China Market Entry of Australian Wine Brand "Hardys Shiraz". A Marketing Plan

Content Outline

1 Executive Summary & Contents

2 Situation Analysis
2.1 Global Wine Market Overview
2.2 China Market Overview
2.3 Consumer & Consumption Trends Overview
2.4 Australian Wine in China
2.5 Outlook – Where is the Market going?
2.6 Market Access Key Factors for Imported Wine in China
2.7 Target Market Overview
2.8 B2C & B2B Markets
2.9 SWOT Analysis
2.10 Main Competitors
2.11 Company Information

3 Marketing Strategy
3.1 Marketing Objectives
3.2 Financial Objectives
3.3 Target Market Defined
3.4 Positioning Strategy
3.5 Marketing Mix

4 Financials
4.1 Break Even Analysis
4.2 Sales Forecast
4.3 Expense Forecast

5 Controls
5.1 Implementation
5.2 Marketing Organization
5.3 Contingencies & Risks

6 Sources

7 Appendix – Presentation Slides

1 Executive Summary & Contents

Hardys is a very successful and well established Australian wine brand with a long history and a wide range of different products including red and white grape wine as well as sparkling and sweet wines. Like many successful wine producers, Hardys plans to enter the Chinese wine market which has shown outstanding growth rates over the last years due to the Chinese perception of 8especially red) wine as elegant, exclusive, healthy and a symbol of high class, education, manners and upper life style.

The Chinese market with its gigantic consumer potential is forecasted to quickly develop into one of the world’s largest markets for imported wines from all around the world. Currently French imported wine is the largest competition on this market, followed by already successfully introduced other Australian brands (making Australia the second largest country of origin of imported wine in China). In addition there is a growing and constantly improving competition from domestic wines.

Research and analysis based positioning elements for Hardys (Shiraz) in China will be the ‘sweet’ taste, the ‘Australian’ origin and a focus on information to educate the consumers to ‘smart’ buyers of Hardys products. Selected customer segments provide a promising market potential in Beijing, Shanghai and Guangzhou which builds the geographically most relevant market for imported wine in China.

Through a themed yearly focus in accordance with Hardys positioning strategy, consumers’ interest will be raised, their knowledge will be improved and with a variety of communication activities they will be turned into potential repeat buyers. Communication channels therefore will be a combination of classical print media (selected magazines) as well as a strong online presence as more and more wine-related product research is done online. In accordance with the selected target segment’s life style and consumption habits, smart phone optimized content and access to information will play another crucial role in Hardys’ brand communication.

Pricing follows Chinese consumers’ habits, expectations and perceptions as well as researched recent market trends and a strategic aspect of positioning Hardys as a ‘smart’ choice with higher value for money compared to already established but often overpriced French brands.

Distribution follows the local market mechanisms with a strong on trade share, reached through a small number of strongly dominating primary distributors within the imported wine market. Still, even though the off-trade share is currently small, the main communication focus lies on reaching out to the consumers who in the end, through their requests at various points of sale, will have the power to draw Hardys products into the on- trade channels as well.

Sales as well as communication expense forecasts follow current market growth rates, focus on two festival holidays within each year (which account for a large share of the yearly wine sales) and predict Hardys a solid growth throughout the 3 year period of this plan. Break even is estimated to be reached with the first year’s mid autumn festival.

2 Situation Analysis

2.1 Global Wine Market Overview

Global wine consumption has been continuously increasing unit 2008, followed by a decrease (by 8.7 million hectoliters) in 2009. This was a clear reminder of the face that wine is still largely a product the consumption of which depends on the customers’ economic situation. Nonetheless, forecasts (by Avvinare, 2011) predict, that world wine consumption essentially will have risen by 8.60% over a 10 year term with a growth of 3.18% over the 2009 – 2014 period.

In terms of production, producers globally added up to 264 million hectoliters in 2010 (down by 7 million hectoliters compared with the previous year). Three old world countries account for about half of this global wine production: With 49 million hectoliters, Italy is the largest producer, followed by France with 45 million hectoliters. The third country in the leading trio is Spain with 36 million hectoliters.

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Figure 1: Top Producers and Consumers of Wine Worldwide.

(Source: modified from Schiller Wine 2011 online).

In terms of consumption France, the US, Italy and Germany are the largest wine consumers in the world, with each of them exceeding 20 million hector liters. All these countries also export a lot of their wines. Emerging wine country China, the next country on the list, is different. The majority of wine produced is still consumed domestically, although their exports are growing.

The growth of Chinese wine production was 115 million cases in 2010, with a forecast of 128 million cases in 2014, an increase of 77% over the 2005 to 2014 period.

Trends in price points globally show that all price points are expected to grow. The largest growth is expected in the more than $10 per bottle category with an increase of 15.37% between 2009 and 2014, while wines between $5 and $10 will grow by 9.25%. (cf. Avvinare 2011)

As of communication, social media and blogging are the basis of communication for a lot of wine professionals and consumers globally: producers, marketers, technicians, food lovers, wine lovers and many others exchange their information and experiences online. They constitute the main stream of exchanges between people and are now more and more relayed by social media. (cf. Resnick 2011)

2.2 China Market Overview

China is the world's fastest growing wine consumption market. Even though in terms of quantity, annual per capita consumption of wine in China is still only around 0.6 liters per annum (a fraction of the consumption in western countries), still wine consumption over all has been growing at around 7% per annum (a much higher rate than traditional wine drinking countries with growth rates of around 1% in recent years).

The retail sector is also experiencing growth, with many supermarkets and other outlets stocking a range of domestic and imported wines. Chinese distribution companies are fast gaining wine marketing expertise and many new companies have joined the industry with the rules for establishing private import/export businesses being relaxed in recent years. These privately owned importers are now starting to take market share from foreign distributors and in some cases have an advantage in being able to tap into local corporate and government client networks.

Since joining the World Trade Organization, (WTO) China lowered its wine import tariff rate to 14% from 65% (excluding consumption and VAT tariff) creating more opportunities for foreign wine against local products and higher taxed spirits. Although China is still emerging as a wine consumption market, the prospects for continued growth are huge because of the rapid increase in wealth and increasing urbanization of the population. (cf. Webley / Jiang 2010 and Berry 2011)

2.2.1 China’s Urbanization & Economic Development

As mentioned, China is the world’s fastest growing economy and has already reached rank 2 on the list of the world’s largest economies. The country’s growth has been sustained and China has come through the recent financial crisis relatively unscathed, compared to economies like the UK, US and Japan. China’s solid economic growth is forecast to continue on a stable level for the next five years.

The economic growth of China has led to an expanding urban, middle class population with increasing disposable incomes. More Chinese are migrating to urban cities due to economic growth and urban population has grown from 20% in 1978 to just over 40% in 2009. With this shift, more and more Chinese consumers now also have access to imported products such as wine.

Along with the sustained economic growth and urbanization in the country, China consists of a continuously growing middle class which enjoys spending their rising - although still modest, -disposable incomes. Within recent years, these consumers are spending more and saving less – products like wine are among the beneficiaries of this development.

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Figure 2: Chinese Social Class Development.

(Source: Rabobank 2010a)

2.2.2 China - One country with many markets

China is one country, but not one market. The various provinces each have different characteristics driving differing preferences for taste. In terms of size, there are 5 major cities with populations in excess of 10 million people and another 20 cities with populations between 5 and 10 million. The Tier 1 cities are currently the largest markets but the Tier 2 cities will quickly grow in importance and should not be left out of consideration.

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Figure 3: China's Cities by Population 2010.

2.2.3 China’s Alcohol market in general

Beer and spirits (baijiu) still dominate China’s alcohol market with sales of alcoholic beverages in totaling to 53 billion liters in 2010 - valued at RMB 806 billion. Beer dominates this market by volume with a share of 85% and with spirits on 8%. However beer’s share by value is much lower at 40%, just a bit ahead of spirits with 38%. Grape wine is ranked fourth by volume but third by value, being the fastest growing part with 5 year volume CAGR (Compound Annual Growth Rate = smoothed average growth rates) of 18% compared to beer at 8% and spirits at 3%.

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Figure 4: China's Alcohol Market.

(Source: Euromonitor International)

2.2.4 Wine in China - Solid Market Volume & Enormous Market Potential

At 1.33 billion, China has the world’s largest population, expected to peak at 1.4 billion by 2030. According to Bailey (2010) research shows, that there are 19 million adults currently drinking wine in China with 14.3 million adults actually drink imported wines, which is a solid market volume. In terms of market potential, estimates (by Rabobank) state, that there are currently 248 million people in China who have the purchasing power to consume imported wines – at least occasionally.

Key Market Figures

- Wine accounts for 14 % of China’s alcoholic beverage sales (with a growth rate of 20 % over the past five years)
- 85 % of the Chinese wine market is accounted for by red wine.
- Due to the global financial crisis spending on wine in traditional markets slowed substantially, while has developed very positively.
- France is the lead exporter to China, representing 44 % of imported bottled wine by volume.
- 2nd in the list: Australia at over 20 %, growing at ~ 67 % over the past five years.
- Penetration of imported wines into China is largely concentrated in Tier 1 cities (representing over half of the volume of imported bottles).
- 60 % of wine sales in China take place during two Chinese festivals, making localized strategy for marketing and packaging the keys to driving sales.
- China’s imports of bottled wine are expected to grow at an average rate of 25 % over the next five years.
- Value of the Chinese grape wine market in 2009: around CNY 75 billion.
- Overall volume sales of grape wine: 32% increase from 2008 to 2009 (mainly still wine).
- Forecast: Chinese grape wine market should increase by roughly 93% by 2014.
- Forecast: 90% total increase from 2009 through 2014 in consumer expenditures on wine.
- Still wines are by far the preferred type of wine, accounting for over 90% of total sales.
- Red wine has become particularly popular in China, due to its perceived health benefits, in addition to the fact that it is more heavily produced and promoted.
- Also ice wine's sweet taste has proven popular amongst Chinese consumers.
- Imported premium wines are available mainly in large urban cities where rising consumer awareness and sophistication have been key driving factors for grape wine sales. (cf. Rabobank 2010, at al)

2.3 Consumer & Consumption Trends Overview

While rice wine is still one of the most popular alcoholic beverages in China, grape wine also has a long history and is widely consumed, though the real market for grape wine lies with consumers residing in industrialized cities. Even though this group tends to have more knowledge of grape wine products than rural consumers, overall the average Chinese consumer is largely 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.

Wine drinking is increasingly considered a healthier alternative to spirits and is somewhat trendy. Still red wines are particularly popular and wine bars are flourishing in the major cities like Shanghai, Beijing and Guangzhou. Young urban professionals and business people account for most of the wine consumed in bars and hotels.

The wine market is strongly dominated by red still wines, which are a major segment driving wine sales growth in China. Red wine accounts for just less than three quarters of China’s wine market while whites account for only under a quarter. Red wine sales are growing at a faster rate (5 year CAGR of 21%) than whites (5 year CAGR of 14%) and rosé and sparkling wines are still small segments too, but growing. The preference for red wines among Chinese customers relates to its image of vintage, sophistication, heritage, investment value and healthiness.

In addition the color red symbolizes fortune and joy in Chinese culture. Recently more consumers, especially females, are starting to consume white wine, which will boost white consumption in the future. (cf. Rabobank 2010, Bailey 2011 et al)

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Figure 5: China's Wine Market Shares by Wine Type.

Overall, Chinese consumers are price sensitive and prefer to purchase local or regional brands. Wine consumption is often reserved for special occasions and imported premium wines are available mainly in high category restaurants. Premium products cater more to well-off individuals who want to display their wealth. High-end products, such as premium wine and champagne, are more likely to be purchased as gift items rather than for personal consumption. (cf. id.)

Overall Chinese consumers are buying more wine – leading to a strong growth throughout all price segments. The China wine market is still skewed towards the lower end of the price spectrum with domestic wines dominating the low end or entry. Imported wines are mainly sold at the mid to higher end. Australia mainly competes at the higher price segments which account for only 5% of the total market (around 6 million cases) which might seem small, but this is the segment with largest growth rates in recent years. (cf. id)

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Figure 6: China wine market price segments - Domestic & Imported wine.

(Source: Rabobank 2010a 40)

Consumption of wine in China is shared between on-trade and off-trade consumption with a larger part on on-trade. Depending on the region (each city is different), on-trade accounts for 50 to 70% of wine consumption, leaving off-trade at 30 to 50%. Generally speaking, Tier 2 cities have a larger share of off-trade consumption, which is expected to grow stronger in China overall within the next years. This clearly shows the importance of B2B sales with restaurants, hotels and bars, where on trade mainly happens. Focusing on imported wines only, on trade holds a share in terms of volume of up to 80%, off trade 20%. In Terms of value, the on trade share is even higher (92%) which shows, that high end wine is more commonly consumed on trade. For 2015 the off trade share among imported wines is forecast to grow to 35%. (cf. Rabobank 2010 and Bailey 2011)

In terms of consumption patterns throughout the year, Chinese consumers have two peaks for wine consumption per year: spring festival (in January / February) and mid autumn festival (in September / October). These two festivals account for 60% of the yearly wine consumption. Consumption during the rest of the year is equally distributed with about 5% of yearly consumption falling into each of the other 8 months.

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Figure 7: Wine Sales in China - Monthly Shares with 2 Festival peaks.

(Source: Rabonak 2010a)

This focus on 2 major festivals in China also leads to a very important aspect in this market: (gift) package design. Especially for the festival periods, package design and special gift packages play a very important role in order to push sales.

When it comes to package design, Chinese consumers like both, traditional and modern labels with a small preference for the traditional ones, as these are highly associated with premium products and old heritage.

Traditional packaging and labeling is preferred, especially those brands in ‘grey’ color which communicate a premium image associated with heritage and quality. Bottles with straight sides and tall shoulders rather than sloping shoulders are preferred and cork is necessary (synthetic is also acceptable, but ideally real cork, especially for premium positioning) versus screw-cap. Still, proper positioning and marketing of screw-cap could help reinforce Australian wine’s image of approachable and good value for money.

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Figure 8: Preferred Wine Bottles & Labels.

(Source: Rabobank 2010b)

Modern packaging (such as screw-cap) facilitates brand identification given its specific look and is well perceived by younger consumers. However, it may be perceived as a daily casual wine rather than premium.

Given the importance of wine for gifts during festivals, where off-trade represents the primary sales channel, bottled wines packaged in boxes (as pictured on prior page) are currently still dominated by local brands.

2.4 Australian Wine in China

Over the last ten years, wine consumption in China has exhibited the strongest growth amongst all alcoholic beverages. In 1999, retail wine sales were only 3.76 billion RMB. By 2008, this increased to about 20 billion RMB, an average annual increase rate of about 20%. For the first time in 2009, bottled wine imports exceeded bulk wine import volumes. This trend reflects the demand for good quality wines that suit a growing middle class consumer base.

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Figure 9: China Wine Market Shares (Sales) by Country of Origin in 2009.

(Source: Global Trade Atlas, IWSR)

Within the wine market as a whole, the import sector is still small with market shares in

2009 of domestic wine 88% (111 million cases) and imported wine 12% (15 million cases). Within the imported wines, France and Australia lead: France (with 45%) is the leading importer followed by Australia (with 20%). Italy, Chile, the US and Spain have much smaller shares which leaves Australia with a solid advantage in terms of country of origin awareness.

As competition intensifies a clear value proposition among countries-of-origin is expected to become ever more important. This is also why Australian wine is currently in a good position in China. Even at the high-end and premium price segments, Australian wines are perceived as having the right quality at the right price. However, as consumers’ skills at selecting quality and tastes become sharper and marketing campaigns of all country-of-origins become more wide spread, a coordinated, consistent and continued brand identity will be necessary to maintain market positioning.

For Australian exporters, developing a national image for Australian wine to be marketed across China could serve as a foundation for developing a sustainable value proposition in China.

Australian sales are concentrated in the on-trade sector accounting for 80% of Australian sales in 2009 with 20% through off-trade. This goes with the general situation for imported wines in China. Almost 90% of Australian sales in China in 2009 was red still wine (including rosé) with only 10% white and a very minor share for sparkling.

Australian sales are concentrated at the higher end of the market at above 90 RMB per bottle. Sales in 2009 added up to shares of 11% in the range of RMB 60 to under RMB 90 and a 89% above RMB 90 per bottle. Growth rates in both these price points increased in 2009 and were similar but Australian wine is generally best established in a price segment of 200 to 400 RMB per bottle.

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Figure 10: Growth throughout price segments.

(Source: Rabobank 2010a)

2.5 Outlook – Where is the Market going?

Chinese wine prices are on an upward trend in line with urbanization, westernization, and the increasing disposable income of consumers. Top tier cities will remain the main market for imported wines, but consumption will grow faster in tier 2 cities within the coming years. Also, imported wine sold through the off trade is likely to reach 35% of total volume in 2015 due to the increasing share of retail and specialized wine shops. It is foreseen that consumers will begin buying wine for their own consumption rather than offering it out as gifts by then.

On a longer term perspective, grape wine is expected to replace baijiu among the developing middle class and younger generations. With the popularization of wine culture and a larger consumer base, imported wine consumption is foreseen to increase by 25% per year until 2015 with two development paths:

- A switch from domestic wines to entry-level imported wines, especially in the retail channel, thus volume sales of wine priced below RMB 200 is expected to gain +35% per year until 2015, and
- An increasing pricing point of mid to high-end market as wealthier consumers increase their average discretionary spending on wine, enlarging consumption of wine sold above RMB 200 of 20-25% per year until 2015

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Figure 11: Price Segment Growth & Distribution Channel Development Forecast.

(Source: Rabobank 2010a and ib)

With decreasing taxes and increasing import volume of lower-end wine, it is expected that entry wine will be more accessible to Chinese consumers and it is estimated that domestic wines, which are not competitive will be squeezed out of the market and replaced by entry- priced imported wines. (cf. Rabobank 2010a and ib 2010b)

2.6 Market Access Key Factors for Imported Wine in China

Driver - Marketing & promotion

- Advertising and wine tasting programs through cooperation with wine importers and wine- makers stimulate higher demand for high quality wine.
- Massive promotions primarily by domestic wine brands helps drive wine consumption in general Driver - Increasing disposable income
- Increasing disposable income has developed a level of consumers able to afford wine
- The middle class in China is beginning to embrace a wine tasting culture, which will in the future help to expand interest in varieties and tastes
Driver - Health
- The healthy image of grape wine, especially red wine, and as compared to other alcoholic categories in China, is one key driver attracting consumers Driver - Privileged Lifestyle
- Wine tasting is always highlighted by the media as that of a prestigious lifestyle which attracts higher profile consumers which then reinforces marketing Restraint - Confusing consumers with
- Numerous brands, origins, wine regions and grape varieties confuse local consumers who have limited knowledge of grape wine Restraint - Consumer preferences
- With limited familiarity of grape wine and its fit with food, most Chinese consumers are developing a preference for select varieties of red wine with limited understanding of other varieties (though this is slowly evolving) Restraint - Affordability
- Due to additional costs including tariffs, marketing expenses and distribution costs, imported wine is considerably more expensive than local wines Restraint - Barriers
- Differences in Western and Asian consumer cultures as well as diet make it difficult for imported wines in their original packaging because what is successful in their country of origin often does not attract Chinese consumers. (cf. Rabobank 2010a)

2.7 Target Market Overview

As a given boundary for this project we are geographically focusing on the Cities of Shanghai, Beijing and Guangzhou with a current total population of 43,2 million people. (cf. China Statistics Press 2011).

This total population has to be further broken down to a relevant partial of 48,5% including these 3 cities’ middle and upper classes (with shares of 42% and 6,5%, cf. CASS 2011). This partial leads to a total market potential relevant to wine consumption (based on their purchasing power) of 21 million people.

These 21 million people build the basis for further segmentation into different market segments, which was chosen based on a lifestyle segmentation following the segmentation models by Sinus Sociovision:

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Figure 12: Sinus Life Style Milieus - Social Clusters in China's Middle & Upper Class.

(Source: Sinus Sociovision)

This model was found appropriate and applicable to wine as a product as it is especially made for all products with a life-style relation. Wine in China is exactly that: it stands for luxury, a higher life style, culture and status. The segmentation model above groups the mentioned 21 million people into different clusters according to their social status (which takes into consideration such factors as income, purchasing power, education etc.) on one hand and basic values (distinguished between harmony and slow move orientation and dynamic, full speed orientation) on the other hand. These clusters share similar attitudes, points of view, life styles and values in their daily lives and in their consumption habits. Consequently this model appears as a good basis to further break down the market into segments. Further information on segmentation as a basis for marketing mix strategies and activities is provided in chapter 2.7 on pages 14ff, including some limitations and comments on this segmentation model.

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