Wine consumption is expected to grow by as much as 90 percent in China over the period from 2009 to 2014 as changing lifestyles result in increasing demand for quality wines. This makes investment in the industry attractive for both domestic and foreign investors.

Production of liquor in China has a rich history and goes back thousands of years, with rice liquor being one of the most popular beverages. In comparison, the grape wine industry has only just begun to realize its potential in China since the turn of the century. Consumption per capita of grape wine in China is very small at around 0.4 to 0.5 liters per person each year, compared to above 50 liters per person a year in France.

It is, however, the rate at which the Chinese wine industry is growing that is turning heads. Between 1999 and 2008, wine was the fastest growing alcohol consumed in China with an annual increase of 20 percent, whereas the annual growth rate for general alcohol consumption was 12.2 percent. Consumption is predicted to grow a further 36 percent between 2009 and 2012 which is mainly driven by the increase in domestic demand. By 2012, China is expected to be the seventh highest consumer of wine worldwide, with a total consumption of 103.5 million nine-liter cases per year.

In terms of preference, there is a considerable dominance of red wine over white wine as red wine consumption is estimated at 80 percent of all grape wine consumed. This can be explained by red wine's perceived health benefits and the fact that it's advertised and produced to a greater extent throughout China.

According to the National Bureau of Statistics of China, 83 percent of wine consumption came from domestic wine production in 2009, highlighting the stronghold that domestic companies have on the industry.

The Chinese sense of brand loyalty is huge and this is demonstrated by 60 percent of the market being controlled by the top four companies. Yantai Changyu is popular in Shandong and Fujian provinces, China Great Wall in northern and southern China, while Tonghua Grape Wine has a stronger presence in northeastern China and Dynasty Fine Wines is one of the largest producers in eastern China.

European wine companies are setting up wine companies and vineyards across China, given the potential of the market and the abundance of the requisite terrain. Famous French label Chateau Lafite recently set up a 62 acre vineyard in Shandong province. Wine merchants Berry Brothers & Rudd have predicted China to become the world leader in the production of bulk wine within 50 years.

As well as increased investment and improving expertise, China's climate is conducive for vineyards which make it an ideal place for expansion. The number of wineries throughout China is expected to increase 10-fold to about 4000 over the next 50 years.

Average wine consumers' awareness of different types and quality of wines in China is still relatively low. Most consumers are price sensitive and prefer to purchase local or regional brands as opposed to higher end wines. However, consumers' interest and consumption of foreign wine in China is increasing as consumers seek a more modern image.

Wine imports to China have as such grown significantly with more and more foreign wine appearing on menus in restaurants and supermarkets. Bottled wine imports have increased from $25 million in 2004 to $377 million in 2009. Bulk wine imports have similarly increased over this period although imports decreased to $64 million in 2009 compared with $84 million in 2008. This decrease in bulk wine imports was largely due to the increased domestic production of wine in China.

There are large barriers to entry for importing wines. Overall import taxes can be high as 50 percent due to tariffs of around 12-20 percent for bottled or bulk wines, 17 percent value added tax and 10 percent consumption tax. The wine industry in China is therefore not an easy market to enter especially when you have to also consider the popularity of domestic brands.

The author is a partner for Specialist Advisory Services at BDO Ltd, a professional services provider. The opinions expressed here are entirely his own.

(HK Edition 12/01/2011 page2)