How The OEM Business Model is Re-Shaping the Chinese Wine Market

Speaking at a recent industry wine event in China, Sun Jian, General Manager of Changyu Pioneer Wine Company, talked about the changing dimensions of the Chinese wine market. First and most importantly, he noted, Chinese wine drinking preferences. Chinese consumers are become more sophisticated about purchasing wine and more aware of the trade-off between price and quality. A key reason for that has been the creation of new business models – such as the OEM (Original Equipment Manufacturer) business model – that have extended the scope and range of wine options for consumers across Mainland China.

The two-tiered Chinese wine market 

Ever since the Chinese market opened up to foreign winemakers with China’s accession to the World Trade Organization (WTO) in 2000, the prevailing sentiment was that foreign wines were not just better – they were also far more prestigious. From this perspective, wines from a domestic producer like Changyu simply could not compare to the big, bold red wines coming from Bordeaux. If you were purchasing a bottle of wine as a gift for a loved one or a business partner, the custom was to purchase the expensive, prestigious Bordeaux.

Jian referred to this in his speech as the “blind idolization” of foreign wines, and he views it as a real impediment to the future growth and dynamism of China’s wine industry. As long as consumers blindly reached for a bottle of French red wine, it would be impossible for domestic producers to grow and compete.

The preference for “anything foreign” led to the creation of a two-tiered system, in which foreign producers occupied the premium tier, while domestic producers occupied the low-budget tier. That two-tiered system, though, is showing signs of changing, as domestic producers begin to challenge foreign producers for the high end of the market.

What caused the paradigm shift in Chinese wine drinking habits?

The primary reason for the paradigm shift is simple: Chinese domestic wine producers are finally catching up to their Western counterparts in terms of quality. They are investing in world-class wineries domestically, and are bringing in prestigious foreign partners to help them improve viticulture, yield and production techniques. At the same time, they are creating award-winning domestic wines that are marketed as prestige labels.

Changyu, for example, now has vineyard holdings across 7 different wine regions of China (Ningxia, Shandong, Xinjiang, Liaoning, Beijing, Hebei and Shaanxi), and has worked tirelessly to boost the quality of its wines coming from Ningxia. The classic example here, of course, is the creation of the Changyu Moser XV Winery in Ningxia, which is modeled on the great chateaux of Bordeaux. At the same time, Changyu has embarked on investment abroad, purchasing wineries in France, Spain, Chile and Australia. Within the next few years, says Changyu, imported wines will account for nearly 30 percent of all business, and the goal is to bring only the best value wines to Mainland China.

The growth of the OEM wine market

And there is a second, less obvious, reason for the paradigm shift within the Chinese wine market, and it has a lot to do with the new bulk wine business model. Instead of importing wine in bottles, China’s nearly 6,000 wine importers can now import wine in bulk containers. As a result, they are purchasing bulk wine abroad from destinations like Australia or Chile, and then bottling the wine within China. At the same time, they are creating the right type of packaging and labeling to win over Chinese wine drinkers.

This emerging business model is popularly known as the OEM model, which is named for the Original Equipment Manufacturer model used in a range of different industries, ranging from automobiles to clothing to electronic devices. The idea is simple: take the raw materials from abroad, and assemble them according to the necessary specifications for a specific market or niche so that they can be re-sold at a higher price later.

The reason why this business model is so powerful is because it enables the creation of entirely tailor-made, bespoke brands for a wide variety of stores, hyper-marts, boutiques and retailers. By some accounts, there are now almost 1,000,000 wine SKUs within China, and every retailer wants to have a private label brand that they can market as being truly unique.

Implications of the OEM wine model

At a glance, it’s possible to see how the popularity (and profitability) of this OEM business model has forever changed the structure of the Chinese wine industry. At the low end of the market, it has encouraged the import of “one Euro wines” (very cheap bulk wine imported from low-cost producers and sold very cheaply). At the high end of the market, it has encouraged much more investment into branding and marketing, with the idea being that it’s very much possible to create a domestic Chinese wine brand that is much more attractive than other foreign wine brands. Given the Chinese wine drinker’s preference for red and gold labels, heavy bottles and cork seals, for example, it is possible to create a wine brand that looks “expensive” and “prestigious,” even if the wine itself is from Chile or Australia and not Bordeaux.

Most notably, the classic two-tiered wine system (Chinese producers at the low end, foreign producers at the high end) is now very much in flux. Some domestic Chinese producers (such as Changyu) are making their way to the premium end of the market, while some foreign producers (the so-called “one Euro wines”) are making their way to the low end of the market. And, in between, there is a new, middle tier emerging that is typically comprised of mid-range wines from New World wine destinations (such as Australia and Chile).

As Chinese wine drinkers embrace wine as a regular part of their lifestyle (rather than just a gift that they purchase 1-2 times per year), it is to see how the wine market will continue to evolve within China. Foreign wine makers who once counted on being instantly scooped up by Chinese wine drinkers desperate for foreign wine brands are now being forced to do a lot of re-thinking about how best to penetrate the Chinese market. Should they continue to export bottles of their finest wine to China and charge a premium – or should they begin to participate in the bulk wine market in recognition of the growing power and allure of private labels? How they answer that question will go a long way in determining the future growth and trajectory of the Chinese wine market.

OEM Wine and Spirits Show Coming To Shanghai In 2019. 

In November 2019, Beverage Trade Network will host the first-ever International Bulk Wine & Spirits Show (IBWSS) in Shanghai, China.

The two day event (November 5-6, 2019) will include an exhibition trade show floor for buyers and sellers to meet in a central marketplace, as well as a series of speaker presentations, panel discussions, and Q&A sessions designed to offer practical, actionable advice about the Chinese private label wine, private label spirits (OEM), bulk wine and spirits industry.

OEM wines and OEM spirits are one of the fastest growing categories in China.

Who should attend IBWSS 2019 in China?

The event is open for global bulk wine producers, negociants, importers and distributors looking to enter the fast-growing Chinese wine market. By becoming an exhibitor at this first event of its kind in China, you will be able to meet directly with Chinese buyers looking to expand imports of foreign wine. At the same time, you will be able to explore the many new offerings from the Chinese wine market, including vineyards that specialize in Cabernet Sauvignon, Merlot and Cabernet Gernischt for the global bulk wine market.

Why China?

China is the next big thing in wine. As a wine producer, China now ranks No. 7 in the world. There are now 450 wineries scattered across China, six major wine producing regions (Hebei, Ningxia, Shandong, Shanxi, Xinjiang and Yunnan) in the nation, and fast-growing consumer demand for new wines. Already, China ranks as one of the most important new export markets for wine, with Chinese consumers showing a particular preference for red international wine varieties. In fact, China is now the largest red wine market in the world.

Building on this growing excitement about the Chinese wine industry, two major Bordeaux producers (Castel, Barons de Rothschild) already have a presence within China’s Shandong region, and in the coming years, it is expected that links between Old World wine producers and New World wine producers in China will continue to grow and expand. Thus, attending the upcoming 2019 IBWSS event in Shanghai, China represents a unique opportunity to get in front of this important trend.

Shanghai, China.

Shanghai, as the host city of the 2019 IBWSS China event, is particularly noteworthy. Shanghai is the most populous city in the world, with a population of more than 24 million as of 2017.

With a favorable location and distinct oriental culture, Shanghai has attracted many foreigners, including Bernard Shaw, Albert Einstein and Tagore, to live here, or just experience the oriental charm. In the eyes of a foreigner, Shanghai has a unique oriental charm, while in the eyes of a Chinese, Shanghai certainly has strong Western flavor.

What to expect at the 2019 IBWSS China event

The two-day IBWSS China event in November 2019 will feature two major components – a lively exhibition trade show floor where 80+ exhibitors will be able to meet directly with potential buyers in China’s vibrant wine capital. There will be plenty of time for networking, making contacts, and face-to-face interactions with Chinese buyers. This is really a unique opportunity to expand into the all-important Chinese wine market.

At the same time, the event will feature an all-star lineup of top wine industry experts and insiders, who will share their insights and advice on how to succeed within the global bulk wine and spirits industry. Based on previous versions of the International Bulk Wine & Spirits Show (IBWSS) that have already taken place in London and San Francisco, there will be presentations and panel discussions on the following topics at the Shanghai event:

·        What retailers are really looking for in private and bulk suppliers

·        Regulatory issues specific to bulk products

·        How retailers can build profitable private label programs

·        Private label and bulk strategy for importers and distributors

·        Trends and opportunities in the global bulk market

·        Why and how to ship in bulk to China

·        Leveraging bulk and private label best practices

·        How to market to young millennial wine drinkers in China

·        Quality challenges facing bulk wine

Most importantly, you will learn how each of these factors can be applied specifically to the Chinese market. For example, you will learn how Chinese wine drinkers differ from those in other wine markets (especially those of North America and Western Europe), how the Chinese regulatory environment impacts the success of any bulk wine program, and different ways that bulk wine producers are ramping up their China strategies.

To make this event as interactive as possible, Beverage Trade Network is planning a list of speakers who can present their own experiences and insights in lively, TEDx-style talks. Some of the types of speakers that you might encounter at the 2019 IBWSS event in Shanghai include the following:

·        Top executives at shipping and logistics firms that can help bring your products to the Chinese market

·        Top branding and marketing professionals who understand the mindset of the Chinese wine consumer

·        Top importers and distributors who can share actionable insights on what works (and what doesn’t)

·        Top regulatory experts who can help you navigate the Chinese market

·        Top winemakers who can share tips on creating wines that Chinese wine drinkers actually want to buy

In just two days, you will walk away with the insights and professional connections needed to enter the Chinese market with a bulk wine and spirits strategy.

More info at www.ibwsshowchina.com