Opportunities in China’s Alcoholic Beverage Market
Led by an expanding base of female and health-conscious consumers, China’s wine market is taking off.China’s unprecedented economic growth has led to increased disposable income, which has caused a rise in consumption and changes in eating and drinking habits. In terms of the country’s alcoholic beverage market, many consumers could afford only locally made alcoholic drinks prior to the economic boom. But the rise of China’s middle class and increases in discretionary income have allowed many consumers to afford foreign-made and foreign-branded alcoholic beverages.
Changing social and cultural factors have also strengthened the potential of China’s alcoholic beverage market. China’s expanding pub culture has offered more avenues for people to consume alcohol. In addition, a rise in the number of women who consume alcohol—especially wine—has expanded the China market. Overall, Chinese consumers are increasingly willing to try new varieties of alcoholic beverages.
To successfully tap China’s alcoholic beverage market, companies must overcome certain obstacles. For example, companies must determine how to alter or market their products to appeal to Chinese consumer tastes and increasing health concerns. They must also maneuver through a changing regulatory environment. Companies that closely track market developments are on the path to success.
Drinks of choice
Grain-based alcohol used in spirits is the earliest known alcohol found in China. To this day, grain-based alcohol, such as baijiu—a high-strength alcohol typically made from sorghum, rice, wheat, or barley—is most commonly served during traditional occasions, such as holidays and formal events. Being the traditional (and indeed, the national) drink of China, baijiu accounts for almost the entire spirits market. For most Chinese men, it is strength that qualifies an alcoholic beverage as a “man’s drink.” This explains why baijiu, which typically has alcohol by volume (ABV) of 50-60 percent, remains the preferred drink among Chinese men during private and business drinking occasions.
In recent years, beer, hard cider, and flavored alcoholic beverages (FABs, which are sweet, relatively low-alcohol content beverages such as wine coolers) have dominated the Chinese alcoholic beverage sector, however, accounting for roughly 90 percent of the market’s sales by volume in 2009 and 2010. Standard lager is the preferred beer in China, but sales of low-and no-alcohol beers are rising faster than those of lager.
Spirits and wine share the remaining 10 percent of China’s sales volume, with spirits contributing the larger proportion, according to Datamonitor Group’s Market Data Analytics (MDA). In terms of spirits, baijiu, brandy, whiskey, and vodka have the highest sales volumes. Recently, an expanding elite consumer segment in China has boosted sales of premium spirits such as whiskey. Datamonitor estimates that whiskey sales will increase by 24 percent in the next five years. Rising demand for premium whiskey is also prompting companies such as Diageo plc to boost its sales through exclusive retail stores in upscale areas of major Chinese cities. The sales volume of brandy and rum may rise twice as fast as the overall alcoholic beverage sector until 2015, and gin and tequila may also experience a surge in demand.
Wine has recorded big increases in sales volume growth rates, with a 32 percent jump during 2008-09 and an estimated 24 percent jump during 2009-10. In comparison, the sales volume of China’s beer, cider, and FABs market and spirits market expanded about 6 percent and 3 percent, respectively, during 2008-09 and 2009-10. Red wine contributes nearly 62 percent of total wine sales by volume, and white wine contributes another 38 percent.
Globally, China ranked first in overall alcoholic beverage sector sales volume in 2009 (see Figure 1). The country’s beer, cider, and FABs market was the largest globally in terms of sales volume that year, according to MDA data. China’s fast-growing wine market ranked ninth globally in terms of sales volume. According to Datamonitor estimates, the rankings were similar in 2010.
Over the past decade, several economic and social changes have driven rapidly increasing market volumes in China’s alcoholic beverage market.
The country’s fast-paced economic development has led to rapid urbanization and changes in beverage consumption. For example, many middle-class consumers were able to afford only local alcoholic beverages—primarily beer and baijiu—prior to China’s recent economic boom. The boost in income has enabled Chinese consumers to buy more expensive types and brands of alcohol—including foreign. It has also enabled consumers to go out more, which has led to the development of more pubs in China. Furthermore, an increasing number of big-city consumers with rising incomes are embracing wine, which many Chinese consider a fashionable Western drink.
Though alcohol consumption has long been considered an integral part of China’s traditions, it has also gone through several periods of government regulation. Chinese history reveals that laws against wine production were enacted and repealed 41 times between 1100 BC and 1400 AD.
In the late 1980s and 1990s, the PRC government took measures to promote responsible and healthier drinking habits among Chinese consumers and reserve more grain for food consumption by encouraging fruit-based alcohol instead of grain-based alcohol. The government launched campaigns to encourage the consumption of grape wine and beer rather than stronger grain-based baijiu. In the late 1990s, the government also increased the tax rate for imported spirits, limited the import of high-strength alcohol into China, and refused to extend new production licenses for domestic and foreign spirits manufacturers—leading to a decline in China’s spirits market during that period. China’s 2001 World Trade Organization entry led to reduced import duties on foreign alcohol, and rising consumer demand led to increased imports and sales of imported spirits and wine.
China’s wine market sales are looking stronger than ever, with the sales volume projected to increase at a compound annual growth rate of 14 percent from 2009 to 2014. Increased consumption among female consumers is fueling this strong growth.
Though it is socially acceptable for men to consume high-strength alcohol, the concept of women consuming high-strength alcohol such as baijiu is still not fully accepted in Chinese culture. Changing social conditions in recent years have led to the wider acceptance of drinking among women, however. Datamonitor has found that gender roles have been blurring, and women and men are more equally attending events and participating in drinking in most social occasions in China. Moreover, the new generation of working women in China is socially compelled to consume alcohol to stay “equal” in the eyes of their male colleagues. Female consumers’ financial independence may also explain the rise in alcohol consumption among women, particularly in the past five years.
Within the alcohol sector, Chinese women appear to have primarily embraced wine, largely because it reflects their aspirational lifestyles. In addition, many consumers believe that drinking wine is good for one’s health and that it promotes beautiful skin. Wine manufacturers may find the fast-growing consumer base of women wine drinkers interested in pre-mixed drinks and fruit-based alcohols as well.
Health and safety concerns
Given the country’s preference for high-strength baijiu, health and safety issues associated with alcohol are a concern. In the last 10 years, China’s alcohol consumption patterns have changed dramatically, from strong demand for the highly potent baijiu to the increased popularity of low- or no-alcohol beer. According to MDA data, between 2000 and 2009, the per capita consumption of low- or no-alcohol beer increased by 11 percent a year, compared to an annual increase of 7 percent for alcoholic beverages overall.
The PRC government only recently enacted a minimum drinking age and laws that prohibit the consumption of alcohol among children. In 2006, the government introduced a law that bans the sale of alcoholic beverages to consumers below the age of 18. In addition, the government in August 2009 increased the base tax and consumption tax rates on high-strength alcohol, including baijiu. Increased taxes on spirits and other high-strength alcohol, coupled with media and industry promotions for healthier drinking habits, have affected consumer choices, and more consumers are choosing lower-strength alcohol.
New alcoholic beverage launches reflect this trend toward healthier alternatives, as wines made up more than half of new products launched in China’s alcoholic beverage sector in 2009 and nearly 40 percent of such new product launches in 2010.
China’s alcoholic beverage market is dominated by major companies such as SABMiller plc, Tsingtao Brewery Co., Ltd., Anheuser-Busch InBev SA/NV, Molson Coors Brewing Co., and Beijing Yanjing Beer Group Corp. According to MDA data, these top five companies together controlled 57 percent of market volume in 2009. Interestingly, the top five players in China’s alcoholic beverage sector are also the top five players in the beer, cider, and FABs category, suggesting that this category drives the overall alcoholic beverages sector. The top five wine companies in China are domestic firms: Yantai Changyu Group Co., Ltd.; China Great Wall Wine Co., Ltd.; Tonghua Grape Wine Co., Ltd.; Dynasty Fine Wines Group Ltd.; and Yantai Weilong Grape Wine Co. Ltd.
Though the beer and wine markets are highly concentrated—with the top five players commanding market shares of 81 percent and 62 percent, respectively—the spirits market in China is more fragmented. In 2009, the top five players contributed a meager 2 percent of total spirits sales. This is because the spirits market reflects the local market for baijiu, which is primarily produced by smaller local companies, rather than by large international companies.
The top players in China’s alcoholic beverage sector are consolidating by acquiring smaller firms to gain market share and access to lower-tier cities in China. A few merger and acquisition deals have occurred among alcoholic beverage companies in recent years. In the first half of 2009, four out of five deals involved large market players such as Anheuser-Busch InBev, Carlsberg Breweries A/S, and Tsingtao Brewery. That year, Denmark-based brewer Carlsberg increased its stake in Xinjiang Lanjian Jianiang Investment Co., Ltd., the company that owns the Xinjiang market leader Xinjiang Wusu Brewery Co., Ltd. Following the deal, Carlsberg held a 63.4 percent stake in the brewery.
Companies will also face competition from counterfeit brands, which generally target lower-income consumer groups. Counterfeit alcohol brands are so prevalent in the country that some alcoholic beverage manufacturers have been forced to take special measures to preserve their brand images and market shares. For example Diageo, the parent company of the premium whisky brand Johnnie Walker, has located special teams at bars and pubs to spot-check bottles to ensure their authenticity. The Australian wine industry, which is a large exporter of wines to China, and Canadian ice wines, which are one of the most coveted wines in Asia, are being counterfeited and sold at lower price points.
Akin to most other food and beverage sectors, China’s alcoholic beverages sector attracts many popular international brands. To reach target consumers, many foreign players attempt to localize their products to suit Chinese preferences. For example, the French alcoholic beverage company Pernod Ricard SA has not only localized its staff and operations through a vineyard in China, but it has also customized the way that its Chivas Regal Scotch whiskey is consumed. Observing that Chinese like green tea as a mixer in their spirits, the company began promoting canned green tea as a mixer with its whiskey products instead of encouraging Chinese consumers to drink Scotch neat, straight up, or on the rocks.
Wine to boom ahead
Because of its large customer base, China’s beer, cider, and FABs market will likely experience moderate growth over the next five years (see Figure 2). In contrast, the wine market, with its smaller base, is expected to rise at a much faster rate. The spirits market may suffer from various government measures to reduce the consumption of high-strength alcohol, especially baijiu. The brandy and rum markets may rise twice as fast as the overall alcohol sector until 2015, however, and gin and tequila may experience a rise in demand.
Chinese consumers are changing their drinking preferences. The country’s alcoholic beverage sector is benefitting from consumers that are increasingly eager to experiment with Western brands and lower-strength products. And women are an expanding consumer group that is boosting wine sales.
Amidst various challenges in the country’s alcoholic beverage sector, companies should focus on consumer education. As nascent markets for most foreign brands, China’s spirits and wine markets abound with counterfeits and fake brands. Massive marketing campaigns along with consumer education on the product’s quality credentials may help companies tap their target consumers and combat competition from counterfeit brands. Furthermore, considering Chinese consumers’ rising incomes and aspirations, companies may choose to brand their products as “premium” or “upscale,” a claim that is expected to attract many wealthy consumers in China.