Alcoholic Drinks in China

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Alcoholic Drinks in China

Euromonitor March 2004

Alcoholic drinks

China

List of Contents and Tables
1. 2. 3. INTRODUCTION ....................................................................................................................... 1 EXECUTIVE SUMMARY ......................................................................................................... 2 OPERATING ENVIRONMENT................................................................................................ 3 3.1 Consumer Expenditure on Alcoholic Drinks.................................................................. 3 Table 1 Consumer Expenditure on Alcoholic Drinks 1998-2003 ..................... 4 3.2 Taxation and Duty Levies .............................................................................................. 4 Summary 1 Taxation and Duty Levies on Alcoholic Drinks in 2002...................... 5 Selling Margin of a Typical Beer Brand 2003 ..................................... 5 Table 2 Table 3 Selling Margin of a Typical Spirits Brand 2003 .................................. 5 Legislation ..................................................................................................................... 5 3.3 Table 4 Number of On-trade Establishments 2002........................................... 6 3.4 Breweries, Wine-makers and Distillers.......................................................................... 6 Table 5 Number of Alcoholic Drinks Producers 2003...................................... 7 3.5 Contraband/Parallel Trade............................................................................................ 7 3.6 Duty-Free....................................................................................................................... 7 ALCOHOLIC DRINKS .............................................................................................................. 8 4.1 Sizes ............................................................................................................................... 8 Table 6 Sales of Alcoholic Drinks by Sector: Total Volume 19982003 ..................................................................................................... 9 Table 7 Sales of Alcoholic Drinks by Sector: Total Value 1998-2003 ............. 9 Table 8 Sales of Alcoholic Drinks by Sector: % Total Volume Growth 1998-2003............................................................................. 10 Table 9 Sales of Alcoholic Drinks by Sector: % Total Value Growth 1998-2003.......................................................................................... 10 4.2 Sizes by Region ............................................................................................................ 10 Table 10 Sales of Alcoholic Drinks by Region: Total Volume 19982003 ................................................................................................... 11 Table 11 Sales of Alcoholic Drinks by Region: Total Value 1998-2003.......... 11 Table 12 Sales of Alcoholic Drinks by Region: % Total Volume Growth 1998-2003............................................................................. 11 Table 13 Sales of Alcoholic Drinks by Region: % Total Value Growth 1998-2003.......................................................................................... 12 4.3 Competitive Environment............................................................................................. 12 4.4 Company Profiles – Leading Companies..................................................................... 12 Summary 2 Beijing Yanjing Beer Group Operational Indicators 2002................. 13 Table 14 Beijing Yanjing Beer Group Shares of Alcoholic Drinks by Subsector 2000-2002 ......................................................................... 13 4.5 Company Profiles – Leading Companies..................................................................... 13 Summary 3 Tsingtao Brewery Co Ltd Operational Indicators 2002 ..................... 14 Table 15 Tsingtao Brewery Co Ltd Shares of Alcoholic Drinks by Subsector 2000-2002 ......................................................................... 14 4.6 Company Profiles – Emerging and Niche Companies ................................................. 14 4.7 Distribution.................................................................................................................. 16 Table 16 On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: Volume 2003 ..................................................................................... 17 Table 17 On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: Value 2003......................................................................................... 17 Table 18 On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: % Volume 2003 ..................................................................................... 18 Table 19 On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: % value 2003 ......................................................................................... 18 Table 20 Off-trade Sales of Alcoholic Drinks by Sector and Distribution Format: % Analysis 2003 .............................................. 19 4.8 Forecasts...................................................................................................................... 19

4.

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4.9

Forecast Sales of Alcoholic Drinks by Sector: Total Volume 2003-2008.......................................................................................... 21 Table 22 Forecast Sales of Alcoholic Drinks by Sector: Total Value 2003-2008.......................................................................................... 21 Table 23 Forecast Sales of Alcoholic Drinks by Sector: % Total Volume Growth 2003-2008 ............................................................... 21 Table 24 Forecast Sales of Alcoholic Drinks by Sector: % Total Value Growth 2003-2008............................................................................. 21 Forecasts by Region..................................................................................................... 22 Table 25 Forecast Sales of Alcoholic Drinks by Region: Total Volume 2003-2008.......................................................................................... 22 Table 26 Forecast Sales of Alcoholic Drinks by Region: Total Value 2003-2008.......................................................................................... 23 Table 27 Forecast Sales of Alcoholic Drinks by Region: % Total Volume Growth 2003-2008 ............................................................... 23 Table 28 Forecast Sales of Alcoholic Drinks by Region: % Total Value Growth 2003-2008............................................................................. 23 23 Sizes and Shares........................................................................................................... 23 Table 29 Sales of Beer by Subsector: Total Volume 1998-2003 ...................... 27 Table 30 Sales of Beer by Subsector: Total Value 1998-2003 ......................... 27 Table 31 Sales of Beer by Subsector: % Total Volume Growth 19982003 ................................................................................................... 27 Table 32 Sales of Beer by Subsector: % Total Value Growth 19982003 ................................................................................................... 28 Table 33 Company Shares of Beer by National Brand Owner 20002002 ................................................................................................... 28 Table 34 Company Shares of Beer by Global Brand Owner 2000-2002 .......... 29 Table 35 Brand Shares of Beer 2000-2002 ....................................................... 30 Sizes and Shares by Region.......................................................................................... 30 Table 36 Sales of Beer by Region: Total Volume 1998-2003 .......................... 32 Table 37 Sales of Beer by Region: Total Value 1998-2003.............................. 32 Table 38 Sales of Beer by Region: % Total Volume Growth 1998-2003 ......... 33 Table 39 Sales of Beer by Region: % Total Value Growth 1998-2003 ............ 33 Table 40 Brand Ranking of Beer by Region 2002 ............................................ 34 Pricing ......................................................................................................................... 35 Summary 4 Lager by Price Band 2003 ................................................................. 36 Table 41 Typical Beer Prices 2003................................................................... 36 Lager by Origin ........................................................................................................... 36 Table 42 Sales of Lager by Origin: Total Volume 1998-2003.......................... 37 Table 43 Sales of Lager by Origin: Total Value 1998-2003............................. 37 Table 44 Sales of Lager by Origin: % Total Volume Growth 19982003 ................................................................................................... 37 Table 45 Sales of Lager by Origin: % Total Value Growth 1998-2003............ 37 Table 46 Brand Shares of Domestic Lager 2000-2002 ..................................... 38 Table 47 Brand Shares of Imported Lager 2000-2002...................................... 39 Packaging .................................................................................................................... 39 Table 48 Sales of Beer by Packaging Format: % Analysis 1998/2003 ............. 40 New Product Developments ......................................................................................... 40 Summary 5 Beer: New Product Launches 2002-2003 .......................................... 41 Distribution.................................................................................................................. 42 Table 49 On-trade vs Off-trade Sales of Beer: Volume 1998-2003.................. 43 Table 50 On-trade vs Off-trade Sales of Beer: Value 1998-2003 ..................... 43 Table 51 On-trade vs Off-trade Sales of Beer: % Volume Growth 1998-2003.......................................................................................... 43 Table 52 On-trade vs Off-trade Sales of Beer: % Value Growth 19982003 ................................................................................................... 43 Table 53 Off-trade Sales of Beer by Distribution Format: % Analysis 1998/2003 .......................................................................................... 44 Forecasts...................................................................................................................... 44

Table 21

5.

BEER 5.1

5.2

5.3

5.4

5.5 5.6 5.7

5.8

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Forecast Sales of Beer by Subsector: Total Volume 20032008 ................................................................................................... 45 Table 55 Forecast Sales of Beer by Subsector: Total Value 2003-2008 ........... 46 Table 56 Forecast Sales of Beer by Subsector: % Total Volume Growth 2003-2008............................................................................. 46 Table 57 Forecast Sales of Beer by Subsector: % Total Value Growth 2003-2008.......................................................................................... 46 Forecasts by Region..................................................................................................... 46 Table 58 Forecast Sales of Beer by Region: Total Volume 2003-2008 ............ 47 Table 59 Forecast Sales of Beer by Region: Total Value 2003-2008 ............... 47 Table 60 Forecast Sales of Beer by Region: % Total Volume Growth 2003-2008.......................................................................................... 48 Table 61 Forecast Sales of Beer by Region: % Total Value Growth 2003-2008.......................................................................................... 48 48 Sizes and Shares........................................................................................................... 48 Table 62 Sales of Wine by Subsector: Total Volume 1998-2003 ..................... 52 Table 63 Sales of Wine by Subsector: Total Value 1998-2003 ........................ 52 Table 64 Sales of Wine by Subsector: % Total Volume Growth 19982003 ................................................................................................... 53 Table 65 Sales of Wine by Subsector: % Total Value Growth 19982003 ................................................................................................... 53 Summary 6 Major Wine Companies 2003 ............................................................ 53 Summary 7 Major Brands of Wine 2003 .............................................................. 54 Sizes by Region ............................................................................................................ 54 Table 66 Sales of Wine by Region: Total Volume 1998-2003 ......................... 55 Table 67 Sales of Wine by Region: Total Value 1998-2003 ............................ 55 Table 68 Sales of Wine by Region: % Total Volume Growth 19982003 ................................................................................................... 55 Table 69 Sales of Wine by Region: % Total Value Growth 1998-2003 ........... 56 Sizes of Non-grape Wine by Region ............................................................................. 56 Table 70 Sales of Non-grape Wine by Region: Total Volume 19982003 ................................................................................................... 57 Table 71 Sales of Non-grape Wine by Region: Total Value 1998-2003........... 57 Table 72 Sales of Non-grape Wine by Region: % Total Volume Growth 1998-2003............................................................................. 57 Table 73 Sales of Non-grape Wine by Region: % Total Value Growth 1998-2003.......................................................................................... 58 Price Segmentation ...................................................................................................... 58 Table 74 Sales of Red Wine by Price Segment 1998/2003............................... 59 Table 75 Sales of White Wine by Price Segment 1998/2003 ........................... 59 Table 76 Sales of Rosé Wine by Price Segment 1998/2003 ............................. 59 Non-grape by Type....................................................................................................... 59 Table 77 Sales of Non-grape by Type: Total Volume 1998-2003 .................... 60 Table 78 Sales of Non-grape by Type: Total Value 1998-2003 ....................... 60 Table 79 Sales of Non-grape by Type: % Total Volume Growth 19982003 ................................................................................................... 60 Table 80 Sales of Non-grape by Type: % Total Value Growth 19982003 ................................................................................................... 61 Packaging .................................................................................................................... 61 Table 81 Off-trade Sales of Wine by Packaging Format: % Analysis 1998/2003 .......................................................................................... 61 Distribution.................................................................................................................. 61 Table 82 On-trade vs Off-trade Sales of Wine: Volume 1998-2003................. 62 Table 83 On-trade vs Off-trade Sales of Wine: Value 1998-2003 .................... 62 Table 84 On-trade vs Off-trade Sales of Wine: % Volume Growth 1998-2003.......................................................................................... 62 Table 85 On-trade vs Off-trade Sales of Wine: % Value Growth 19982003 ................................................................................................... 63 Table 86 Off-trade Sales of Wine by Distribution Format: % Analysis 1998/2003 .......................................................................................... 63

Table 54

6.

WINE 6.1

6.2

6.3

6.4

6.5

6.6

6.7

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6.8

6.9

Forecasts...................................................................................................................... 63 Table 87 Forecast Sales of Wine by Subsector: Total Volume 20032008 ................................................................................................... 65 Table 88 Forecast Sales of Wine by Subsector: Total Value 2003-2008.......... 65 Table 89 Forecast Sales of Wine by Subsector: % Total Volume Growth 2003-2008............................................................................. 66 Table 90 Forecast Sales of Wine by Subsector: % Total Value Growth 2003-2008.......................................................................................... 66 Forecasts by Region..................................................................................................... 66 Table 91 Forecast Sales of Wine by Region: Total Volume 2003-2008........... 67 Table 92 Forecast Sales of Wine by Region: Total Value 2003-2008 .............. 67 Table 93 Forecast Sales of Wine by Region: % Total Volume Growth 2003-2008.......................................................................................... 68 Table 94 Forecast Sales of Wine by Region: % Total Value Growth 2003-2008.......................................................................................... 68

7.

SPIRITS 68 7.1 Sizes and Shares........................................................................................................... 68 Table 95 Sales of Spirits by Subsector: Total Volume 1998-2003 ................... 72 Table 96 Sales of Spirits by Subsector: Total Value 1998-2003....................... 73 Table 97 Sales of Spirits by Subsector: % Total Volume Growth 19982003 ................................................................................................... 74 Table 98 Sales of Spirits by Subsector: % Total Value Growth 19982003 ................................................................................................... 75 Table 99 Company Shares of Spirits by National Brand Owner 20002002 ................................................................................................... 76 Table 100 Company Shares of Spirits by Global Brand Owner 20002002 ................................................................................................... 76 Table 101 Brand Shares of Spirits 2000-2002 .................................................... 77 7.2 Sizes and Shares by Region.......................................................................................... 77 Table 102 Sales of Spirits by Region: Total Volume 1998-2003 ....................... 78 Table 103 Sales of Spirits by Region: Total Value 1998-2003........................... 78 Table 104 Sales of Spirits by Region: % Total Volume Growth 19982003 ................................................................................................... 79 Table 105 Sales of Spirits by Region: % Total Value Growth 1998-2003 ......... 79 Table 106 Brand Ranking of Spirits by Region 2002 ......................................... 80 7.3 Sizes and Shares of Other Spirits by Region ................................................................ 81 Table 107 Sales of Other Spirits by Region: Total Volume 1998-2003 ............. 82 Table 108 Sales of Other Spirits by Region: Total Value 1998-2003................. 82 Table 109 Sales of Other Spirits by Region: % Total Volume Growth 1998-2003.......................................................................................... 83 Table 110 Sales of Other Spirits by Region: % Total Value Growth 1998-2003.......................................................................................... 83 7.4 Pricing ......................................................................................................................... 83 Table 111 Blended Scotch Whisky Pricing 2003 ............................................... 84 Table 112 Canadian Whisky Pricing 2003 ......................................................... 84 Table 113 Brandy and Cognac Pricing 2003 ...................................................... 85 Table 114 Vodka Pricing 2003 ........................................................................... 85 7.5 Packaging .................................................................................................................... 85 Table 115 Sales of Spirits by Packaging Format: % Analysis 1998/2003 .......... 86 7.6 New Product Developments ......................................................................................... 86 Summary 8 Spirits: New Product Launches 2002-2003........................................ 87 7.7 Distribution.................................................................................................................. 87 Table 116 On-trade vs Off-trade Sales of Spirits: Volume 1998-2003............... 88 Table 117 On-trade vs Off-trade Sales of Spirits: Value 1998-2003 .................. 88 Table 118 On-trade vs Off-trade Sales of Spirits: % Volume Growth 1998-2003.......................................................................................... 88 Table 119 On-trade vs Off-trade Sales of Spirits: % Value Growth 19982003 ................................................................................................... 88 Table 120 Off-trade Sales of Spirits by Distribution Format: % Analysis 1998/2003 .......................................................................................... 89 7.8 Forecasts...................................................................................................................... 89

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Forecast Sales of Spirits by Subsector: Total Volume 20032008 ................................................................................................... 90 Table 122 Forecast Sales of Spirits by Subsector: Total Value 20032008 ................................................................................................... 91 Table 123 Forecast Sales of Spirits by Subsector: % Total Volume Growth 2003-2008............................................................................. 92 Table 124 Forecast Sales of Spirits by Subsector: % Total Value Growth 2003-2008.......................................................................................... 93 Forecasts by Region..................................................................................................... 93 Table 125 Sales of Spirits by Region: Total Volume 2003-2008 ....................... 94 Table 126 Sales of Spirits by Region: Total Value 2003-2008........................... 94 Table 127 Sales of Spirits by Region: % Total Volume Growth 20032008 ................................................................................................... 94 Table 128 Sales of Spirits by Region: % Total Value Growth 2003-2008 ......... 95

Table 121

8. 9.

CIDER/PERRY ......................................................................................................................... 95 8.1 Sizes and Shares........................................................................................................... 95 FABS 9.1 95 Sizes and Shares........................................................................................................... 95 Table 129 Sales of FABs by Subsector: Total Volume 1998-2003 .................... 96 Table 130 Sales of FABs by Subsector: Total Value 1998-2003........................ 96 Table 131 Sales of FABs by Subsector: % Total Volume Growth 19982003 ................................................................................................... 96 Table 132 Sales of FABs by Subsector: % Total Value Growth 19982003 ................................................................................................... 96 Table 133 Company Shares of FABs by National Brand Owner 20002002 ................................................................................................... 97 Table 134 Company Shares of FABs by Global Brand Owner 20002002 ................................................................................................... 97 Table 135 Brand Shares of FABs 2000-2002 ..................................................... 97 Packaging .................................................................................................................... 97 Table 136 Sales of FABs by Packaging Format: % Analysis 1998/2003 ........... 98 New Product Developments ......................................................................................... 98 Distribution.................................................................................................................. 98 Table 137 On-trade vs Off-trade Sales of FABs: Volume 1998-2003 ................ 98 Table 138 On-trade vs Off-trade Sales of FABs: Value 1998-2003 ................... 98 Table 139 On-trade vs Off-trade Sales of FABs: % Volume Growth 1998-2003.......................................................................................... 99 Table 140 On-trade vs Off-trade Sales of FABs: % Value Growth 19982003 ................................................................................................... 99 Forecasts...................................................................................................................... 99 Table 141 Forecast Sales of FABs by Subsector: Total Volume 20032008 ................................................................................................... 99 Table 142 Forecast Sales of FABs by Subsector: Total Value 2003-2008 ....... 100 Table 143 Forecast Sales of FABs by Subsector: % Total Volume Growth 2003-2008........................................................................... 100 Table 144 Forecast Sales of FABs by Subsector: % Total Value Growth 2003-2008........................................................................................ 100

9.2 9.3 9.4

9.5

10.

APPENDIX .............................................................................................................................. 100 10.1 Industry Statistics....................................................................................................... 100 Table 145 Beer: Production, Imports and Exports: Total Volume 20002002 ................................................................................................. 101 Table 146 Wine Production, Imports and Exports: Total Volume 20002002 ................................................................................................. 101 Table 147 Domestic Brandy Production: Total Volume 1998-2002................. 101 Table 148 Whisk(e)y Production, Imports and Exports: Total Volume 2000-2002........................................................................................ 102 Table 149 Brandy And Cognac Production, Imports and Exports: Total Volume 2000-2002 .......................................................................... 102 Table 150 Vodka Production, Imports and Exports: Total Volume 20002002 ................................................................................................. 102

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ALCOHOLIC DRINKS IN CHINA
1. INTRODUCTION

This report analyses the market for alcoholic drinks in China. The review period covered is 19982003, and forecasts are made to the year 2008. For the purposes of the study, the market has been divided into the following sectors: • • • • • Beer Wine Spirits Cider/Perry Flavoured Alcoholic Beverages (FABs)

The People’s Republic of China is divided administratively into 23 provinces (P), five autonomous regions (AR), four municipalities (M) and two special administrative regions (SAR). This report covers mainland China only, and therefore excludes the two SARs, Hong Kong and Macau, as well as one province, Taiwan. Both Hong Kong and Taiwan are analysed separately by Euromonitor. In order to give clearer insight into the Chinese market, analysis is given at both regional and national levels. For the purposes of this study, China has been broken down into six broad regions: East China • • • Includes Shandong (P), Jiangsu (P), Anhui (P), Shanghai (M) and Zhejiang (P). The coastal provinces, containing 220 million people, are perfectly positioned to take full advantage of the policies of market reform, and have benefited accordingly. Shanghai, China’s most populous city, is the economic centre of both the region and the country.

Mid China • • • Includes Henan (P), Hubei (P), Hunan (P) and Jiangxi (P). This is the most populous region in China, with over 323 million inhabitants. The economy is largely agricultural, except for Hubei province, which is heavily industrialised. Per capita income is low and the region is a major source of migrant workers for the major coastal cities.

North and Northeast China • • Includes Heilongjiang (P), Jilin (P), Liaoning (P), Tianjin (M), Beijing (M), Hebei (P) and Shanxi (P). With a population of 226 million, this region is rich in natural resources (crude oil, iron and manganese) and agriculture. However, its development is constrained by a weak transportation infrastructure.

Northwest China • Includes Xinjiang (AR), Qinghai (P), Gansu (P), Ningxia (AR), Shaanxi (P) and Inner Mongolia (AR).

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• •

The least developed of the six regions, Northwest China has a population of 113.5 million. Farming is the main industry; however, output is still insufficient to feed the population. Poverty is widespread and Xinjiang shows a degree of political instability due to tensions between separatist Uygurs and the Chinese authorities.

South China • • Includes Fujian (P), Guangdong (P), Guangxi (AR) and Hainan (P). Located on the South of China’s “golden coast”, this is a strong economic region in China. With a population of 160 million people, the provinces have very close ties with Taiwan, Hong Kong, Macau and Southeast Asia. The region is a gateway for international trade and, as such, represents a major source of income for the Chinese government.



Southwest China • • Includes Tibet (AR), Sichuan (P), Yunnan (P), Guizhou (P) and Chongqing (M). The economic gap between this region and coastal regions is dramatic. The Chinese central government is now taking a more hands-off and market-oriented approach to compensate for this imbalance. Tourism, the so-called “green industry”, is booming rapidly and becoming the principal economic activity.

Explanations of Chinese words and/or terminology used in this report are as follows: Yellow wine – also called shaoxing wine, traditional wine made of rice and sorghum, with about 15% alcohol by volume. Other terminology: • • GBO: refers to Global Brand Owner, which is the ultimate owner of a brand. NBO: refers to National Brand Owner, which is the company licensed to distribute a brand on behalf of a GBO. The NBO may be a subsidiary of a GBO or it may be a completely separate company. Share tables at both GBO and at NBO level are provided in the report. Reference to shares in the report analysis is at NBO level.

2.

EXECUTIVE SUMMARY

Consolidation taking place In 2003, the alcoholic drinks market in China stood at an estimated 31,313 million litres, and was worth RMB339,216 million, having increased by 4.9% in volume and by 2.2% in value on the previous year. The increasing health consciousness of consumers has translated into purchases of drinks with a lower alcohol content or even non-alcoholic drinks. At the same, consolidation is taking place in the beer, wine and spirits sectors, due to intense competition brought about by the health trend and China’s entry to the WTO. Mergers and acquisitions – key to success in the beer sector Many mergers and acquisitions took place over the 2002-2003 period in the Chinese beer sector, including the deals between Tsingtao and Anheuser-Busch, and SABMiller and Haerbing, which were examples of strategic alliances between major foreign players and local manufacturers. In addition, there were also local mergers and acquisitions, such as China Resources Enterprise’s purchase of Sichuan Blue Sword, and Heilongjiang Harbin’s purchase of Ballantine Management Ltd. Both foreign-local and local-local acquisitions have been beneficial to the parties involved. Having witnessed the success of this strategy, many foreign and local beer manufacturers are

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following suit. Further consolidation is expected, and the impact is likely to be positive for the alcoholic drinks market as a whole. Red wine dynamic performance to continue Still red wine saw strong growth over the review period, and is projected to continue its dynamism. In 2003, off-trade volume sales grew by 13.6%, continuing its double-digit growth since 1998. Red wine demonstrated an impressive performance in both the off- and on-trade, largely because of the changing drinking habits of many Chinese consumers, and the fact that wine is widely consumed on special occasions and during festive seasons. The share of still red wine sales as a proportion of total wine sales continued to increase in 2003, and growth showed no signs of abating, underpinned by increased awareness of the alleged health benefits to be derived from moderate red wine consumption. Beer and spirits manufacturers are entering the wine sector in order to exploit its substantial potential. Spirits on the way to being healthier and trendier Sales of local spirits continue to fall, though the rate of decline is slowing. In terms of taste and price, local spirits still occupy a unique position compared to imported products. Most local spirits manufacturers are endeavouring to gain a healthier image for their products and thus win back consumers. To achieve this, the alcohol content has been reduced, with 40-49% ABV becoming the norm. Alcohol content is expected to drop to below 39% ABV in the forecast period. Distributors of imported spirits are, meanwhile, endeavouring to promote their products as fashionable to youngsters who are not the traditional consumers of spirits. In spite of tariff reductions following China’s entry into the WTO, imported spirits are still not as affordable as local spirits. By attracting younger consumers with greater purchasing power, imported spirits are likely to enjoy positive growth in the near future in both volume and value terms. Outlook positive despite SARS The alcoholic drinks industry is poised for continued growth despite the SARS outbreak in the second quarter of 2003, which killed 339 people out of the 5,322 cases reported. The virus epidemic has now been brought under control. Prospects for alcoholic drinks are bright, with new products being developed and introduced onto the market. Continued consolidation will strengthen the industry and improve production and distribution, making alcoholic drinks more affordable and accessible to Chinese consumers. As a result, volume growth of almost 30% is predicted for the industry over the forecast period.

3.
3.1

OPERATING ENVIRONMENT
Consumer Expenditure on Alcoholic Drinks

The alcoholic drinks industry in China continued its growth in 2003, in line with the economy as a whole, with consumer expenditure reaching RMB76 billion. The wine sector outperformed the others, registering double-digit growth. Large alcoholic drinks manufacturers and distributors consolidated their positions over the review period through acquisitions of local players or joint ventures with foreign enterprises, especially in the beer sector. Adopting such strategies has put domestic companies in a stronger position to compete with foreign players as the market liberalises.

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Table 1 RMB million

Consumer Expenditure on Alcoholic Drinks 1998-2003

1998 Beer Wine Spirits TOTAL
Source:

1999

2000

2001

2002

2003

22,693.3 25,365.1 27,723.8 32,896.0 34,702.5 37,007.8 10,416.6 11,889.9 13,303.7 16,094.5 16,616.5 19,018.6 15,252.9 15,456.8 16,115.1 17,934.5 18,860.0 20,365.4 48,362.8 52,711.8 57,142.6 66,925.0 70,179.0 76,391.8
Official statistics (National Bureau of Statistics of China), Euromonitor

3.2

Taxation and Duty Levies

Domestic breweries and distilleries continued to be subject to heavy taxes levies in 2003. Generally speaking, a 33% tax on income and 17% valued added tax were imposed on manufacturers. Consumption tax of around 10% is imposed on all alcoholic beverages. Following approval from the State Council, China has begun to adjust consumption taxes on alcohol. New regulations were published and have been implemented since 1 May 2001. Under the new system, tax on local spirits is levied based on volume as well as price. Generally speaking, the tax rate for spirits was set at 25% plus RMB1,000 on each tonne of spirits sold: paid tax = sales value × 25% + sales volume (measurement unit: tonnes) × RMB1,000. Consumption tax on beer was also adjusted, with the tax level related to the price (manufacturer’s price) of the products. RMB250 per tonne (one tonne is generally equal to 988 litres) is imposed on beers priced at RMB3,000 per tonne and over, while RMB220 per tonne is imposed on beers priced below RMB3,000 tonne. For unbranded beers (for example, products brewed by individual pubs or restaurants), RMB250 per tonne is the standard tax level. New tax policy does not benefit big manufacturers The consumption tax rate is a levy based on volume as well as price, which means the more the manufacturer sells, the higher tax rate it is going to pay. Local spirits distilleries were much more negatively affected by the new tax regulations than beer and wine producers. The government’s original intention in implementing this policy was to regulate the industry, bridging the gap with international practice and also to restrain spirits manufacturers from adopting strategies on the pricing of their products to dodge the tax. However, it turned out that the profit margin for large manufacturers was reduced; indeed, small manufacturers gained an advantage in terms of cost as the big manufacturers had to follow the tax policy strictly, and paid more tax than before. Wu Liang Ye alone contributed one fifth of its revenue to paying the tax levied on volume in 2002, which decreased its total annual net profit by more than 4%. However, many small provincial producers were protected by local government through a fixed tax policy (that is to say the amount of tax is fixed and not related to volume sales). Consequently, the big manufacturers have to operate under a heavier tax burden, and small distilleries thus enjoyed greater profit margins and continued to flood the market with inferior products. The new taxation likely to be modified

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Taking into consideration the negative effect of the new taxation policy on local spirits output, the relevant authorities are, according to trade sources, considering modifying the policy. The adjustment of the taxation policy aims at creating a fairer competitive environment for all local spirits manufacturers.
Summary 1 Taxation and Duty Levies on Alcoholic Drinks in 2002 Consumption tax Beer with msp exceeding RMB3,000/tonne Beer with msp less than RMB3,000/tonne Unbranded beer Wine Cider and perry Local spirits made from grain Local spirits made from sweet potato Imported spirits
Source:

Import duty RMB3.50/litre RMB3.50/litre RMB3.50/litre 35% 65%

RMB250/tonne RMB220/tonne RMB250/tonne RMB240/tonne 10% RMB1/kg+25% ad valorem tariff RMB1/kg+15% ad valorem tariff RMB1/kg+25% ad valorem tariff

Trade associations (China Brewery Association)

Table 2 % share

Selling Margin of a Typical Beer Brand 2003

2003 VAT Excise Retailer Distributor Manufacturer TOTAL
Source: Note: Trade interviews, store checks, Euromonitor estimates based on Yanjing, RMB2.20, 355ml, supermarket

14.53 10.00 11.15 7.37 56.96 100.00

Table 3 % share

Selling Margin of a Typical Spirits Brand 2003

2003 VAT Excise Retailer Distributor Manufacturer TOTAL
Source: Note: Trade interviews, store checks, Euromonitor estimates based on Tuo Pai Da Qu, RMB12.90, 480ml, supermarket

14.53 10.00 11.15 8.55 55.77 100.00

3.3

Legislation

Legislation on advertising

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A series of regulations regarding the advertising of liquors was implemented in January 1996. According to these regulations, advertising time of liquors is restricted. Firstly, for media advertising on each TV channel, no more than two commercials, either on brand or manufacturer, are allowed during the period 19.00-21.00hrs and no more than ten a day. Secondly, on each TV channel, no more than two commercials are allowed per hour. Thirdly, for newspapers and periodicals, no more than two pieces of advertising are allowed in one issue, and the advertisements cannot appear on the first page of the newspaper or on the cover of a periodical. The State Administration of Industry and Commerce (SAIC) revised the above regulations in 1999, and the limitations on numbers of advertisements, time shown and page space have not applied across the board since January 2000. However, the revised policies only apply to low-alcohol liquor of no more than 24% ABV and not to all kinds of alcoholic drinks. According to this definition, low-alcohol liquors only include beer and wine. It is clear that through the revision of the advertising legislation, the Chinese government is promoting the consumption of beer and wine and discouraging consumption of spirits. CCTV is the key TV channel with the largest audience, as its coverage is nationwide. In 1 July 2003, the advertising fee for the four minutes before 19:00hrs prime time news reached RMB30,000 per five seconds. Since January 2002, their has been a 10% surcharge for advertisements for alcoholic products. Drink driving The punishment for drink driving can be very severe in China. According to the Punishment Regulations of Security Administration of PRC, the driving licence of a driver convicted of drink driving can be revoked for up to six months. If an incident is very serious, the licence can be revoked for up to 12 months. However, this policy is frequently not enforced as the number of Chinese people with cars is still small, so local police stations do not see drink driving as a significant problem. Opening hours Bars within hotels In big cities such as Beijing, Shanghai and Guangzhou, hotels usually have at least one bar. These bars generally open from 20.00hrs to 02.00hrs, and mainly serve drinks rather than meals. Bars outside hotels In Beijing, there are several streets, such as Sanlitun, Guanghualu, which are full of theme bars and pubs, for example, Irish, Scottish or American. The same applies to the Sunday drinking centre in Shanghai. Xi’an, as a tourist attraction, also receives millions of foreign visitors each year, which accounts for the high penetration of on-trade outlets there. Bars outside hotels usually open from 18.00hrs to 02.00hrs or 03.00hrs, and serve both drinks and meals.
Table 4 Number of On-trade Establishments 2002

Number of establishments (registered restaurants and catering places) 2002 TOTAL
Source: Trade associations (China Cookery Association)

3,500,000

3.4

Breweries, Wine-makers and Distillers

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The spirits industry is very fragmented, with a vast number of small concerns with only a limited local presence, due to the difficulties of wider distribution in a large country with an underdeveloped transport infrastructure. China currently has about 38,000 companies distilling local spirits. The leading company, Sichuan Yibin Wu Liang Ye Distillery Co Ltd, accounted for less than 4% of the market in volume terms in 2002. Over the review period, the number of breweries in China declined, as the beer sector has excess production capacity. Towards the end of review period, many small breweries ran at a loss due to price competition in the sector. Price wars led to low profit margins or even losses, and this forced small breweries to close down. Moreover, many big international breweries aggressively merged or acquired local beer manufacturers, which was another reason for the decline in the number of domestic breweries. On the other hand, the number of wine-makers increased over the review period, reflecting the healthy development of the sector. The number of suppliers has grown from 400 in 1996 to over 600 in 2002. However, with the abolition of half juice grape wine in 2003, many small wineries may not survive and will be forced to close or be acquired by the large wine companies in 2004.
Table 5 Number of Alcoholic Drinks Producers 2003 2003 600 650 38,000 39,250
Trade associations (China Brewery Association)

Beer Wine Spirits TOTAL
Source:

3.5

Contraband/Parallel Trade

Black and grey markets notable Compared with 2002, black and grey market activity in 2003 changed little. Parallel trade is still common, especially for imported alcoholic drinks. In 2002 and 2003, there were hundreds of small distributors of imported alcoholic drinks into China. For domestic alcoholic drinks, parallel trade has been discouraged. Most leading players have either set up sales companies across China or have established close relationships with local distributors. In this way, parallel trade is largely avoided or more effectively controlled. Since off-trade outlets are not allowed to import liquor directly, foreign products have to enter China via agents possessing import/export licences. However, especially in coastal cities, distributors work closely with overseas agents or manufacturers to bypass the supervision of National Sugar and Liqueur Corp (NSLC), which was set up to control the distribution of liquor within the country. Lack of efficient control of distributors makes it possible for counterfeit and smuggled goods to be brought into the country. Grey imports are the most common, but due to deficiencies in the implementation of regulations, the practice continues to occur through a combination of legal and illegal means. All statistics relating to illegal products or trading are excluded from the data used for the purposes of this report.

3.6

Duty-Free

Duty-free sales in China are insignificant, for a number of reasons. Firstly, an overwhelming majority of Chinese consumers are still more used to the flavours of local products, hence imported alcoholic drinks only have a limited market share. Secondly, owing to the development of

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distribution channels, imported spirits available in retail channels are often no more expensive than those in duty-free shops. Lastly, it is often the case that US dollars rather than renminbis have to be used when purchasing in the duty-free shops. During the review period, duty-free products were only available in duty-free shops located in airports. Duty-free shops in Northeast and Northwest China are not as popular as they are in Eastern or Southern China. Travellers from abroad are permitted to bring one to two bottles (less than 750ml per bottle) of duty-free liquor into China.

4.
4.1

ALCOHOLIC DRINKS
Sizes

The alcoholic drinks market in China was valued at an estimated RMB339 billion in 2003, representing an increase of 2.2% in current value terms on 2002. However, the performance of the different sectors comprising the alcoholic drinks market was mixed over the review period. Spirits sales performed poorly, having been dampened by unfavourable government policy. Volume sales of spirits declined by 7.6% in 2003, with a 3.3% fall in current value terms. Beer and wine performed rather better, increasing by 5.5% and 6.8%, respectively, in current value terms. Standard lager increasingly popular With sales worth over RMB150 billion in 2003, beer has strengthened its position as the largest sector of the alcoholic drinks market, with a value share of 45%, compared to 38% for spirits. Beer continued its steady growth in 2003 on the back of increasing consumer demand, which was driven by rapidly rising levels of consumer income and thus spending power. Consumers in urban areas switched from economy lager to standard lager in China over the review period as a result of increasing disposable incomes and greater concern about product quality as opposed to price. Although economy lager is the predominant choice in China, sales have shown signs of saturation. In fact, the profit margin on economy lager declined over the survey period and, as a result, beer manufacturers, after gaining brand recognition among consumers with their economy products, began to develop the more profitable standard lager. Consumers tend to choose different products for different occasions. Economy products are often chosen to consume at home; however, when dining out with friends, consumers often prefer standard or premium lager with a better brand image. Moreover, due to variations in regional standards of living and regional breweries’ different rankings, different types of beers attract different consumption groups. For example, standard lagers from Tsingtao and Yanjian dominate in the East and Northeast regions, while imported beers dominate in on-trade outlets. Grape wine outperforms non-grape wine In 2003, total sales of wine in China increased by nearly 7% in volume terms, to reach a total of 1.76 billion litres. As a result of the growing sophistication of alcoholic drinks consumers, wine is seeing massive growth in China. As consumers are tending to be more influenced by Western lifestyles, many have adopted Western drinking habits. Among all grape wines, red wine registered the highest volume growth in 2003, of 13.5%, and it also accounted for the majority of grape wine sales. Still red wine remains the most popular grape wine due to its perceived health benefits, and saw growth of 13% in value terms in 2003. Rosé wine is only popular in the South and East regions, where consumers are more knowledgeable and are willing to pay a higher price for imported wine, while in contrast, rosé wine is not well received in other regions due to a lack of product knowledge and promotions.

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Demand for local non-grape wine is on a downward trend due to the diminishing number of consumers, which mainly comprise elderly people and blue-collar workers. Due to regional preferences, non-grape wine is more often sold in the East region. Low profit margins have caused many non-grape wine producers to withdraw from the subsector, which resulted in a reduction in the number of brands on the market in China over the review period. Spirits’ declining is slowing down The decline in sales of spirits in volume terms continues, but slowed down in 2003. Following years of adjustment to the government’s new taxation policies, local spirits, which account for the bulk of spirits sales, are approaching a stage of stable development. Demand is moving towards higher quality spirits with a healthier image (ie lower alcohol content) and greater variety. Imported spirits witnessed a downturn in demand due to increasing sales of rival drinks, such as wine, beer and even local spirits. Gin, rum, vodka and other imported spirits are mainly consumed in on-trade establishments. Sales continued to drop in 2003, although the decline is again slowing down.
Table 6 Million litres 1998 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source:

Sales of Alcoholic Drinks by Sector: Total Volume 1998-2003

1999

2000

2001

2002

2003

18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6 0.6 0.7 1,204.0 1,300.8 1,414.1 1,539.8 1,645.9 1,757.0 6,192.0 5,314.1 4,776.6 4,310.8 3,884.3 3,590.9 25,862.2 26,481.1 27,455.0 28,558.7 29,840.6 31,313.1

Trade interviews, Euromonitor estimates

Table 7 RMB million

Sales of Alcoholic Drinks by Sector: Total Value 1998-2003

1998 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source:

1999

2000

2001

2002

2003

109,691.1 116,748.4 124,714.7 133,352.9 142,554.7 150,415.1 108.0 120.0 42,651.0 45,548.7 49,038.0 53,349.6 57,274.9 61,185.7 187,138.9 162,396.5 148,044.9 138,270.2 131,851.6 127,495.4 339,481.0 324,693.7 321,797.7 324,972.7 331,789.1 339,216.2

Trade interviews, Euromonitor estimates

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Table 8

Sales of Alcoholic Drinks by Sector: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 7.1 7.9 -10.3 3.9

1998/03 TOTAL 40.6 45.9 -42.0 21.1

6.8 15.0 6.7 -7.6 4.9

Table 9

Sales of Alcoholic Drinks by Sector: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 6.5 7.5 -7.4 0.0

1998/03 TOTAL 37.1 43.5 -31.9 -0.1

5.5 11.1 6.8 -3.3 2.2

4.2

Sizes by Region

Changing habits key to low growth in spirits drinking Due to different drinking habits across the country, different regions demonstrated significant differences in performance over the review period. North and Northeast China, Northwest China and Southwest China, the regions that consume the most spirits, all registered lower volume growth over the review period than the other regions. Changing drinking habits, with an increasing number of consumers switching from spirits to drinks with a lower alcohol content, such as wine or beer, contributed to the decline of spirits sales. The fall can also be attributed to price reductions due to high levels of competition and excess production capacity, particularly in the aforementioned regions, which are fairly saturated. Increasingly sophisticated consumption in more developed regions East, South, North and Northeast China register the highest levels of per capita consumption of alcoholic drinks. Since these regions opened to the outside world earlier than the other regions of China, they tend to be more influenced by Western lifestyle trends, and are thus more likely to adopt Western drinking habits. With living standards and levels of disposable income much higher than the national average, and with an ethos leaning towards the enjoyment of life, consumers in these regions are more likely to purchase higher quality and branded products. At the same time, the fever for imported alcoholic drinks has faded among these consumers, and they tend to prefer products offering value for money. Therefore, the leading domestic wine brands are favoured because they are much cheaper than imported wine, yet their quality is reasonably good. Developed regions registered higher on-trade sales

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The high level of growth in on-trade consumption was another reflection of the improving economy and rising living standards in 2003. The rapid development of bars and pubs contributed to growth. Well-paid younger consumers use bars and pubs as places for gatherings and relaxation. Also, as the people in the East, South, North and Northeast regions can afford more expensive products, ontrade sales are greater than in other regions in both volume and value terms.
Table 10 bn litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

Sales of Alcoholic Drinks by Region: Total Volume 1998-2003

1999 6.8 4.0 8.2 1.9 3.4 2.2 26.5

2000 7.2 4.2 8.3 1.9 3.5 2.3 27.5

2001 7.7 4.5 8.5 1.8 3.8 2.3 28.6

2002 8.2 4.7 8.7 1.8 4.0 2.4 29.8

2003 8.6 5.0 9.0 1.8 4.3 2.5 31.3

6.5 3.8 8.1 2.0 3.2 2.2 25.9

Trade interviews, Euromonitor estimates

Table 11 RMB million

Sales of Alcoholic Drinks by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1999 95,415.0 51,250.8 75,112.1 15,902.8 44,241.5 42,771.4 324,693.7

2000 97,626.4 50,529.7 73,828.1 14,890.1 44,380.8 40,542.6 321,797.7

2001 100,995.6 50,758.8 73,604.5 14,457.6 45,861.3 39,294.9 324,972.7

2002 105,291.9 51,436.6 74,434.0 14,255.6 47,679.3 38,691.6 331,789.1

2003 109,222.4 52,193.2 75,511.0 14,152.0 49,707.7 38,429.8 339,216.2

96,561.7 54,198.4 77,815.7 17,676.9 45,823.7 47,404.6 339,481.0

Trade interviews, Euromonitor estimates

Table 12

Sales of Alcoholic Drinks by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 6.0 5.5 2.1 -1.9 6.1 2.4 3.9

1998/03 TOTAL 33.7 30.6 10.9 -9.1 34.5 12.7 21.1

5.8 6.8 3.6 -0.3 6.7 4.1 4.9

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Table 13

Sales of Alcoholic Drinks by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 2.5 -0.8 -0.6 -4.4 1.6 -4.1 0.0

1998/03 TOTAL 13.1 -3.7 -3.0 -19.9 8.5 -18.9 -0.1

3.7 1.5 1.4 -0.7 4.3 -0.7 2.2

4.3

Competitive Environment

More foreign beer producers to enter the market More foreign beer manufacturers are entering the Chinese market, especially now that China has surpassed the US as the largest beer market in the world, although per capita consumption was only 19.8 litres in 2003. Competition will intensify since big local brewers are moving from producing economy lagers to the more profitable standard and premium lagers, which are traditionally the strongholds of foreign producers. Foreign and local beer manufacturers will essentially be fighting over the same pie. The saving grace is that the pie is likely to grow with the continuing economic boom in China, resulting in consumer demand for better quality products. Consumers will gain, with a wider choice of brands and value-for-money products. To avoid the high entry cost of starting from scratch, foreign companies will look to acquisitions of local brewers as the way to enter the Chinese market. At the same time, local brewers are adopting the same strategy to strengthen their current positions and to expand into other regions where they do not have a strong foothold. Thus, it is inevitable that competition will become increasingly fierce, and small players will find it difficult to survive. Mergers and acquisitions ahead for wineries As the wine industry moves to adhere to international standards for wine-making, many of the small wineries which previously produced half juice grape wine will not be able to sustain their businesses without merging with or being acquired by the bigger players. Big players, on their part, will further consolidate their positions by forming partnerships with other major players, both local and foreign, in order to improve their product mixes and know-how in wine-making and marketing. This is to prepare themselves for more competition, as tariffs will fall to 10% by 2005, and imported wines will rush into the market. Local spirits manufactures experience product range restructuring The new taxation policy on local spirits unexpectedly marginalised low-end products. Profit-driven manufacturers are now focusing on mid- to high-end new product launches. Rising unit prices have narrowed the gap between premium local spirits and low-end imported spirits.

4.4

Company Profiles – Leading Companies

Beijing Yanjing Beer Group Company Background Beijing Yanjing Beer Group, which sells high quality beer and beverage products, was started in 1980. Its key brand, Yanjing beer, has been the number one brand in China for seven consecutive

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years, with a sales volume of 1,106 million litres in 2002. Yanjing beer is ranked at number 13 among Chinese branded products, with its brand valued at RMB6 billion. The company has been selected as one of China’s top 100 enterprises.
Summary 2 Sales 2002 % growth over 2001 Net profit 2002 % growth over 2001
Source:

Beijing Yanjing Beer Group Operational Indicators 2002 RMB2,767 million 21 RMB201 million -29

Company research, trade interviews, Euromonitor estimates

Competitive Positioning Beijing Yanjing Beer Group has pursued something of a buying spree, with its latest acquisition being a 38% stake in Huiquan Beer Group Co, the largest beer producer in the eastern province of Fujian, for US$43 million (RMB360 million). The acquisition of Huiquan will give Yanjing another opportunity to enter the Taiwanese market, with Taiwan located off the Fujian coast. In 2002, Yanjing successfully launched its products in Taiwan, selling 2.9 million litres of beer within a few months. The deal marks a further stage in the aggressive expansion of Yanjing, which has made some 14 acquisitions in the last four years. Yanjing beer has more than an 85% market share in Beijing, as its national headquarters are in the capital. It also has 45% market share in Northern China; 25% in Shandong; 12% in Hubei; 35% in Hunan; 35% in Jiangxi; and 75% in Guangxi. The company has successfully built its distribution network across the country, which has contributed strongly to its being the number one brand of beer in China. In 2002, Yanjing’s sponsorship of NBA Houston Rockets, to which the Chinese basketball star Yao Ming belongs, helped Yanjing beer to break into the US market. Yanjing’s exports doubled to 6.8 million litres in 2002. Beijing Yanjing Beer Group has developed very rapidly in recent years by extending its market and diversifying its products. Its subsidiaries include Beijing Yanjing Beer Co Ltd, Beijing Yanda Crown Lid Co Ltd, Beijing Changyi Ginseng Drinks Co Ltd, Beijing Double-Swallow Color Printing Works, Beijing Hangxing Seasonings Co Ltd, Yanjing Mineral Water Factory and Yanjing Zhongke Biological Co Ltd.
Table 14 Beijing Yanjing Beer Group Shares of Alcoholic Drinks by Subsector 20002002

% total volume 2000 Lager Beer
Source:

2001 7.4 7.4

2002 8.5 8.5

6.6 6.6
Company research, trade interviews, Euromonitor estimates

4.5

Company Profiles – Leading Companies

Tsingtao Brewery Co Ltd Company Background

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Tsingtao Brewery Co Ltd, founded in 1903, is the oldest and largest brewery in China. Tsingtao’s business scope is brewing, distribution and related businesses. Its Tsingtao Beer brand has become one of the most well known Chinese beers, and is exported to more than 40 countries. The company is so far the only enterprise in the food and beverage industry to be awarded the National Quality Management Award. It recorded a sales volume of 2,951 million litres in 2002, representing a rise of 21% over the previous year. Sales of Tsingtao beer, its key product, reached 909 million litres in 2002, up by 42% on 2001. Tsingtao has successfully introduced Tsingtao beer to the Taiwanese market after China and Taiwan’s accession to the WTO, by working closely with Taiwan’s local beer distributors. In only eight months, it exported a total of 31 million litres to the Taiwanese market, out of its total export volume of 63 million litres in 2002. It aimed to produce 3,557 million litres of beer, and sell 1,186 million litres of its key brand, Tsingtao, in 2003. Its ultimate goal is to be one of the 10 largest beer companies in the world.
Summary 3 Sales 2002 % growth over 2001 Net profit 2002 % growth over 2001
Source: Company research

Tsingtao Brewery Co Ltd Operational Indicators 2002 RMB6,195 million 32 RMB222.6 million 166

Competitive Positioning Tsingtao has bought about 45 smaller rivals in China in the past four years, of which one third are believed to be profitable and one third at the break-even point. After such rapid expansion, the company is focusing on integration and consolidation of its businesses across the country. In response to the rising competition resulting from China’s accession to the WTO and globalisation, Tsingtao entered into a strategic alliance with Anheuser-Busch in October 2002, whereby Anheuser-Busch will increase its stake in Tsingtao to 27% over seven years, for a total sum of US$182 million (RMB1.5 billion). Tsingtao believed it is a win-win situation for both parties. On one hand, it can improve its management effectiveness, profitability and core competitiveness through Anheuser-Busch’s marketing expertise, capital and management resources. Anheuser-Busch, on the other hand, can tap into China’s rapid growth through Tsingtao’s production bases, sales network and operational experience.
Table 15 % total volume 2000 Lager Beer
Source:

Tsingtao Brewery Co Ltd Shares of Alcoholic Drinks by Subsector 2000-2002

2001 10.8 10.8

2002 12.1 12.1

8.6 8.6
Company research, trade interviews, Euromonitor estimates

4.6

Company Profiles – Emerging and Niche Companies

China Kweichow Moutai Co Ltd China Kweichow Moutai Co Ltd is a leading manufacturer of high-end local spirits. The company is located in Guizhou province (Southwest China), with 6,000 employees and annual production capacity of more than 6,000 tonnes. The company developed brand extensions over the review period, and launched lower alcohol spirits (29% and 33% ABV) catering to the health trend in

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spirits consumption. Unlike other local spirits manufacturers, which have different brands and diversified products, China Kweichow Moutai Co Ltd concentrates on its flagship brand Moutai, which has been traditionally perceived as a high-prestige brand in both the domestic market and abroad. Under its market strategy of “One focus brand (Kweichow Moutai) complemented by multi-brand development”, Kweichow Moutai launched its beer products in Southwest China in May 2003. China Resources Enterprise Ltd China Resources Enterprise is the second largest brewer in China, with volume sales of 2,343 million litres in 2002. Its national brand, Snowflake, reached 442 million litres in volume sales in 2002. China Resources Enterprise Ltd’s strategy is to expand production capacity through acquisitions in targeted regions. Recent acquisitions include a new brewery in Wuhan City in April 2002, and another new brewery in Panjin in December 2002, bringing the total number of breweries to 28, with a combined annual production capacity of approximately 4 billion litres. The company has concentrated on taking over leading regional breweries across the country while retaining its own brand names, which have established consumer loyalty and leadership positions in their local areas. For example, China Resources has Zero Point and Xing Yin Ge in Mid China, Snow Flake in Northeast China and Blue Sword in Southwest China. COFCO (China National Cereals, Oils, Foodstuffs Imp & Exp Corp) International Limited COFCO International Limited produces and sells wine under the brand Great Wall in China, through its subsidiaries China Great Wall Wine Co Ltd, Huaxia Winery Co Ltd and Yantai COFCO Winery Co Ltd. The group has an extensive distribution network which covers over 300 leading distributors. It is dedicated to the development of an enterprise integrating grape planting and winemaking. China Great Wall Wine Co Ltd is a wine producer created by COFCO in 1983, and developed the first domestic line of Dry White Wine and Great Wall Sparkling Wine. These filled the vacuum in Chinese wines at that time. Great Wall white wines have won numerous awards at both national and international levels. Huaxia Winery Co Ltd, founded by COFCO in 1988, is the first “dry red” winery in China. It is located in Changli, Hebei Province. Acclaimed as the “Bordeaux of China”, Changli is an ideal place for grape growing since it has an excellent climate. Huaxia has built the largest vineyard of fine grape varieties in China, in an area of around 667 hectares. Like the company’s white wines, Great Wall Dry Red Wine, its main product, has won many prizes at national and international events. COFCO Yantai Winery Co Ltd was established by COFCO in 1999 to produce and market Great Wall wines. Dynasty Winery Co Ltd Dynasty Winery Corp, founded in 1980, is a Sino-France joint venture, one of the earliest Chineseforeign joint ventures ever set up in China, and was also the first such joint venture in Tianjin. The company produced more than 23 million bottles of wine in 2002, a substantial increase from the 100,000 bottles produced when it was founded in 1980. It produces 16 varieties of wine in three ranges. Dynasty wines have won numerous awards nationally as well as at the international level. The company’s products are exported to over 20 countries and regions, including the US, the UK, Canada, Japan, France, Australia, Singapore, Denmark, Hong Kong and Macau.

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Montrose Food & Wine Ltd Montrose Food & Wine Ltd has been supplying premium wines in the Chinese market since 1992. It was China’s first foreign wine importer and has since expanded into hotels, restaurants and supermarkets, as well as online sales. Montrose now exclusively carries over 700 wines from 16 countries across the globe, and its imported wines include selections from France, Italy, the USA, Spain, Portugal, Austria, Australia, Chile, Argentina, New Zealand, South Africa and Canada. Over the review period, Montrose expanded its business through a variety of projects, such as the establishment of Montrose Food & Wine Hong Kong Ltd, in order to compete in the wine market of Hong Kong, a joint venture with the Great Wall Winery Group, and a partnership with St Maarten Spirits to import a full range of premium spirits into China and Hong Kong. Montrose entered the retail market in 2001, by opening China’s Premier Wine Boutique in the heart of Beijing’s Kerry Center Mall. This was followed by its expansion into the Tianjin metropolitan market in 2002, by opening up a sales office in the city to further develop and serve customers in that area. Shanghai Haolaixi Co Ltd Founded in 1995, Shanghai-based Haolaixi, a distributor of imported spirits and premium local spirits, has established a strong sales network in China, reaching most of the capital cities of the provinces. Haolaixi mainly distributes various brands of brandy, whisk(e)y, vodka, rum and tequila, ranging from mass to premium. The brands distributed include Hennessy, Rémy Martin, Camus, Courvoisier, Ballantine’s, J&B and Chivas Regal. Sichuan Tuopai Group Co Ltd Sichuan Tuopai Group Co Ltd is located in the Shehong County of central Sichuan, and is one of the leading local spirits manufacturers in China. With total assets near RMB2.8 billion, it employs more than 5,000 people, with a total annual production capacity of over 200,000 tonnes. It was the second largest spirits producer in China in 2002, behind Wu Liang Ye. Tuopai has been promoting its “modern enterprise system” since 1995. Market-oriented, the company has been making efforts to optimise its internal operations system and adjust the product structure, in order to enhance net profits. Sichuan Yibin Wu Liang Ye Distillery Co Ltd The Wu Liang Ye Distillery is the leading spirits manufacturer in China, with registered capital of RMB2 billion. The company is located in Yibin, Sichuan province (Southwest China), employs 10,000 people and has a production capacity of 200,000 tonnes. The company boasts 11 family brands and 42 different local spirits products, including Wu Liang Ye Spirits, Jianzhuang, Wu Liang Chun, Wu Liang Purity and Ampenas Whisky, and fruit wines. Wu Liang Ye Spirits is its leading brand, and is exported to over 100 countries. The specially packaged supreme quality Wu Liang Ye Spirits product sells well in both domestic and international markets.

4.7

Distribution

On-trade vs Off-trade Sales

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The off-trade accounted for the larger proportion of both volume and value sales in 2003, with shares of 70% and 62%, respectively. The dominance of the off-trade is a result of the vast demand for economy products in China, which are mostly sold via off-trade outlets. The increasing number of off-trade outlets such as hypermarkets and convenience stores also contributed to increased sales of alcoholic drinks. This channel is increasingly important as such outlets are able to offer lower prices due to their strong buying power. Despite this, traditional food outlets remain strong, as they are conveniently located in residential areas. Restaurants account for the majority of on-trade sales. Chinese people like to form close relationships with their business partners, and thus prefer to talk business at the dining table rather than in the office. However, due to an anti-corruption campaign across the country, corporate hospitality has decreased dramatically, hitting sales in on-trade establishments to some extent. This anti-corruption campaign also affected consumption of premium wines and spirits. Consumers adopted more practical consumption habits, and switched to more economical drinks as a result. Another increasingly popular on-trade channel is night-spots such as pubs, bars and lounges. With more exposure to the West, many people are turning to such places to socialise and relax. The partying lifestyle is particularly attractive to the young and those in cosmopolitan cities like Shanghai.
Table 16 On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: Volume 2003 Off-trade Beer (Million litres) Cider/perry ('000 litres) FABs (flavoured alcoholic beverages) ('000 litres) Wine (Million litres) Spirits ('000 litres) Alcoholic drinks (Million litres)
Source:

On-trade 8,225.6 690.0 734.0 572,378.5 9,532.7

TOTAL 25,964.6 690.0 1,757.0 3,590,865.8 31,313.1

17,738.9 1,023.0 3,018,487.2 21,780.4

Store checks, trade interviews, Euromonitor estimates

Table 17 RMB million

On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: Value 2003

Off-trade Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source:

On-trade 63,336.6 120.0 31,500.0 36,573.9 131,530.5

TOTAL 150,415.1 120.0 61,185.7 127,495.4 339,216.2

87,078.5 29,685.7 90,921.5 207,685.7

Store checks, trade interviews, Euromonitor estimates

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Table 18

On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: % Volume 2003

% volume analysis Off-trade Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source:

On-trade 31.7 100.0 41.8 15.9 30.4

Total 100.0 100.0 100.0 100.0 100.0

68.3 58.2 84.1 69.6

Store checks, trade interviews, Euromonitor estimates

Table 19 % value analysis

On-trade vs Off-trade Sales of Alcoholic Drinks by Sector: % value 2003

Off-trade Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source:

On-trade 42.1 100.0 51.5 28.7 38.8

Total 100.0 100.0 100.0 100.0 100.0

57.9 48.5 71.3 61.2

Store checks, trade interviews, Euromonitor estimates

Retailer Activity Advent of new distribution channels Spain’s Dia Group joined forces with Lianhua Supermarket Holdings Co Ltd, China’s largest retailer, to open the first discount store in Shanghai in July 2003. It is expected that 300 outlets will be opened by 2006 in Shanghai and Beijing, respectively. In cooperation with Sinopec, China’s largest petroleum retailer, Lianhua Quik, a subsidiary of Lianhua Supermarket Holdings Co Ltd, opened the first G-store in four petrol stations in Shanghai in early June and announced that 400 more are to come. The development of more distribution channels suggests that competition in the retail market will become increasingly fierce. Convenience stores still on the rise Convenience stores have been experiencing significant growth for several years, especially in big cities such as Shanghai and Beijing. There is on average one convenience store per 4,200 residents in Shanghai, close to the ratio of one store per 3,800 residents in Taiwan. This level of penetration was achieved in only a few years. Although experts have warned of over-supply of convenience stores, which may result in mergers and acquisitions, the expansion is continuing.

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Table 20

Off-trade Sales of Alcoholic Drinks by Sector and Distribution Format: % Analysis 2003

% off-trade B Supermarkets/hypermarkets Independent food stores Convenience stores Discounters Specialists Direct sales Others Total
Source: Key:

C/P -

FABs 90.0 5.0 5.0 100.0

W 55.0 15.0 10.0 10.0 10.0 100.0

S 50.0 20.0 7.0 15.0 8.0 100.0

18.0 76.0 5.0 1.0 100.0

Store checks, trade interviews, Euromonitor estimates B = beer; C/P = cider/perry; FABs = flavoured alcoholic beverages; W = wine; S =spirits

Private Label Trends In 2003, the only private label found in alcoholic drinks was Carrefour cider. Consumers are more likely to buy familiar brands than private labels of unknown quality. It will be some time before consumers accept private label alcoholic drinks widely. Internet Sales Although there are hundreds of alcoholic drinks websites in China, very few alcoholic drinks are sold via the Internet. Firstly, most consumers do not have access to the Internet. Secondly, when people buy alcoholic drinks, especially spirits and wine, most prefer to examine the product prior to purchase. Thirdly, Internet infrastructure and delivery systems would have to further develop before e-shopping can take off in China.

4.8

Forecasts

Healthy growth of wine and beer to continue Alcoholic drinks are predicted to grow by 29% in volume terms and at a lower rate of 20% in constant value terms over the forecast period. Overall, beer is expected to achieve the highest growth rate, with volume growth of 35% and value growth of 36% over the period. Red wine is the star in the wine sector, with projected volume growth of 31% and value growth of 25% between 2003 and 2008. Growth will be driven by several key factors. Firstly, in line with positive economic growth, consumer spending is expected to increase. Secondly, manufacturers will be very aggressive in their advertising and marketing programmes to capture consumers’ growing disposable incomes. Thirdly, distribution of alcoholic drinks will benefit from the growing number of new off-trade outlets in the form of supermarkets/hypermarkets, as well as more on-trade outlets, as lifestyles change with more social activities taking place in pubs, bars and other entertainment outlets. The growing independence of Chinese women and greater acceptance of female drinking has resulted in a new niche for manufacturers. In the forecast period, FABs, which saw negligible sales over the review period, are expected to expand as these flavoured drinks with low alcohol content and interesting packaging designs tend to appeal to women. Increased competition throughout forecast period China’s entry to the World Trade Organisation (WTO) will result in increased foreign imports. The potential reduction in import duties will reduce the costs of raw materials in general. The relaxation

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of controls over foreign-funded enterprises will allow more foreign players to enter the market, and existing multinationals to expand their operations in the country. Local manufacturers will continue to dominate sales, although foreign manufacturers will find it easier to get their brands into the Chinese market after the country’s accession to the WTO. The untapped rural areas will be developed to some extent as big breweries solve transportation problems and manage costs more effectively. Fierce competition means that branding will become more important than price in the purchasing decision. An increasing variety of products will become available. Lighter-tasting drinks such as draft beer will become increasingly popular, as will “healthier” products, such as low-calorie beer. Wine to register dynamic increase The State Economic and Trade Commission, in its Tenth Five-Year Plan, has identified grape wine as the focus for the development of China’s alcoholic drinks industry over the next five years. With strong governmental support, wine sales are expected to demonstrate a dynamic performance over the forecast period, with total sales increasing by 31% in volume terms. This will be underpinned by increased sales of still red wine, which is predicted to see growth of 31% over the forecast period. With China’s accession to the WTO, an increasing amount of foreign wine, made more competitive due to much lower tariffs, will enter the Chinese market. With government education, increased awareness of health issues and wine producers’ marketing campaigns, an increasing number of consumers will shift from spirits consumption to wine. With the continued strong growth of the Chinese economy, more foreigners will also come to work or travel in the country, which will further contribute to increasing wine sales. Spirits to continue to suffer Spirits is likely to emerge as the poorest performer, with forecast declines of 14.5% and 2.5%, in volume and constant value terms, respectively. The widespread shift in consumer preferences from spirits to wine, beer and soft drinks will be the major factor contributing to the poor performance of spirits over the forecast period. The value decline is expected to be lower than the decrease in volume terms due to a rise in the quality of spirits being purchased. Lower alcohol content spirits are also likely to see growth. 2008 Olympic Games to boost alcoholic drinks consumption Sales of alcoholic drinks are expected to see a boom in 2008, when the Olympic Games take place in Beijing, as fans gather together with friends at home or in on-trade outlets to support their favourite athletes, with live TV coverage. However, the rate of growth will be different for different types of alcoholic drinks, with beer likely to see a greater increase than wine and spirits. Based on past experience, such as the Soccer World Cup in 2002, when sales of beer in Korea and Japan soared by 30-40% during the tournament, the Olympic Games will be a golden opportunity for beer companies. Whilst it will be a short-lived one, given that the games take place over a period of only around three weeks, it does provide a chance for local brands to make themselves known to the thousands of overseas visitors who are expected to turn up for the event.

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Table 21 Million litres

Forecast Sales of Alcoholic Drinks by Sector: Total Volume 2003-2008

2003 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Euromonitor estimates

2004

2005

2006

2007

2008

25,964.6 27,660.3 29,385.4 31,154.5 32,959.6 35,052.5 0.7 0.8 0.9 1.1 1.3 1.5 1,757.0 1,842.8 1,950.6 2,066.0 2,181.6 2,300.0 3,590.9 3,386.2 3,246.9 3,158.7 3,107.2 3,069.8 31,313.1 32,890.0 34,583.9 36,380.2 38,249.7 40,423.8

Table 22 RMB million

Forecast Sales of Alcoholic Drinks by Sector: Total Value 2003-2008

2003 Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Euromonitor estimates

2004

2005

2006

2007

2008

150,415.1 159,262.4 169,071.5 179,897.8 191,450.7 204,655.5 120.0 134.4 151.9 173.1 199.1 230.0 61,185.7 62,264.8 66,150.9 70,268.7 74,535.3 78,865.2 127,495.4 124,916.6 123,362.0 123,055.2 123,620.8 124,319.1 339,216.2 346,578.1 358,736.3 373,394.8 389,805.8 408,069.6

Table 23

Forecast Sales of Alcoholic Drinks by Sector: % Total Volume Growth 20032008

% total volume growth 2003-08 CAGR Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Euromonitor estimates

2003/08 TOTAL 35.0 119.2 30.9 -14.5 29.1

6.2 17.0 5.5 -3.1 5.2

Table 24

Forecast Sales of Alcoholic Drinks by Sector: % Total Value Growth 20032008

% local currency, constant value growth 2003-08 CAGR Beer Cider/perry FABs (flavoured alcoholic beverages) Wine Spirits Alcoholic drinks
Source: Euromonitor estimates

2003/08 TOTAL 36.1 91.6 28.9 -2.5 20.3

6.4 13.9 5.2 -0.5 3.8

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4.9

Forecasts by Region

Premium drinks to offer greater potential Compared with the review period, premium or imported alcoholic drinks have a brighter future in the forecast period. With the rise in living standards and greater influence from Western culture, more Chinese consumers will consume more sophisticated drinks, such as wine and spirits. In general, developed regions like East, South and North China will move away from economy lagers to standard lagers. Also, after China’s accession to WTO, imported wine and spirits will become more affordable to local consumers, and thus greater consumption is anticipated. However, economy lager, non-grape wine and local spirits will continue to dominate the alcoholic drinks market in China over the forecast period, although their market share will decline. Moreover, low-end products will mainly be sold in rural areas or the least developed regions. As a result, international and domestic alcoholic drink manufacturers will aggressively promote their products on the mainland, with wine continuing to offer the greatest potential. Western development projects to drive growth The Southwest and Northwest will experience strong growth in the forecast period, due to the state’s substantial investment in these regions, in conjunction with the “Go West” policy. Thus, western regions’ transportation and logistic infrastructure will be improved, and thousands of workers from all areas will rush into these regions. Therefore, the western regions have a promising future. More Chinese alcoholic drinks will be exported Due to tariff reductions after China’s entrance to the WTO, not only will more foreign alcoholic drinks enter China, but also more local products will be exported to foreign countries. Due to saturation in domestic non-grape wine and local spirits, Chinese manufacturers are extending their scope in order to survive, and aiming to build better brand images. Chinese drinks are increasingly popular in other countries, such as non-grape wine in Taiwan and local spirits in Hong Kong.
Table 25 Million litres 2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

Forecast Sales of Alcoholic Drinks by Region: Total Volume 2003-2008

2004

2005

2006

2007

2008

8,647.4 9,095.9 9,587.7 10,104.6 10,625.6 11,225.1 5,024.7 5,305.9 5,572.1 5,858.3 6,147.2 6,463.4 8,987.3 9,409.1 9,865.2 10,352.1 10,875.1 11,536.5 1,801.7 1,814.4 1,842.8 1,883.3 1,942.3 2,008.6 4,319.9 4,625.0 4,959.6 5,304.4 5,647.9 6,038.3 2,532.1 2,639.8 2,756.5 2,877.5 3,011.6 3,151.9 31,313.1 32,890.0 34,583.9 36,380.2 38,249.7 40,423.8

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Table 26 RMB million

Forecast Sales of Alcoholic Drinks by Region: Total Value 2003-2008

2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2004 113,098.1 52,920.5 76,557.3 14,055.5 51,629.2 38,317.4 346,578.1

2005 118,166.1 54,435.7 78,941.0 14,087.8 54,391.7 38,714.1 358,736.3

2006 123,945.7 56,396.4 81,894.7 14,229.9 57,476.0 39,452.0 373,394.8

2007 130,136.7 58,645.8 85,357.4 14,434.3 60,839.2 40,392.5 389,805.8

2008 136,901.0 61,080.3 89,414.8 14,729.2 64,538.7 41,405.7 408,069.6

109,222.4 52,193.2 75,511.0 14,152.0 49,707.7 38,429.8 339,216.2

Table 27

Forecast Sales of Alcoholic Drinks by Region: % Total Volume Growth 20032008

% total volume growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 29.8 28.6 28.4 11.5 39.8 24.5 29.1

5.4 5.2 5.1 2.2 6.9 4.5 5.2

Table 28

Forecast Sales of Alcoholic Drinks by Region: % Total Value Growth 20032008

% local currency, constant value growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 25.3 17.0 18.4 4.1 29.8 7.7 20.3

4.6 3.2 3.4 0.8 5.4 1.5 3.8

5.
5.1
• • • •

BEER
Sizes and Shares

2003 headlines Premium beer powers ahead in growth Economy lager gripped by price war No sign of slowdown in consolidation in the beer sector Regional brands lead

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SARS impacts beer sector

Per capita consumption is still low with much room for growth As of 2002, China had already overtaken the US as the world’s largest beer market. Total sales of beer in China grew by 6.8% and 5.5% in volume and current value terms, respectively, in 2003. Only lager is available in China, with negligible production or sales of dark beer, stout and non/low-alcohol beers. In 2003, lager sales were worth RMB150.4 billion, on total volume sales of 26 billion litres. Total volume sales of beer in China increased by more than 40% over the 1998-2003 period. Beer in China is constituted entirely by lager, and in particular economy brands, with the sector being gripped by an ongoing fierce price war. Despite the fact that China has attained the number one position in the world’s beer market in volume terms, its per capita consumption is only 18.7 litres, far lower than the 85 litres per capita in the US. Therefore, there is still much room for growth, especially with the continuing boom in the Chinese economy. Economy lagers lead in volume and value, but premium beers enjoy highest growth Economy lager accounts for the lion’s share of beer sales, holding a share of 90% in volume terms in 2003. In value terms, it accounted for nearly 75% of total lager sales in 2003. Beer is not considered a luxury product, and is consumed by most Chinese on a regular basis. Out of all alcoholic drinks consumed in China, 75% is beer in volume terms. In most of China, beer sells at RMB3-4/litre, making it even cheaper than domestically produced bottled water. For the majority of consumers, price is the first consideration when purchasing beer for everyday consumption. Thus, the majority of production lines in China, especially in some inland regions, produce economy products. Underpinned by increasing consumer affluence and a growing willingness to consume premium lagers in pubs and bars, premium lager experienced the fastest growth in both volume and value terms in 2003, increasing by 9.5% and 9.9%, respectively. Not only is premium lager perceived to be of particularly high quality, but the prestige brand names also represent personal status, image and taste. Stout and non-/low-alcohol products negligible Stout is not popular in China because consumers are unfamiliar with the taste. The only brand available in 2003 was Guinness, which is available on a limited basis in upmarket off-trade establishments and in on-trade outlets. Domestic sales of stout were negligible throughout the review period. Sales of non-/low-alcohol beer are negligible, with very little consumer awareness of such products. A few manufacturers have launched low-alcohol beers, such as Carlsberg’s Jolly Shandy. These are targeted at people who do not like or are unable to consume alcohol. However, sales were very low at the end of the review period, and it remains too early to speculate on the potential for such products. Producers plagued by excess production capacity For many years, the industry has been plagued by excess production capacity, which is about 30% more than production volume. China produced 23,581 million litres of beer in 2002. With excess production capacity, many brewers inevitably try to undercut each other in order to retain market share. This strategy has been damaging for many companies, resulting in them being acquired by large local breweries or foreign enterprises keen to enter the Chinese market. After being taken over, production lines are streamlined to be more efficient and provide a platform for the acquirers to expand regionally through a local production and distribution network.

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Mergers and acquisitions paid off for local brewers Heilongjiang Harbin Brewery Group acquired Ballantine Management Ltd in August 2002, for HK$70 million (RMB74.4 million) and this strategy of buying out competitors paid off handsomely. Revenue, profits and volume sales of beers all saw more than 30% growth for the financial year ending 2002. This success was attributed by the company to enhanced operating efficiencies in the newly acquired breweries. China Resources Enterprise Ltd also attributed a large portion of its more than 50% growth in turnover and profit in 2002 to its acquisitions, including Sichuan Blue Sword in late 2001 and a new brewery in Wuhan City in April 2002. Volume sales of beer in 2002 showed an increase of 62% over 2001. Discounting the new acquisitions, volume sales of beer by the company recorded growth of about 5.2%. Hence, it is easy to understand why the group has no intention of slowing down, as it acquired another new brewery in Panjin in December 2002 and bought a 70% equity stake in a brewery in Beijing in January 2003. Mergers and acquisitions among large beer manufacturers have intensified the concentration of the beer industry among a small number of large enterprises. In 2002, the top 10 brewers accounted for 46% of sector sales in China, up from 39% in 2001. Industry sources expect that China’s beer industry will continue to undergo consolidation with the emergence of a small number of large brewery groups. Strategic alliances continue Facing stiff local competition and challenges arising from China’s accession to the WTO, many local brewers have formed or are open to exploring strategic alliances with large multinational companies. Local brewers look upon such strategic alliances favourably as they will increase the flow of foreign technology, knowledge and investment, leading to an increase in domestic quality and expertise. On the other hand, foreign companies are keen to ride on the back of local brewers’ production facilities, distribution networks and operational experience instead of going it alone, especially after learning from the expensive and painful lessons suffered by their predecessors. Carlsberg entered the Chinese market in 1997 with investment of US$80 million (RMB663 million) to build a new plant in Shanghai. However, after suffering severe losses, it was forced to retreat in 2000, selling the plant, with its imported Danish production line, to Tsingtao at a substantial loss. Others, like Fosters, the Australian brewer, and UK-based Bass Beers have also exited the Chinese market after serious losses, whilst Scottish & Newcastle has also tried unsuccessfully to penetrate the market. In June 2003, the international brewing group SABMiller announced that it had acquired a 30% stake in Harbing Brewery Group, for US$87 million (RMB721 million) in cash. The two companies are to explore the potential for further cooperation in a number of areas including sales, distribution and procurement. There are also plans for sharing best practice and the transfer of expertise. The precedent of such alliances was set by Tsingtao, which entered into a strategic alliance with Anheuser-Busch in October 2002, whereby Anheuser-Busch will increase its stake in Tsingtao to 27% over seven years, for a total sum of US$182 million (RMB1.5 billion). It is regarded as a winwin situation for both parties. On one hand, Tsingtao aims to improve its management effectiveness, profitability and core competitiveness through Anheuser-Busch’s marketing expertise, capital and management resources. Anheuser-Busch, on the other hand, hopes to tap into China’s rapid growth through Tsingtao’s production bases, sales network and operational experience. Other important consolidations and changes of ownership in 2003 included:

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Carlsberg Asia acquired 100% of Dali Beer, a leading brewer with a market share of 41% in the Yunnan province. The Dali acquisition followed Carlsberg’s purchase of the Kunming Huashi Brewery, also in Yunnan province, earlier in 2003. Carlsberg now has a market share of more than 50%.in the Yunnan province, which is in the southwest of China. The province is currently developing its tourism industry, which should boost beer consumption in the long term. These acquisitions marked the comeback of Carlsberg into the Chinese market, choosing to work with reputable local brewers this time round rather than striking out on its own, as it did a few years earlier. Belgium-based Interbrew has acquired a 70% stake in the KK Group for US$35 million (RMB290 million). KK Brewery is the leading brewer in the province of Zhejiang. Its main brands are the standard lagers King Beer and Zizhulin, as well as the premium lagers KK and One Week.



Local breweries lead but shares highly fragmented Despite the entry of many foreign brands into China, either through direct import or local production, local breweries still lead sales, for two main reasons. Firstly, in order to keep the beer fresh, and given its packaging is largely in bottles, it cannot easily or cheaply be transported over long distances. A company’s sales radius is usually within 500 km of its brewery. Thus, if a company does not have a local production base, it is very difficult to be price competitive. Secondly, many provinces practise local protectionism, whereby retailers are not allowed to sell beer produced outside the province of origin. This is to ensure a steady flow of income for local governments, as taxes on beer are high. As such, the beer sector in China is very fragmented regionally, with regional players capturing significant market share. Strong regional players include Harbin in the Northeast; Yanjing in the North; Tsingtao in the East; Blue Sword in the West; Zhujiang in the South; and Jinxing in Mid China. Local brand recognition and consumer loyalty are strong. China’s large size, coupled with cargo transport problems and local protectionism have enabled domestic players to maintain their leading positions in beer on the mainland. However, the sector is still very fragmented, with no dominant player able to capture a significant share. Tsingtao, China Resources and Yanjing, the three largest manufacturers, achieved a total volume share of 30% in 2002. Their sector shares were 12.1%, 9.6% and 8.5%, respectively. SARS has adverse impact on beer sales The Chinese beer industry experienced slow sales growth in the first half of 2003 due to the SARS outbreak. Consumers stayed at home and avoided dining out, while night-spots were ordered to close to prevent the spread of the virus. Transportation of beer was also restricted, as cross-province trade was discouraged temporarily to prevent the virus from spreading. Beijing-based Yanjing Brewery saw a double-digit drop in beer sales in April relative to the same month in 2002. Tsingtao Brewery, the number one brewer in China, posted sales growth of only 9.7% year-on-year for the first four months of 2003. It reported 11% growth for the first three months of 2002. Beer manufacturers were affected to varying degrees by the SARS outbreak, depending on their market strategies and geographical strongholds. More than 30% of Tsingtao’s sales are to hotels, restaurants and other on-trade outlets, thus its sales were hit as domestic tourism saw a severe slide. Some industry analysts have projected that Tsingtao is unlikely to meet its sales target of 3.5 billion litres in 2003. Yanjing Brewery was affected to a lesser degree than Tsingtao, as on-trade channels contribute only around 20% to its total volume sales. At the same time, it carried out aggressive off-trade promotions and discounts in supermarkets/hypermarkets to make up for the loss of business in the on-trade. Harbin Brewery, China’s fourth largest brewer, did not see its sales affected greatly, as 95% of its beer is sold in northern China, where the virus outbreak was less severe compared to Beijing and southern China.

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The peak season for beer sales is traditionally May to October, accounting for 65% of total volume sales for the whole year. Whilst in 2003, volume sales were adversely impacted in April and May due to the spread of SARS, business picked up in June as the epidemic was brought under control. While industry sources do not expect the improving sales growth to offset fully the adverse impact experienced in the second quarter of 2003, nevertheless it is early days yet to predict doom for the beer industry. Exceptionally hot summer weather in 2003 may contribute to a strong recovery by the industry.
Table 29 Million litres 1998 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source:

Sales of Beer by Subsector: Total Volume 1998-2003

1999

2000

2001

2002

2003

18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6 328.7 364.1 393.9 431.5 474.4 519.3 1,295.5 1,363.6 1,453.0 1,549.5 1,654.4 1,763.5 16,841.9 18,138.6 19,417.4 20,727.1 22,180.9 23,681.7 18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Table 30 RMB million

Sales of Beer by Subsector: Total Value 1998-2003

1998 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source:

1999 116,748.4 12,279.5 14,844.6 89,624.3 116,748.4

2000 124,714.7 13,920.6 15,931.3 94,862.8 124,714.7

2001 133,352.9 15,518.4 17,013.7 100,820.8 133,352.9

2002 142,554.7 17,293.7 18,072.9 107,188.1 142,554.7

2003 150,415.1 19,005.7 18,939.7 112,469.8 150,415.1

109,691.1 11,138.3 14,259.6 84,293.2 109,691.1

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Table 31

Sales of Beer by Subsector: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source:

1998-03 CAGR 7.1 9.6 6.4 7.1 7.1

1998/03 TOTAL 40.6 58.0 36.1 40.6 40.6

6.8 9.5 6.6 6.8 6.8

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

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Table 32

Sales of Beer by Subsector: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source:

1998-03 CAGR 6.5 11.3 5.8 5.9 6.5

1998/03 TOTAL 37.1 70.6 32.8 33.4 37.1

5.5 9.9 4.8 4.9 5.5

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Table 33 % total volume Company

Company Shares of Beer by National Brand Owner 2000-2002

2001 10.8 6.3 7.4 3.1 3.8 0.9 1.8 1.7 1.3 1.4 0.8 0.4 0.5 0.3 0.2 0.2 0.2 0.1 0.1 1.4 57.4 100.0

2002 12.1 9.6 8.5 3.7 3.7 1.9 1.8 1.7 1.6 1.5 0.9 0.4 0.4 0.2 0.2 0.2 0.1 0.1 0.1 51.2 100.0

Tsingtao Brewery Co Ltd China Resources Enterprises Co Ltd Beijing Yanjing Beer Group Heilongjiang Haerbing Brewery Group Guangzhou Zhujiang Brewery Group Co Yantai Beer Asahi Co Ltd. Henan Jinxing Brewery Group Fujian Huiquan Brewery Group Chongqing Brewery Group Hubei Jinglongquan Brewery Group Wuhai Budweiser Brewery Co Lion Nathan (Suzhou) Brewery Co Guangzhou San Miguel Brewery Co Ltd Shenzhen Kingway Brewery Co Heineken NV Hainan Asia Pacific Brewery Ltd Guangdong Blue Ribbon Group Co Ltd Guangdong Carlsberg Co Ltd Shanghai Asia Pacific Hubei Wuhan Ouliandong Xihui Brewery Group Sichuan Blue Sword Group Others Total
Source:

Company research, store checks, trade interviews, Euromonitor estimates

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Table 34 % total volume Company

Company Shares of Beer by Global Brand Owner 2000-2002

2000 8.6 4.1 6.6 1.9 3.4 0.7 2.1 1.5 1.6 1.6 1.0 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.2 1.8 62.7 100.0

2001 10.8 6.3 7.4 3.1 3.8 0.9 1.8 1.7 1.3 1.4 1.4 0.8 0.3 0.5 0.3 0.3 0.2 0.2 0.1 57.5 100.0

2002 12.1 8.7 8.5 3.7 3.7 1.9 1.8 1.7 1.6 1.5 0.9 0.9 0.4 0.4 0.3 0.2 0.2 0.1 0.1 51.2 100.0

Tsingtao Brewery Co Ltd China Resources Enterprises Co Ltd Beijing Yanjing Beer Group Heilongjiang Haerbing Brewery Group Guangzhou Zhujiang Brewery Group Co Asahi Breweries Ltd Henan Jinxing Brewery Group Fujian Huiquan Brewery Group Chongqing Brewery Group Hubei Jinglongquan Brewery Group Danone, Groupe Anheuser-Busch Cos Inc Lion Nathan Ltd San Miguel Corp Asia Pacific Breweries (S) Pte Ltd Shenzhen Kingway Brewery Co Heineken NV S & P Co Carlsberg A/S Sichuan Blue Sword Group Others Total
Source:

Company research, store checks, trade interviews, Euromonitor estimates

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Table 35

Brand Shares of Beer 2000-2002

% total volume Brand (Global Brand Owner) Yanjing Haerbing Zhujiang Tsingtao Blue Sword Zero Point Jinxing Snowflake Huiquan Chong Qing Jinglongquan Yantai (Asahi Breweries Ltd) Xing Yin Ge (Danone, Groupe) Budweiser (AnheuserBusch Cos Inc) Asahi Super Dry (Asahi Breweries Ltd) Dong Beer San Miguel (San Miguel Corp) Taihushui (Lion Nathan Ltd) Kingway Tsingtao Premium Heineken Premium Pabst Blue Ribbon (S & P Co) Anchor (Asia Pacific Breweries (S) Pte Ltd) Carlsberg (Carlsberg A/S) Reeb (Asia Pacific Breweries (S) Pte Ltd) Rheineck (Lion Nathan Ltd) Blue Sword Xing Yin Ge (Danone, Groupe) Dong Beer (Danone, Groupe) Others Total
Source:

Company

2000

2001

2002

Beijing Yanjing Beer Group Heilongjiang Haerbing Brewery Group Guangzhou Zhujiang Brewery Group Co Tsingtao Brewery Co Ltd China Resources Enterprises Co Ltd China Resources Enterprises Co Ltd Henan Jinxing Brewery Group China Resources Enterprises Co Ltd Fujian Huiquan Brewery Group Chongqing Brewery Group Hubei Jinglongquan Brewery Group Yantai Beer Asahi Co Ltd. China Resources Enterprises Co Ltd Wuhai Budweiser Brewery Co Yantai Beer Asahi Co Ltd. China Resources Enterprises Co Ltd Guangzhou San Miguel Brewery Co Ltd Lion Nathan (Suzhou) Brewery Co Shenzhen Kingway Brewery Co Tsingtao Brewery Co Ltd Heineken NV Guangdong Blue Ribbon Group Co Ltd Hainan Asia Pacific Brewery Ltd Guangdong Carlsberg Co Ltd Shanghai Asia Pacific Lion Nathan (Suzhou) Brewery Co Sichuan Blue Sword Group Hubei Wuhan Ouliandong Xihui Brewery Group Hubei Wuhan Ouliandong Xihui Brewery Group

4.3 1.9 3.4 2.2 1.2 2.1 2.0 1.5 1.6 1.6 0.5 0.5 0.2 0.4 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.1 0.1 1.8 0.7 0.3 72.3 100.0

4.7 3.1 3.8 2.8 2.2 1.4 1.8 1.8 1.7 1.3 1.4 0.5 0.7 0.3 0.5 0.2 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.9 0.5 69.1 100.0

4.6 3.7 3.7 3.5 2.9 2.1 1.8 1.8 1.7 1.6 1.5 1.2 0.9 0.8 0.7 0.5 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 65.0 100.0

Company research, store checks, trade interviews, Euromonitor estimates

5.2

Sizes and Shares by Region

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Volume growth outpaced value growth across all regions In 2003, volume growth continued to outpace value growth across all regions due to the intense price competition in economy lager. Among all regions, South China saw the highest value growth in 2003, with sales reaching nearly RMB25 billion, up by 7.6% on the previous year. The high value growth is a reflection of the shift in consumption towards standard lager from economy lager, especially in the more developed regions where there are higher living standards and greater disposable income. On the other hand, in the less developed regions, such as Northwest and Southwest China, economy beer still remains consumers’ first choice. Per capita consumption of beer in these regions was 11.8 litres and 8.5 litres, respectively, in 2003, compared with the national average of 19.8 litres per head. Beer per capita consumption in China is dominated by the major cities, such as Beijing, Shanghai and Guangzhou, which have benefited most from the economic boom, and see the most visitors. The outlook for beer remains promising as China develops its economy and catches up with world consumption on a per capital basis. Regional players dominate Tsingtao is one of the top five leading players in all regions except the South. Its major role in beer is due to its aggressive acquisition programme since 1996. In the East and Northwest regions, Tsingtao is the undisputed number one player, which is due to its headquarters being located in the East, and its having the strongest regional presence in Northwest China relative to other brewers. Moreover, the company’s strategy of buying established breweries and retaining their existing beer brands, coupled with the introduction of its own premium beers, has been successful. In 2002, Tsingtao had sales of 2,951 million litres and its share increased from 10.8% to 12.1%, strengthening its leading position further. Meanwhile, China Resources Enterprise has replaced Beijing Yanjing Brewery as China’s second leading company in beer, with volume sales of 2,343 million litres in 2002. Its national brand, Snowflake, reached volume sales of 442 million litres in 2002. The newcomer, backed by hefty capital support from Hong Kong China Resources Holding Co, has marched into the market aggressively. The company’s strategy is to expand production capacity through acquisitions in targeted regions. Currently, it has a total of 28 breweries and a combined annual production capacity of approximately 4 billion litres. China Resources has the Zero Point and Xing Yin Ge brands in Mid China, Snow Flake in Northeast China, and Blue Sword in Southwest China. Beijing Yanjing Brewery plays an important role in northern regions. It sold 2,055 million litres of beer in 2002, and has more than an 85% market share in Beijing. However, other regions, such as Mid, South and Southwest China are dominated by regional players, for example Zhujiang in the South; Jinxing in Mid China; Harbin in the Northeast; and Blue Sword in the Southwest. North and Northeast China leads beer consumption In terms of volume sales of beer, North and Northeast was the leading region in China throughout the review period. In 2003, this region saw sales reach over 7.6 billion litres, representing 30% of total sales of beer, almost half billion litres more than the second largest region, East China. The North and Northeast witnessed strong volume growth of 36% over the 1998-2003 period, equal to a compound annual growth rate (CAGR) of 6.4%. However, the value increase in North and Northeast China was not as strong as volume growth. This is mainly due to the fact that, traditionally, consumers here prefer high alcohol content drinks and are used to drinking large volumes. However, as beer has low alcohol content, such consumers always choose the heavy tasting beers, which usually belong to the economy range. Hence value growth lags behind volume growth.

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Climatic conditions and customs play a part Throughout the review period, East China was the second largest region in volume terms, and in 2003 beer sales amounted to 7.2 billion litres. Although it has the largest population, with 23% of the total, it does not account for the largest volume sales of beer. However, in terms of value, it outperformed the North and Northeast region, with sales reaching RMB49 billion. Consumers here pay more attention to the quality of the product and prefer light tasting beer. Moreover, their stronger purchasing power permits the consumption of standard lager and the occasional purchase of premium beer. Another important factor is that the climatic conditions in East China do not favour all year-round consumption of beer. Sales of beer, especially off-trade sales, are sluggish during the winter due to the region’s cold and wet weather. Besides, consumers usually do not have heating facilities at home and therefore consider beer too cold to drink in winter. In contrast, in North and Northeast China, although the winter is also very cold, households have built-in heating facilities and therefore the indoor temperature is conducive to beer drinking. Therefore, the North and Northeast region is characterised by greater volume consumption of cheaper beer, while the East is characterised by lower consumption of more expensive beer. The tropical climate in the South extends the summer season beyond that of other regions, so beer can be consumed all year-round. However, consumers in the Southwest region generally prefer high alcohol content liquors, such as local spirits; therefore consumption of beer is low. Specific regional customs in Northwest China also hinder growth in beer consumption. This is because Northwest China has the most minorities, which form a large population in western China, and most of them have their own unique consumption habits. For example, Hui minorities often brew their own drinks, while Inner Mongolians like to drink Ovine Milk Jiu, and the flavour of beer does not suit their traditional tastes. Thus, the beer sector in these regions still requires some time to develop.
Table 36 Million litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

Sales of Beer by Region: Total Volume 1998-2003

1999

2000

2001

2002

2003

5,010.0 5,428.3 5,860.1 6,278.2 6,750.1 7,199.3 2,858.5 3,115.6 3,358.4 3,604.0 3,865.6 4,191.1 5,609.3 6,012.5 6,383.1 6,768.5 7,210.0 7,653.1 1,167.2 1,214.0 1,259.8 1,306.1 1,353.3 1,403.5 2,583.1 2,767.0 2,970.7 3,212.5 3,476.5 3,745.3 1,238.0 1,328.9 1,432.2 1,538.8 1,654.1 1,772.3 18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6

Company research, store checks, trade interviews, Euromonitor estimates

Table 37 RMB million

Sales of Beer by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1999 36,269.7 16,043.2 33,832.5 5,856.4 18,225.1 6,521.6 116,748.4

2000 39,618.7 17,075.7 35,634.0 5,990.8 19,474.7 6,920.9 124,714.7

2001 42,717.4 18,293.6 37,552.2 6,174.7 21,301.1 7,313.9 133,352.9

2002 46,017.3 19,569.5 39,628.3 6,390.0 23,186.8 7,762.8 142,554.7

2003 48,718.5 20,667.4 41,312.1 6,582.0 24,946.9 8,188.2 150,415.1

33,790.3 15,061.3 31,439.2 5,805.7 17,397.0 6,197.7 109,691.1

Company research, store checks, trade interviews, Euromonitor estimates

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Table 38

Sales of Beer by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1998-03 CAGR 7.5 8.0 6.4 3.8 7.7 7.4 7.1

1998/03 TOTAL 43.7 46.6 36.4 20.2 45.0 43.2 40.6

6.7 8.4 6.1 3.7 7.7 7.1 6.8

Company research, store checks, trade interviews, Euromonitor estimates

Table 39

Sales of Beer by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1998-03 CAGR 7.6 6.5 5.6 2.5 7.5 5.7 6.5

1998/03 TOTAL 44.2 37.2 31.4 13.4 43.4 32.1 37.1

5.9 5.6 4.2 3.0 7.6 5.5 5.5

Company research, store checks, trade interviews, Euromonitor estimates

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Table 40 Brand (Company)

Brand Ranking of Beer by Region 2002 SW S M X E 4 X NW 3 X N&NE 5 -

Aoke (Henan Aoke Brewery Co Ltd) Asahi Super Dry (Yantai Beer Asahi Co Ltd.) Baotuquan (Shandong Baotuquan Brewery) Beeb (Asia Pacific Breweries (S) Pte Ltd) Blue Ribbon (Guangdong Blue Ribbon Group Co Ltd) Blue Ribbon 11P (Guangdong Blue Ribbon Group Co Ltd) Blue Sword (China Resources Enterprises Co Ltd) Budweiser (Wuhai Budweiser Brewery Co) Carlsberg (Guangdong Carlsberg Co Ltd) Chong Qing (Chongqing Brewery Group) Corona Light (Modelo SA de CV, Grupo) Double Deer (Lion Nathan (Suzhou) Brewery Co) Guang Han Gong (Shandong Guang Han Gong Group) Haerbing (Heilongjiang Haerbing Brewery Group) Hans Dry Beer (Xi'an Beer Brewery Co Ltd) Heineken Premium (Heineken NV) Huiquan (Fujian Huiquan Brewery Group) Huiquan (Huiguan Brewery Co Ltd) Jinxing (Henan Jinxing Brewery Group) King Long (King Long Group) Kingway (Shenzhen Kingway Brewery Co) Liquan (Guiling Liquan Co Ltd) Nan Tian (Honghu Lan Tian Brewery Co Ltd) Pabst Blue Ribbon (Guangdong Blue Ribbon Group Co Ltd) San Miguel (Guangzhou San Miguel Brewery Co Ltd) Shengquan (Shengquan Brewery Co Ltd) Snowflake (China Resources Enterprises

1

-

-

-

-

-

X 2 -

X -

X -

X X

X -

X X X -

-

-

-

X

-

-

X

2 X 5 X

1 2 X -

3 -

X -

X X -

X

X

-

-

X

-

3

-

5 -

-

-

4

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Co Ltd) Suntory (Jiangsu Suntory (Kunshan) Brewery Co Ltd) Tsingtao (Tsingtao Brewery Co Ltd) Tsingtao Dry Beer (Tsingtao Brewery Co Ltd) Tsingtao Shanshui (Tsingtao Brewery Co Ltd) Xihu (Lion Nathan (Suzhou) Brewery Co) Xing Yin Ge (Hubei Wuhan Ouliandong Xihui Brewery Group) Xuejin (Fujian Xuejin Brewery Group Co Ltd) Yanjing (Beijing Yanjing Beer Group) Yanjing 11P Qingshuang (Beijing Yanjing Beer Group) Zero Point (China Resources Enterprises Co Ltd) Zhujiang (Guangzhou Zhujiang Brewery Group Co) Zhujiang Qingshuang 10P (Guangzhou Zhujiang Brewery Group Co)
Source:

-

-

-

5

-

-

5 -

4 -

3

1 X -

1 4 -

2 3 -

X -

3 X -

X -

2 -

2 5

1 -

4

-

4

-

-

-

X

1

X

-

-

-

-

-

-

-

X

-

Company research, store checks, trade interviews, Euromonitor estimates

5.3

Pricing

Intense competition in economy lagers kept prices low In 2003, the off-trade price for economy lager averaged less than RMB7/litre, whilst standard lager cost RMB7-20/litre and premium lager over RMB20/litre. As in 2002, economy lager accounted for more than 90% of total beer volume sales, with the remaining 10% shared by premium and standard lagers. As a whole, consumers place price as the first consideration in their purchasing decision. Beer is consumed frequently by households and, as such, its pricing is kept within reach of the masses. Economy lagers are usually sold for RMB3-4/litre and competition is fierce in this segment because there are many breweries operating in it. For some manufacturers, the profit on a 640ml bottle of beer with a price-tag of RMB2 is only RMB0.1. This low margin is a result of intense price wars between economy lager manufacturers with little product differentiation. On-trade unit prices for economy lager are only about 1.35 times those in the off-trade, the lowest mark-up among alcoholic drinks. With the razor-thin margins in economy lagers, many beer manufacturers, such as Tsingtao, Yanjing, and Zhujiang are concentrating more on the production of standard lager, as margins are higher. Premium beers enjoy strong value growth Premium beers experienced total value growth of 10% in 2003, compared to 5% for economy lagers. This is a result of brand building and positioning efforts by manufacturers and distributors to avoid the overcrowded mass market and target the growing affluent consumers in big cities through

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on-trade channels. According to San Miguel and Heineken, as much as 70-85% of their sales are in the on-trade. While economy lagers are consumed at home, standard and premium lagers are more often the first choice when dining out with family and friends. For the Chinese, the “face” factor is involved, as nobody wants to be perceived as unable to afford the better quality products. As such, more people chose premium beers at on-trade outlets. Since premium lagers are already priced 4-7 times higher than economy lagers, notwithstanding the mark-ups in on-trade outlets, it is not difficult to understand the higher value growth for premium beers.
Summary 4 Sector Premium Standard Economy
Source:

Lager by Price Band 2003 Price range per litre Over RMB20/litre RMB7-20/litre Below RMB7/litre
Store checks, trade interviews, Euromonitor estimates

Table 41

Typical Beer Prices 2003 Pack size (ml) 330 355 355 330 Price (RMB) 9.00 9.60 15.00 8.00

Brand name Premium lager Heineken Corona Tsingtao Platinum Premium Bud Standard lager Carlsberg Pabst Blue Ribbon Budweiser Tsingtao Economy lager Yanjing Asahi Snowflake Zhujiang Other beer Guinness
Source: Store checks

Local company Heineken NV Light Modelo SA de CV, Grupo Tsingtao Brewery Co Ltd Ice Wuhan Budweiser Brewery Co Ltd Guangdong Carlsberg Co Ltd Guangdong Blue Ribbon Group Co Ltd Wuhan Budweiser Brewery Co Ltd Tsingtao Brewery Co Ltd Beijing Yanjing Beer Group Yantai Beer Asahi Co Ltd China Resources Enterprises Co Ltd Guangzhou Zhujiang Brewery Group Co Diageo Plc

355 355 640 355 640 355 640 640

4.60 3.30 5.00 3.50 3.50 2.30 4.00 2.80

330

9.30

5.4

Lager by Origin

Domestic beers dominate Domestic players maintained their substantial lead in lager sales in 2003, with imported lager constituting less than 1% of total volume sales, and about 4% of total value sales. Lager sales in China are dominated by regional players. While Tsingtao is number one in total sales volume with all its brands combined, Yanjing continued to be number one brand in China, with volume sales of 1,100 million litres. The brands has a share of more than 85% in Beijing. In the South region, Zhujiang is the leader, with more than 50% of volume sales in the Guangdong province, and more than 80% in Guangzhou. Huiquan leads in the Fujian province; Chongqing in the Chongqing province; and Harbin in the Heilongjiang Province.

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Though China’s economy has grown by leaps and bounds, most consumers are still price sensitive. The price of imported beers is 3-4 times higher than domestic beers, making them affordable only to the higher income groups.
Table 42 Million litres 1998 Lager - Imported - Domestic
Source:

Sales of Lager by Origin: Total Volume 1998-2003

1999

2000

2001

2002

2003

18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6 20.9 31.0 45.9 59.6 76.4 94.8 18,445.2 19,835.2 21,218.4 22,648.5 24,233.3 25,869.8
Store checks, trade interviews, Euromonitor estimates

Table 43 RMB million

Sales of Lager by Origin: Total Value 1998-2003

1998 Lager - Imported - Domestic
Source:

1999

2000

2001

2002

2003

109,691.1 116,748.4 124,714.7 133,352.9 142,554.7 150,415.1 1,373.4 2,065.4 3,050.2 3,974.7 5,066.9 6,209.2 108,317.8 114,683.0 121,664.6 129,378.2 137,487.8 144,205.9
Store checks, trade interviews, Euromonitor estimates

Table 44

Sales of Lager by Origin: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Lager - Imported - Domestic
Source:

1998-03 CAGR 7.1 35.3 7.0

1998/03 TOTAL 40.6 353.7 40.3

6.8 24.2 6.8
Store checks, trade interviews, Euromonitor estimates

Table 45

Sales of Lager by Origin: % Total Value Growth 1998-2003

% current total value growth 2002/03 Lager - Imported - Domestic
Source:

1998-03 CAGR 6.5 35.2 5.9

1998/03 TOTAL 37.1 352.1 33.1

5.5 22.5 4.9
Store checks, trade interviews, Euromonitor estimates

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Table 46

Brand Shares of Domestic Lager 2000-2002

% total volume Brand (Global Brand Owner) Yanjing Haerbing Zhujiang Tsingtao Blue Sword Zero Point Jinxing Snowflake Huiquan Chong Qing Jinglongquan Yantai (Asahi Breweries Ltd) Xing Yin Ge (Danone, Groupe) Budweiser (AnheuserBusch Cos Inc) Asahi Super Dry (Asahi Breweries Ltd) Dong Beer San Miguel (San Miguel Corp) Taihushui (Lion Nathan Ltd) Kingway Tsingtao Premium Pabst Blue Ribbon (S & P Co) Anchor (Asia Pacific Breweries (S) Pte Ltd) Carlsberg (Carlsberg A/S) Reeb (Asia Pacific Breweries (S) Pte Ltd) Rheineck (Lion Nathan Ltd) Bud Ice (AnheuserBusch Cos Inc) Steinlager (Lion Nathan Ltd) Kirin Ichiban (Kirin Brewery Co Ltd) Beck's (Interbrew NV SA) Tiger (Asia Pacific Breweries (S) Pte Ltd) Tiger (Asia Pacific Breweries (S) Pte Ltd) Blue Sword Xing Yin Ge (Danone, Groupe)

Company

2000

2001

2002

Beijing Yanjing Beer Group Heilongjiang Haerbing Brewery Group Guangzhou Zhujiang Brewery Group Co Tsingtao Brewery Co Ltd China Resources Enterprises Co Ltd China Resources Enterprises Co Ltd Henan Jinxing Brewery Group China Resources Enterprises Co Ltd Fujian Huiquan Brewery Group Chongqing Brewery Group Hubei Jinglongquan Brewery Group Yantai Beer Asahi Co Ltd. China Resources Enterprises Co Ltd Wuhai Budweiser Brewery Co Yantai Beer Asahi Co Ltd. China Resources Enterprises Co Ltd Guangzhou San Miguel Brewery Co Ltd Lion Nathan (Suzhou) Brewery Co Shenzhen Kingway Brewery Co Tsingtao Brewery Co Ltd Guangdong Blue Ribbon Group Co Ltd Hainan Asia Pacific Brewery Ltd Guangdong Carlsberg Co Ltd Shanghai Asia Pacific Lion Nathan (Suzhou) Brewery Co Wuhai Budweiser Brewery Co Lion Nathan (Suzhou) Brewery Co Zhuhai Kirin President Brewery Co Lion Nathan (Suzhou) Brewery Co Hainan Asia Pacific Brewery Ltd Shanghai Asia Pacific Sichuan Blue Sword Group Hubei Wuhan Ouliandong Xihui Brewery Group

4.3 1.9 3.4 2.2 1.2 2.1 2.0 1.5 1.6 1.6 0.5 0.5 0.2 0.4 0.2 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.0 0.1 0.0 0.0 0.0 1.8 0.7

4.7 3.1 3.8 2.9 2.2 1.4 1.8 1.8 1.7 1.3 1.4 0.5 0.7 0.3 0.5 0.2 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.9

4.6 3.7 3.7 3.5 2.9 2.1 1.8 1.8 1.7 1.6 1.5 1.2 0.9 0.8 0.7 0.5 0.4 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 -

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Dong Beer (Danone, Groupe) Beck's (Brauerei Beck GmbH & Co) Others Total
Source:

Hubei Wuhan Ouliandong Xihui Brewery Group Lion Nathan (Suzhou) Brewery Co

0.3 0.1 72.1 100.0

0.5 0.0 69.0 100.0

64.9 100.0

Store checks, trade interviews, Euromonitor estimates

Table 47

Brand Shares of Imported Lager 2000-2002

% total volume Brand (Global Brand Owner) Heineken Premium Corona Extra Corona Light Sol Stella Artois Blue Girl Others Total
Source:

Company

2000

2001

2002

Heineken NV Modelo SA de CV, Grupo Modelo SA de CV, Grupo FEMSA (Fomento Economico Mexicano SA de CV) Interbrew NV SA Jebsen International

73.5 13.5 1.0 1.8 1.4 1.1 7.7 100.0

75.0 15.0 2.0 2.0 1.0 0.6 4.4 100.0

64.4 16.4 2.2 2.0 0.7 0.4 13.9 100.0

Store checks, trade interviews, Euromonitor estimates

5.5

Packaging

Glass bottles still dominate Glass bottles remain the most popular packaging format, accounting for 75% of total beer volume in 2003. The 640ml glass bottle is the main packaging format, since it is the preferred packaging for economy beer. Most people consume beer at home or in restaurants with family and friends, so the large bottle format of 640ml is most suitable, given that the consumption volume is large. Moreover, those who purchased economy beer are more concerned with price than the attractiveness of the packaging. Hence, they do not mind the dark green/brown glass bottles used for economy lagers. Consumers can return the empty beer bottles of any brands to independent food stores and obtain a discount of RMB0.20-0.30 per bottle returned off their new purchases of beer. The empty beer bottles are then collected by the distributors, which return them to the manufacturers to be washed and re-used. This practice is adopted mostly by the small players, where new bottles account for only about 20% of the total number. On the other hand, major players seldom collect used bottles. For example, Tsingtao collects only its own bottles, and only in the region of Tsingtao. Hence, reused bottles constitute a very small percentage of its total number of bottles. This practice of reusing bottles helps to keep the price of packaging for economy lagers low, making it more economical than the use of cans. Cans ranging from the 330-355ml are popular in supermarkets and convenience stores because they are easy to carry and suitable for storage in refrigerators at home. Following the trend of higher consumption of standard lagers, can packaging increased to 17% of total volume sales in 2003, since most standard lagers are packaged in cans. Kegs are not widely used as a packaging format in China. They are found mostly in pubs and hotels, and come mostly in 10, 20 and 30 litres. More than 50% of kegs are the 20-litre type, followed by the 30-litre and 10-litre types.

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Packaging is key to premium beer Small bottles of 330-355ml are the preferred packaging choice for premium beer manufacturers. Premium beers are targeted at the higher income groups and are consumed in on-trade channels such as pubs, bars, hotels and restaurants, thus projecting the right image is crucial. To appeal to the well-heeled young and fashionable, the bottles are designed with attractive labels and are usually transparent to make them look more elegant and sophisticated. The bottle is small so that it can be held in one hand comfortably while chatting with people.
Table 48 Sales of Beer by Packaging Format: % Analysis 1998/2003

% off-trade volume 1998 Can Glass Plastic Keg Others Total
Source: Store checks, trade interviews, Euromonitor estimates

2003 17.0 75.0 0.0 8.0 0.0 100.0

13.0 80.0 0.0 7.0 0.0 100.0

5.6

New Product Developments

Fruit flavoured beer for women Fruit flavoured beer and low-alcohol beer have gained in popularity among consumers, especially women. Beer manufacturers are targeting women because they have higher purchasing power as a growing number have joined the workforce, and are slowly adopting the habit of drinking socially. The strong bitter taste of beer deters most women, so manufacturers have tried to cater to their tastes with fruit flavoured beer. Examples include Yanjing Lemon beer and Yanjing Pineapple beer. Low-alcohol beer for the health conscious At the same time, consumers are becoming more health conscious with rising affluence, so they are increasingly looking for low-alcohol beer. In the past, 11% ABV beer was common. Now, there are 8% ABV beers and even 3% ABV ones for those who want to enjoy a beer and yet are health conscious. Heilongjiang Harbin Brewery Group has developed a new product, Qingyidai, which has 28% lower alcohol content and less sugar. It is claimed to be suitable for people who are diabetic or overweight. Draft beer continues to gain new converts Draft beer, with its light and refreshing taste, continues to find favour with consumers. It became popular in 2002, and the trend has continued with more manufacturers launching draft beer to capitalise on its rising acceptance. Major brands like Tsingtao, Yanjing and Zhujiang have launched draft beer among their ranges of new products. Switch to standard lager As the Chinese economy continues to boom, more consumers are drinking standard lagers, especially in the more affluent areas where purchasing power is higher. Moreover, due to fierce competition and low margins on economy beer, more manufacturers have begun to introduce standard and premium lagers into their product ranges so as to widen their consumer base and diversify their sources of revenue.

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Tsingtao’s Banlangen forced to withdraw In response to the SARS outbreak, Tsingtao developed a new brand of beer laced with Chinese medicines, called Banlangen, in March 2003, hoping that it would appeal to the many Chinese who believe that a dried root with that name can help thwart the deadly respiratory virus. Sales of Banlangen beer reached nearly 100,000 litres before it was forced to be recalled from the market in April 2003, as Tsingtao had violated rules barring companies from adding traditional Chinese medicines to food or beverages, or using the names of traditional Chinese medicines as brands. Tsingtao has also developed green tea beer, bitter melon beer and chrysanthemum beer, though volume sales remain very small. China becomes the third country in the world to produce milk beer Liulutong Dairy Development Corporation Ltd in Hebei province has started the production of milk beer, a new tonic beverage, after Tianjin Food Science Research Institute invented it by taking fresh milk as the raw material and fermenting it twice. Milk beer is a cross between milk and beer, with a low alcohol content. China was the third country after the United States and Japan to acquire the production technology. However, such beers are not widely available in retail outlets.
Summary 5 Brand name Jolly Shandy Harbin-Bingshengtai Laiyiza Yanjing Lemon Beer Beer: New Product Launches 2002-2003 Company Guangdong Carlsberg Co Ltd Heilongjiang Harbin Brewery Group Beijing Yanjing Beer Group Beijing Yanjing Beer Group Beijing Yanjing Beer Group Beijing Yanjing Beer Group Beijing Yanjing Beer Group Tsingtao Brewery Co Ltd Heilongjiang Harbin Brewery Group Heilongjiang Harbin Brewery Group Guangzhou Zhujiang Brewery Co Ltd Guangzhou Zhujiang Brewery Co Ltd Beijing Yanjing Beer Group Lion Brewing Group Product type Low-alcohol lager Domestic standard lager Dark beer Domestic standard lager – lemonflavoured Domestic standard lager – pineapple flavoured Low-alcohol lager Domestic standard lager Beer with Chinese medicine Domestic standard lager Low alcohol lager Domestic premium lager Domestic premium lager Domestic standard lager Domestic standard lager Launch date April 2003 April 2003 April 2003 March 2003

Yanjing Pineapple Beer Yanjing 8° Low Alcohol Beer Yanjing Fengdu Beer Tsingtao Banlangen Qingpi Qingyidai Golden Wheat Zhujiang Beer Zhujiang Premium Draft Beer Yanjing Light Beer 11°P Lion Red Dry Beer

March 2003

March 2003 March 2003 March 2003 December 2002 November 2002 July 2002 July 2002 June 2002 May 2002

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Lion Fresh Beer Teshuang Suntory Yanjing 12º Ice Beer Yanjing 12º Rose Beer Yanjing Chrysanthemum Beer

Lion Brewing Group Shanghai Suntory Beer Co Ltd Beijing Yanjing Beer Group Beijing Yanjing Beer Group Beijing Yanjing Beer Group

Domestic standard lager Domestic economy lager Domestic standard lager Domestic standard lager Domestic standard lager – chrysanthemum flavoured

May 2002 May 2002 March 2002 March 2002 March 2002

Source:

Company research, store checks, trade interviews

5.7

Distribution

On-trade vs Off-trade Trends The off-trade distribution channel, dominates with 68% of total volume sales of beer in 2003. This is largely due to the bulk sales of economy lager which make up more than 90% of total volume sales. Economy lager is consumed by the lower and lower-middle income groups, who buy at offtrade outlets such as independent food stores and supermarkets/hypermarkets. On the other hand, more premium beer is sold through on-trade outlets than in the off-trade. This can be attributed to marketing efforts targeted at the upper-middle and high income groups in restaurants, bars, pubs and hotels by manufacturers and distributors of premium beer. Most of them position their beer as a symbol of sophistication and success. Some companies engage beautiful girls in on-trade outlets to entice customers to choose their brands, while others use promotions such as two for the price of one or price discounts during certain periods to drive sales. Furthermore, with growing affluence and a faster pace of life, more people are dining out. As more people are exposed to Western lifestyles, as China opens up to the world, many young people have developed the habit of relaxing and drinking with friends at pubs. At the same time, more women are drinking outside the home because it has become more acceptable socially, and they have greater spending power as many have joined the workforce. All these developments contributed to the higher growth of on-trade sales in both volume and value terms over the review period. SARS hit on-trade sales However, due to the SARS outbreak during the second quarter of 2003, on-trade sales were sluggish as many people avoided crowded places. It is estimated that on-trade sales fell by as much as 50-80% during the second quarter of 2003. Manufacturers were quick to react and carried out aggressive promotions and discounts at off-trade channels to encourage consumption. Though these efforts did not manage to offset fully the fall in on-trade sales, they arrested the steep dive. In general, SARS has caused more damage to the premium beer manufacturers because they rely more on on-trade channels for their sales. With SARS under control, business started to come back in ontrade outlets, and many manufacturers expressed optimism that growth would return to normal in the second half of 2003, balancing out the negative effects of the second quarter. On-trade volume growth stood at an estimated 7.5% in 2003, which will still outpace off-trade volume growth of 6.2%. High entry fees a barrier to on-trade expansion The payment of entry fees to supermarkets/hypermarkets and entertainment spots such as discos, pubs, nightclubs before brewers can sell and promote their products is common in China. This practice has grown to an unhealthy level, with more restaurants entering the fray to demand similar

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selling and promotion rights at their outlets. Distribution costs for brewers have escalated as a result, thus their profitability is under mounting pressure and their expansion plans for on-trade business are being hampered.
Table 49 Million litres 1998 Off-trade On-trade TOTAL
Source:

On-trade vs Off-trade Sales of Beer: Volume 1998-2003

1999

2000

2001

2002

2003

12,895.0 13,871.9 14,769.4 15,656.5 16,660.0 17,738.9 5,571.1 5,994.4 6,494.9 7,051.7 7,649.7 8,225.6 18,466.1 19,866.3 21,264.3 22,708.2 24,309.7 25,964.6
Store checks, trade interviews, Euromonitor estimates

Table 50 RMB million

On-trade vs Off-trade Sales of Beer: Value 1998-2003

1998 Off-trade On-trade TOTAL
Source:

1999

2000

2001

2002

2003

64,327.9 67,875.3 72,412.5 77,343.0 82,636.6 87,078.5 45,363.3 48,873.1 52,302.2 56,009.9 59,918.1 63,336.6 109,691.1 116,748.4 124,714.7 133,352.9 142,554.7 150,415.1
Store checks, trade interviews, Euromonitor estimates

Table 51 % volume growth

On-trade vs Off-trade Sales of Beer: % Volume Growth 1998-2003

2002/03 Off-trade On-trade TOTAL
Source:

1998-03 CAGR 6.6 8.1 7.1

1998/03 TOTAL 37.6 47.6 40.6

6.5 7.5 6.8
Store checks, trade interviews, Euromonitor estimates

Table 52

On-trade vs Off-trade Sales of Beer: % Value Growth 1998-2003

% current value growth 2002/03 Off-trade On-trade TOTAL
Source:

1998-03 CAGR 6.2 6.9 6.5

1998/03 TOTAL 35.4 39.6 37.1

5.4 5.7 5.5
Store checks, trade interviews, Euromonitor estimates

Off-trade Distribution Patterns Independent food stores continue to dominate the retail channels, with a 76% share of beer volume sales, as they are conveniently situated in residential areas. However, with more supermarkets/hypermarkets opening in China, especially in the big cities, sales of beer through independent food stores have declined, and are being taken away by supermarkets/hypermarkets, which had an 18% share in 2003. Consumers have increasingly taken to shopping at supermarkets/hypermarkets as there are many choices available, given the vast selection of brands and products. Also, consumers are able to get better prices because of the economies of scale commanded by such outlets and the constant

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promotions and discounts carried out. However, the share of sales through convenience stores remained stagnant at 5% in 2003, due to their relatively high prices and low penetration rate. Budweiser succeeds with its distribution chain While most local brewers must pass through four or five distributors before getting their products to consumers, Budweiser has succeeded in keeping its distribution chain to three levels. Products go from the Budweiser brewery to its regional distributor and then to the retailer. This distribution chain offers the dual advantages of higher profit margins and tighter control. The success of Budweiser in China can be partially attributed to its ability to build up a stable and loyal distribution network in 36 cities across China.
Table 53 % off-trade 1998 Supermarkets/hypermarkets Independent food stores Convenience stores Discounters Specialists Direct sales Others Total
Source: Store checks, trade interviews, Euromonitor estimates

Off-trade Sales of Beer by Distribution Format: % Analysis 1998/2003

2003 18.0 76.0 5.0 1.0 100.0

12.0 81.0 5.0 2.0 100.0

5.8

Forecasts

International brewers cannot ignore China’s potential In contrast to mature markets around the world which offer limited growth potential, beer volume sales in China are set to grow by 35% over the 2003-2008 period, such that sales will become larger than the whole of Western Europe combined, and account for 20% of world volume sales by 2008. In 2003, per capita consumption of beer stood at 19.8 litres, compared to an average of 86 litres in the US. Hence, there is significant room for growth. After its accession to WTO, China has become an even more attractive market to multinationals. While the benefits of joining the trade body may not be felt for many years to come, it should lead to greater liberalisation and a decline in protectionism in the long term. International brewers are keen to access what is now the world’s largest beer market through partnerships, developing local brands and knowledge on a regional basis; hence the trend of mergers and acquisitions will continue. In the immediate term, there is a concerted push by beer manufacturers to switch consumers’ tastes to higher quality products, such as standard and premium lagers, through strong marketing campaigns in on-trade channels in the urban areas. Demand for branded lager is currently tiny in comparison to economy lager, but in the long term demand for high quality products will increase as disposable incomes rise. Brewers to focus on rural areas next Beer manufacturers are likely to turn their attention towards consumers in the less developed regions of China, as the urban areas are closer to reaching their maturity, and the strong growth enjoyed in the past cannot continue indefinitely. Rural per capita consumption is about 50% lower than in the developed areas, offering significant potential for growth.

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Previously untapped rural areas will develop to some extent as big breweries solve the transportation problems concomitant with serving such areas, and also seek to manage costs more effectively. However, levels of growth will vary, depending on the economic development of the region. Japanese producers set their sights on China Faced with a saturated market back home, Japanese beer producers are now setting their sights on China, which is now the largest beer market in the world. Suntory Ltd has unveiled plan to establish a research and development base in Shanghai to develop beer and soft drinks to be sold in China. It will also release new products and extend its operational and distribution reach to other parts of the mainland. Asahi Breweries Ltd is planning to build a new plant in Beijing to produce Super Dry, its main draft beer. It hopes to make its operation in China profitable within three years of the launch of the new plant, in spring 2004. Following suit are Sapporo Breweries Ltd, which is planning to increase local production and expand sales channels into major cities, as well as Kirin Brewery, which is considering making inroads into China through Lion Nathan, its Australian business partner. 2008 Olympic Games to boost sales Brewers are eagerly anticipating the 2008 Olympic Games in Beijing. Beer is traditionally the preferred alcoholic drink when watching sport live on TV at home or at on-trade outlets, such as pubs or restaurants. Volume sales are expected to increase substantially during the games, more so than for other alcoholic drinks. Given past experience, such as the Soccer World Cup in 2002, when sales of beer in Korea and Japan soared by 30-40% during the tournament, beer producers can expect to enjoy a boom in business during the 2008 Olympic Games. Although it will probably be a short-lived boom, given that the event is held over only three weeks period, it is a significant opportunity for beer companies. This is especially true for local brewers as it provides a chance to introduce their brands to the thousands of overseas visitors who are expected. More strategic alliances expected Local brewers are keen to explore strategic alliances with large multinational companies, in order to survive stiff competition arising from China’s accession to the WTO. At the same time, foreign companies are eager to sell to the 1.3 billion Chinese, but lack local knowledge. Hence, such alliances are mutually beneficial as there is an inward flow of foreign technology, knowledge and investment, leading to improvements in domestic quality and expertise, while foreign companies can benefit from local brewers’ production facilities, distribution networks and operational experience instead of going it alone. With these clear advantages, more mergers and acquisitions are expected during the forecast period.
Table 54 Million litres 2003 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source: Euromonitor estimates

Forecast Sales of Beer by Subsector: Total Volume 2003-2008

2004

2005

2006

2007

2008

25,964.6 27,660.3 29,385.4 31,154.5 32,959.6 35,052.5 519.3 572.7 631.5 696.6 767.4 852.6 1,763.5 1,893.9 2,041.3 2,206.4 2,390.6 2,604.8 23,681.7 25,193.7 26,712.6 28,251.4 29,801.6 31,595.1 25,964.6 27,660.3 29,385.4 31,154.5 32,959.6 35,052.5

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Table 55 RMB million

Forecast Sales of Beer by Subsector: Total Value 2003-2008

2003 Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source: Euromonitor estimates

2004 159,262.4 21,065.8 19,936.8 118,259.8 159,262.4

2005 169,071.5 23,403.0 21,047.9 124,620.6 169,071.5

2006 179,897.8 26,025.8 22,226.2 131,645.8 179,897.8

2007 191,450.7 28,928.5 23,476.1 139,046.0 191,450.7

2008 204,655.5 32,400.7 24,919.1 147,335.7 204,655.5

150,415.1 19,005.7 18,939.7 112,469.8 150,415.1

Table 56

Forecast Sales of Beer by Subsector: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source: Euromonitor estimates

2003/08 TOTAL 35.0 64.2 47.7 33.4 35.0

6.2 10.4 8.1 5.9 6.2

Table 57

Forecast Sales of Beer by Subsector: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR Lager - Premium lager - Standard lager - Economy lager Dark beer Stout Non-/low-alcohol Beer
Source: Euromonitor estimates

2003/08 TOTAL 36.1 70.5 31.6 31.0 36.1

6.4 11.3 5.6 5.5 6.4

5.9

Forecasts by Region

North and Northeast region will lead volume sales The largest beer drinking region is expected to remain the North and Northeast region, with forecast sales of 10,400 million litres of beer by 2008. Though the winter in this region is extremely cold, households have built-in heating facilities and thus consumption of beer all year round is not hindered. The East will maintain its position as the second largest beer region in 2008, with volume sales of 9,513 million litres. The climate does not favour all year-round consumption of beer due to the cold and wet winter conditions. In addition, consumers usually do not have heating at home and thus

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regard beer as too cold to drink in winter, and consume yellow wine instead. However, with rising prosperity, premium beer will find more consumers in the East. Highest growth in South and lowest in West In South China, rural consumers residing in the Pearl River Delta areas represent a substantial potential market for standard or even premium products, as wealth trickles down from the more affluent urban areas. It is probable that South will continue to experience the highest growth rate in beer sales over the forecast period. However, in less developed regions, such as Mid China, where economy beer will continue to account for the largest proportion of sales, growth will be dependent on the speed of economic expansion. In the western regions, where the climate is harsher, with particularly cold winter months, consumers are traditionally more inclined to consume liquor with high alcohol content. Many rural consumers are not fully aware of the health benefits of beer, relative to high alcohol spirits, and thus consumer education is needed before sales can take off.
Table 58 Million litres 2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

Forecast Sales of Beer by Region: Total Volume 2003-2008

2004

2005

2006

2007

2008

7,199.3 7,620.9 8,070.6 8,535.4 9,002.6 9,547.9 4,191.1 4,475.6 4,737.8 5,013.9 5,291.5 5,594.2 7,653.1 8,167.2 8,681.2 9,202.6 9,735.1 10,396.8 1,403.5 1,454.7 1,508.3 1,563.9 1,632.3 1,703.9 3,745.3 4,047.3 4,371.4 4,702.6 5,031.0 5,405.5 1,772.3 1,894.6 2,016.2 2,136.1 2,267.1 2,404.2 25,964.6 27,660.3 29,385.4 31,154.5 32,959.6 35,052.5

Table 59 RMB million

Forecast Sales of Beer by Region: Total Value 2003-2008

2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2004 51,802.7 21,824.3 43,217.7 6,795.4 26,945.8 8,676.4 159,262.4

2005 55,109.3 23,094.5 45,462.8 7,017.2 29,151.7 9,236.1 169,071.5

2006 58,710.3 24,533.3 48,012.5 7,247.2 31,554.8 9,839.8 179,897.8

2007 62,443.3 26,091.2 50,816.0 7,473.3 34,133.9 10,493.0 191,450.7

2008 66,808.5 27,828.7 54,053.1 7,730.4 37,023.7 11,211.0 204,655.5

48,718.5 20,667.4 41,312.1 6,582.0 24,946.9 8,188.2 150,415.1

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Table 60

Forecast Sales of Beer by Region: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 32.6 33.5 35.9 21.4 44.3 35.7 35.0

5.8 5.9 6.3 4.0 7.6 6.3 6.2

Table 61

Forecast Sales of Beer by Region: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 37.1 34.7 30.8 17.4 48.4 36.9 36.1

6.5 6.1 5.5 3.3 8.2 6.5 6.4

6.
6.1
• • • • •

WINE
Sizes and Shares

2003 headlines Red wine leads with highest growth rate Abolition of half juice grape wine Changyu, Dynasty and Great Wall dominate the wine sector Robust wine sector attracts many new entrants Wine sector plagued by fake products

Non-grape wine leads in volume Sales of wine in China increased rapidly over the review period, by 46% in volume and by 41% in value terms. In 2003, total sales of wine reached over 1.7 billion litres, valued at more than RMB61 billion, largely dominated by non-grape wine, which consists of locally produced rice wine. Such non-grape wines accounted for 75% of total wine sales in volume terms in 2003, with the rest being accounted for by imported and locally produced grape wines. Non-grape wine as defined here is mainly consisted of traditional Chinese rice wine, also called “yellow wine” or shaoxing wine. Its alcohol content ranges from 14% to 20% and it is widely perceived to be nutritious and beneficial to health. Yellow wine is more popular among older consumers, who may drink a small portion every day, and many new mothers consume this product as a tonic. It is, however, not appreciated by the young as they consider it a traditional and oldfashioned drink.

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With its consumer base limited to the older population, volume growth in yellow wine of 5.5% was low compared to red wine’s double-digit growth of 13.5% in 2003. Red wine powers ahead Total sales of red wine in 2003 reached 272 million litres with a value of RMB10.9 billion, up 13.5% in volume terms and 13.1% in current value terms, making it not only the most dynamic of all wines but also of all alcohol drinks. The significant growth of grape wine sales is a result of the growing middle class developing a taste for wine, and the increased awareness of the health benefits that are inherent in grape wines. The influence of Western eating and drinking habits has played a key role too. Wine consumption only caught on in China in the early 1990s. The trend-setters have been those who have studied aboard or businessmen who travel abroad frequently. They tend to be very sophisticated, well read and affluent, seeking to live a more gracious lifestyle, of which wine appreciation is seen as a part. As a result, a “wine and dine” culture has begun to develop around social events and special occasions, such as wedding dinners and birthday parties. Wine has successfully carved a place for itself in Chinese restaurants, with many consumers switching from local spirits to wine. Promotional and marketing activities by foreign trade associations and local retailers, such as winetasting classes, also contributed to the increase in wine consumption. With increased local production over the years, a wide range of wines from low to high priced brands has become available to the less affluent consumers to indulge in wine appreciation as a status symbol too. Red wine is particularly popular because of its colour, as red is believed by the Chinese to bring good luck. Many Chinese consumers drink red wine on special days such as Chinese New Year. Wine producers recognised the trend of increased health consciousness among consumers, and thus positioned their marketing campaigns from the angle of red wine’s ability to improve blood circulation and prevent heart diseases. All these factors contributed to red wine leading the pack, with a share of 60% of grape wine volume sales, leaving white and rosé wine some way behind. White wine lacklustre, rosé’s share marginal Chinese people traditionally decorate things in red for happy days and in white for bad days, such as funerals. As most Chinese consumers lack knowledge of wine, when it comes to making purchasing decisions, it is often the colour of the wine that influences their choice. This contributed to the lacklustre performance of white wine, which grew by 6.7% in volume terms in 2003, half the rate of red wine. White wine accounted for only 30% of total grape wine volume in 2003, since Chinese consumers are not accustomed to its taste, and there was less promotion by manufacturers and distributors. Sales of still rosé remained small throughout the review period due to its perceived lack of sophistication and taste when compared to red or white wines. Rosé accounted for a marginal share of total wine sales in 2003, with only 10% of the grape wine subsector. Rosé continues to be a small niche, with expatriates wine drinkers as its main consumers. Sparkling wine and vermouth negligible Champagnes, other sparkling wines, fortified wine and vermouth have been available in China for a long time, but in negligible quantities. Demand is limited due to poor advertising and promotion, as well as cultural factors, with beer and spirits more popular in the country. Still wine industry plagued by fake products

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According to a recent survey by the China National Administration for Industry and Commerce in Beijing, Shenyang, Zhengzhou and Chengdu, more than 70% of “imported” wine sold in restaurants and hotels in the four cities is fake. Its inspection of 50 hotels and restaurants in the four cities revealed that just 28.6% of bottles sold as imported wine were the real thing. Though Beijing fared better than the rest, it is reported to have only managed 60% authenticity. Counterfeiting is a multimillion dollar business in China. Sometimes, it is simply done by transferring cheap local wine into imported bottles complete with labels. The prevalence of fake products destroys the confidence of consumers and is damaging to the development of the wine industry in China. This illegal trade is detrimental to local wine manufacturers’ plans to expand into higher end products. In addition, it will be extremely difficult to instil consumers’ confidence in buying imported wine for fear of overpaying, thereby impairing the healthy growth of the industry. Imported wines made up less than 20% of total volume sales of grape wine in 2003. Having recognised the threat posed by counterfeiting, the government is closing in on illegal agents and dealers. Changyu, Great Wall, Dynasty dominate the grape wine market While there are no official statistics published on individual market shares of major companies, industry consensus indicates that Changyu, Great Wall and Dynasty are the undisputed top three wine companies in China. Industry sources estimate that they had a combined volume share of 5060% in both volume and value terms in 2003. Changyu has the advantages of branding, a strong sales network and a broad product range. In terms of branding, Changyu has established itself as the leader of wine in China, resulting from its long history and reputation. In addition, it has built up almost 1,000 major sales outlets. Changyu offers a wide range of wines, from dry wine to sweet wine, and a comprehensive price range from a few renminbi to a few hundred, to cater to all consumers. Great Wall enjoys strong backing from its parent company, the state-owned China National Cereals, Oils & Foodstuffs Import & Export Corporation (COFCO), in terms of resources and connections. Thus, it is a brand that is easily recognisable by consumers and it is highly regarded as a national brand with a loyal following. Finally, Dynasty has an image of class and good taste. It has carved out a substantial share in the premium wine segment, making it a popular brand in on-trade outlets. Dynasty has also built up a strong sales network. Grape wine market buzzing with new entrants As red wine is a booming area in the alcoholic drinks industry, some spirits and beer producers have also entered the fray, hoping to have a piece of the action and diversify their revenue base. Examples include: • • • • • Wuliangye, which, in cooperation with France’s Plamon Group, launched Asia Dry Red wine Maotai, working with Hong Kong Tongbao Winery Co Ltd, launched Moutai Dry Red wine Gujinggong acquired Fenglai Winery Tsingtao launched Kaixuan wine Quanxing and Luzhoulaojiu are also preparing to enter the wine sector

New brands muscling in with substantial advertising spending Attracted by the double-digit growth of the grape wine industry, and armed with strong capital backing, two newly established wine companies are muscling in with substantial advertising

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spending, attempting to wrestle share away from the veterans. Suntime spent RMB42.9 million on advertisements on CCTV, far more than Changyu’s RMB28.9 million, while Impression spent an extravagant sum of RMB82.5 million, beating all industries, including IT, telecommunications, spirits, beer and even cosmetics companies, to be the number one spender on advertising on CCTV. Suntime and Impression have since joined forces as they shared the same vision to “make wine available and affordable to everyone” and vowed to “popularise wine consumption in China”. Impression planned to launch in July 2003 a 100ml soft packaging for red wine for consumption at non-premium restaurants so as to change consumers’ perception that red wine is a high-end, luxury product. With such aggressive marketing by the newcomer, it is inevitable that established companies will react with counter strategies, mostly in the form of price cutting, in order to retain their market shares. Hence, a wine price war is looming in China. Abolition of half juice grape wine The China State Economic and Trade Commission has recently announced the abolition of half juice grape wine, which has led to much controversy outside and inside wine industry. According to the announcement, all wineries were to stop the production of half juice grape wines by 17 May 2003. All marketing of half juice grape wines was to stop by 30 June 2004. The half juice grape wine standard has been abolished in order to accelerate the restructuring of the Chinese wine industry and to adhere to the standards of the international market. The so-called half juice grape wine is a product found only in China. Besides grape juice, sugar, water and some essences are also added in half juice grape wine production. The product is popular among ordinary Chinese people due to its low price. However, with the development of the market economy, more and more industry players petitioned to stop half juice grape wine production because the reduction of grape juice content by some profiteering producers had created unhealthy competition in wine industry. Industry sources estimate that the half juice grape wine market made up a large portion of the grape wine industry in China. Some reckoned that as much as two thirds of grape wine was half juice grape wine, while others suggested a more conservative figure of 40%. However, all agreed that sales of half juice grape wine were more prevalent in less developed regions due to lower standards of living. The gap in the market left by the abolition of half juice grape wine means that there will be a major reshuffle in the Chinese wine sector. All wineries will have to meet this change by reorganising their production and marketing strategies. They will have to transform their product mixes from half juice grape wine to full juice grape wine within as short a time as possible.

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Table 62 Million litres

Sales of Wine by Subsector: Total Volume 1998-2003

1998 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source:

1999 143.4 91.7 34.6 1,031.1 361.7 316.0 241.6 111.9 1,300.8

2000 169.5 100.1 36.3 1,108.2 390.5 340.4 257.8 119.5 1,414.1

2001 209.8 111.9 38.5 1,179.6 415.6 364.3 272.7 127.0 1,539.8

2002 240.0 120.0 40.0 1,246.0 437.5 387.2 287.2 134.2 1,645.9

2003 272.3 128.1 41.5 1,315.1 458.9 411.7 302.8 141.7 1,757.0

127.2 86.2 33.5 957.1 335.6 292.2 225.3 104.1 1,204.0

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Table 63 RMB million

Sales of Wine by Subsector: Total Value 1998-2003

1998 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source:

1999 6,024.0 2,845.0 1,232.3 -

2000 7,025.2 3,082.6 1,286.0 -

2001 8,521.4 3,415.4 1,358.1 -

2002

2003

5,398.3 2,688.7 1,195.4 -

9,635.7 10,897.1 3,639.3 3,887.2 1,404.6 1,461.0 -

33,368.6 35,447.5 37,644.3 40,054.7 42,595.3 44,940.4 2,556.4 2,714.6 2,902.8 3,067.1 3,238.5 3,385.5 4,955.7 5,324.5 5,702.8 6,109.4 6,527.3 6,909.1

12,915.9 13,694.6 14,503.0 15,414.9 16,402.9 17,356.2 12,940.5 13,713.7 14,535.7 15,463.3 16,426.6 17,289.5 42,651.0 45,548.7 49,038.0 53,349.6 57,274.9 61,185.7

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

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Table 64

Sales of Wine by Subsector: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source:

1998-03 CAGR 16.4 8.2 4.4 6.6 6.5 7.1 6.1 6.4 7.9

1998/03 TOTAL 114.1 48.6 23.8 37.4 36.7 40.9 34.4 36.1 45.9

13.5 6.7 3.7 5.5 4.9 6.3 5.4 5.6 6.7

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Table 65

Sales of Wine by Subsector: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source:

1998-03 CAGR 15.1 7.7 4.1 6.1 5.8 6.9 6.1 6.0 7.5

1998/03 TOTAL 101.9 44.6 22.2 34.7 32.4 39.4 34.4 33.6 43.5

13.1 6.8 4.0 5.5 4.5 5.9 5.8 5.3 6.8

Official statistics (National Bureau of Statistics of China), trade interviews, Euromonitor estimates

Summary 6 First tier

Major Wine Companies 2003 Yantai Changyu Wine Group Co Ltd Yantai COFCO Winery Co Ltd Dynasty Winery Co Ltd

Second tier

Tonghua Grape Wine Co Ltd Yantai Weilong Grape Wine Co Ltd Minquan Wufeng Wine Co Ltd

Up and coming
Source:

Vinisuntime International Co Ltd Impression Winery Co Ltd

Company research, store checks, trade interviews, Euromonitor estimates

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Summary 7 First tier

Major Brands of Wine 2003 Changyu (Yantai Changyu Wine Group Co Ltd) Great Wall (Yantai COFCO Winery Co Ltd) Dynasty (Dynasty Winery Co Ltd)

Second tier

Huaxia (Yantai COFCO Winery Co Ltd) Tonghua (Tonghua Grape Wine Co Ltd) Weilong (Yantai Weilong Grape Wine Co Ltd) Minquan Wufeng (Minquan Wufeng Wine Co Ltd)

Up and coming
Source:

Suntime (Vinisuntime International Co Ltd) Impression (Impression Winery Co Ltd)

Company research, store checks, trade interviews, Euromonitor estimates

6.2

Sizes by Region

North and Northeast China – number one region for wine North and Northeast China’s coastal area, with its advantageous natural conditions, grows the best wine grapes, such as cabernet sauvignon in Changli and muscat in Tianjin. As such, it is not only the largest wine-producing region, but also the number one region for wine consumption. In 2003, sales of grape wine in the region reached 124 million litres, representing growth of 11% over the previous year. There are two key consumer groups in the Northeast, one is the sophisticated group, normally consisting of foreign expatriates and the well-heeled middle to high income workers, since North China has the most foreign companies as well as embassies. The other group is “modern” consumers, who are ordinary wage earners but like to purchase local wine to keep up with the trend. This group is expanding, and consumes imported wine on limited occasions. Regional wine consumption varies In 2003, East and South China were the second and third largest regions for grape wine after the Northeast, with volume sales totalling 104 million and 100 million litres, respectively. As affluent regions, people living in East and South China are more influenced by Western lifestyles including drinking preferences. Due to rising incomes and increased exposure to Western food, sales of imported wine are higher in these regions. Imported wines are often first launched in Shanghai and Guangzhou before being introduced to other areas. As a result of aggressive marketing campaigns, consumers in the large cosmopolitan cities show good product recognition for premium wine. However, as domestic companies start to enter the high-end market, consumers are showing strong support for these local products, which taste good and are reasonably priced. Regional companies dominate There are many wine producers located in Northwest China, which consists of the extensive alluvial plain to the east of the Helan mountains in Ningxia, the Wuwei district in Gansu, and Tulufan in Xinjiang. This is a newly developed wine-producing area on the Silk Road in China, and enjoys good weather and produces high-grade wine grapes; Xinjiang was the first established grape planting and winemaking area.

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However, as the Northwest is the least developed region, and consumer purchasing power is low, regional brands are the leaders, as they are comparatively cheap. There are, however, a few national brands, such as Suntime and Yeli.
Table 66 Million litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

Sales of Wine by Region: Total Volume 1998-2003

1999 657.8 213.2 148.2 19.1 179.2 83.3 1,300.8

2000 709.8 231.3 163.4 20.6 198.4 90.5 1,414.1

2001 763.6 251.7 183.8 22.7 219.1 98.9 1,539.8

2002 811.3 268.5 201.0 24.3 235.3 105.5 1,645.9

2003 861.3 286.5 218.3 26.0 252.4 112.4 1,757.0

613.9 197.3 137.2 18.1 160.2 77.4 1,204.0

Trade interviews, Euromonitor estimates

Table 67 RMB million

Sales of Wine by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1999

2000

2001

2002

2003

24,014.5 25,471.2 27,235.0 29,303.9 31,296.5 33,211.8 5,825.5 6,204.3 6,641.7 7,207.6 7,732.1 8,247.6 4,493.2 4,811.2 5,284.3 5,934.6 6,481.2 7,066.7 434.8 458.0 491.7 540.3 574.7 610.9 5,772.7 6,348.8 6,956.7 7,699.3 8,332.2 8,988.5 2,110.3 2,255.2 2,428.6 2,663.9 2,858.2 3,060.2 42,651.0 45,548.7 49,038.0 53,349.6 57,274.9 61,185.7

Trade interviews, Euromonitor estimates

Table 68

Sales of Wine by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 7.0 7.8 9.7 7.5 9.5 7.8 7.9

1998/03 TOTAL 40.3 45.3 59.1 43.9 57.5 45.3 45.9

6.2 6.7 8.6 7.1 7.2 6.5 6.7

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Table 69

Sales of Wine by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 6.7 7.2 9.5 7.0 9.3 7.7 7.5

1998/03 TOTAL 38.3 41.6 57.3 40.5 55.7 45.0 43.5

6.1 6.7 9.0 6.3 7.9 7.1 6.8

6.3

Sizes of Non-grape Wine by Region

East region dominates Non-grape wine in China mainly comprises rice wine, also called “yellow wine”, which is a type of traditional alcoholic drink with a strong regional character. The consumption of yellow wine is concentrated in the East region because of local drinking habits, with the East being where it originated. In 2003, overall sales of non-grape wine reached 1.3 billion litres, with the East accounting for 57.5% (757 million litres) and 63.6% (RMB29 billion) of total volume and value, respectively. The yellow wine producers are mainly located in the East region, especially in the Zhejiang province, which accounts for 60% of non-grape wine production. In fact, all the leading brands of non-grape wine come from Zhejiang, such as Gu Yue Long Shan, Chaoxing Hua Tiao and Nuerhong. The urban areas account for a dominant share of yellow wine consumption as consumers are more sophisticated, and pay more attention to the quality of the wine. Consequently, yellow wine priced above RMB50/litre is mostly sold in the urban areas, while wines consumed in rural areas generally cost less than RMB10/litre. However, although purchasing power is low in rural areas, the potential for yellow wine priced RMB11-50/litre is very promising, due to increasing urbanisation and improving living standards. Non-grape wine remains small in other regions Sales of non-grape wine in other regions are low. In general, only a few provinces in the South and Mid regions consume yellow wine, and it remains unpopular in Southwest, Northeast and Northwest China, especially in the latter two regions, where there is an ingrained preference for local spirits. Moreover, people in the Northwest prefer locally-made traditional non-grape wines, with Ovine Milk Jiu in Xinjiang province very popular among the minorities. Ovine Milk Jiu is a traditional drink going back hundreds of years, and is produced by the local people and consumed on a daily basis. Also, people in the South like to use low-end yellow wine for cooking, especially for seafood products. Therefore, non-grape wine in other regions still needs time for development, and marketing activities are needed in order to promote sales. Competition from other liquors Yellow wine dominates non-grape wine in China, but is facing strong competition from other nongrape wines, such as the Chinese Nuo Mi Jiu and Japanese sake, as well as some sweet-scented osmanthus wines. Furthermore, non-grape wine also faces competition from beer, grape wine and spirits, since these westernised alcoholic drinks have a better image and taste. Usually, young consumers are more inclined to drink beer and wine to show they are in touch with the world, while businessmen prefer spirits.

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However, yellow wine also has its own uniqueness that distinguishes it from other liquors. Yellow wine is often consumed in autumn or winter as a daily tonic, and is much loved by the elderly and people of poor health. Therefore, the consumer base and sales growth remained stable in 2003, but lower-end yellow wine is on a downward trend, as consumers are more cautious about the quality of the product.
Table 70 Million litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

Sales of Non-grape Wine by Region: Total Volume 1998-2003

1999 595.3 170.6 75.1 8.6 123.3 58.4 1,031.1

2000 638.4 183.2 79.7 9.0 135.1 62.8 1,108.2

2001 679.1 195.1 84.4 9.4 144.8 66.8 1,179.6

2002 717.0 206.1 89.2 9.9 153.1 70.7 1,246.0

2003 757.0 217.6 94.0 10.4 161.5 74.6 1,315.1

556.9 158.0 70.9 8.2 109.0 54.2 957.1

Trade interviews, Euromonitor estimates

Table 71 RMB million

Sales of Non-grape Wine by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1999

2000

2001

2002

2003

21,416.5 22,634.1 24,019.1 25,526.1 27,112.2 28,586.2 4,525.9 4,802.2 5,072.3 5,398.3 5,751.1 6,058.1 2,073.3 2,153.3 2,255.9 2,368.4 2,491.5 2,601.3 183.1 190.9 199.1 208.0 218.1 226.1 3,797.2 4,202.0 4,542.4 4,889.8 5,243.4 5,580.7 1,372.7 1,464.9 1,555.5 1,664.0 1,778.9 1,888.0 33,368.6 35,447.5 37,644.3 40,054.7 42,595.3 44,940.4

Trade interviews, Euromonitor estimates

Table 72

Sales of Non-grape Wine by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 6.3 6.6 5.8 4.9 8.2 6.6 6.6

1998/03 TOTAL 35.9 37.8 32.6 26.7 48.2 37.7 37.4

5.6 5.6 5.4 5.1 5.5 5.5 5.5

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Table 73

Sales of Non-grape Wine by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 5.9 6.0 4.6 4.3 8.0 6.6 6.1

1998/03 TOTAL 33.5 33.9 25.5 23.4 47.0 37.5 34.7

5.4 5.3 4.4 3.6 6.4 6.1 5.5

6.4

Price Segmentation

Red and white wine commonly priced at RMB30-40/litre Over the review period, the price segmentation of red and white wine remained much the same. Half juice grape wine, a unique product found only in China, is produced by adding sugar, water and some essences to grape juice. As the amount of grape juice varies across brands, prices can range from RMB5/litre to RMB15/litre. Domestic still red and white wine is usually priced at RMB30-60/litre with the most popular ones priced at RMB30-40/litre. For most price-conscious drinkers, the preference is for wine priced below RMB40/litre. Imported bulk wines which are locally bottled are priced at RMB60-90/litre. The domestic and imported premium wines are priced at RMB90-120/litre and over RMB120/litre, respectively. In general, the unit price for red wine is slightly higher than for white wine, as the former is more popular in the Chinese market. Consumers upgrading to still wine In China, half juice grape wine is popular among consumers, not only because of its low price, which allows regular consumption, but also its taste is more easy on the tongue than still wine, which Chinese consumers are not accustomed to. However, as income levels rise and educational efforts by wine manufacturers bear fruit, more consumers will start to ask for the “real thing” and not the diluted version. As a result, with the share of half juice grape wine slowly shrinking, manufacturers are putting greater efforts into upgrade their existing products, improving product technology as well as quality. Imported wines more competitive with falling tariffs As part of China’s WTO agreement in December 2001, tariffs on wine fell, thus allowing foreign wines to be more competitively priced in the RMB60-90/litre range, and to fight for share with domestic wines. To face this competition, domestic producers also reduced the prices of their premium products. This has benefited consumers as they are able to enjoy good quality wines without the high price tags. Premium wine has limited consumer base In 2003, premium wine accounted for only a small share of sales, owing to its high price. The main consumers of premium wine are foreign expatriates, local businessmen, and the more sophisticated. Domestic premium wines are priced lower, at RMB90-120/litre, whereas those costing over

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RMB120/litre are almost exclusively imported products. The prices of imported premium wines can reach several hundreds renminbis, which means that only a privileged few get to enjoy them, and they are usually found in high-class on-trade establishments. Rosé wine is a niche market Sales of rosé wine are low because consumers lack the necessary product knowledge, and wine manufacturers are not doing much to educate them. In China, domestic rosé wines are mostly priced below RMB30/litre, and imported rose wines are above RMB60/litre.
Table 74 % off-trade 1998 Under RMB 30 RMB 30 to RMB 59.99 RMB 60 to RMB 89.99 RMB 90 to RMB 119.99 RMB 120 and above Total
Source: Store checks, trade interviews, Euromonitor estimates

Sales of Red Wine by Price Segment 1998/2003

2003 32.5 45.0 12.5 7.5 2.5 100.0

45.0 30.0 10.0 12.0 3.0 100.0

Table 75 % off-trade

Sales of White Wine by Price Segment 1998/2003

1998 Under RMB 30 RMB 30 to RMB 59.99 RMB 60 to RMB 89.99 RMB 90 to RMB 119.99 RMB 120 and above Total
Source: Store checks, trade interviews, Euromonitor estimates

2003 38.0 45.0 12.0 3.5 1.5 100.0

50.0 35.0 7.0 6.0 2.0 100.0

Table 76 % off-trade

Sales of Rosé Wine by Price Segment 1998/2003

1998 Under RMB 30 RMB 30 to RMB 59.99 RMB 60 to RMB 89.99 RMB 90 to RMB 119.99 RMB 120 and above Total
Source: Store checks, trade interviews, Euromonitor estimates

2003 50.0 36.0 10.0 3.0 1.0 100.0

58.0 28.0 8.5 4.8 0.7 100.0

6.5

Non-grape by Type

Four price segments for non-grape wine Throughout the review period, the leading price ranges for non-grape wine, or Chinese yellow wine, were RMB10/litre and under, and RMB11-50/litre. Yellow wine is a traditional drink, which does not require complicated distilling technology and, as such, its unit price is comparatively low.

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Indeed, low-end yellow wine is generally dominated by regional players, especially those priced below RMB20/litre. However, premium products, which are priced above RMB100/litre, are manufactured by national players, such as Gu Yue Long Shan and Nuerhong. The pricing of yellow wine varies according to the number of years of ageing; for example, wine stored 3-5 years is priced under RMB50-100/litre, while wine stored for more than five years is often over RMB100/litre. These premium products are often purchased as gifts or consumed during special Chinese festivals, like Moon Cake festival or Chinese New Year.
Table 77 Million litres 1998 Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine
Source:

Sales of Non-grape by Type: Total Volume 1998-2003

1999 1,031.1 361.7 316.0 241.6 111.9 -

2000 1,108.2 390.5 340.4 257.8 119.5 -

2001 1,179.6 415.6 364.3 272.7 127.0 -

2002 1,246.0 437.5 387.2 287.2 134.2 -

2003 1,315.1 458.9 411.7 302.8 141.7 -

957.1 335.6 292.2 225.3 104.1 -

Store checks, trade interviews, Euromonitor estimates

Table 78 RMB million

Sales of Non-grape by Type: Total Value 1998-2003

1998 Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine
Source:

1999

2000

2001

2002

2003

33,368.6 35,447.5 37,644.3 40,054.7 42,595.3 44,940.4 2,556.4 2,714.6 2,902.8 3,067.1 3,238.5 3,385.5 4,955.7 5,324.5 5,702.8 6,109.4 6,527.3 6,909.1

12,915.9 13,694.6 14,503.0 15,414.9 16,402.9 17,356.2 12,940.5 13,713.7 14,535.7 15,463.3 16,426.6 17,289.5 -

Store checks, trade interviews, Euromonitor estimates

Table 79

Sales of Non-grape by Type: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine
Source:

1998-03 CAGR 6.6 6.5 7.1 6.1 6.4 -

1998/03 TOTAL 37.4 36.7 40.9 34.4 36.1 -

5.5 4.9 6.3 5.4 5.6 -

Store checks, trade interviews, Euromonitor estimates

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Table 80

Sales of Non-grape by Type: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine
Source:

1998-03 CAGR 6.1 5.8 6.9 6.1 6.0 -

1998/03 TOTAL 34.7 32.4 39.4 34.4 33.6 -

5.5 4.5 5.9 5.8 5.3 -

Store checks, trade interviews, Euromonitor estimates

6.6

Packaging

Glass the dominant packaging format Glass bottles accounted for 95% of total off-trade wine sales in 2003, strengthening its dominance further. For grape wine, the most common packaging size is the 750ml bottle, with a very small portion of 1-litre and 375ml bottles. The slight increase in share of glass packaging over the review period was brought about by the use of glass bottles as a form of packaging for non-grape wines too, especially for low and middle range products. Non-grape wines have their own distinct packaging in pottery, with some in the form of historical or legendary figures from Chinese history. This type of packaging is more often used for higher end products to differentiate them from the lower end ones. In addition, pottery is used for its ability to preserve wine. Non-grape wine in pottery can be stored in good condition for as long as 20 years. The most common packaging size for non-grape wine is 500ml.
Table 81 Off-trade Sales of Wine by Packaging Format: % Analysis 1998/2003

% off-trade volume 1998 Glass Plastic Carton Bag-in-box Others Total
Source: Store checks, trade interviews, Euromonitor estimates

2003 95.0 0.0 2.0 0.0 3.0 100.0

91.0 0.0 2.0 0.0 7.0 100.0

6.7

Distribution

On-trade vs Off-trade Sales In China, about 58% of total volume wine sales were through off-trade channels in 2003. However, in large cities such as Shanghai, Beijing and Guangzhou, on-trade channels may account for up to 60% of total volume sales. Wine consumption has continued to increase in on-trade establishments such as restaurants, pubs, bars and nightclubs due to the rising disposable income of the growing middle and upper income groups. In the past, more socialising was carried out at home, with alcoholic drinks purchased from off-trade outlets. Imported wine dominates sales in most upmarket on-trade establishments. Two factors contributed to this phenomenon: firstly, consumers in upmarket outlets are mostly foreigners

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or expatriates, who are likely to be familiar with foreign brands but may know little about the domestic alternatives; secondly, in such establishments domestic brands are no match for their foreign competitors in terms of packaging and promotions. A bottle of wine is often expensive in the on-trade due to high mark-ups in order to cover overheads. To entice consumers to drink, on-trade establishments will offer promotions such as two for the price of one promotions, or the second glass at 50% off. At other times, companies will organise wine-tasting sessions at an attractive price in on-trade channels so as to create awareness and increase wine appreciation. SARS hits on-trade sales On-trade sales were badly affected as a result of the SARS outbreak, as people avoided crowded areas in order to reduce the risk of infection. Declines of as much as 50-80% in on-trade sales were reported during the second quarter of 2003. Manufacturers reacted with aggressive promotions and discounts at off-trade outlets in order to offset the steep fall in on-trade sales. In general, SARS has caused more damage to imported wines because they rely more on on-trade channels for their sales. Given that SARS has been successfully brought under control, business has started to creep back in on-trade channels. It is thought that growth has picked up and returned to normal in the second half of 2003.
Table 82 Million litres 1998 Off-trade On-trade TOTAL
Source:

On-trade vs Off-trade Sales of Wine: Volume 1998-2003

1999 766.8 534.0 1,300.8

2000 829.3 584.8 1,414.1

2001 899.1 640.8 1,539.8

2002 959.2 686.7 1,645.9

2003 1,023.0 734.0 1,757.0

713.1 491.0 1,204.0

Trade interviews, Euromonitor estimates

Table 83 RMB million

On-trade vs Off-trade Sales of Wine: Value 1998-2003

1998 Off-trade On-trade TOTAL
Source:

1999

2000

2001

2002

2003

21,800.1 23,145.4 24,707.4 26,454.0 28,101.2 29,685.7 20,850.9 22,403.4 24,330.7 26,895.5 29,173.6 31,500.0 42,651.0 45,548.7 49,038.0 53,349.6 57,274.9 61,185.7
Trade interviews, Euromonitor estimates

Table 84 % volume growth

On-trade vs Off-trade Sales of Wine: % Volume Growth 1998-2003

2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 7.5 8.4 7.9

1998/03 TOTAL 43.5 49.5 45.9

6.6 6.9 6.7

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Table 85

On-trade vs Off-trade Sales of Wine: % Value Growth 1998-2003

% current value growth 2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR 6.4 8.6 7.5

1998/03 TOTAL 36.2 51.1 43.5

5.6 8.0 6.8

Off-trade Distribution Patterns Supermarkets/hypermarkets not only retained their top position in off-trade channel for volume sales of wine in 2003, but also increased their share to 55%. Given that supermarkets/hypermarkets offer a wide range of goods at competitive prices, and are conveniently located in shopping districts, an increasing number of consumers like to do their shopping in these large outlets. As such, wine manufacturers and importers have focused their marketing efforts on these outlets to tap this rising patronage. Specialist stores accounted for 10% of off-trade distribution in 2003, and many of them are run by wine importers. They tend to carry only imported wines in order to maintain an image of sophistication and taste, so as to appeal to the young and affluent. Sometimes they run subsidised or free wine-tasting classes to stimulate interest, and act as an avenue to consumers who lack knowledge in wine but are keen to learn more. The outlets look upon such classes as a form of investment which allows them to reap higher returns from sales in the medium to long term. Other food outlets still accounted for 10% of off-trade sales of wine in 2003, because many consumers buy yellow wine from outdoor markets due to their low prices. However, these outlets, which constitute a more traditional distribution format, saw their share eroded over the review period.
Table 86 % off-trade 1998 Supermarkets/hypermarkets Independent food stores Convenience stores Discounters Specialists Direct sales Others Total
Source: Trade interviews, Euromonitor estimates

Off-trade Sales of Wine by Distribution Format: % Analysis 1998/2003

2003 55.0 15.0 10.0 10.0 10.0 100.0

50.0 15.0 8.0 10.0 17.0 100.0

6.8

Forecasts

Tremendous potential in grape wine Sales of grape wine in China are expected to fall significantly in 2004, as the marketing of half juice grape wine will be prohibited in June 2004. The fall in sales will be reflected most acutely in red wine, with a fall of more than 20% in both volume and value terms, as it has a higher portion of half juice grape wine than white wine. There is no half juice rosé grape wine. However, it is expected that sales of grape wine, and the double-digit growth in red wine in particular, will resume in 2005, after wine manufacturers are given time to restructure and reposition themselves.

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Given that per capita consumption of grape wine in China was only 0.34 litres in 2003, compared to the world average of 7 litres, there is tremendous potential for growth in the years ahead. Also, the State Economic and Trade Commission, in its 10th Five-Year Plan, has identified grape wine as the focus for the development of China’s alcoholic drinks industry over the next five years. This is due to the under-representation of grape wine in overall alcoholic drinks production in China. Grape wine only accounts for a tiny 1% of the total. Over the forecast period, non-grape wine, ie “yellow wine”, is expected to maintain stable growth, with CAGRs of 5.9% and 5.6% in volume and value terms, respectively. The State Economic and Trade Commission, in its 10th Five-Year Plan, has stated that production of Chinese rice wine should be encouraged. With government support, favourable policies will be enacted to facilitate the growth of the rice wine industry. More imported wines expected As part of China’s WTO agreement, the tariff on wine in bottles of less than two litres will be reduced from 65% to14%, and the tariff on wine in bulk will be reduced to 20%, effective from 1 January 2004. Tariff on wine in bottles is set to drop to 10% by 2005. This brings hopes to foreign winemakers that a bottle of premium wine could soon be affordable to China’s growing middle class. Importers hope to be able to tap the mass market after years of being restricted to a tiny, elite market. With an increasingly open economy and the growing influence of Western eating and drinking habits, young consumers have demonstrated a preference for beer and grape wine, especially red wine. Indeed, grape wine is becoming a fashionable drink for wealthy, young and sophisticated Chinese consumers. Currently, according to government figures, Spain, Chile, Italy, France and the United States are the major wine exporters to China in volume terms. Imported wines made up less than 20% of the total grape wine market by volume in 2003. Mergers and acquisitions ahead With the halting of half juice grape wine production in May 2003, and of sales in June 2004, industry experts estimated that some 200 manufacturers which are very small in terms of production volume will be affected. It is unlikely that they will be able to turn to producing full juice grape wine within the given timeframe. Thus, many will choose to merge with or be acquired by large companies. Industry sources predict that China wine industry would follow in the footsteps of the beer sector, with mergers and acquisitions as the strategy for growth in the next two years. However, half juice grape wine is not going to disappear from the shelves of stores next year. Under the new ruling, it is prohibited to be sold as full juice grape wine, but it can still be sold as long as it does not claim to be full juice. Thus, some industry players have suggested changing its name to guo jiu, and it can thus continue to be marketed, since it already enjoys a substantial market share and consumers are accustomed to its taste. Having said this, it is still uncertain whether consumers will continue to buy half juice grape wine if more are aware that it is not authentic, and may perceive it as of low quality. Currently there are more than 600 wineries in China, 70% of which produce less than 1,000 tonnes per year, whilst only 10 wineries have production capacity of more than 10,000 tonnes per year. Having suffered the double blows of the abolition of half juice grape wine and increased price competition from imported wines, as a result of falling tariffs, many wineries will be forced to consolidate to enjoy economies of scale in order to survive. Industry players suggest that the future of the Chinese wine industry lies in the hands of the big players – Changyu, Great Wall and Dynasty – since they already have a head start and will be able to withstand the changes brought about by new regulations.

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Table 87 Million litres

Forecast Sales of Wine by Subsector: Total Volume 2003-2008

2003 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source: Euromonitor estimates

2004 214.9 109.3 43.2 1,475.3 88.2 479.1 438.1 319.8 150.1 1,842.8

2005 245.9 117.3 45.1 1,542.4 80.1 498.8 466.3 338.3 158.9 1,950.6

2006 279.8 125.7 47.0 1,613.5 72.8 517.5 496.2 358.9 168.2 2,066.0

2007 316.5 134.2 48.8 1,682.0 64.5 533.7 527.0 379.3 177.6 2,181.6

2008 356.3 142.8 50.5 1,750.3 57.5 548.3 557.9 399.8 187.0 2,300.0

272.3 128.1 41.5 1,315.1 458.9 411.7 302.8 141.7 1,757.0

Table 88 RMB million

Forecast Sales of Wine by Subsector: Total Value 2003-2008

2003 Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB1150/litre - Rice wine from RMB51100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source: Euromonitor estimates

2004 8,768.4 3,344.7 1,523.1 -

2005

2006

2007

2008

10,897.1 3,887.2 1,461.0 -

9,863.3 11,036.1 12,259.0 13,570.6 3,590.7 3,841.9 4,101.8 4,364.2 1,591.9 1,658.4 1,723.2 1,784.9 -

44,940.4 48,628.6 51,105.0 53,732.2 56,451.2 59,145.5 - 1,189.1 1,054.2 934.7 803.7 700.1 3,385.5 3,529.4 3,669.6 3,802.8 3,925.8 4,040.1 6,909.1 7,318.3 7,764.8 8,239.7 8,729.8 9,217.3

17,356.2 18,363.0 19,392.5 20,475.3 21,607.6 22,707.0 17,289.5 18,228.9 19,224.0 20,279.8 21,384.4 22,481.0 61,185.7 62,264.8 66,150.9 70,268.7 74,535.3 78,865.2

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Table 89

Forecast Sales of Wine by Subsector: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source: Euromonitor estimates

2003/08 TOTAL 30.8 11.5 21.8 33.1 19.5 35.5 32.0 32.0 30.9

5.5 2.2 4.0 5.9 3.6 6.3 5.7 5.7 5.5

Table 90

Forecast Sales of Wine by Subsector: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR Still red wine Still white wine Still rosé wine Sparkling wine - Champagne - Other sparkling wine Fortified wine and vermouth Non-grape wine - Half juice grape wine - Rice wine below RMB10/litre - Rice wine from RMB11-50/litre - Rice wine from RMB51-100/litre - Rice wine over RMB100+/litre - Other non-grape wine Wine
Source: Euromonitor estimates

2003/08 TOTAL 24.5 12.3 22.2 31.6 19.3 33.4 30.8 30.0 28.9

4.5 2.3 4.1 5.6 3.6 5.9 5.5 5.4 5.2

6.9

Forecasts by Region

Yellow wine moves South Over the forecast period, non-grape wine, ie “yellow wine”, is expected to continue the regional trends apparent over the review period. Mature markets for yellow wine include Shanghai, Zhejiang province, Jiangxi province and Jiangsu province, while growing markets include Beijing, Fujian province, Guangdong province, Henan province and Shandong province. Many more companies will enter the southern regions because demand there is far from saturated, and thus competition is much less fierce compared with East China. The less competitive environment will provide a healthy development space for yellow wine companies.

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Urban areas account for a large proportion of yellow wine consumption. Due to limited purchasing power, the consumption of yellow wine in rural regions is mostly limited to festive days. With increasing urbanisation and rises in living standard, the potential for yellow wine in rural areas will be better. More to enjoy grape wine Consumption of grape wine is strongest in major cities such as Shanghai, Beijing and Guangzhou. As consumer awareness increases and grape wines become more affordable due to price competition, more people in the developing regions such as Mid, Northwest and Southwest China will be able to enjoy them as well. As with other alcoholic drinks, urban areas account for a large proportion of grape wine consumption. With the continuing boom in the China’s economy, the rural areas will benefit from increased prosperity as well, leading to greater purchasing power. Hence, there is potential for grape wine sales in rural areas over time. Sales of red wine are expected to continue their robust growth, owing to its wide appeal as a healthy drink and its colour being deemed “auspicious’ by the Chinese. White wine sales are expected to lag behind, and rosé wine will remain the least popular choice. Neither of these types enjoys as much investment from manufacturers in terms of advertising as red wine. More education is needed in order to generate more receptivity to white and rosé wine.
Table 91 Million litres 2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

Forecast Sales of Wine by Region: Total Volume 2003-2008

2004 905.4 301.5 227.1 26.7 264.5 117.5 1,842.8

2005 958.4 318.6 242.6 28.1 279.4 123.5 1,950.6

2006 1,015.5 336.1 259.7 29.6 295.2 129.8 2,066.0

2007 1,071.7 353.3 277.8 31.1 311.5 136.2 2,181.6

2008 1,128.6 370.8 297.0 32.6 328.3 142.6 2,300.0

861.3 286.5 218.3 26.0 252.4 112.4 1,757.0

Table 92 RMB million

Forecast Sales of Wine by Region: Total Value 2003-2008

2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2004

2005

2006

2007

2008

33,211.8 34,445.3 36,472.4 38,619.2 40,841.8 43,043.4 8,247.6 8,314.5 8,827.7 9,373.5 9,919.2 10,464.4 7,066.7 6,854.9 7,392.8 7,983.4 8,608.7 9,295.6 610.9 560.8 590.9 623.3 655.7 687.5 8,988.5 9,078.3 9,667.5 10,274.3 10,919.7 11,591.5 3,060.2 3,011.0 3,199.6 3,395.0 3,590.3 3,782.8 61,185.7 62,264.8 66,150.9 70,268.7 74,535.3 78,865.2

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Table 93

Forecast Sales of Wine by Region: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 31.0 29.4 36.0 25.4 30.1 26.9 30.9

5.6 5.3 6.3 4.6 5.4 4.9 5.5

Table 94

Forecast Sales of Wine by Region: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Euromonitor estimates

2003/08 TOTAL 29.6 26.9 31.5 12.5 29.0 23.6 28.9

5.3 4.9 5.6 2.4 5.2 4.3 5.2

7.
7.1
• • • • •

SPIRITS
Sizes and Shares

2003 headlines Value decreases more slowly than volume Premium products craze in local spirits Main consumer group of spirits remains unchanged, though consumption is shrinking Imported spirits still losing market share Low-end imported spirits compete with mid- and high-end local products

Sales continue to drop but value decreases more slowly than volume Total sales of spirits continued to fall over the review period, although the rate of decline slowed. Volume sales declined by an estimated 8% in 2003, whilst in current value terms they fell by 3.3%. The consumption of imported spirits used to be passion-driven, as consumers did not make purchases out of their own necessity. With increasing product awareness and maturing consumer education, the consumption of imported spirits is very much based on one’s own need. Meanwhile growing health consciousness and government restrictions on public-funded banquets and entertainment have also had a negative impact on sales. Due to the central government’s control over the development of domestic spirits, the local spirits industry has been experiencing restructuring for a number of years. Some well-known local spirits makers have suffered significant declines in both volume and value terms, but have been able to

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survive. Lang Jiu Group, for example, witnessed a 35% decline in volume sales in 2001. However, after product restructuring and adjustment, the company achieved 116% growth in volume sales in 2002. Premium products craze as a result of the new taxation policy on local spirits Many local spirits manufacturers have either reduced or ceased production of low-end brands. Sichuan Quanxing, for example, cut down production of its low-end Quanxing Da Qu brand, and has concentrated on the mid- to high-end product Shui Jing Fang. Among the new product launches in 2002 and 2003, premium products accounted for a large proportion of the total. In order to minimise declines in turnover, some local spirits manufacturers have targeted more profitable and growing sectors, and have started to produce beer or wine. Beijing General Distillery, well known for its Red Star Er Guo Tou spirits brand, has begun to produce wine under the brand Yeguangbei. Local spirits still fragmented There are about 38,000 local spirits manufacturers in China in 2002, but only 33 have an annual output of over 20,000 tonnes (19,240,000 litres). The total production volume of these 33 manufacturers represents about 30% of the total national output. Even for leading players such as Sichuan Yibin Wu Liang Ye Distillery Co Ltd, Sichuan Tuopai Group Co Ltd, and Beijing General Distillery, their national volume shares were only 3.7%, 1.9% and 1.3%, respectively, in 2002. Local small brands with low retail prices still account for a substantial percentage of total volume sales. Local spirits heavily advertised on TV TV advertising is the most important way to promote consumer awareness of spirits brands, and some manufacturers spend significant sums. Wu Liang Ye, for example, generally spends RMB100-200 million on TV advertising every year. The most effective means is to run commercials on the national TV network CCTV (Chinese Central TV). Baofeng, recently acquired by Jianlibao, one of the major domestic soft drinks manufacturers, successfully used prime time advertising on CCTV in 2003, at a cost of RMB2.5 million. The high investment is usually rewarded by sales. A survey has shown that 44.6% of consumers stick to one brand once they conclude that this brand is reliable. TV advertising is an effective way to create a strong brand image and sustain awareness among consumers. Main consumer group of spirits remains unchanged, though consumption is shrinking Chinese spirits are still a key element in Chinese people’s consumption habits. In north and inland areas, drinking local spirits is very common social behaviour. The main consumers are men aged between 24 to 45, regardless of their educational background. However, consumption among this key group is gradually declining, due to growing health concern and the promotion of more healthy drinks, such as beer and wine. Low-end products target consumers in rural areas, whereas the heavy drinkers in cities are mainly managers in companies or departments, and they consume premium products on social occasions. For imported spirits, typical consumers are those who are more exposed to Western lifestyles and who are wealthy enough to afford these more expensive products. Imported spirits still loses market share

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Total sales of imported spirits continued to drop in 2003, although the decline has been slowing down. In terms of volume, sales of whisk(e)y, brandy and cognac fell by about 2% in 2003, while vodka declined by around 1%. Penetration of imported spirits rises, but need further expansion in retail market Imported spirits brands found in the Chinese market in 2003 included: Single malt Scotch whisky: Glenfiddich Blended Scotch whisky: Ballantine’s 12 YO, Ballantine’s 17 YO, Ballantine’s Finest, Grant’s, Johnnie Walker, Johnnie Walker Gold Label Bourbon/other US whiskey: Jim Beam Canadian whiskey: Canadian Club English gin: Bombay Sapphire, Gordon’s, Tanqueray Vodka: Finlandia, Stolichnaya Dark rum: Mount Gay Tequila (and mezcal): José Cuervo, Sauza Bitters: Bols, Campari, Cointreau, De Kuyper range, Galliano, Kahlúa, Southern Comfort, Tia Maria Imported spirits have very narrow market penetration – about 80% of imported spirits are consumed in the on-trade, in restaurants, bars, night clubs and high class hotels, in major cities such as Shanghai, Beijing and Guangzhou. The SARS outbreak in the second quarter of 2003 greatly affected the sales of imported spirits during that period, as on-trade establishments were required to close for business to stop the spread of the disease. More vigorous promotion strategies adopted by imported spirits manufacturers Besides using the traditional on-trade promotion site – bars – imported spirits manufacturers have adopted more active approaches to gain market share while competing with local counterparts. Instead of encouraging Chinese consumers to adapt to the tastes of imported spirits, foreign manufacturers have been making more efforts to cater to local people’s taste. Seagram 30° Hi,

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which tastes like a combination of local spirits, rice wine as well as imported whisky, is a new product from Pernod Richard which is tailored to satisfy the specific needs of the Chinese. To meet the fast-changing consumer trends, imported spirits manufacturers continually introduce new, trendy drinks. The successful launches of rum and FABs in 2003, like Bacardi Ice and Bacardi Jazz by Bacardi & Co Ltd, suggests that manufacturers are exploring new markets for imported spirits. For imported spirits, on-site promotion is particularly important to boost sales, as are advertisements in trendy magazines. Promoters are frequently found in restaurants, bars, clubs, specialists and big retail outlets. Sponsoring public events, especially sports games, is also effective in promoting brand image. Johnnie Walker, for example, sponsored the Shanghai Inter-Club Golf Championship in 2002. Golf is a symbol of class and elegance in China, and by sponsoring such events, imported spirits manufacturers aim to boost public awareness of their brands, especially among the affluent. Hip-hop, which is of great interest to fashion-conscious young people, is utilised by Bacardi & Co Ltd to promote its brands among the younger generation. The company sponsored the first hip-hop band in China, Hi-Bomb, and its national concert tour in 2002. Domestic brand dominates brandy sales in terms of volume Domestic wine maker Changyu is also well known for its Jinjiang brandy. Targeted at the domestic off-trade market, Changyu Jinjiang brandy had a sales volume of over 14 million litres in 2003, and sales have grown by around 5% annually for the past few years. Owing to the fact that about 80% of Changyu brandy on sale is constituted by its low-end products, with retail prices of about RMB26/litre, total sales value in 2003 was low compared with imported brandy. However, in terms of off-trade share, Changyu Jinjiang is the clear leader in China, accounting for over 90% of the total market in 2003. Low-end imported spirits compete with mid- and high-end local products Having an advantage in price and familiarity of taste over imported spirits, local spirits are much more popular among consumers in China. However, with China’s entry into the WTO, more imported products with lower retail prices will enter China, thanks to the decreasing tariffs. According to the government, customs tariffs on imported spirits will decrease from 65% to 10% over the next five years. Cheaper imported spirits with more competitive prices are thus likely to be able to compete with mid- and high-end local spirits.

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Table 95 '000 litres

Sales of Spirits by Subsector: Total Volume 1998-2003

1998 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source:

1999 2,116.2 1,625.5 490.8 19,271.4 16,815.2 2,456.2 401.3 401.3 5,292,27 9.6 3,073,79 8.0 1,337,23 3.5 674,722.9

2000 1,996.4 1,524.1 472.4 18,271.2 15,936.2 2,335.0 384.6 384.6 4,755,97 7.3 2,707,76 8.7 1,236,47 8.9 625,911.0

2001 1,899.0 1,440.7 458.2 17,509.5 15,275.2 2,234.4 372.6 372.6 4,290,97 1.9 2,349,05 7.7 1,174,42 6.0 594,043.7

2002 1,836.1 1,389.2 446.9 16,994.0 14,816.2 2,177.8 365.8 365.8 3,865,10 1.5 2,003,19 3.6 1,133,99 5.1 563,224.6

2003 1,797.2 1,360.1 437.1 16,721.4 14,570.5 2,150.9 361.2 361.2 3,571,98 6.0 1,762,32 4.3 1,108,14 9.9 543,307.2

2,275.8 1,760.5 515.3 20,478.5 17,868.0 2,610.5 422.7 422.7 6,168,82 8.4 3,652,37 9.4 1,513,09 2.3 764,150.3

239,206.4 206,525.1 185,818.7 173,444.6 164,688.1 158,204.6 6,192,00 5,314,06 4,776,62 4,310,75 3,884,29 3,590,86 5.3 8.5 9.5 3.1 7.3 5.8

Trade interviews, Euromonitor estimates

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Table 96 RMB million

Sales of Spirits by Subsector: Total Value 1998-2003

1998 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source:

1999 805.7 598.6 -

2000 758.9 559.8 -

2001 721.1 529.0 -

2002 690.2 503.8 -

2003 669.1 488.4 -

865.7 649.0 -

216.7 207.1 199.1 192.1 186.5 180.7 4,611.1 4,312.6 4,087.0 3,888.5 3,776.0 3,692.5 2,114.5 1,964.7 1,857.2 1,761.3 1,704.2 1,663.0 2,496.6 2,347.9 2,229.8 2,127.1 2,071.8 2,029.4 103.2 97.1 92.4 88.5 86.5 84.8 103.2 97.1 92.4 88.5 86.5 84.8 181,558.9 157,181.1 143,106.6 133,572.2 127,298.9 123,049.0 25,856.7 21,065.4 18,078.3 15,389.6 13,578.8 12,168.9 50,907.8 44,749.0 41,419.0 39,457.8 38,246.9 37,696.3 57,767.5 50,890.5 47,162.1 44,763.1 43,166.0 42,052.6 47,026.9 40,476.2 36,447.2 33,961.7 32,307.2 31,131.3 187,138.9 162,396.5 148,044.9 138,270.2 131,851.6 127,495.4

Trade interviews, Euromonitor estimates

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Table 97

Sales of Spirits by Subsector: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -4.6 -5.0 -3.2 -4.0 -4.0 -3.8 -3.1 -3.1 -10.4 -13.6 -6.0 -6.6 -7.9 -10.3

1998/03 TOTAL -21.0 -22.7 -15.2 -18.3 -18.5 -17.6 -14.5 -14.5 -42.1 -51.7 -26.8 -28.9 -33.9 -42.0

-2.1 -2.1 -2.2 -1.6 -1.7 -1.2 -1.3 -1.3 -7.6 -12.0 -2.3 -3.5 -3.9 -7.6

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Table 98

Sales of Spirits by Subsector: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -5.0 -5.5 -3.6 -4.3 -4.7 -4.1 -3.8 -3.8 -7.5 -14.0 -5.8 -6.2 -7.9 -7.4

1998/03 TOTAL -22.7 -24.7 -16.6 -19.9 -21.4 -18.7 -17.8 -17.8 -32.2 -52.9 -26.0 -27.2 -33.8 -31.9

-3.1 -3.0 -3.1 -2.2 -2.4 -2.0 -1.9 -1.9 -3.3 -10.4 -1.4 -2.6 -3.6 -3.3

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Table 99 % total volume Company

Company Shares of Spirits by National Brand Owner 2000-2002

2001 3.1 1.7 1.2 1.1 1.1 1.2 0.6 0.3 0.6 0.5 0.7 0.3 0.4 0.3 0.2 0.3 0.1 0.1 86.1 100.0

2002 3.7 1.9 1.5 1.3 1.3 0.7 0.7 0.7 0.5 0.5 0.4 0.4 0.4 0.3 0.2 0.1 0.1 0.1 85.2 100.0

Sichuan Yibin Wu Liang Ye Distillery Co Ltd Sichuan Tuopai Group Co Ltd Sichuan Mian Zhu Jian Nan Chun Distillery Sichuan Lu Zhou Lao Jiao Distillery Beijing General Distillery Anhui Hao Xian Gu Jing Gong Co Ltd Guangdong Jiujiang Distillery Co Ltd Lang Jiu Group Shandong JingZhi Distillery Hunan Jiu Gui Jiu Co Ltd Sichuan Chengdu Quanxing Distillery Yantai Changyu Wine Group Co Ltd Jiangsu Yanghe Distillery Kweichow Moutai Yunfeng Distillery Hubei Daye Jingjiu Distillery Shandong Kong Fu Jia Distillery Co Ltd China Kweichow Moutai Co Ltd Sichuan Mianyang Distillery Others Total
Source: Trade interviews, Euromonitor estimates

Table 100 % total volume Company

Company Shares of Spirits by Global Brand Owner 2000-2002

2000 3.0 1.6 1.1 0.9 1.2 1.3 0.6 0.4 0.6 0.5 0.7 0.3 0.3 0.3 0.1 0.5 0.1 0.1 0.1 86.0 100.0

2001 3.1 1.7 1.2 1.1 1.1 1.2 0.6 0.3 0.6 0.5 0.7 0.3 0.4 0.3 0.2 0.3 0.1 0.1 0.1 86.1 100.0

2002 3.7 1.9 1.5 1.3 1.3 0.7 0.7 0.7 0.5 0.5 0.4 0.4 0.4 0.3 0.2 0.1 0.1 0.1 0.1 85.2 100.0

Sichuan Yibin Wu Liang Ye Distillery Co Ltd Sichuan Tuopai Group Co Ltd Sichuan Mian Zhu Jian Nan Chun Distillery Sichuan Lu Zhou Lao Jiao Distillery Beijing General Distillery Anhui Hao Xian Gu Jing Gong Co Ltd Guangdong Jiujiang Distillery Co Ltd Lang Jiu Group Shandong JingZhi Distillery Hunan Jiu Gui Jiu Co Ltd Sichuan Chengdu Quanxing Distillery Yantai Changyu Wine Group Co Ltd Jiangsu Yanghe Distillery Kweichow Moutai Yunfeng Distillery Hubei Daye Jingjiu Distillery Shandong Kong Fu Jia Distillery Co Ltd Sichuan Mianyang Distillery China Kweichow Moutai Co Ltd China Guizhou Maotai Distillery Co Ltd Others Total
Source: Trade interviews, Euromonitor estimates

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Table 101

Brand Shares of Spirits 2000-2002

% total volume Brand (Global Brand Owner) Tuo Pai Red Star Er Guo Tou Lu Zhou Lao Jiao Da Qu Wu Liang Chun Jianzhuang Wu Liang Ye Jian Nan Chun Jiujiang Shuang Zheng Lang Jiu Jingzhi Baigan Mian Zhu Da Qu YiDixiang Gu Jing Gong Quanxing Changyu Jinjiang Yang He Da Qu Mian Zhu Jiu Guo Ding Gong Jiu Xiao Hu Tu Xian Jing Jiu Jiu Gui Jiu Xiao Hu Tu Shen Kong Fu Jia Jiu Fenggu Techunwang Guizhouchun (China Guizhou Maotai Distillery Co Ltd) Others Total
Source:

Company

2000

2001

2002

Sichuan Tuopai Group Co Ltd Beijing General Distillery Sichuan Lu Zhou Lao Jiao Distillery Sichuan Yibin Wu Liang Ye Distillery Co Ltd Sichuan Yibin Wu Liang Ye Distillery Co Ltd Sichuan Yibin Wu Liang Ye Distillery Co Ltd Sichuan Mian Zhu Jian Nan Chun Distillery Guangdong Jiujiang Distillery Co Ltd Lang Jiu Group Shandong JingZhi Distillery Sichuan Mian Zhu Jian Nan Chun Distillery Sichuan Yibin Wu Liang Ye Distillery Co Ltd Anhui Hao Xian Gu Jing Gong Co Ltd Sichuan Chengdu Quanxing Distillery Yantai Changyu Wine Group Co Ltd Jiangsu Yanghe Distillery Sichuan Mian Zhu Jian Nan Chun Distillery Sichuan Yibin Wu Liang Ye Distillery Co Ltd Kweichow Moutai Yunfeng Distillery Hubei Daye Jingjiu Distillery Hunan Jiu Gui Jiu Co Ltd Kweichow Moutai Yunfeng Distillery Shandong Kong Fu Jia Distillery Co Ltd Sichuan Mianyang Distillery China Kweichow Moutai Co Ltd

1.6 1.2 0.9 0.8 1.0 0.6 0.5 0.6 0.4 0.6 0.3 0.5 0.3 0.7 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.5 0.1 0.1

1.7 1.1 1.0 1.0 0.9 0.6 0.6 0.6 0.3 0.6 0.4 0.4 0.3 0.7 0.3 0.4 0.2 0.2 0.2 0.2 0.1 0.1 0.3 0.1 0.1

1.9 1.3 1.2 1.2 1.1 0.8 0.8 0.7 0.7 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1

87.7 100.0

87.5 100.0

86.1 100.0

Trade interviews, Euromonitor estimates

7.2

Sizes and Shares by Region

North and Northeast China – the largest region for spirits Due to strong cultural influences and regional climatic characteristics, North and Northeast China remains the number one region, in terms of volume sales, for imported spirits, such as brandy and cognac, and also the number one region for local sprits. As people in this region tend to drink high

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alcohol content spirits rather than other types of alcoholic drink, volume consumption remained high in the review period. In 2003, consumption reached over 1 billion litres. Strong regional preferences Even though imported spirits experienced price reductions over the review period, they are still regarded as luxury products by Chinese consumers, as they are not as affordable as local spirits to ordinary Chinese consumers. Imported spirits are more popular in the more developed regions, such as North and Northeast, East and South China. Furthermore, there are more expatriates in these three regions because of more frequent political and economic exchanges with foreign countries. On the other hand, people in Mid, Northwest and Southwest China are less exposed to Western lifestyles. More importantly, purchasing power in these regions is comparatively low, thus consumption of imported spirits also remains very low. Combined, the three regions accounted for only about 15% of volume sales of imported spirits sales in China in 2003. Of the imported spirits types, cognac accounts for the largest proportion of sales. The North and Northeast region is the number one for cognac and vodka, while the East is the leading region for whisk(e)y. The domestic brandy Changyu is extremely popular in the South region.
Table 102 mn litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note:

Sales of Spirits by Region: Total Volume 1998-2003

1999 736.7 691.9 1,990.1 673.3 408.3 813.8 5,314.1

2000 678.8 638.3 1,743.8 590.6 375.4 749.7 4,776.6

2001 637.4 600.6 1,504.1 509.8 352.3 706.5 4,310.8

2002 608.5 571.1 1,266.2 429.8 335.1 673.6 3,884.3

2003 586.0 547.0 1,115.9 372.2 322.3 647.4 3,590.9

843.5 792.0 2,358.5 797.6 469.0 931.3 6,192.0

Trade interviews, Euromonitor estimates Excludes “other” spirits

Table 103 RMB million

Sales of Spirits by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note:

1999 33,674.1 29,003.4 36,468.4 9,588.5 19,667.6 33,994.6 162,396.5

2000 30,772.7 26,812.3 32,909.8 8,407.6 17,949.5 31,193.0 148,044.9

2001 28,974.3 25,257.7 30,117.8 7,742.6 16,860.9 29,317.0 138,270.2

2002 27,870.1 24,135.0 28,324.5 7,290.9 16,160.3 28,070.7 131,851.6

2003 27,172.1 23,278.2 27,132.2 6,959.1 15,772.4 27,181.4 127,495.4

38,756.9 33,311.7 41,883.3 11,436.4 22,654.0 39,096.6 187,138.9

Trade interviews, Euromonitor estimates Excludes “other” spirits

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Table 104

Sales of Spirits by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Trade interviews, Euromonitor estimates Excludes “other” spirits

1998-03 CAGR -7.0 -7.1 -13.9 -14.1 -7.2 -7.0 -10.3

1998/03 TOTAL -30.5 -30.9 -52.7 -53.3 -31.3 -30.5 -42.0

-3.7 -4.2 -11.9 -13.4 -3.8 -3.9 -7.6

Table 105

Sales of Spirits by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Trade interviews, Euromonitor estimates Excludes “other” spirits

1998-03 CAGR -6.9 -6.9 -8.3 -9.5 -7.0 -7.0 -7.4

1998/03 TOTAL -29.9 -30.1 -35.2 -39.1 -30.4 -30.5 -31.9

-2.5 -3.6 -4.2 -4.6 -2.4 -3.2 -3.3

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China

Table 106 Brand (Company)

Brand Ranking of Spirits by Region 2002 SW S M 3 E NW N&NE -

Bai Yun Bian (Huibei Bai Yu Bian Distillery Co Ltd) Beijing Chun (Beijing Niulanshan Winery Co Ltd) Erguotou Premium (Beijing Niulanshan Winery Co Ltd) Fen Jiu (Shanxi Xing Hua Cun Fen Jiu Co Ltd) Gu Jing Gong (Anhui Hao Xian Gu Jing Gong Co Ltd) Gui Zhou Chun (Gui Zhou Chun Distillery Co Ltd) Jian Nan Chun (Sichuan Mian Zhu Jian Nan Chun Distillery) Jian Nan Te Qu (Sichuan Mianyang Distillery) Jianzhuang (Sichuan Yibin Wu Liang Ye Distillery Co Ltd) Jing Jiu (Hubei Daye Jingjiu Distillery) Jing Yang Chun (Shandong JingZhi Distillery) Jinliufu (Sichuan Yibin Wu Liang Ye Distillery Co Ltd) Jinliufu (1 star) (Sichuan Yibin Wu Liang Ye Distillery Co Ltd) Jiu Gui Jiu (Hunan Jiu Gui Jiu Co Ltd) Lan Ling Cheng Xiang (Shandong Lan Ling Cheng Xiang Distillery Co Ltd) Lan Ling Da Qu (Shandong Lan Ling Cheng Xiang Distillery Co Ltd) Lang Jiu (Lang Jiu Group) Lianglichun (Sichuan Tuopai Group Co Ltd) Lu Zhou Lao Jiao (Sichuan Lu Zhou Lao Jiao Distillery) Lu Zhou Lao Jiao Da Qu (Sichuan Lu Zhou Lao Jiao Distillery) Mian Zhu Da Qu (Sichuan Mian Zhu Jian Nan Chun Distillery) Moutai (China Kweichow Moutai Co Ltd) Quanxing (Sichuan Chengdu Quanxing Distillery)

-

-

-

-

-

5 4

X -

X X -

X

X -

4 X

-

2

3

5

X 5

X

-

-

-

-

2

-

3 -

-

-

X

-

-

X

-

-

-

-

-

2

-

-

-

X

-

X -

-

-

-

1

-

-

X 5 -

5 -

-

-

3

-

X

X

X

X

-

-

3

-

-

-

-

-

-

-

-

-

X 5

X -

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Red Star Er Guo Tou (Beijing General Distillery) Red Star Yujiu (Beijing General Distillery) Shuangou Da Qu (Jiangsu Shuanggou Distillery Co Ltd) Songhe (Henan Songhe Distillery Co Ltd) Tuo Pai (Sichuan Tuopai Group Co Ltd) Tuo Pai Chun (Sichuan Tuopai Group Co Ltd) Wan Jiu Wang (Anhui Wan Jiu Wang Distillery Co Ltd) Wu Liang Chun (Sichuan Yibin Wu Liang Ye Distillery Co Ltd) Wu Liang Ye (Sichuan Yibin Wu Liang Ye Distillery Co Ltd) Xinghuacun (Shanxi Xing Hua Cun Fen Jiu Co Ltd) Yang He Da Qu (Jiangsu Yanghe Distillery) Yang Shao Jiu (Henan Yang Shao Group) Yuanhang Jiujiang Shuang Zheng Jiu (Guangdong Jiujiang Distillery Co Ltd) Zhi Jiang Da Qu (Huibei Zhi Jiang Distillery Co Ltd)
Source: Note:

4

4

-

-

2

1

-

-

-

3

-

X -

1 X -

2 X

X 2 -

4 -

-

-

X

X

X

-

X

X

-

-

-

-

1

-

-

1

4 -

X -

X -

-

-

-

1

-

-

-

Trade interviews, Euromonitor estimates Excludes “other” spirits

7.3

Sizes and Shares of Other Spirits by Region

East sees slowest rate of decline Sales of local spirits in China continued to fall over the review period, although the decline is slowing down. East China experienced the slowest rate of decline. In 2003, sales fell by 2.6% in current value and by 3.7% in volume terms over the previous year. There are two major reasons for this. First, most consumers in East prefer products with low alcohol content, and the production of low-alcohol local spirits is being encouraged by the government policy, whilst high alcohol content products are gradually being phased out. Second, levels of disposable income are higher in East China, making mid-priced and premium spirits more affordable to locals. People in the South also have higher disposable incomes, but generally they are not as fond of spirits as those in the North and Northeast. Per capita consumption of local spirits in South in 2003 stood at 0.85RMB/litre, lower than 0.87RMB/litre in the East and 1.08RMB/litre in the North and Northeast. Decline in North and Northeast slows down Over the review period, North and Northeast China was the largest region for local spirits sales, due to traditional consumption patterns and regional climatic characteristics. However, volume sales

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declined at double-digit rates throughout the review period, although the decline was slightly less in 2003 than in previous years. There are several reasons for the less sharp decline in sales in 2003. First, local spirits are catering to domestic consumers’ tastes, even though they have a negative image of doing harm to health. Second, manufacturers have been making efforts to produce low alcohol content products, to compensate for the decrease in high alcohol content products. Third, with rising disposable incomes, air conditioning systems are more affordable to average consumers, making the drinking of spirits as a means of keeping warm less significant. Southwest remains the largest spirits consumption region in terms of value Southwest is the most important region for local spirits production. In volume terms, it is the second largest region for spirits sales, closely following the North and Northeast. In terms of sales value, however, the Southwest is the largest region, with sales reaching almost RMB27 billion in 2003, accounting for about 22% of the total. Only few local spirits manufacturers able to enjoy positive volume growth Owing to the new taxation policy, a large majority of the local spirits manufacturers are experiencing volume sales declines. Only a few brands are able to survive. Among them, Wu Liang Ye, Mian Zhu Jian Nan Chun and Lu Zhou Lao Jiao continued to rank among the top four in 2002. Low-end local spirits brand Tuo Pai remained in second position, even though sales have been undermined by the new taxation policy, and declined in 2002.
Table 107 mn litres 1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

Sales of Other Spirits by Region: Total Volume 1998-2003

1999 730.4 690.7 1,983.0 672.1 403.2 813.0 5,292.3

2000 672.9 637.2 1,736.9 589.5 370.6 748.9 4,756.0

2001 631.8 599.5 1,497.4 508.7 347.7 705.8 4,291.0

2002 603.1 570.0 1,259.7 428.7 330.7 672.9 3,865.1

2003 580.7 546.0 1,109.6 371.2 317.9 646.7 3,572.0

836.6 790.7 2,351.1 796.4 463.5 930.4 6,168.8

Trade interviews, Euromonitor estimates

Table 108 RMB million

Sales of Other Spirits by Region: Total Value 1998-2003

1998 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source:

1999 32,163.9 28,641.3 34,804.6 9,350.9 18,459.8 33,760.7 157,181.1

2000 29,362.3 26,471.2 31,316.5 8,181.4 16,803.0 30,972.1 143,106.6

2001 27,638.0 24,934.3 28,591.7 7,525.4 15,775.7 29,107.0 133,572.2

2002 26,569.2 23,822.1 26,855.4 7,081.8 15,102.5 27,867.8 127,298.9

2003 25,890.6 22,971.1 25,713.3 6,756.6 14,734.6 26,982.9 123,049.0

37,124.1 32,923.8 40,135.6 11,184.4 21,352.6 38,838.4 181,558.9

Trade interviews, Euromonitor estimates

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Table 109

Sales of Other Spirits by Region: % Total Volume Growth 1998-2003

% total volume growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -7.0 -7.1 -13.9 -14.2 -7.3 -7.0 -10.4

1998/03 TOTAL -30.6 -31.0 -52.8 -53.4 -31.4 -30.5 -42.1

-3.7 -4.2 -11.9 -13.4 -3.9 -3.9 -7.6

Table 110

Sales of Other Spirits by Region: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -7.0 -6.9 -8.5 -9.6 -7.2 -7.0 -7.5

1998/03 TOTAL -30.3 -30.2 -35.9 -39.6 -31.0 -30.5 -32.2

-2.6 -3.6 -4.3 -4.6 -2.4 -3.2 -3.3

7.4

Pricing

Local spirits manufacturers are increasingly producing high-end products, as a result of the new taxation policy. Imported spirits are still considered luxury products in China, but experienced price reductions over the review period. The price difference between high-end domestic and low-end imported spirits in the retail market is thus no longer as great as it once was. For example, premium local spirits Jin Jian Nan is sold at RMB450/litre. Mid-priced imported Napoleón Seguin is available in the retail market at RMB241/litre. Generally, about 80% of imported spirits are sold through on-trade channels. On-trade selling prices are around twice the off-trade prices. In 2003, cognac was the most popular imported spirit, followed by blended Scotch whisky.

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Table 111

Blended Scotch Whisky Pricing 2003 Price per bottle (RMB) 710 1,980 Price per litre (RMB) 1,014 2,640

Brand name Premium Chivas Royal Salute Johnnie Walker Blue Label Standard Dimple 15 YO Ballantine’s 17 YO Economy Bell’s Extra Special William Grant’s
Source: Store checks

Local company Pernod Ricard Groupe Diageo Plc

Bottle size (ml) 700 750

Diageo Plc Allied Domecq Plc

750 750

300 340

400 453

Diageo Plc William Grant & Sons Ltd

750 750

105 80

140 106

Table 112

Canadian Whisky Pricing 2003 Price per bottle (RMB) 208 Price per litre (RMB) 277

Brand name Premium Canadian Crown Royal Standard Canadian Club Economy Seagram Canadian Whisky
Source: Store checks

Local company Pernod Ricard Groupe

Bottle size (ml) 750

Allied Domecq Plc

750

155

207

Pernod Ricard Groupe

750

110

147

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Table 113

Brandy and Cognac Pricing 2003 Price per bottle (RMB) Price per litre (RMB)

Brand name Premium Armagnac Marques de Montesquieu XO Napoleon VSOP Rémy Martin XO Special Camus XO Standard Napoleón Seguin Armagnac Marques de Montesquieu VSOP Hine Rare Delicate

Local company

Bottle size (ml)

Pernod Ricard Groupe Prince de France Rémy Cointreau Camus la Grande Marque

700 700 750 700

990 580 700 1,108

1,414 829 933 1,582

Rémy Cointreau Pernod Ricard Groupe LVMH Moët Hennessy Louis Vuitton

700 700 700

169 270 320

241 386 457

Economy Changyu VSOP Changyu VS Rémy Martin Silver
Source: Store checks

Yantai Changyu Wine Group Co Ltd Yantai Changyu Wine Group Co Ltd Rémy Cointreau

700 700 700

130 16 145

186 23 207

Table 114

Vodka Pricing 2003 Price per bottle (RMB) 110 118 105 Price per litre (RMB) 157 157 140

Brand name Premium Absolut Vodka Stolichnaya Smirnoff Standard Absolut Havana Club Finlandia Economy Eristoff Moskovskaya
Source: Store checks

Local company V&S Vin & Sprit AB Soyuzplodimport Diageo Plc

Bottle size (ml) 700 750 750

V&S Vin & Sprit AB Altia Group Oy Altia Group Oy

750 750 750

80 85 76

107 113 101

Bacardi & Co Ltd Soyuzplodimport

700 750

63 63

90 84

7.5

Packaging

Glass bottles still dominate Glass bottles are the traditional packaging for spirits, and remain dominant. Altogether, glass bottles accounted for over 93% of total off-trade volume sales in 2003. One alternative packaging for local spirits is glass cups. Consumers may make use of the packaging after drinking. Plastic bottles are another alternative packaging for local spirits, but are only found in far less developed areas. Although plastic bottles are on the decline, they still have a presence in the market due to their low cost.

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Local spirits available in smaller pack sizes In line with consumers’ growing demand for less quantity but higher quality, smaller packaging is now available, especially for high-end products. Most premium products in the market are available in smaller sized packaging of 250-300ml, as well as the standard 500ml size. Packaging increasingly deemed a reflection of the cultural value of local spirits The success of Kong Fu Jia in pottery containers instead of the traditional glass bottle led to a packaging trend. Pottery containers look ancient and are a symbol of the long-running Chinese spirits culture. More innovative packaging is also appearing in the market. The new Red Star Er Guo Tou 52° is packaged in containers made from celadon – a traditional type of Chinese stoneware.
Table 115 Sales of Spirits by Packaging Format: % Analysis 1998/2003

% off-trade volume 1998 Can Glass Plastic Others Total
Source: Trade interviews, Euromonitor estimates

2003 0.0 93.1 0.3 6.6 100.0

0.0 93.4 0.4 6.2 100.0

7.6

New Product Developments

Premium product craze With the advent of the new tax policy for local spirits in 2001, manufacturers have been striving to survive by developing premium products (over RMB100/litre), as the new policy made low-end products unprofitable. In 2003, sales of high-end products accounted for about 5% of the total in terms of volume, but about 25% of the total in terms of value. According to trade sources, the profit from premium products account for nearly 50% of the total for the manufacturers in this industry. Jian Nan Chun alone launched four premier brands in 2002. Jin Jian Nan (or Gold Jian Nan), one of the new launches, is sold at RMB450/litre in the retail market. Its retail price is actually higher than some mid-priced imported spirits (eg the off-trade price for The Famous Grouse 12 YO is RMB344/litre). Innovative taste Meanwhile, manufacturers have endeavoured to create a modern image for some traditional local spirits. Gu Jing Gong launched whisky-like Yetaiyang, targeting the younger generation. Some manufacturers also began to explore new markets. Yi Wu Jia, a domestic bitters brand, was introduced by Wu Liang Ye early in 2003. Beijing General Distillery, famous for its Red Star Er Guo Tou, has begun production of ginseng brandy. More attractive packaging Festivals, especially the Chinese New Year, as well as social gatherings, are occasions when local spirits are frequently consumed. Local spirits are traditionally chosen as gifts, especially for people of older generations. Consequently, attractive gift packaging for local spirits is usually in high demand during festivals.

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The success of Kong Fu Jia in pottery containers led other manufacturers to adopt similar packaging. Examples are the new Red Star Er Guo Tou 52° packaged in celadon containers, and Wu Liang Ye Yifanfengshun packaged in crystal glass bottles. Health concept is increasingly popular Growing health awareness partly accounts for the decline in volume sales of local spirits. To change the negative image of local spirits, some manufacturers have produced “healthcare” spirits, which are claimed to be able to do good, instead of doing harm, to the liver. Haokexiang, launched by Wu Liang Ye during the 2003 Chinese New Year, is made from choice bamboo shoots and Wu Liang Ye alcohol. It is said to be anti-ageing and able to reduce blood cholesterol, hence protecting the liver.
Summary 8 Brand name Yi Wu Jia Yeguangbei Ginseng Brandy Red Star Er Guo Tou 52° Jin Jian Nan Yin Jian Nan Dong Fang Hong Jian Nan Jiao Zi Jiu
Source:

Spirits: New Product Launches 2002-2003 Company Sichuan Wu Liang Ye Distillery Co Ltd Beijing General Distillery Beijing General Distillery Sichuan Jian Nan Chu Distillery Co Ltd Sichuan Jian Nan Chu Distillery Co Ltd Sichuan Jian Nan Chu Distillery Co Ltd Sichuan Jian Nan Chu Distillery Co Ltd Product type Bitters by local spirits manufacturer Brandy by local spirits manufacturer Local spirits packaged in celadon container Domestic spirits over RMB100/litre Domestic spirits over RMB100/litre Domestic spirits over RMB100/litre Domestic spirits over RMB100/litre Launch date 2003 2003 2003 2002 2002 2002 2002

Store checks, trade interviews

7.7

Distribution

On-trade vs Off-trade Sales On-trade sales account for only a small proportion of the total in volume terms, with a 16% share in 2003. On-trade promotions are traditionally carried out in bars and pubs. Chivas Regal, for example, set up a concept bar in Beijing. Owing to low disposable incomes and cultural factors, the majority of Chinese do not have the habit of eating out frequently. Changing drinking habits, with consumers increasingly shifting away from spirits to beer, wine and even soft drinks, have eroded the share of sales held by spirits in the alcoholic drinks market, and this has especially affected off-trade sales. Off-trade volume sales continued to drop in 2003, by almost 9%, while sales in current value terms declined by 5%. On-trade sales, on the other hand, saw slight growth of 0.1% in volume and 0.4% in value. After years of adjustment resulting from the tight control of public-funded banquets and entertainment expenditure, on-trade consumption is close to stable development. Imported spirits and high-end local spirits are popular sellers in the on-trade. Imported spirits are a must in entertainment establishments, such as bars and night clubs, while high-end local spirits are usually consumed during traditional Chinese festivals and at business functions.

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Table 116 mn litres

On-trade vs Off-trade Sales of Spirits: Volume 1998-2003

1998 Off-trade On-trade TOTAL
Source:

1999 4,709.4 604.7 5,314.1

2000 4,190.9 585.7 4,776.6

2001 3,735.5 575.2 4,310.8

2002 3,312.6 571.7 3,884.3

2003 3,018.5 572.4 3,590.9

5,539.9 652.1 6,192.0

Trade interviews, Euromonitor estimates

Table 117 RMB million

On-trade vs Off-trade Sales of Spirits: Value 1998-2003

1998 Off-trade On-trade TOTAL
Source:

1999

2000

2001

2002

2003

145,442.6 123,622.4 110,645.8 101,636.5 95,407.8 90,921.5 41,696.3 38,774.2 37,399.1 36,633.7 36,443.7 36,573.9 187,138.9 162,396.5 148,044.9 138,270.2 131,851.6 127,495.4
Trade interviews, Euromonitor estimates

Table 118 % volume growth

On-trade vs Off-trade Sales of Spirits: % Volume Growth 1998-2003

2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -11.4 -2.6 -10.3

1998/03 TOTAL -45.5 -12.2 -42.0

-8.9 0.1 -7.6

Table 119

On-trade vs Off-trade Sales of Spirits: % Value Growth 1998-2003

% current value growth 2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -9.0 -2.6 -7.4

1998/03 TOTAL -37.5 -12.3 -31.9

-4.7 0.4 -3.3

Off-trade Distribution Patterns Supermarkets/hypermarkets constitute the most important off-trade distribution channel with a volume share of 50% in 2003 – an increase of 2.5 percentage points on 2002. The penetration of chained supermarkets into rural areas has reduced the number of independent food stores. Also owing to supermarkets/hypermarkets’ chain operations and the resulting economies of scale, they are able to sell spirits at lower prices than independent food stores. Specialists, most of which take the form of counters attached to supermarkets, have also benefited from the expansion of supermarkets/hypermarkets. Spirits sales through specialist shops accounted for a volume share of 15% in 2003, a slight increase of 0.9 percentage points over 2002. Specialists tend to offer a wider range of products, especially authentic imported spirits. Convenience stores continue to expand, especially in big cities, and thus saw their share of sales increase over the forecast period.

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Table 120 % off-trade

Off-trade Sales of Spirits by Distribution Format: % Analysis 1998/2003

1998 Supermarkets/hypermarkets Independent food stores Convenience stores Discounters Specialists Direct sales Others Total
Source: Trade interviews, Euromonitor estimates

2003 50.0 20.0 7.0 15.0 8.0 100.0

36.1 29.7 5.3 13.7 15.2 100.0

7.8

Forecasts

Value growth higher than volume growth In local spirits, the most popular pricing currently is at middle to low level. This is because the bulk of volume consumption is accounted for by spirits being drunk at home. There were about 38,000 producers in the local spirits industry in 2002, with nearly 70% of these providing economy spirits with retail prices below RMB20/litre. Thus the average unit price is still very low. As a result of the introduction of the new tax policy, more producers have started to develop premium products. With the rise in living standards, both in cities and in rural areas, this development is likely to prove successful. Consequently, the average unit price of sprits will rise gradually, leading to value sales growth in the latter part of the forecast period. Spirits explore new market Local spirits manufacturers, which are restricted by the new taxation policy, are likely to explore new markets by launching Western-style products, such as liqueurs. These products also have the benefit of higher margins. The higher retail prices of imported spirits make further market penetration difficult. Manufacturers are expected to launch more trendy but cheaper products to promote brand image, especially among the younger generation. Products with low alcohol content become mainstay due to health concerns The current mainstream local spirits product is around 40-49% ABV. The former mainstream products of 50-55% ABV are being phased out. With growth in health awareness, products with lower alcohol content (less than 39% ABV), which currently account for 40% of total annual output, will become the leading type in the forecast period. Local spirits continue to dominate in domestic market With improving quality and better packaging, local spirits remain dominant in the market. Even though high-end products are targeted for further development, low-end products will still account for nearly 50% of total volume sales in the forecast period, owing to average disposable incomes remaining low. Imported spirits benefit from reduced tariff and direct shipments There are still prospects for Western spirits in China despite the decline experienced by these products over the review period. Marginal positive growth in volume terms is expected for

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imported spirits over the forecast period. Volume sales will be stimulated by the reduction in import tariffs from 60% to 10%, following China’s accession to the WTO, as well as rising disposable incomes. To take advantage of lower tariffs, more global spirits companies are likely to make direct shipments to mainland China, following the steps of the Scotch whisky brand The Famous Grouse, which made its first direct shipment in mid-2002. To benefit further from lower tariffs, Western spirits companies are expected to cut prices to attract more Chinese consumers. With distribution centres moving from Hong Kong to the mainland, more resources will be put into promotion and advertising of products.
Table 121 mn litres 2003 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Euromonitor estimates

Forecast Sales of Spirits by Subsector: Total Volume 2003-2008

2004 1.8 1.4 0.4 16.6 14.5 2.2 0.4 0.4 3,367.4 1,589.1 1,094.2 530.4 153.6 3,386.2

2005 1.8 1.4 0.4 16.7 14.6 2.2 0.4 0.4 3,228.0 1,462.0 1,091.2 523.8 151.0 3,246.9

2006 1.8 1.4 0.4 16.9 14.7 2.2 0.4 0.4 3,139.5 1,370.4 1,095.4 523.6 150.2 3,158.7

2007 1.9 1.4 0.5 17.3 15.0 2.2 0.4 0.4 3,087.7 1,307.1 1,101.5 528.4 150.7 3,107.2

2008 1.9 1.4 0.5 17.6 15.3 2.3 0.4 0.4 3,049.9 1,258.6 1,106.0 534.0 151.3 3,069.8

1.8 1.4 0.4 16.7 14.6 2.2 0.4 0.4 3,572.0 1,762.3 1,108.1 543.3 158.2 3,590.9

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Table 122 RMB million

Forecast Sales of Spirits by Subsector: Total Value 2003-2008

2003 Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Euromonitor estimates

2004 656.8 479.7 -

2005 652.3 476.2 -

2006 652.0 475.9 -

2007 657.7 480.2 -

2008 665.4 485.8 -

669.1 488.4 -

180.7 177.1 176.1 176.1 177.6 179.6 3,692.5 3,645.4 3,630.9 3,646.7 3,672.4 3,714.8 1,663.0 1,640.7 1,631.8 1,637.1 1,648.6 1,666.1 2,029.4 2,004.7 1,999.1 2,009.6 2,023.8 2,048.7 84.8 84.0 83.8 84.3 85.2 86.4 84.8 84.0 83.8 84.3 85.2 86.4 123,049.0 120,530.4 118,994.9 118,672.2 119,205.4 119,852.5 12,168.9 11,049.9 10,115.5 9,477.6 9,054.1 8,731.8 37,696.3 37,651.8 37,752.4 37,996.2 38,424.4 38,776.1 42,052.6 41,494.3 41,253.1 41,343.4 41,651.9 42,054.6 31,131.3 30,334.4 29,873.9 29,854.9 30,075.0 30,289.9 127,495.4 124,916.6 123,362.0 123,055.2 123,620.8 124,319.1

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Table 123

Forecast Sales of Spirits by Subsector: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Euromonitor estimates

2003/08 TOTAL 5.9 6.2 5.2 5.3 5.1 6.5 4.6 4.6 -14.6 -28.6 -0.2 -1.7 -4.4 -14.5

1.2 1.2 1.0 1.0 1.0 1.3 0.9 0.9 -3.1 -6.5 0.0 -0.3 -0.9 -3.1

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Table 124

Forecast Sales of Spirits by Subsector: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR Whisk(e)y - Single malt Scotch whisky - Blended Scotch whisky - Bourbon/other US whiskey - Canadian whisky - Irish whiskey - Japanese whisky - Other whisk(e)y Brandy and Cognac - Brandy - Cognac White spirits - Gin - Vodka Rum - White rum - Dark rum Tequila (and mezcal) Liqueurs - Cream-based liqueurs - Bitters - Other liqueurs Other spirits - Local spirits below RMB10/litre - Local spirits from RMB11 - 50/litre - Local spirits from RMB51 - 100/litre - Local spirits over RMB100/litre Spirits
Source: Euromonitor estimates

2003/08 TOTAL -0.6 -0.5 -0.6 0.6 0.2 0.9 1.9 1.9 -2.6 -28.2 2.9 0.0 -2.7 -2.5

-0.1 -0.1 -0.1 0.1 0.0 0.2 0.4 0.4 -0.5 -6.4 0.6 0.0 -0.5 -0.5

7.9

Forecasts by Region

Imported spirits sales on the rise in East, South, North and Northeast After years of decline, sales of imported spirits are expected to pick up during the forecast period in the more developed regions of East, South, and North and Northeast China, thanks to reduced tariffs, rising disposable incomes and the thriving bar culture in cities. With import tax being reduced from 60% to 10%, more mid-priced spirits brands – which were previously blocked because of the high tariffs – are expected to enter China. These new entries will initially emerge in coastal areas such as East and South China, and will penetrate deeper into inland regions as they become more established.

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Table 125 mn litres

Sales of Spirits by Region: Total Volume 2003-2008

2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Euromonitor estimates Excludes “other” spirits

2004 568.7 528.8 1,014.7 333.0 313.3 627.7 3,386.2

2005 557.9 515.7 941.4 306.4 308.8 616.7 3,246.9

2006 552.6 508.3 889.8 289.8 306.6 611.6 3,158.7

2007 550.1 502.4 862.2 278.8 305.4 608.2 3,107.2

2008 547.0 498.4 842.7 272.1 304.5 605.2 3,069.8

586.0 547.0 1,115.9 372.2 322.3 647.4 3,590.9

Table 126 RMB million

Sales of Spirits by Region: Total Value 2003-2008

2003 East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Euromonitor estimates Excludes “other” spirits

2004 26,715.7 22,781.7 26,484.7 6,699.3 15,605.1 26,630.0 124,916.6

2005 26,432.6 22,513.5 26,085.4 6,479.6 15,572.5 26,278.4 123,362.0

2006 26,443.2 22,489.6 25,898.8 6,359.5 15,646.9 26,217.2 123,055.2

2007 26,652.5 22,635.4 25,932.7 6,305.3 15,785.6 26,309.2 123,620.8

2008 26,819.1 22,787.2 26,066.1 6,311.4 15,923.5 26,411.8 124,319.1

27,172.1 23,278.2 27,132.2 6,959.1 15,772.4 27,181.4 127,495.4

Table 127

Sales of Spirits by Region: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Euromonitor estimates Excludes “other” spirits

2003/08 TOTAL -6.7 -8.9 -24.5 -26.9 -5.5 -6.5 -14.5

-1.4 -1.8 -5.5 -6.1 -1.1 -1.3 -3.1

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Table 128

Sales of Spirits by Region: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR East China Mid China North and Northeast China Northwest China South China Southwest China TOTAL
Source: Note: Euromonitor estimates Excludes “other” spirits

2003/08 TOTAL -1.3 -2.1 -3.9 -9.3 1.0 -2.8 -2.5

-0.3 -0.4 -0.8 -1.9 0.2 -0.6 -0.5

8.
8.1

CIDER/PERRY
Sizes and Shares

Sales of cider/perry were negligible throughout the review period. Cider and perry products are still quite new to most Chinese consumers due to a lack of promotional and advertising support from producers. Imported brands dominate the very limited sales. Cider/perry is largely targeted at expatriate consumers. Mostly, these products are distributed through on-trade establishments, where prices can be up to five times higher than off-trade prices, making them unaffordable to most Chinese consumers. Only a small proportion of the cider and perry sold is distributed through off-trade channels.

9.
9.1

FABS
Sizes and Shares

FABs still a new drink There are only a handful of brands of FABs, which are mostly imported from Western countries and are most often found in on-trade outlets such as pubs and discos, or in a few supermarkets catering to expatriates. Brands available include Bacardi Breezer, Bacardi Jazz, Sour, Jack Daniel’s & Cola, Red Square and the Arbor Mist range. Most are spirits-based rather than wine-based. The vast majority of Chinese consumers have never heard of FABs due to a lack of marketing and promotional support from producers. Those who drink FABs are mostly the young, trendy and high income earners who are in touch with the latest fads and have high disposable incomes. In addition, FABs have to compete against premium beer in terms of pricing, image and taste. Off-trade unit price for FABs start from RMB8 per 275ml bottle, while on-trade prices can be 3-4 times higher. Bacardi leads Industry sources suggest that Bacardi has by far the largest volume share in the sector, of about 90%. The success of FABs in China has been dependent on the first mover advantage, and the Bacardi brand has been available for 3-4 years. Bacardi Breezer and Jazz are produced locally. FABs sales are mainly in Shanghai. FABs sales are estimated to have reached 690,000 litres in 2003, and are projected to grow by 15-20% in volume terms per year for the next few years.

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Table 129 '000 litres

Sales of FABs by Subsector: Total Volume 1998-2003

1998 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source:

1999 -

2000 -

2001 -

2002 600.0 600.0

2003 690.0 690.0

-

Trade interviews, Euromonitor estimates

Table 130 RMB million

Sales of FABs by Subsector: Total Value 1998-2003

1998 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source:

1999 -

2000 -

2001 -

2002 108.0 108.0

2003 120.0 120.0

-

Trade interviews, Euromonitor estimates

Table 131

Sales of FABs by Subsector: % Total Volume Growth 1998-2003

% total volume growth 2002/03 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -

1998/03 TOTAL -

15.0 15.0

Table 132

Sales of FABs by Subsector: % Total Value Growth 1998-2003

% local currency, current value growth 2002/03 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -

1998/03 TOTAL -

11.1 11.1

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Table 133 % total volume Company

Company Shares of FABs by National Brand Owner 2000-2002

2001 -

2002 90.0 1.0 1.0 8.0 100.0

Bacardi (Shanghai) Co Ltd Beijing Shunxing Halewood Winery Co Ltd Brown-Forman Corp Others Total
Source: Trade interviews, Euromonitor estimates

Table 134 % total volume Company

Company Shares of FABs by Global Brand Owner 2000-2002

2000 -

2001 -

2002 90.0 1.0 1.0 8.0 100.0

Bacardi & Co Ltd Brown-Forman Corp Halewood International Ltd Others Total
Source: Trade interviews, Euromonitor estimates

Table 135

Brand Shares of FABs 2000-2002

% total volume Brand (Global Brand Owner) Bacardi Ice (Bacardi & Co Ltd) Red Square (Halewood International Ltd) Jack Daniel's & Cola Others Total
Source:

Company

2000

2001

2002

Bacardi (Shanghai) Co Ltd Beijing Shunxing Halewood Winery Co Ltd Brown-Forman Corp

-

-

90.0 1.0 1.0 8.0 100.0

Trade interviews, Euromonitor estimates

9.2

Packaging

Glass bottles are the only packaging format available for FABs. The most common packaging size is 275ml, followed by 355ml. The bottle is small so that it can be held in one hand comfortably while chatting with people, as FABs are mostly consumed in on-trade outlets such as pubs, bars and discos. Projecting the right image is especially crucial to appeal to the well-heeled young and fashionable. The bottles are designed with attractive labels and are usually transparent to make them look more elegant and sophisticated.

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Table 136

Sales of FABs by Packaging Format: % Analysis 1998/2003

% off-trade volume 1998 Can Glass Plastic Others Total
Source: Trade interviews, Euromonitor estimates

2003 0.0 100.0 0.0 0.0 100.0

0.0 0.0 0.0 0.0 0.0

9.3

New Product Developments

FABs are fairly new to Chinese consumers, and the vast majority of people have never heard of FABs. Most of the limited number of brands available are imported, and due to a lack of marketing and promotional support from producers many brands come and go quickly without establishing a presence.

9.4

Distribution

On-trade vs Off-trade Sales FABs are mostly consumed in the on-trade in night spots such as in pubs, bars and discos. They are seldom found in off-trade outlets, except a few specialists, convenience stores and supermarkets catering to expatriates, because most Chinese consumers are not familiar with FABs and hence are not willing to purchase them. As a result, off-trade sales are negligible.
Table 137 '000 litres 1998 Off-trade On-trade TOTAL
Source:

On-trade vs Off-trade Sales of FABs: Volume 1998-2003

1999 -

2000 -

2001 -

2002 600.0 600.0

2003 690.0 690.0

Trade interviews, Euromonitor estimates

Table 138 RMB million

On-trade vs Off-trade Sales of FABs: Value 1998-2003

1998 Off-trade On-trade TOTAL
Source:

1999 -

2000 -

2001 -

2002 108.0 108.0

2003 120.0 120.0

Trade interviews, Euromonitor estimates

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Table 139 % volume growth

On-trade vs Off-trade Sales of FABs: % Volume Growth 1998-2003

2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -

1998/03 TOTAL -

15.0 15.0

Table 140

On-trade vs Off-trade Sales of FABs: % Value Growth 1998-2003

% current value growth 2002/03 Off-trade On-trade TOTAL
Source: Trade interviews, Euromonitor estimates

1998-03 CAGR -

1998/03 TOTAL -

11.1 11.1

9.5

Forecasts

FABs to march into more cities FABs are predicted to grow by 15-20% per year in volume terms over the forecast period, as younger consumers are increasingly exposed to Western culture and tastes. With FABs having gained a measure of acceptance in Shanghai, they are likely to be promoted in other big cities, such as Beijing and Guangzhou. FABs manufacturers are likely to hold promotions and to invest in marketing activities in on-trade outlets so as to create awareness and widen the customer base. With the introduction of FABs into more cities, the next logical step will be to offer off-trade sales as well. However, to reach out to a wider spectrum of consumers, FABs manufacturers will have to invest in advertisements in the mass media. At the same time, FABs also face competition from premium beer, which is more established and affordable. Bacardi to dominate Given that FABs is still a very small sector in the Chinese market, there are unlikely to be many new players entering it. Moreover, with Bacardi holding such a strong position, it is understandable that other manufacturers will do their sums carefully before joining the fray. Having said that, should there be competition, it will probably come from foreign brands as there is no expertise in FABs in China yet.
Table 141 '000 litres 2003 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Euromonitor estimates

Forecast Sales of FABs by Subsector: Total Volume 2003-2008

2004 797.0 797.0

2005 924.5 924.5

2006 1,081.6 1,081.6

2007 1,276.3 1,276.3

2008 1,512.4 1,512.4

690.0 690.0

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Table 142 RMB million

Forecast Sales of FABs by Subsector: Total Value 2003-2008

2003 Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Euromonitor estimates

2004 134.4 134.4

2005 151.9 151.9

2006 173.1 173.1

2007 199.1 199.1

2008 230.0 230.0

120.0 120.0

Table 143

Forecast Sales of FABs by Subsector: % Total Volume Growth 2003-2008

% total volume growth 2003-08 CAGR Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Euromonitor estimates

2003/08 TOTAL 119.2 119.2

17.0 17.0

Table 144

Forecast Sales of FABs by Subsector: % Total Value Growth 2003-2008

% local currency, constant value growth 2003-08 CAGR Wine-based FABs Spirits-based FABs Other FABs FABs (flavoured alcoholic beverages)
Source: Euromonitor estimates

2003/08 TOTAL 91.6 91.6

13.9 13.9

10.
10.1

APPENDIX
Industry Statistics

In 2002, the National Bureau of Statistics of China changed its policy, and required only companies with turnover of over RMB5 million to submit their production figures. Hence, to ensure consistency of data, only data from 2000 to 2002 are included here. Beer: Production, Imports and Exports Local production of beer registered an increase of 5% in 2002. This increase was a result of improved efficiency at production plants after the acquisitions of small players by larger local companies, or joint ventures with foreign enterprises. Imports, however, suffered a double-digit decline of 19% in 2002, with only 43.6 million litres being imported, as more foreign players began local production through joint ventures with domestic companies. Exports rose by more than 50% to 130 million litres in 2002, with large local players such as Tsingtao and Yanjing taking the lead as they sought overseas expansion, given the increasing

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maturity of the beer sector in China’s cities. Tsingtao and Yanjing exported 63.2 million litres and 6.7 million litres, respectively, in 2002.
Table 145 Million litres 2000 Production Imports Exports Apparent consumption
Source:

Beer: Production, Imports and Exports: Total Volume 2000-2002

2001 22,465.1 53.8 83.5 22,435.4

2002 23,581.8 43.6 130.5 23,494.9

22,045.4 71.6 84.4 22,032.7

Official statistics (National Bureau of Statistics of China)

Wine: Production, Imports and Exports Grape wine production and consumption in China have developed quite rapidly. Production of grape wine in 2002 was 277 million litres, an increase of 15% over 2001. However, per capita consumption was still very low at around 0.3 litres, which reflects the great potential for future sales. Official production figures are about 30% lower than Euromonitor’s total volume sales data. Since the official statistics only cover companies with turnover of RMB5 million, it is estimated that production of about 50 million litres from small producers is not reported.
Table 146 Million litres 2000 Production Imports Exports Apparent consumption
Source:

Wine Production, Imports and Exports: Total Volume 2000-2002

2001 241.0 0.0 0.0 241.0

2002 277.1 0.0 0.0 277.1

194.2 0.0 0.0 194.2

Official statistics (National Bureau of Statistics of China)

Spirits: Production, Imports and Exports Only production figures for local spirits and domestic brandy are available. The exact size of imported spirits sales is impossible to calculate, but according to industry sources, volume sales of smuggled imported spirits are about 10 times as large as sales of legally imported products. Locally produced brandy is mainly for domestic sale. Exports accounted for about 10% of total output in 2002.
Table 147 ‘000 litres 1998 13,468.0
Source: Trade interviews, Euromonitor estimates

Domestic Brandy Production: Total Volume 1998-2002

1999 13,939.4

2000 14,430.0

2001 15137.1

2002 15,909.1

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Table 148 '000 litres

Whisk(e)y Production, Imports and Exports: Total Volume 2000-2002

2000 Imports Exports
Source:

2001 1,978.1 2.0

2002 2,067.9 198.0

1,314.6 146.5
Official statistics (National Bureau of Statistics of China)

Table 149

Brandy And Cognac Production, Imports and Exports: Total Volume 20002002

'000 litres 2000 Imports Exports
Source:

2001 2,005.5 55.0

2002 2,832.2 324.4

1,599.2 36.3
Official statistics (National Bureau of Statistics of China)

Table 150 '000 litres

Vodka Production, Imports and Exports: Total Volume 2000-2002

2000 Imports Exports
Source:

2001 183.9 41.9

2002 324.9 7.2

221.3 58.0
Official statistics (National Bureau of Statistics of China)

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