• Current sales of imported wines are limited largely to foreigners and upper-income urban Chinese. Shanghai residents have the highest per capita disposable income in China at US$1800 per year, and residents of nearby cities are not far behind with disposable incomes in major cities ranging from $1600 (Zhejiang Province) to $1200 (Nanjing & Jiangsu Provinces) a year.3
+ Competitor analysis
In China, the alcohol industry is quite competitive. The industry is divided into beer, spirits and wine. Compared to beer and spirits, the market for wine is very small because the Chinese know little about it. Since the Chinese government started to promote wine and its health benefits, the wine market has been growing.
About 90 per cent of the Chinese wine market comprises domestic wine brands. Chinese wine producers own the top 10 brands in the market. The reason for this is that Chinese-produced wine is much cheaper. This is changing, however, because the government has reduced the import tariff from 65 per cent to 14 per cent.
Demand for Australian wines in China4
Major competitors
China's four largest wine producers control approximately 60 per cent of the country's wine market.
Changyu: Changyu Wine Group Co. Ltd was established in 1892 and is the oldest wine company in China. Originally a Yantai Government-owned organisation, the government now owns 12 per cent, employees and management 45 per cent, and foreign investment 43 per cent. Changyu produces 120 different types of wine. It is focusing on the dry red and dry white wine markets for the next five years. Changyu has total sales of around CNY2.42 billion (US$293 million) annually.
Great Wall: Great Wall is owned by COFCO and managed by the Wines and Spirits Division. This organisation also owns Huaxia Winery Co. Ltd and COFCO Yantai Winery. COFCO has been named in the world's top 500 enterprises. It produces 50000 tonnes of wine annually and, in 2006, Great Wall exported to 20 different countries including France, Germany, UK and Japan. Great Wall has recently entered the Shanghai market and sales continue to increase.
Tonghua: Tonghua Grape Wine Co. Ltd is located in Dongbai, a city in the north of China. The grapes used in Tonghua wine are from Changbaishan, the coldest place in China. In winter the temperature there is often below −40°C. Consequently, the soil is very rich. Wild grapes have developed as the main varieties in this region because of their resistance to low temperatures. The grapes used in Tonghua wine are semi-wild grapes. They are claret-coloured in peel and pulp, and they have a sourish, sweet flavour. All of these factors amount to a different tasting wine. Tonghua have six retail sellers in Shanghai.
Dynasty: French spirits company Remy Cointreau currently own 26.27 per cent of Dynasty Fine Wine Group. Dynasty has joint partnerships with three other companies: Grapery of Tian Jin, China; Remy Martin Group, France; and INTTRA, Hong Kong. This partnership has brought together the most advanced wine-making skills, technology and facilities. In 2005, Dynasty was listed in the Hong Kong Stock Exchange.
The wine market in China by brand
Other competitors
Dragon Seal: Dragon Seal is located in Hebei, in the north of China, not far from Beijing. The company is half French and half Chinese, and the wine has a French flavour. The business was established by the French in 1976 then later taken on by the Chinese.
Hardy: Hardy Wine Company is an Australian company established in 1853. Hardy Wine has been exporting to 60 different countries globally. In Australia, it has around 25 per cent of the domestic market. It is increasingly interested in exporting its wine. In 2002 Hardy Wine signed a distribution contract with Dragon Seal Wines. Dragon Seal has 20 city networks in China and will import Hardy's products and then distribute them to the market.
Jacob's Creek: Jacob's Creek is a popular Australian wine in China. Eighty per cent of Jacob's Creek wine is exported to over 60 different countries around the world. Jacob's Creek exports Shiraz Cabernet and Chardonnay to China.
+ Customer analysis
Given the size of the Chinese market, Swords Wines will concentrate on entering the market in the Luwan district of Shanghai, targeting the Xinguixi (the new nobles). This is a wealthy segment of the market, consisting primarily of professional males aged 24–44 years and interested in purchasing wine as a means of boosting their prestige and image. Targeting this group will allow Swords to enter the market at the top and filter their product down. A strategy could be to target the Xinguixi through high-end restaurants in Xintiandi. An advantage of targeting the Xinguixi over the older generation is that they have the potential to become long-term customers and have not yet developed strong tastes. If Swords can satisfy this market, it will theoretically be easy to expand to other markets. A number of behavioural and attitudinal descriptors are identified in the table on the following page.
Segmentation parameters Future Chinese market: The Xinguixi
Age 24–44 years
Sex Male
Occupation Business person; accountant, executive, advertising/marketing consultant, manager
Family life cycle Single, de facto, early married
Income Above average (A$5000+)
General industry type Financial and professional services
Specific industry Medium–large Public and private sectors Consumer markets
Geographic China, Shanghai, Luwan district
Attitude Influenced by image and prestige of modern products, early adopters, seek long-term advantages
Lifestyle Young, generation X and Y, modern, retro, adventurous
Usage rates Medium–high users Existing–future users
Benefits desired Buys for the benefits of prestige, quality and dependability
+ Company analysis
Swords Wines operates as both a retailer and a wholesaler of wine. Located in North Melbourne, Swords' facilities consist of storage, bottling, distribution and head office. It operates three retail outlets, situated at:
• Queen Victoria Market, Melbourne
• South Melbourne Market, South Melbourne
• 348 Queens Parade, Clifton Hill.
Export capacity
Financial capacity: Swords is prepared to put $80 000 into the China exports business. As Swords is a small company, the budget is reasonably small in comparison to other exporters in the Chinese market.
Human resource capacity: Presently, Swords has 18 employees. It is not feasible at this stage to employ additional staff. In the future, however, assuming business has grown in China, Swords will need to restructure its staffing and employ further staff. This might include an export manager, a receptionist and further bottling staff.
Bottling capacity: Swords is currently bottling 1200 bottles per day and is capable of bottling 1600, allowing 400 bottles per day to be bottled for export with the current staff. Maximum output for export equals 8000 bottles per month. When demand exceeds this amount, bottling will have to be outsourced.
Storage capacity: Storage capabilities within Swords' warehouse stand at 100 pallets, 90 of which are used for current production. Storage may need to be outsourced or more space acquired due to the anticipated expansion of the export business.
+ SWOT analysis
Strengths
• Swords has the ability to buy any quality Australian wine in any quantity.
• Swords has the ability to bottle, pack and ship from its existing facility.
• It is situated inner city, close to ports; only 1–4 hours from wineries.
• It has a competent team, experienced in the Australian wine industry.
• The product is environmentally friendly.
• Swords has access to numerous methods and types of research into the wine market.
• It has access to monetary resources if required.
• Swords has 16 years of successfully selling the product into the Australian market and can now apply that skill to a new market with an appropriately researched product.
• Wine labels have bar codes.
• Wines are not distressed/spoilt or cancelled export orders.
• The range can be fine-tuned to suit customer tastes.
• Stelvin cap closure means there is no cork taint.
• Exports indicates a market for koala-shaped bottle and other product lines.
Weaknesses
• Swords is a small company, with a low budget.
• It has a small budget for promotions and advertising.
• Capital is required for expansion into exporting.
• 18 employees may be insufficient if sales and production requirements boom.
• Swords has limited production capacity in comparison to other companies.
• It has limited storage capacity in comparison to other companies.
• Staff are already busy enough.
• Swords staff have limited international business experience.
• The time taken to do business in China will stretch human resources.
Opportunities
• 80 per cent of wine is consumed in restaurants with food.
• Chinese can be more loyal to brands than Westerners.
• Wine consumption is growing.
• Red wine is perceived as healthy.
• 80 per cent of wine consumed is red.
• Red wine in China is desired and seen as a symbol of status.
• Estimates suggest that by 2010 China will be the strongest economic power, with three times the consumers of the United States.
• Shanghai has the highest per capita disposable income in China.
• Shanghai has the highest per capita expenditure on wine.
• Australian wine consumption in China has increased 50 per cent in the past year.
• Tariffs have been lowered to 14 per cent for cases and 20 per cent for bulk wines.
• WTO abstention is aligning international laws.
• Xintiandi, the target market, is located in inner Shanghai.
• Xinguixi, male businessmen aged 24–44, are the main target group.
• Australia has higher quality procedures in wine production.
Threats
• Chinese can have a resistance to Western products.
• Red wine in China is an acquired taste; many Chinese even mix red wine with soft drinks.
• Business relationships take a long time to forge.
• Language and cultural differences exist.
• There is low annual wine consumption per individual.
• Current sales of imported wines are limited mostly to foreigners and upper-class urban Chinese.
• Licences can take a year to be approved.
• Value-added tax, consumption tax and wine list and corking costs are all additional costs.
• There is a lack of traditional banking methods.
• Complicated legal requirements exist.
• Government connections are essential.
• Inland transport is poor, long haulage may spoil wine.
• Chinese wineries are developing higher quality grapes.
• Chinese wineries are developing more advanced technologies.
• Imitation wine and pirating industry exist.
• Extreme temperatures may spoil wine.
+ Critical success factors
The following factors will be critical to the success of Swords in China:
• Market entry should be as soon as possible so that, through promotion and distribution, the brand can grow with the wine boom.
• Health benefits of red wine are associated with tannins, similar to those in tea. The Chinese government has heavily promoted this fact.
• Initial product lines will be red wine, with a Shiraz to appeal to a wider market.
• Pricing will be high and promotion will be aimed at professionals.
• Target is Shanghai and in particular the restaurant precinct of Xintiandi, Luwan.
• Increase the recognition of Swords' association with Australia and that it is an Australian wine.
• Offer discounts on quantity to Chinese distributors/customers.
• Work together with international agencies, such as Austrade, and Chinese business and use Chinese marketing and promotion techniques.
• Make high quality of wine known to the market.
Objectives
+ Company mission statement
Swords Wines aims to develop and market high-quality brands of wines for the Chinese market. To achieve this, Swords is committed to building its brand equity with the assistance of a quality product and targeted marketing activities.
+ Company objectives
Swords Wines' objectives are:
1. to capitalise on favourable trends in the wine market in Shanghai
2. to launch a range of Swords Wines into the Shanghai imported wine market
3. to build relationships with the local industry, including pursuing a distributorship agreement with a local company.
+ Marketing objectives
Swords Wines' key marketing objectives should be as follows:
• to capture 0.5 per cent of the forecasted increase in demand for Australian wine
• for demand for Swords wine to be approximately 10 000 bottles
• to grow at the rate of demand for Australian wine (currently 50 per cent per annum)
• to begin marketing a 750 mL, corked bottle of dry red wine, to be positioned in the high end of the market
• to target Xintiandi, Shanghai, in particular, due to the significant number of restaurants
• to have a two-pronged promotional approach, targeted at the distributor by way of promotional kits and the end user by way of magazine advertisements
• to obtain profit margins to Swords of 30 per cent and a total mark-up of around 70 per cent between the distributor and end user.
Target markets
+ Shanghai
A large potential market for wine in China remains. With relatively low per capita consumption of domestic wines, and even less of imported wines, this market has room for growth. Shanghai is one of the busiest cities in China. It is a cosmopolitan city buzzing with the concept of ‘lifestyle revolution’, showcased in the architectural temples of art, fine dining and contemporary urban living. Shanghai residents have the highest disposable income in China at US$1800 per year. The 18 million residents especially enjoy new foods and flavours, and Shanghai leads the nation in food and restaurant trends. As the middle class expands and incomes rise, consumption of non-essential, high-value products such as wine will rise as well.5
Shanghai is the largest market in China for imported wines. As the up-and-coming financial centre of Asia, Shanghai is now home to a group of exclusive five-star restaurants, wine bars, boutiques, and supermarkets that sell imported wine to foreigners and increasingly to locals as they become more educated about wine. The French and Italian winemakers have high market recognition in Shanghai because they have been in the Asian market for the past several years. Those wine sellers are known as the ‘old world’ wine suppliers. As China's economy is expanding, the new competitive wine suppliers, such as Australia, Chile and the US, have entered the market. They are known as the ‘new world’. Their wines are perceived as a little less prestigious but more value for money. Even though the French and Italian wines have high recognition among Shanghainese, the population prefers the ‘new world’ fruity and fuller flavoured wine.
Shanghai is the most suitable geographic region for Swords to enter the market. This is due to the following factors:
• It is located in proximity to the port and reliable infrastructure.
• The wine market is less saturated and growing at a faster rate.
• The Xintiandi restaurant precinct will provide for a top-down strategy; success in this niche market will ascribe status and strong reputation to the brand.
• Shanghai has China's highest disposable income.
+ Xinguixi (the new nobles)
Swords Wines should target the Xinguixi (the new nobles). This is a wealthy segment of the market, which will allow Swords to enter the market at the top and filter its product down. This is a viable niche market in the Luwan district, Shanghai, China. It comprises professional males in the 24–44 years age group, who are interested in purchasing wine as a means of boosting their prestige and image.
A strategy could be to target the Xinguixi through high-end restaurants in Xintiandi where they gather for lunch and dinner. An advantage of targeting the Xinguixi over the older generation is that they have the potential to become long-term customers and have not developed strong tastes. If Swords can satisfy this market, it will theoretically be easy to expand to other markets.
Guerrilla marketing will be used to enter the market:
• interviews with the right magazines, including China Drinks magazine, and Enticement Magazine
• an awarded Australian winery that will appeal to the Xinguixi
• top-down retailing and exclusive distribution strategies.
Once established in this market, distribution strategies may become less exclusive to increase sales revenue. The Beijing market is likely to be entered after succeeding in the Shanghai market. Expanding to different markets can also help offset economic risks.
+ Positioning
The intended position for Swords' product is to be at the high end of the ‘new world’ imported wines. That position may be interpreted as a high-quality, middle-range wine. The retail price range of the ‘new world’ imported wine segment is between 100 and 200 yuan (A$15–$35).
Marketing strategy
+ Product strategy
Swords Wines has already undertaken quantitative research in the form of a survey of owners of restaurants, bars, nightclubs and cafés in Shanghai's restaurant precinct, the Xintiandi region, to explore perceptions of its target market, competitors, wine tastes and preferences, price, distribution methods and advertising mediums.
Essentially Swords' product is simply Australian wine; however, through market research it has been established that the best way for Swords to enter the Chinese market is with medium- to high-quality Shiraz, sourced from the Barossa Valley. The product will be made available to the Chinese consumer market via a Chinese distributor, initially targeting the established areas of Shanghai in the Luwan district — that is, Xintiandi. Swords initial product strategy is to gain recognition and reputation in the established markets; it is believed that achieving status in these markets will allow for easier entry into less established markets when Swords is in a position to expand and diversify its range.
Market research has led to the decision that the style of the product will be:
• red wine
• Shiraz
• 750 mL bottle
• labelled in English; however, in Chinese wherever legally necessary as detailed in labelling under legal requirements
• corked, not plastic
• sealed in tin and wax-stamped.
Swords' label design will be adapted for the Chinese market.
+ Price strategy
In China, domestic brands still dominate the large, price-sensitive market segment with 57 per cent of red wine and 61 per cent of white wine sold at under CNY50 per litre. Mid-range wines (CNY50–90 per litre) continue to grow as consumers have higher disposable incomes and better wine education. Imported wines (retailing at A$16–65) are a much smaller market percentage, but opportunities for bulk shipping and bottling in China could greatly reduce prices of imported wines and bring them on par with domestic wines.
The price must provide acceptable sales volume for the distributor as well as an acceptable profit margin. From the budget, one pallet of wine will cost Swords a total of A$3051.95. Swords is only willing to export with a 30 per cent margin, which brings the selling price up to A$3966.59; however, for an order of less than 10 000 bottles per annum, Swords should charge A$5337.60 per pallet.
With costs of manufacturing and export, Swords will deliver the bottles at A$5.35 to Shanghai. The price to the distributor per bottle will be A$6.95 (including mark-up) per bottle, which equals CNY42, leaving room for profit margins of 60–100 per cent before reaching the end consumer. As orders get larger, the price per bottle will come down through discounts. As Swords is sending only one pallet for the first export, the prices are higher than they could be. It is estimated to reach the market at prices of A$25–A$30.
+ Place (distribution) strategy
Swords' strategy is to grow the brand out of the Xintiandi and Luwan districts of Shanghai. Swords anticipates an initial order to be small, at one pallet. This would contain 64 cases, or 768 bottles. The recommended distributors are very capable of facilitating this and are more than likely to want to sell on a larger scale. Both ACS and Montrose are the largest wine distributors in China and have networks and facilities throughout many Chinese cities. An exclusive distribution arrangement should be negotiated on performance and sales.
It is anticipated that wine will be sold on a free on board (FOB) or cost, insurance and freight (CIF) basis, therefore Swords has physical control until the goods are loaded onto a vessel. Freight and insurance charges may also be Swords' responsibility. Once the Chinese distributor takes the goods, it then has physical control over them. This is why distributor selection is crucial. However, as demand in the business-to-business market is derived, it is recommended that Swords Wines plays an additional role in promotions in China. Control over promotions is likely to be shared by both Swords and the distributor, as investigated further in this report.
+ Promotion strategy
Promotions to distributor
Swords' promotions with regard to the distributor should be handled in the following ways:
Information kits: Swords will provide distributors with information and promotional kits for their customers. The main aim of the information kit will be to inform about Swords' culture in Australia, its goals in the Chinese market and the high quality of the product. Similar information kits will be provided at any trade shows that Swords attends prior to a distributor affiliation. An information kit will include brochures, slide shows and samples.
Gifts: Gifts are certainly part of Chinese culture. Gifts will be presented to the distributor in person during a visit. Lunches and dinners may be provided by the distributor and will be reciprocated by Swords. Other gifts, more commonly known in Australia as bribes, are a method of doing business in China and you may appear to be rude if you don't give appropriate gifts and dinners.
Discounts: Initially, Swords should anticipate small orders by a distributor unless the distributor is willing to contribute to an extensive marketing campaign. Discounts on orders, however, may be an effective method of increasing order quantities. Swords should therefore consider offering a discount on large orders. Essentially, discounts may be a method of ensuring minimum stock clearances are achieved.
Relationship management with distributor
Relationship management plans with the distributor are essential. Customer relationship management (CRM) is vital and will be better managed if Swords hires an export manager fluent in Mandarin, at least, and conscious of Chinese culture. From the outset, though, CRM will be handled via:
• visiting distributors in China
• inviting distributors to visit Australia
• giving appropriate gifts
• implementing CRM policies
• communication with export manager via phone, email, Internet portal to log on, electronic data interchange (EDI).
Trade shows
Trade shows are a very effective way for Swords to promote their product to Chinese distributors and members of the Chinese wine industry. Chinese consumer trade shows recommended to Swords are detailed in the visiting plan. Although very effective, entering a trade show as an exhibitor is a very expensive practice, and even more expensive for a foreigner such as Swords to fund a trip to China and exhibit. These funds are not available in Swords' export budget. The main purpose of trade shows for Swords is to establish contacts and carry out further research into the wine market. If successful in the future, Swords may participate as an exhibitor. Although Montrose Food and Wines and/or ACS Fine Wines are the largest wine distributors in China, they exhibit at trade shows and may exhibit Swords' wine anyway as part of their marketing activities.
Pull strategy
As demand in the business-to-business market is derived, Swords will undertake some additional promotion in China to stimulate sales and pull orders through the distribution channel. The scheme to fund this pull strategy is that 3 per cent of all profit made by Swords Wines' Chinese activities will be contributed towards this cause. Initially this amount will be small, but the idea is that as sales will grow from this activity and 3 per cent will become a more significant amount, total profits will rise as a result. Initially the funds from this scheme will go towards a magazine advertisement. Outdoor advertising, such as on billboards, was also discovered to be very effective in our market research; however, this may remain a long-term goal due to budget limits. Swords should also consider funding or assisting distributor-initiated activities.
Magazine advertisements
Interviews with the right magazines are very important. Magazines may include China Drinks magazine and Enticement Magazine, a 300 000-subscriber publication, launched due to the interest in wine and better living now that incomes and the Chinese economy are rising. Interviews may, however, be hard to secure. The cost of this advertising will be partially funded by the scheme outlined in the Pull strategy. It may be the case that the distributor would prefer to take on this role, and this is one issue that will need to be negotiated.
Budget
The following is an estimate of the budget required to implement the marketing plan.
Promotional budget
Insert attached table here
Implementation
Insert attached table here
Evaluation and control
+ Financial forecasts
The profit and loss statement below is based on Swords attaining 0.5 per cent of the 50 per cent annual growth in the demand for Australian wine. Forecasts indicate that demand will increase in 2007 from 3195570 L to 4793355 L. The amount of 0.5 per cent of this increase is equal to 9986 bottles to be exported by Swords in 2007. This amount is then estimated to increase at the rate of demand for Australian wine, therefore at around 50 per cent per annum. For the remainder of 2006, it is realistic to predict only one pallet to be exported.
Profit and loss statement
Insert attached table here
+ Market research
In a product launch of this nature, it is desirable that market research be employed to reconfirm the underlying assumptions on which the plan is based and to assist in ‘fine-tuning’ the post-launch activities. Some quantitative research has already taken place in the form of a survey of owners of restaurants, bars, nightclubs and cafés in Shanghai's restaurant precinct, the Xintiandi region, which assisted in forming the marketing plan. While formal market research undertaken prior to the preparation of this plan has been modest, it is recommended that Swords Wines engages in formal market research for the ongoing post-launch management of its wines in China.
Post-launch information
Post-launch information is required to:
• identify awareness of the Swords Wines brand in Shanghai through surveys
• identify attitudes with respect to the brand and product acceptance, using a mixture of focus groups and surveys
• track brand sales and market share through distributor data.
Tracking data will be needed monthly for at least the first few months. Advertising awareness assessment should take place two weeks after the first magazine advertisement is published. Attitude information should be obtained three to six months after launch, depending on sales uptake.
Conclusion and recommendations
This report has found the Shanghai wine market to be viable for Swords. Swords is in the fortunate position of being able to source quality Australian wine, which has been found to have a very high standing in the Chinese wine marketplace, second only behind France.
It is the conclusion of this report that Swords should enter the market targeting the Xinguixi, in the restaurant precinct of Xintiandi and the Luwan district. It is believed that this marketplace, if entered correctly, will ascribe status to Swords' wine and allow for easier expansion into other cities and for the development of other product lines.
It is, however, vital to understand the long-term commitment to be made to China and appreciate that while the demand for Australian wine is growing at a rate of 50 per cent per annum and would appear to be booming, the market is still very much in its infancy and wine consumption is still very low. Local companies heavily dominate the wine market. Imports account for 10 per cent and Australian imports account for only 2 per cent of the wine market.
The opportunity available to Swords is to enter the imported wine market in Shanghai. Swords has the ability to grow as the imported wine market grows in China. Disposable incomes, a better wine-educated population and a strong status image associated with drinking wine all contribute to a promising future. Entry into this market should be viewed as a long-term investment. It is thus recommended that this plan be accepted and that Swords Wines be launched in China.
Endnotes
1. GAIN Report Shanghai Wine Brief, 2006.
2. GAIN Report, Wine in China, 2004.
3. China Statistical Yearbook, 2004.
4. GAIN Report, Shanghai Wine Brief, 2005.
5. GAIN Report, Wine in China, 2004.
This marketing plan is based on an export marketing plan that won the 2006 Austrade national student competition, prepared by RMIT students Georgia Beattie, Nicholas Shiells, Michael Clarke, Ronita Agakhan, Kellie Mortimer and Yan Yan.
(Pride, W.. Marketing: Core Concepts & Applications, 2nd Edition. John Wiley & Sons Australia,, 012007. 17.1.1.11).
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