upper class
Young-middle aged
South Guangzhou Premium/ imported wine, spirits and beer High-income elite
Middle-upper class
Southwest - Domestic beer and wine Middle-upper class

Source: Euromonitor International, 2007




Industry Breakdown


Beer, Cider and FAB's
The market for beer, cider and FABs sold in China was worth US$30.6 billion in 2006 – a growth in value of 8.6%, roughly US$2 billion, over 2005. The segment continues to be dominated by beer.1

China Beer, Cider and FABs value, 2001-2006 (US$ Billion) Category 2002 2003 2004 2005 2006 GR
Beer 21.9 23.8 25.9 28.1 30.5 8.8%
FABs 0.021 0.023 0.025 0.028 0.030 8.5%
Cider 0.007 0.007 0.008 0.009 0.010 9.9%
Overall 21.938 23.849 25.940 28.191 30.622 8.8%
Growth 9.2% 8.7% 8.8% 8.7% 8.6%

Source: Datamonitor © Datamonitor

China Beer, Cider and FABs expenditure per capita, 2001-2006 (US$) Category 2002 2003 2004 2005 2006 GR
FABs <0.1 <0.1 <0.1 <0.1 <0.1 7.9%
Cider <0.1 <0.1 <0.1 <0.1 <0.1 9.2%
Beer 17.1 18.4 19.9 21.6 23.3 8.2%
Overall 17.1 18.5 20.0 21.6 23.3 8.2%
Growth 8.6% 8.1% 8.1% 8.1% 8.0%

Source: Datamonitor © Datamonitor

China Beer, Cider and FABs distribution channels, by volume, 2005-2006 (%) Channel 2005 2006
On-trade 57.7 57.8
Specialist retailers 33.8 33.6
Supermarkets / hypermarkets 6.2 6.2
Convenience stores 1.6 1.7
Service stations 0.5 0.6
Department stores (incl. duty-free shops) 0.1 0.1
Cash & Carry and Warehouse clubs <0.1 <0.1
Overall 100.0 100.0

Source: Datamonitor © Datamonitor

China Beer, Cider and FABs brand share, by volume, 2005-2006 (%) Company Brand 2005 2006
Tsingtao Brewery Co., Ltd Overall 13.8 14.0
Beijing Yanjing Overall 10.0 10.0
China Resources Snow Breweries Ltd. Snow 9.2 9.9
China Resources Snow Breweries Ltd. Others 4.1 6.6
Henan Jinxing Overall 5.0 5.2
Chongqing Overall 4.3 4.6
Zhujiang Overall 3.8 4.0
Harbin Umbrella 3.9 4.0
Fujian Sedrin Overall 2.7 2.9
Kingway Brewery Holdings Ltd. Overall 1.8 2.1
Sandeli Overall 1.8 1.9
Overall 100.0 100.0

Source: Datamonitor © Datamonitor

Forecast
Datamonitor forecasts the beer, cider and FABs market in China will be worth US$45.8 billion in 2011. The beer, cider and FABs market is forecast to increase by US$15.2 billion, with an expected 8.4% annual growth rate over the five-year period spanning 2006-2011.2 Beer is forecast to maintain its position as the lead in value and volume in this category.

Through 2011 it is anticipated that the beer, cider and FABs market will see a 5.5% increase in consumption (volume). Beer, the dominant segment will see 5.4% annual growth, while cider will see a 7% increase in consumption volume and FABs will see a 6.5% increase in consumption.

Forecast 2006-2011: China Beer, Cider and FABs value (US$ Billions) Category 2006 2007 2008 2009 2010 2011 GR
Beer 30.5 33.1 36.0 39.1 42.3 45.7 8.4%
FABs 0.030 0.032 0.035 0.037 0.039 0.042 6.7%
Cider 0.010 0.011 0.012 0.013 0.013 0.014 7.6%
Overall 30.622 33.243 36.076 39.150 42.415 45.853 8.4%
Growth 8.6% 8.6% 8.5% 8.5% 8.3% 8.1%

Source: Datamonitor © Datamonitor



Beer
Beer is the leading category in the beer, cider and FABs market with a year-on-year growth of 8.6% between 2005 and 2006. The Chinese beer market was valued at US$30.5 billion in 2006, representing an 8.8% annual growth rate between 2001 and 2006.3

China is the top beer market in the world and is expected to remain the largest beer consumer in the foreseeable future. Per capita beer consumption has experienced an annual growth of 12% in recent years, making China the largest and one of the fastest growing beer markets in the world, fuelled by a buoyant economy and rising income levels. Domestic beer production is ever-expanding and this has benefited Canada, a leading exporter of malting barley to China. However, the Chinese beer market is extremely fragmented, made up of many local and regional players. To increase profitability, many breweries have merged together; the top 10 beer companies now control more than half of the market. Tsingtao is the country's biggest brewery and controls 13% of the industry.

Many foreign companies entering the market have opted to acquire or invest in local breweries and sell beer under existing local brand names as consumers prefer domestic products and companies can take advantage of established distribution channels. However, some foreign beer companies have chosen to set up their own production in China and sell directly to the market under their own brand name. International companies have also set up joint ventures with local breweries to develop better quality and innovative beer products for consumers.

China Beer value, 2001-2006 (US$ millions) Category 2002 2003 2004 2005 2006 GR
Standard lager 17858.1 19307.1 20879.5 22561.5 24365.5 8.2%
Premium lager 3888.9 4328.2 4819.7 5359.8 5954.5 11.4%
Specialty beer 67.7 74.9 83.0 91.9 101.6 10.8%
Low/no alcohol 49.2 56.3 64.5 73.7 84.1 14.6%
Ales, stouts & bitters 45.7 51.9 58.9 66.7 75.5 13.6%
Overall 21909.6 23818.4 25905.6 28153.5 30581.2 8.8%
Growth 9.2% 8.7% 8.8% 8.7% 8.6%

Source: Datamonitor © Datamonitor

The beer market is led by standard lager (representing 79.7% of the total value) followed by premium lager and specialty beers with a 19.5% and 0.3% market share respectively. Low/no alcohol and ales, stouts and bitters form the next segments with a 0.33% and 0.27% market share respectively. The leading players in the Chinese beer, cider and FABs market are China Resources Snow Breweries Ltd., Tsingtao Brewery Co., Ltd and Beijing Yanjing.4

Most beer products fall in the low-priced category but premium lager is seeing an increase in popularity as incomes rise. Imported premium beer, such as Corona Extra, has also had success because of the prestigious image foreign products convey. There has been a growing trend towards low-alcohol and light tasting beer, especially among female and young consumers. Other trends include a desire for healthy beer, resulting in the creation of "green beer", a drink with algae extracts. While off-trade sales continue to dominate two-thirds of total sales, on-trade sales have been boosted by a growing number of night clubs, bars and sporting events.

Forecast
Datamonitor forecasts the beer market in China will increase by more than US$15 billion over the next six years, with an annual growth rate of 8% and will be worth US$45.8 billion by 2011. The standard lager segment will continue to dominate the sector, but the other products in the category will easily outpace the growth of standard lager, in some cases 2 to 1 (i.e. low/no alcohol products).5

Lemon was one of the top flavours for new beer product launches in 2006 appearing in both information gathered on flavouring and ingredient introductions. Rice and other edible essences were other notable introductions for 2006.



FABs & Cider
FABs are the second largest category within the Chinese beer, cider and FABs market. The category is broken down into three main segments: pre-mixed spirits, alcoholic soft drinks and wine coolers. The market for FAB products sold in China was worth US$30.6 million in 2006 - a growth in value of 8.4% over 2005. Within the FABs category, pre-mixed spirits accounts for 46.3% of total sales followed by alcoholic soft drinks with a 40.8% market share. Wine coolers accounts for the remaining 12.9% share.6

The FABs category recorded an annual growth rate of 8.5% between 2001 and 2006. The market for FAB products increased by US$2.4 million between 2005 and 2006, while the sales increase between 2001 and 2006 was roughly US$10.2 million.7

China FABs value, 2001-2006 (US$ Millions) Category 2002 2003 2004 2005 2006 GR
Pre-mixed spirits 10.2 11.0 12.0 13.1 14.2 8.5%
Alcoholic soft drinks 8.9 9.7 10.6 11.5 12.5 8.5%
Wine coolers 2.8 3.1 3.3 3.6 3.9 8.5%
Overall 21.9 23.8 25.9 28.2 30.6 8.5%
Growth 7.6% 8.4% 9.2% 8.8% 8.4%

Source: Datamonitor © Datamonitor

The leading players in the Chinese FABs market are Beijing Yanjing Beer Group and Sichuan Yibin Wuliangye Distillery Co Ltd.

China FABs company share by volume, 2005-2006 (%) Company 2005 2006
Beijing Yanjing Beer Group 18.3 18.4
Sichuan Yibin Wuliangye Distillery Co Ltd 11.1 11.3
Others 70.6 70.3
Overall 100.0 100.0

Source: Datamonitor © Datamonitor

Sales of pre-mixed spirits proved the most lucrative for the FABs market in 2006, generating total revenues of US$14.2 million, and representing an annual growth rate of 8.5% between 2001 and 2006. In comparison, sales of alcoholic soft drinks generated total revenues of US$12.5 million in 2006, representing an annual growth rate of 8.5% between 2001 and 2006.

A majority of FABs are sold through specialist retailers, followed closely by on-site sales with supermarkets and grocery retailers increasing in importance. FABs currently target foreigners, tourists and young Chinese adults eager to adopt Western lifestyles. Distribution is limited to top-tier cities in China and on-trade sales dominate. Name brand spirit-based FABs, such as Bacardi Breezers and Jack Daniel's & Cola are the only products currently with a major presence in the market. Domestic producers have a very small portion of the FAB market and have focused on products of lower alcoholic content that are fruit or malt flavoured. Domestic producers struggle to compete with foreign importers due to lower prestige and lack of promotion.



Cider
Cider and FABs are a niche market in China but have growth potential in the near future. Cider is a new product in China and therefore sales of this product are limited to large cities, as cider is available mainly in supermarkets or stores that cater to foreigners. Domestic players are trying to increase consumer awareness of this product by marketing cider as sparkling apple wine.

Cider is the third largest category within the Chinese beer, cider and FABs market. The market for cider in China was valued at US$10.3 million in 2006 - a growth in value of 9.4% over 2005. The cider market was valued at US$10.3 million in 2006, representing a 9.9% annual growth rate between 2001 and 2006.8

The leading players in the Chinese cider market are China National Cereals, Oils & Foodstuffs and Beijing Yanjing Beer Group. The leading brand for China National Cereals, Oils & Foodstuffs in China is Great Wall.9

China Cider brand share, by volume, 2005-2006 (%) Company Brand 2005 2006
China National Cereals, Oils & Foodstuffs Great Wall 15.0 15.5
Beijing Yanjing Beer Group Overall 2.2 2.2
Nongfu Overall 1.0 1.0
Others Others 81.8 81.3
Overall 100.0 100.0

Source: Datamonitor © Datamonitor

Cider is predominately purchased at on-trade establishments with specialist retailers the second most popular. Together these two retail options account for 90% of cider sales in China.

Forecast
Datamonitor forecasts the FABs market in China will be worth US$42.3 million by 2011 with an annual growth rate of 6.7%. By 2011, the sector will be fairly evenly split between pre-mixed spirits (46.3% of the market) and alcoholic soft drinks (40.8%). Wine coolers will hold the remaining 12.9% share of the market.10

Wine coolers present an interesting opportunity in this market because of China's current style of wine consumption. It is common for bottled still wine to be mixed with fruit juice. While wine education is currently taking place to change this practice, the fact that wine consumers are regularly mixing wine with fruit juices, and stores are promoting wine with buy one get one sales involving a bottle of wine and a bottle of soda or fruit juice should demonstrate a real opportunity for wine coolers in China. In addition, the fact that these drinks are typically lower in alcohol will make them attractive to an increasingly large percentage of the population that is looking for lower alcohol beverages. With this in mind, wine coolers should have a distinct advantage in this market because they are a ready to use, single serving product that is properly mixed, and can offer flavours and varieties that are attractive to Chinese consumers.

Sales of cider will reach US$14 million by 2011, an increase of US$4.5 million over 2006 totals. However, the growth of cider sales is expected to slow from the average rate of 9% experienced from 2001 through 2006 to an average of roughly 7% through 2011.11



Spirits
The market for spirits in China was valued at roughly US$6 billion in 2006, representing a modest growth rate of 1.6% over 2005. Given the amount of traditional spirits and the growing number of imported spirits entering the Chinese market, this figure is surprisingly low in comparison to other segments in the alcoholic beverage sector.

The current spirits market in China is essentially dominated by specialty spirits or traditional products. The overall decreases in this segment of the market mask real opportunities and the growth of imported and western style products. The sheer size of the traditional spirits segment makes judging the performance of the entire sector difficult.

China Spirits value, 2001-2006 (US$ million) Category 2002 2003 2004 2005 2006 GR
Specialty spirits 5,059.6 5,152.0 5,240.0 5,322.2 5,402.7 1.1%
Tequila & Mezcal 343.0 356.7 367.8 378.0 388.7 3.1%
Brandy 49.7 50.0 50.3 50.4 50.6 -0.4%
Whiskey 35.8 36.5 37.2 38.2 39.3 2.5%
Gin & Genever 14.3 15.1 15.9 16.7 17.5 5.2%
Vodka 6.0 6.0 6.1 6.1 6.1 0.5%
Rum 1.6 1.7 1.7 1.8 1.9 3.8%
Liqueurs 1.7 1.6 1.6 1.5 1.5 -2.7%
Overall 5,511.6 5,619.6 5,720.5 5,815.0 5,908.3 1.2%
-% Growth -1.0% 2.0% 1.8% 1.7% 1.6%

Source: Datamonitor © Datamonitor

The spirits market was dominated by the specialty spirits category in 2006. The specialty spirits category accounted for 91.4% of the total market share followed by tequila and mezcal and brandy with 6.6% and 0.9% market share respectively. The spirits market witnessed an overall growth in value terms of around 1.2% between 2001 and 2006. Sales for the overall spirits market increased by $93.3 million between 2005 and 2006, while the increase between 2001-2006 was roughly $340.1 million.12

Local Chinese spirits saw a slight decline in sales in 2006 because of a shift towards beer and wine. The overall market for imported spirits remains small because of high prices. Imported spirits are mostly sold in major urban cities and distribution is limited to bars, pubs and night clubs. However, spirit companies are beginning to increase brand awareness by sponsoring events, entertainment venues and sporting competitions. For example, Diageo (producer of Bailey's Irish Cream and Johnnie Walker) raised its profile by sponsoring Formula 1, which is highly regarded in China as modern and trendy. Both local and imported premium spirits are seeing a growing market, especially among young adults as consumer education improves. Premium spirits are also commonly given as gifts.

Top Companies and Brands - 2005-2006 Company Brand
Kirin Brewery Company, Limited Maotai
Diageo plc José Cuervo
Pernod Ricard Martell
Remy Cointreau Rémy Martin VSOP
LVMH Moet Hennessy Louis Vuitton SA Hennessy
Pernod Ricard Seagram's London Dry
Diageo plc Seagram's 7 Crown
LVMH Moet Hennessy Louis Vuitton SA FOV
LVMH Moet Hennessy Louis Vuitton SA Hine
Fortune Brands, Inc. Courvoisier
Pernod Ricard Chivas Regal
Diageo plc Johnnie Walker Black Label
Edrington Group The Famous Grouse
De Vere Group PLC Greenall's
Bacardi Limited Bacardi
Diageo plc Johnnie Walker Red Label
Pernod Ricard Glen Grant
Fortune Brands, Inc. Jim Beam
Diageo plc Smirnoff
Diageo plc Bailey's Irish Cream
Pernod Ricard Beefeater
Diageo plc Captain Morgan

Source: Datamonitor © Datamonitor



Spirits by Category
Specialty Spirits are the largest segment in the spirits category accounting for 91.4% of the category's total value. The specialty spirits market was valued at US$5.4 billion in 2006, a growth in value of 1.5% over 2005. The category witnessed an overall growth in value terms of roughly 1% between 2001 and 2006.13 This category is incredibly diversified with regional and national products making up a sector with no truly dominant players. The Kirin Brewery Company has the largest presence in the specialty spirits category; however, they control just 1.1% of this US$5 billion segment.

Tequila and Mezcal is the second largest category in the Chinese spirits market with a share of 6.6%. The segment was valued at US$388.7 million in 2006, a growth of 3.1% since 2001.14 Diageo plc (José Cuervo) is the largest supplier in the segment controlling 51% of the total market.

Brandy is the third largest segment within the category with 1% of the total market share. This segment is broken down into four sub segments: cognac, armagnac, fruit brandy and other grape brandy. The brandy market was valued at $50.6 million in 2006, a growth in value of 0.4% over 2005. Within the brandy segment, cognac accounts for 68.4% of the total sales followed by armagnac with a 10.9% market share. Fruit Brandy is the next largest segment with 7.9% of the market share.15 The Chinese brandy market was dominated by Pernod Ricard, Remy Cointreau and LVMH Moet Hennessy Louis Vuitton SA.

Gin and Genever is the fifth largest category within the Chinese spirits market with a value of US$17.5 million in 2006. This represented a growth in value of 5% over 2005. The gin and genever category witnessed an overall growth in value terms of roughly 5.2% between 2001 and 2006. Pernod Ricard (Seagram's London Dry) and De Vere Group PLC (Greenall's) are the major gin and genever suppliers in China.

Vodka is the sixth largest category within the Chinese spirits market with an estimated market size of US$6.1 million in 2006 – a very slight growth of 0.1% over 2005. Unflavoured vodka accounts for 93.8% of total sales followed by flavoured vodka with 6.2% of sales. The vodka category witnessed an overall growth of 0.5% between 2001 and 2006. Diageo plc (Smirnoff) and Pernod Ricard (Beefeater) were the largest suppliers in the Chinese vodka market accounting for roughly 7% of the total market segment. 16

Rum is the seventh largest segment within the category. The rum market was worth an estimated US$1.9 million in 2006 - a growth in value of 5.3% since 2005. Within the rum category, light rum accounted for 83.9% of the total sales followed by dark rum with 16.1% market share. The rum market is dominated by companies like Bacardi Limited and Diageo plc (Capitain Morgan).17 No information was available on the market size or demand for blended rums or flavoured/spiced rum products. However, given the heavy introduction of lemon, blackcurrant and other fruit flavours into various alcoholic drinks it would seem obvious that there is a potential market for these types of products in the segment.

Liqueurs are the eighth largest segment within the category. The market for liqueurs was worth an estimated US$1.5 million in 2006, a slight decrease of growth in value of 1.7% from 2005. Within the segment, fruit liqueurs account for 32% of total sales followed by cream liqueurs with 19.7% market share. The liqueurs segment witnessed a 3% decline in value between 2001 and 2006.18

Whisky is the fourth largest segment within the Chinese spirits market with 0.7% of the total market share. The market for whisky was valued at an estimated US$39.3 million in 2006 – a growth in value of 2.6% over 2005. Within the whisky category, Scotch whiskey accounted for 76% of total sales followed by American whisky with 5.1% market share. Canadian whisky is the next largest segment with 5% of the market share. The whisky category witnessed an overall growth in value terms of around 2.5% between 2001 and 2006.19

Expensive imported Scotch whisky is well received by high-income consumers, who purchase whisky as a status symbol. The major players in the Chinese whisky market include Diageo plc, Pernod Ricard, Fortune Brands and Edrington Group. Seagram's 7 Crown, Chivas Regal, Johnnie Walker, and Jim Beam are some of the key brands

Forecast
Despite a slight increase in the value of the spirits segment overall, a decline in consumption (volume), less than 1%, is anticipated through 2011. This will come primarily because of an overall decline in the consumption of specialty spirits which dominate the category. These traditional beverages will see declines, while on the positive side; some imported spirits will see small but noticeable consumption increases. While the brandy, vodka and liqueurs segments will see small declines, gin and genever will see large increases in consumption with annual growth rates of roughly 10% through 2011. The gin category will be followed by tequila and mezcal, rum and whisky with annual consumption growth of 2 – 2.5% through 2011.

China Spirits Value Forecast, 2006-2011 (US$ millions) Category 2007 2008 2009 2010 2011 GR
Specialty spirits 5,484.8 5,568.5 5,651.1 5,736.0 5,819.4 1.5%
Tequila & Mezcal 398.8 408.4 418.0 427.4 436.9 2.4%
Brandy 51.2 52.2 52.7 53.2 53.7 1.2%
Whiskey 40.3 41.5 42.6 43.8 44.9 2.7%
Gin & Genever 18.4 19.2 20.0 20.9 21.8 4.4%
Vodka 6.1 6.1 6.1 6.1 6.1 0.2%
Rum 2.0 2.1 2.2 2.3 2.4 4.8%
Liqueurs 1.5 1.4 1.4 1.4 1.4 -1.9%
Overall 6,003.0 6,099.5 6,194.2 6,291.1 6,386.5 1.6%
Growth 1.6% 1.6% 1.6% 1.6% 1.5%

Source: Datamonitor © Datamonitor



Datamonitor forecasts for the spirits sector:20
The spirits market in China is forecast to be worth an estimated US$6.4 million in 2011. By the end of 2011, the specialty spirits segment is forecast to account for 91.1% of the total market share followed by tequila and mezcal and brandy with 6.8% and 0.8% market share respectively.

The Specialty spirits market in China will be worth an estimated US$5.8 billion by 2011, a growth of 1.5% over 2006.
The Tequila and Mezcal category is forecasted to continue to be the second largest category in the Chinese Spirits market with an annual growth rate of 2.4% and an estimated worth of US$436.9 million by 2011.
The Whisky market in China will be worth an estimated US$44.9 million in 2011, a growth of 2.7% over 2006. The Scotch whisky segment within the whisky market is forecast to account for an increasingly large percentage of the segment. Canadian whisky is also expected to increase its share of the segment; both Canadian and Scotch will grow at the expense of American whisky.
The Brandy market in China will be worth an estimated US$53.7 million in 2011. Cognac is forecasted to continue it's dominance as a leading market segment within the brandy category. However, the armagnac segment is expected to be the growth leader in the segment.
The Gin & Genever market in China will be worth an estimated US$21.8 million in 2011, a growth of 4.4% over 2006.
The value of the Chinese Vodka market will remain essentially unchanged.The Rum market in China will be worth an estimated US$2.4 million in 2011, a growth of 4.8% over 2006. The light rum segment within the rum category is forecast to account for 86.3% of the total market share followed by dark rum with 13.7% market share. The rum market is forecast to see an increase of US$0.5 million in sales for the five-year period spanning 2006-2011.
The Liqueur market in China will be worth an estimated $1.4 million in 2011, a decrease of 2% from 2006. A general decline of 1% to 4% is projected throughout the segment.
The following flavours, ingredients and labelling claims were most common amongst new product launches in the Chinese spirits market in 2006. This information comes from Datamonitor's ProductScan Online database and is presented as a sample of what was common in the Chinese market in 2006, but is not a definitive list of all the major new product launches.

New spirits product launches in China – 200621 By flavour/ingredient:
Orange, lemon, banana, ume, beer, bitter, black tea, blend, blackcurrant, grapefruit.
By package labelling claims:
Natural, pure, high collagen, low calories, no alcohol, real.

Source: Datamonitor © Datamonitor



Wine
For more information on the Chinese wine market please refer to The Wine Market in China: Opportunities for Canadian Wine Exporters at www.ats.agr.gc.ca/asia/4398_e.htm.

Wine consumption is normally reserved for special occasions and imported premium wines are available mainly in restaurants catering to foreigners or expatriates. Some large Chinese seafood restaurants have begun selling wine for on-trade consumption. Well-off consumers tend to be more health conscious and there is a growing market for premium spirits and wines that have supposed health benefits. However, the average Chinese consumer is unfamiliar with the different types of wine available and better consumer education and brand awareness is needed for imported wine to successfully penetrate the Chinese market. Overall, Chinese consumers are price sensitive and prefer to purchase local or regional brands.

However, icewine has proved particularly popular in Asia Pacific and Southeast Asian markets in recent years, as the fascination with icewine's unique production (i.e. handpicked frozen grapes during winter months) is widespread among these regions' consumers. In fact, icewine is extremely rare in Asian markets, and the "sought after/exclusive" product is often purchased when visiting Canada as gifts or investments, let alone for drinking. The growth of Canadian Icewine in Asian markets is realized firsthand in export data; approximately 48% of Canadian Icewine is exported to Asian markets, a value of $5.6 million in 2006. The export of Icewine is the most feasible opportunity for Canada at present but exporters should be aware of recent cases of counterfeit Canadian Icewine sold in the Chinese market.

The grape wine industry in China was worth US$9.5 billion in 2006. Revenue from wine sales saw 35% growth in 2005, mainly from sales of dry red wine. Overall volume sales of still grape wine saw an 8% increase from 2005 to 2006. However, per capita wine consumption remains low. Despite the growing popularity of still grape wine, rice wine (a non-grape wine) remains the most heavily consumed wine product. Consumers have trouble adapting to the taste of still grape wine and tend to mix it with soda or sweet juice. Nonetheless, drinking wine is increasingly regarded as fashionable and trendy; red wine is growing in popularity due to its perceived health benefits. The colour red also signifies good luck and happiness in China. White wine has established a small but growing base as Chinese consumers have adapted more easily to the lighter, fresher taste of white wine. Champagne sales by volume jumped 20% from 2001 to 2006, but overall sales remain low compared to the rest of the sector.

Forecast
The Chinese wine segment is forecast to grow by 4% through 2011, with a US$1 billion increase in the segment's total value. Fortified wine will continue its sales dominance but will lag behind still and sparkling wine in growth. Fortified wines are projected to increase by 3.8% in value terms and 4.4% in terms of consumption. Still wines are forecast to grow by 4.6% annually in terms of value and 4.9% in volume terms. Sparkling wine will see 4.6% annual growth in terms of value and 6.3% growth in terms of consumption.22

Overall growth in the segment will continue, but growth is forecast to slow considerably in 2009 through 2011.




Opportunities for Canadian Alcohol Exporters
Canadian companies looking to expand into China should be aware of these points:

Lowering prices and cutting costs
Ensuring prices are competitive and keeping costs low is crucial to achieve a good profit margin as Chinese consumers are extremely price sensitive, the market is highly competitive and distribution costs can add up.
Diversity in tastes and preferences of chosen geographic base
Large scale marketing is costly and time-consuming given the diversity of preferences across the country. While large domestic firms can afford to do this, Canadian companies are unlikely to achieve this scale of promotion at present. Mindful of the varying tastes across the regions, Canadian importers can choose to focus on a specific region, city or consumer group to target their promotion.
Existing and upcoming middle class
Currently, Canadian alcohol exporters may find it best to focus on the affluent, urban-based Chinese who can afford the high price of imports. However, as incomes rise in mid-sized cities, China will see a surge in the number of people who fall under the middle class category. This is a very short time to undertake market research, establish business relationships, enhance brand awareness and develop brand loyalty.
To gain an overview of the agriculture, food and beverage market in China, visit www.infoexport.gc.ca/ie-en/DisplayDocument.jsp?did=76753.



Concerns
Canadian producers and exporters face challenges arising from the proliferation of fake and counterfeit products across China. Many Chinese alcoholic beverages have been revealed to contain only water, colouring, juices and alcohol. For example, there have been cases in the past few years of fake icewine products in China bottled and packaged under the name "Canadian Icewine" or "Icewine style" and sold for a lowly RMB 10-20 ($1-$3). Icewine spelled out as one word is a registered trademark of Canada but producers have problems enforcing this law abroad. The hefty price tag for imports naturally encourages locals to manufacture cheap counterfeit substitutes. In addition, China also has poor market management and supervision, as mentioned earlier with regard to quality standards and regulations. It should be noted that Chinese consumers want to buy products that enhance their status and are more attracted to prestigious brands with attractive labels and packaging.



Challenges
Competitors
The alcohol market in China is extremely fragmented with hundreds of producers nationwide. Dominant local players have well-established distribution networks, although they may be confined to a specific region. Local products benefit from lower prices and greater consumer brand awareness.

Apart from local competitors, Canadian exporters face competition from foreign competitors such as the United States, Australia, France and Italy. A number of key competitors benefit from close shipping proximity aiding in price advantages. Competition for the high-end market is particularly fierce, especially for alcohol sold at upscale locations in large, prosperous urban cities like Shanghai.

Distribution
China's vast country and large population offer large and varied markets that exporters can tap into. However, its sheer size can be a hindrance as China's infrastructure is often underdeveloped in many areas. It is also hard to find a good distributor who can guarantee the timely distribution of products, and foreign importers often have to turn to many agents, complicating co-ordination. In addition, agents vary in their levels of competence and reliability. New importers may find it difficult to persuade a well-established distributor to take on their wines as these firms often already have agreements to distribute certain wines. An effective distribution network and promotional strategy is crucial. Potential importers must also consider storage and transportation facilities, which vary in quality and reliability depending on the region.

Potential importers can seek to have their goods distributed in four ways: firstly, through contacting a retailer directly; secondly, through an agent; thirdly, through a wholesaler/distributor; and fourthly, through a wholesale mart. Most foreign/imported wines are consumed in high-end restaurants but supermarkets are increasingly located where middle- and high-income consumers go to buy their groceries.

Local producers distribute their products in three ways. One is through restaurants and liquor stores by securing deals with the help of agents. There are also some state-owned distributors who deliver nationally. Secondly, through supermarkets, and thirdly, by setting up a large warehouse in big cities and having agents or businesses approach them to make direct purchases. More information on distribution at: www.tdctrade.com/chinadistribution/index.htm.

Supermarket sales can be boosted if brand awareness and education is targeted not only at consumers, but also at store clerks and managers responsible for selling and stocking the wine. Examples of promotion in Chinese supermarkets include discounting prices (local products are sometimes sold at half the price); tasting events; prize draws; or buy one get one free deals. Currently, promotion of domestic products is aggressive, while promotion of foreign products remains at a much smaller scale. Carrefour recently held an Autumn Wine Festival in Beijing showcasing wines from famous winemaking areas such as France, Italy, Australia, Chile and South Africa in its stores with free wine-tasting events and discounts on wine purchases.

While in most cases on site sales currently dominate the sale of alcoholic beverages, and do provide an excellent avenue to reach consumers capable of purchasing imported beer, wine and spirits, the presence of specialty stores, grocery stores as well as corner stores have provided a wide range of options to introduce alcoholic beverage to the Chinese market. As stated earlier, grocery stores have proven very useful in product promotion and education and specialty stores have overtaken on site sales in the sale of certain imported alcoholic beverages (FABs).

Barriers to Entry
Before China's entry into the WTO, tariffs on wine could reach up to 65%. Now, tariffs on imported foreign alcohol range from 10% to 30%. These tariffs, combined with the 10% Consumption Tax Rate (CTR) and 17% Value Added Tax (VAT), result in an overall tax of around 50% of the product's value.

Standards for alcohol fall under the responsibility of the Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). In 2005, the government adjusted its regulations with regard to imports and revised some standards. However, these standards do not necessarily correspond with international standards. Some standards that apply to wine:

Standards for the Administration of Wholesaling of Alcoholic Products
Standards for Administration of Retailing of Alcoholic Products
Measures for the Administration of Wine Distribution
Hygiene Standards of Distilled and Brewed Wine
An unofficial translation of the new wine standards can be found at: www.calwinexport.com/content/Market_Info/FAS%20reports%202006...

Labelling is governed more generally under the General Provisions on Pre-Packaged Food Labelling. Labelling must be in Chinese. More can be found at: www.wines-info.com/en/item.aspx?col=195.




Contact Information
The Embassy of Canada to China
19 Dong Zhi Men Wai Street
Chaoyang District
Beijing 100600
Tel: (011-86-10) 6532-3536
Fax: (011-86-10) 6532-4072
E-Mail: infocentrechina@international.gc.ca
Website: www.infoexport.gc.ca/cn




Key Resources
Agriculture and Agri-Food Canada – China At A Glance
ats-sea.agr.gc.ca/stats/china.pdf

Agriculture and Agri-Food Canada – China Agri-Food Consumer Profile
ats-sea.agr.gc.ca/asia/3858_e.htm

Agriculture and Agri-Food Canada – China Past, Present & Future Report
ats-sea.agr.gc.ca/asia/3833_e.pdf

Agriculture and Agri-Food Canada – China Agricultural Policy Review
www.agr.gc.ca/pol/pub/oecd-oced/pdf/china_e.pdf

BC Wine Institute
www.winebc.com/

California Wine Association – Wine in China: A Report to the California Association of Winegrape Growers
iis-db.stanford.edu/pubs/21702/wine_in_china_CAWG_2005.pdf

The Canadian Trade Commissioner Service – China
www.infoexport.gc.ca/ie-en/MarketProspect.jsp?cid=512&oid=32

Canadian Vintners Association – Canadian Wine Statistics
www.canadianvintners.com/canadianwines/statistics.htm

China Alcoholic Beverages Industry Association (Chinese Only)
www.cada.cc/index.jsp

China Wines Information Website – Laws & Regulations
www.wines-info.com/en/item.aspx?col=195

Datamonitor – Wine in China to 2011 - Market Databook

Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook

Datamonitor – Spirits in China to 2011 - Market Databook

Decantor.com
www.decanter.com/

The Economist – China
www.economist.com/countries/China/

EDC – China Economic Profile
www.edc.ca/english/docs/gchina_e.pdf

Euromonitor International
www.euromonitor.com/

Global Trade Atlas
www.gtis.com/gta/

Guide to distribution in China – Hong Kong Trade Development Council
www.tdctrade.com/chinadistribution/index.htm

Hong Kong Trade Development Council - China Trade
china.tdctrade.com/?w_sid=1000&w_pid=sp02&w_nid=10775&w_cid=2&w_idt=1900-01-01

IPR in China – Hong Kong Trade Development Council
www.tdctrade.com/chinaipr/index.htm

McKinsey Global Institute – From 'Made in China' to 'Sold in China': The Rise of the Chinese Urban Consumer
www.mckinsey.com/mgi/publications/china_consumer/executive_summary.asp

The McKinsey Quarterly – The value of China's emerging middle class
doubleoceanfin.com/files/6_The_value_of_China_s_emerging_middle_class.pdf

Toronto Sun – Fake Icewines Hit Sales
www.thestar.com/News/World/article/247573

U.S. Commercial Service – Country Commercial Guide – Doing Business in China
commercecan.ic.gc.ca/scdt/bizmap/interface2.nsf/vDownload/CCG_7747/$file/X_98756.DOC

U.S. Department of Agriculture – Attaché Reports
www.fas.usda.gov/scriptsw/attacherep/default.asp

U.S. Department of Agriculture – China National Wine Standard
www.calwinexport.com/content/Market_Info/FAS%20reports...

U.S. Department of Agriculture – China Resources
usdachina.org/en_index.asp

U.S. Department of Agriculture – China Wine Export Guide
www.fas.usda.gov/scripts/gd.asp?ID=145884934

Vintners Quality Alliance of Ontario
www.vqaontario.com/


--------------------------------------------------------------------------------

1. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
2. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
3. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
4. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
5. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
6. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
7. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
8. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
9. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
10. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
11. Datamonitor - Beer, Cider and FABs in China to 2011 - Market Databook
12. Datamonitor - Spirits in China to 2011 Market Databook
13. Datamonitor - Spirits in China to 2011 Market Databook
14. Datamonitor - Spirits in China to 2011 Market Databook
15. Datamonitor - Spirits in China to 2011 Market Databook
16. Datamonitor - Spirits in China to 2011 Market Databook
17. Datamonitor - Spirits in China to 2011 Market Databook
18. Datamonitor - Spirits in China to 2011 Market Databook
19. Datamonitor - Spirits in China to 2011 Market Databook
20. Datamonitor - Spirits in China to 2011 Market Databook
21. Datamonitor - Spirits in China to 2011 Market Databook
22. Datamonitor -Wine in China to 2011 Market Databook