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China, New Approaches

CONTENTS
1. Wine consumption
2. Baijiu
3. Community Group Buying
4. Mystery Box
KEY POINTS

Demand for wine was decimated in 2020, due to the lockdowns in response to the pandemic, leaving importers and wholesalers with heavy loads of excess inventories. This is forcing the industry to find new, creative ways to adjust their business model to reduce bloated inventories and find a path forward.

In 2020, the import volume of wines was 471m litres, a 28.8% decline compared to that in 2019, and imports are not expected to return to pre-pandemic levels in 2021. Impacted by Covid-19, many wine traders and distributors are struggling financially, with lots of excess inventory, and a desperate need to de-stock. This makes wine traders and wholesalers very cautious about the import plans in 2021. Coupled with the uncertainty about trade disputes, including China-Australia and China-US, It is highly unlikely that wine imports in 2021 will recover to the pre-crisis levels of 2019.

Additionally, domestic production also continued to decline, resulting in a sustained fall in apparent wine consumption for the fourth consecutive year of 20.6% (according to National Bureau of Statistics). This decline is mainly due to the impact of Covid-19, which reduced on-premise consumption across bars and restaurants. The pandemic’s economic toll on the on-premise channels will have a lingering impact in 2021. The consumers’ fear of ongoing financial insecurity, growing desire to save money, and the safety concerns of eating out could affect the recovery speed of restaurants in 2021. This causes drinking occasions to remain restricted, and weighs on wine consumption. Thus, wine companies are modifying their business models in an effort to survive. Some of the new strategies being explored include expanding into new lucrative segments, tapping into community group buying and releasing mystery-box marketing.

Diversifying Beyond Wine

In increasingly difficult circumstances, many wine companies – especially wine traders and wholesalers – have been diversifying beyond wine and are tapping into a new growth category. For example into a niche segment of Chinese Baijiu (sauce-aroma Baijiu). The growing popularity of sauce-aroma Baijiu is largely due to the spillover effect of the increasingly popular Maotai Baijiu brand’s scarcity of supply. The prices of Maotai continued to climb, with limited production capacity and strong demand leaving supplies tight, which has continued to drive up profit margins accordingly. Many major wine traders and wholesalers are eager to seek new growth engines to compensate for the declining profits of imported wine and sustain their business. The wine companies’ tapping into the sauce-aroma Baijiu has become a growing trend.

Diversification of product portfolios is becoming a common sense strategy for wine wholesalers.

This phenomenon can be foreseen at the moment is that diversification of product portfolios is becoming a common sense strategy for wine wholesalers. This appears to be part of a broader trend in China, as we have also seen beer and spirits companies move into the soft drinks business, and coffee brands starting to sell alcoholic drinks.

Community Group Buying

Covid-19 has spurred the expansion of the community group buying model in China (where groups of consumers – often whole communities – coordinate their orders to purchase in bulk and receive discounts) as people turn to online shopping. Some big wine brands saw new opportunities in community group buying and have tapped into this channel. Buying in bulk ensures lower costs for individuals and is therefore particularly popular in lower-tier cities in China.

The popular products on these group buying community platforms are lower-priced brands (both domestic and imported) with prices usually ranging from RMB 29.9-60 per bottle (750ml). Thus, the effect of big brands and low prices are the main selling points of these wine products.

Wine brands directly cooperated with these platforms, effectively eliminating the layers of distribution.

From a short-term perspective, wine companies are using these platforms to unload excess inventory, especially those generated during the pandemic. Moreover, wine brands directly cooperated with these platforms, effectively eliminating the layers of distribution and thus gaining a more efficient return on their capital. In addition, these wine brands are looking to leverage the platforms to penetrate markets in lower-tier cities.

The Popular Trend of Mystery Box

Mystery box marketing is quite popular and trendy, with some wine retailers launching wine mystery boxes in the hope of capturing new business opportunities. In essence, mystery boxes sell a surprise to consumers who don’t know what they’re getting until it arrives. In the mystery box, consumers will receive goods which will be at least equivalent to the price they paid. The mystery box wines range in price from RMB 99-298 and are mainly targeted at consumers who want to buy wine but find it difficult to choose or are willing to try different mix portfolios at a relatively good value.

For wine retailers, it’s a good opportunity to move inventory out by combining less popular items with best-selling ones or directly destock. More importantly, mystery boxes can allow wine brands to discount/offer great value to consumers, without directly undermining the brands. This is not the most effective strategy for building long-term consumer brand loyalty. As a result, most players currently prefer to promote their mystery box wines as limited editions, rather than as quarterly or annual subscriptions.

KEY POINTS
  • Wine declines by 28.8%
  • Domestic production also declined
  • Growing popularity of sauce-aroma Baijiu
  • Groups of consumers purchase in bulk and receive discounts
  • Wine mystery boxes in the hope of capturing new business opportunities