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Strengthening its management of the wine consumption tax, the State Administration of Taxation issued the Administrative Measures for the Wine Consumption Tax (Trial), implemented since July 1 this year, the China Business News reported on August 29.

Since January 1, 2005, tariffs on imported bottled wine dropped from 43 to 14 percent with that on bulk wine imports falling to 20 percent. It was hoped that the resulting price fall would enable foreign wines to compete with domestic brands. However, the top three domestic brands – Great Wall, Zhangyu and Dynasty – still control more than 60 percent in the Chinese market with their share continuing to rise.

Foreign wines displayed on shelves in a Shanghai market

Chen Xun, an industrial analyst with Ping'an Securities, said the tariff and price drops had increased the inflow of foreign brands. China Customs statistics show that in January to February this year, China imported 17.78 million liters of wine, up 78.6 percent year-on-year from 2005. However, foreign wine still cannot mount a real challenge to the domestic industry at present, said Li Weige, general manager of the Beijing Donghai Xinye Commercial and Trade Company, a distributor of the famous French Castel wine in China.

Currently, the average price of wine in bulk is only one-fifth of that of bottled wine. China Customs statistics show that although imports increased by 78.6 percent in Jan-Feb 2006, their value of US$16.70 million was only 35 percent higher.

A wine surplus is a serious global problem. In Australia, bumper grape harvests for three years running have resulted in national grape stocks reaching 1 billion kilos, depreciating the average price of bulk wine imports to under US$1 per liter; while in east China grape yields showed a drop last year with the purchase price up 30-40 percent. Naturally, this has stimulated grape wine imports.

According to Jing Xingyu, chief executive officer of the Westman Investment Consulting Co., most foreign brand operations do not conform to the Chinese market's characteristics.

Currently, foreign wines enjoy a strong state-related brand-name reputation, but this carried limited influence. For example, Chinese consumers agree that French wine is good, but they can't tell which brands are more reliable. Even some industry insiders know little about foreign wine brands. High-grade brands are sold in large cities like Beijing, Shanghai and Guangzhou, but consumer numbers are low.

No longer do Chinese wine aficionados rely on price instead of quality, but a decision-making dependence on advertising remains. Zhangyu, Dynasty and Great Wall brands are accepted by Chinese consumers due to their successful promotion. "Impression on brands has become the main reason for consumers' purchasing actions," Jing Xingyu said.

The weakness of foreign wine brands is related to their operational mode, said insiders. In Europe, the world's most important grape producer, most wine producing areas have low yields due to traditional and legal restrictions. Some famous wine-makers, benefiting from only a few ridges of grape vines, produce a low annual output of 50,000 bottles. Thus, it is difficult for them to form large scale brand operation and sales.

European wine tradition, in France and Italy in particular, is founded on the principles of quality and exclusivity. In this way, the market is not flooded with high-quality wine but is able to accommodate a myriad of different wines, each tailored to various palates. The price range is also able to fluctuate, allowing all to enjoy the marvels of wine, and enabling higher-quality producers to keep their prices up. Thus, the reason for low yields in elite wine-producing areas stems from the desire of European wine-drinkers to savor "grands crus" (high-quality wines) as a rarity.

In sale methods, foreign brands face a "lack of acclimatization." "In foreign countries, instead of actively marketing, wine businesses wait for buyers," said Li Weige. "That's a direct variance to Chinese custom". Foreign counterparts are often surprised by Chinese ways of operating. In countries where wine is established, people often buy wine through wine clubs or at high-grade wine-tasting parties, or via special promotions. But these kinds of channels still cannot impact upon the Chinese market. To foreigners, collecting fees for entrance tickets, bottle openings and sales promotions is unimaginable.

"Currently foreign brands do not have a controlling capability in the Chinese market," said Jing Xingyu. Foreign brands are sold in China via agents, and most of the market investments are undertaken by the agents themselves. However, since agents and enterprises often have conflicting aims, operations often fall short of required standards. Due to excessive production lines, some agents cannot adequately advertise or promote their goods. For example, one agent serves more than 800 brands, making it impossible to conduct equal promotion for all. The costs of acting as a foreign wine agent are also much bigger than those for domestic clients.

Foreign wine brands have been short-sighted in their approach to the China market. "You cannot gain profits from wine until after a number of years of investment," Li Weige said. However, few wine brands stick it out. In 1997 and 1998, foreign brands enjoyed a fast growth in China, but many withdrew as the trend slowed down.

"Agents of foreign brands experience more difficulties than those of domestic brands," said Li. Nevertheless, foreign wines supported by experienced and popular Chinese firms can reveal a large customer base.

"Sales of foreign brands still have a large profit space. There is space for price hikes up to 60 percent in large distribution areas," said an insider. "If we add on the 10 percent transport fee, 14 percent tariff, together with added value consumption tax, packaging fees and logistics fees, additional costs will weigh considerably on the cost to the consumer," said Li.

(China.org.cn by Li Jingrong, September 1, 2006)