New opportunities in China for U.S. wine producers

AgExporter, April, 2004

The Latin proverb in vino veritas means "in wine there is truth," but there may be more in wine than just truth--like profits. In 2003, China imported 1.2 million liters of U.S. wines, making it the 24th largest market for U.S. wine exports. Although Taiwan, Singapore and Hong Kong each buy more U.S. wines than China, few countries can boast the long-term potential that its largely undeveloped market represents.

Bulk Versus Bottled

Over the past few years, U.S. bulk and bottled wines have followed divergent paths in China. While imports of U.S. bulk wines plummeted between 2000 and 2002, imports of U.S. bottled wines increased 68 percent, according to China customs data. Imports of inexpensive U.S. bulk wines have been undercut by growth in China's own wine production, while lower tariffs and growing disposable income have smoothed the way for bottled wine imports.

U.S. exporters may find a greater comparative advantage in selling mid- and high-range bottled varieties than bulk wines. However, this trend may be changing, as some U.S. exporters have begun shipping higher quality wines in bulk to be bottled in China.

Market Shifts to Shanghai Suppliers

Although no single data source fully captures China's market for imported wines, certain trends have become evident. In the last several years, China's wine imports have shifted from indirect shipments through Hong Kong to direct shipments into Shanghai, due to improvements in both the quantity and quality of import and distribution options and infrastructure available to U.S. bottled wine producers.

China's demand for wines is growing even faster than its steadily rising production, creating a shortfall that has led to the blending of inexpensive bulk foreign wines with local ones, so most wines labeled as Chinese contained 30-40 percent imported product.

The Domestic Wine Industry

China's grape-growing area expanded 40 percent between 1997 and 2002 and is expected to grow at an annual average of 12 percent through 2007. In 2002, China had about 461,127 acres planted with grapes.

The top wine-producing provinces are Hebei and Shandong in North China and Xinjiang in the far west. Although China's wine output has grown rapidly, its exports have declined steadily during the last few years as its domestic consumption has increased.

Import Taxes

Under China's World Trade Organization accession agreement, wine tariffs are declining from 24.2 to 14 percent in 2004. But if foreign wines gain market share, consumption taxes may be raised. Since these taxes are assessed on value, they would affect bottled imports more than domestic wines.

Bottle Labeling--Accept No Substitutions!

China's food labeling law applies to all prepackaged food and beverage products, such as bottled wines. Labels must include: name or brand, net fluid, alcoholic, sugar and other ingredient content, production date, name and address of packer, distributor or importer, must content (expressed juice before and during fermentation), country of origin and quality guarantee or storage period date.

Standard required documents include certificates of origin and health. Bottling companies and wineries often provide certificates of analysis and origin.

Many imported wines continue to have original labels on the front of the bottle, with Chinese language stickers on the back. While customs officials have said that they would enforce the labeling law more strictly beginning in March 2003, wine imports continue to enter with stickers.

Producers are advised to develop Chinese language labels in anticipation of full enforcement of the law. Such labeling will also help to support promotional efforts and to differentiate genuine products from imitations.

Import and Distribution Channels

Typically, wines enter China's importer and distributor network through three channels:

* CEROILS (China National Cereals, Oils & Foodstuffs Import and Export Corporation), the state monopoly wholesaler and distributor of alcoholic beverages. Most private importers and distributors bring product into the country under the auspices of CEROILS.

* Joint venture and foreign-owned hotels and duty-free stores under China Travel Services. This is a somewhat limited channel, as products are restricted from general distribution.

* The gray channel of Hong Kong and Guangzhou. This channel is declining in importance as duties fall and enforcement of regulations becomes more rigorous.

As the dominant port of entry, Shanghai offers several foreign-run, fully integrated import and distribution options; however, importers in Shanghai are often reluctant to carry new products.

Some importers and distributors offer a Full range of sales and marketing services. including climate-controlled warehousing, trade education, market promotion, sales and delivery. Most successful importers and distributors obtain a sublicense from CEROILS, and then handle marketing and distribution themselves, an arrangement that allows them more control over brand development, handling and storage.