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Building business in Asia Pacific New Distribution Models. By Mark Bedingham, Moet Hennessy Asia Pacific Ltd. Regional Managing Director – Asia, Japan, and Australasia. Asia Today. CHINA GDP Growth*: 9.1% GDP: USD 1,472bn Pop n : 1.299 bn GDP/head: USD1,140. KOREAN GDP Growth*: 3.1%

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building business in asia pacific new distribution models

Building business in Asia PacificNew Distribution Models

By Mark Bedingham,

Moet Hennessy Asia Pacific Ltd.

Regional Managing Director – Asia, Japan, and Australasia

asia today
Asia Today

CHINA

GDP Growth*: 9.1%

GDP: USD 1,472bn

Popn: 1.299 bn

GDP/head: USD1,140

KOREAN

GDP Growth*: 3.1%

GDP: USD 521.4bn

Popn: 47.9 m

GDP/head: USD 10,880

HONG KONG

GDP Growth*: 3.3%

GDP:USD160.9bn

Popn: 6.845 m GDP/head:USD23,350

TAIWAN

GDP Growth*: 3.2%

GDP: USD 281.9bn

Popn: 22.6m

GDP/head: USD12,552

INDIA

GDP Growth*: 8.1%

GDP: USD 585.1bn

Popn: 1.055 bn

GDP/Head: USD550

THAILAND

GDP Growth*: 6.5%

GDP: USD 140.5bn

Popn: 64.2 m

GDP/head: USD2,200

MALAYSIA

GDP Growth*: 5.3%

GDP: USD 102bn

Popn: 23.7 m

GDP/head: USD4,080

SINGAPORE

GDP Growth*: 1.1%

GDP: USD 91.4bn

Popn: 3.407m

GDP/head: USD21,710

* 2003 GDP Growth Rate

Source: Economist Intelligence Unit, 2004 First Qtr Update

HSBC Global Economics Report, Q3 2004

japanese market
Japanese Market

JAPAN

GDP Growth: 2.5%

GDP: USD 4,317.8 bn

Popn: 127m

GDP/head: USD33,941

global asia wine market

Total Vol: 50.059mil

Global Asia Wine Market

Total Vol: 50.059mil

Total Wine Market = Still + Sparkling Wine

Source: IWSR, June 2004/Sopexa/Industry

key still wine markets in asia 2003
Key Still Wine Markets in Asia 2003

Estimated Total Value of Key Asian Still Wine Market 2003

Total Vol: 47.335 mil 9L c/s

Source: IWSR, June 2004/Sopexa/Industry

Total Vol: 20 mil 9L c/s

Source: IWSR, June 2004/Sopexa/Industry

outlook for the future
Outlook for the Future

Forecast volume growth in Key Asian Markets incl. Japan

% Growth in vol (2009 vs. 2004): +29%

the consumer in japan
The Consumer in Japan

Life Style of Japanese wine consumersaged between 25-35years old

still wines consumption per capita

Japanese Wine Consumption Litre/per capita

Still Wines Consumption per capita

Tokyo’s consumption per capita is 2.7 times the National consumption!

purchasing power parity in china key regions
Purchasing Power Parity in China & Key Regions

Shanghai’s GDP per capita is 4 times that of China, and Guangzhou’s is more than 5 times!

australia s position in asia
Australia’s Position in Asia

Value based on Import Value

Total Volume of Still Bottled Import Wines

australia s position in asia14
Australia’s Position in Asia

Total Vol. in

K std cases:

1,052 444 570 20,000 1,575 388 571 168 600 21,540

Source: IWSR, June 2004/Sopexa/Industry

australia s position in asia15

Total Vol. in

K std cases:

1,052 444 570 437 1,055 388 471 600 74 14,250

Australia’s Position in Asia

Source: IWSR, June 2004/Sopexa/Industry

australia s position in asia16

Total Vol: 1,052K std cs

Total Imported Value: USD 71m

Total Vol: 444K std cs

Total Imported Value: USD 61m

Total Vol: 437K std cs

Total Imported Value: USD 54m

Australia’s Position in Asia

Total Still Imported Wines

Source: IWSR, June 2004/Sopexa/Industry

australia s position in asia17

Total Vol: 570K std cs

Total Imported Value: USD 37 m

Total Vol: 1,055K std cs

Total Imported Value: USD 42 m

Total Vol: 388K std cs

Total Imported Value: USD 16 m

Australia’s Position in Asia

Total Still Imported Wines

Source: IWSR, June 2004/Sopexa/Industry

australia s position in asia18

Total Vol: 471K std cs

Total Vol: 74K std cs

Total Imported Value: USD 2.4m

Total Vol: 14,250K std cs

Total Imported Value: USD 719m

Australia’s Position in Asia

Total Still Imported Wines

Source: IWSR, June 2004/Sopexa/Industry

duty and taxes a key factor for imported wines20

Assumption: CIF = FOB

Australia assumes Trade Margin of 30% due to no Importer’s Margin

Duty and Taxes : A Key Factor for Imported Wines
duty and taxes a key factor for imported wines21

Assumption: CIF = FOB

Australia assumes Trade Margin of 30% due to no Importer’s Margin

Duty and Taxes : A Key Factor for Imported Wines
consumer behaviour the success of australian wines in asia
Consumer Behaviour:The Success of Australian Wines in Asia

In Asia, we can make out two distinctive market profiles:

the success of australian wines in se asian markets why
The Success of Australian Wines in SE Asian Markets – WHY?
  • New young generation / more open-minded wine drinkers start with New World wines
    • Traditional / ‘older’ generation wine drinks followed spirits-beer-red wine pattern
  • Australian wines are accessible wines for beginners - offer drinkability, fruit character and easy to understand varietal labels (easy to order cabernet sauvignon or shiraz)
  • Strong influence of multi ethnic cuisine, fusion and less reverence for the association between wine and food (French wine for French cuisine, Italian wine for Italian cuisine..)
the success of australian wines in se asian markets why24
The Success of Australian Wines in SE Asian Markets – WHY?
  • ‘Cultural’ reference for many SE Asian markets is the ‘anglo-world’ (USA, UK, Australia) with many tourists and expatriates coming from these countries
  • Knowledge of English language and relative simplicity of Australian wine labels.
  • Geographic proximity with Australia and prime destination to immigrate, travel, study and do business.
the success of australian wines in se asian markets why25
The Success of Australian Wines in SE Asian Markets – WHY?
  • Higher frequency of activities, influence from Australian trade (chefs, restaurateurs and hoteliers) in the region have given Australian wines an edge
    • Australian Wine Export Council
    • Austrade
  • More laid back, open-minded attitude very much in line with local mind-set, rather than the more formal and more ‘cultural’ French wines
old world markets the case of japan

Consumption Trend (Total Wines)

4th Wine Boom:

Explosion of French & Italian cuisine

1985

Source: Japan wines and spirits importers Association

Old World Markets: The Case of Japan
  • Deeply entrenched in wine drinking tradition (more than 100 years) despite rapid growth in market in the last 20 years
old world markets the case of japan27

A high proportion of the 9,500 qualified sommeliers

have a greater training in French and Italian wines

1000 Japanese chefs

studied in Italy

2,500 Japanese chefs

studied in France

Italian Restaurant

French Restaurant

Italian wines stand for

90% of consumption

French wines stand for

90% of consumption

Old World Markets: The Case of Japan
  • Very strong fidelity to matching style of cuisine with wine origin – do not accept drinking Australian wines in French or Italian restaurants.
  • Fidelity is reinforced not only by consumers expectations but by the restaurants themselves
    • Japanese Chefs & sommeliers regard French and Italian wines as being more a part of the ‘true’ tradition of wine.
old world markets the case of japan28
Old World Markets: The Case of Japan
  • Approachability of Australian wine labels not much of an advantage in a country where general knowledge of English is weak
  • Communication / Publicity skewed towards Old World
    • Huge publicity on French and Italian wines in Specialist wine magazines even if they have smaller influencing power on their readers than in the UK or USA
    • Highly influential fashion and lifestyle magazines feature France, Italy and the USA, more than Australia
old world markets the case of japan29

Fashion & Lifestyle magazines

  • Circulation : 150,000-300,000 copies/month
  • Target: according to magazine type
  • Mainly feature on French/Italian/US wines
Old World Markets: The Case of Japan
  • Specialist Wine magazines
  • Circulation : 30,000 copies/month
  • Target: Sommeliers/chefs
  • Mainly focused on French/Italian wines
old world markets the case of japan30
Old World Markets: The Case of Japan
  • Mass market – there is a great range of options for Japanese trade customers and consumers to source inexpensive wine
    • Chile has done well (and in the future Argentina?), brands such as Gallo are well established, Liebfraumilch still sells well.
    • Significant volume of sales between ¥ 300- ¥ 700 (AUD 5 – AUD 12) dominated by domestic brands (mostly local bottling). They are successful in occupying much of the supermarket shelf or as part of a beer company’s portfolio they achieve the lowest price pouring contracts.

Domestic wines¥1,000> 84%

Market Share by brand

Ureshi Wine 13%

Bistro 11%

Bon Rouge 9%

German Wines¥ 1,000>30%

Market Share by brand

Valckenberg 14 % (Liebfraumilch)

GA Schmitt 12%

Racke 7%

¥ 1,000> 65%

Market

US Wines ¥ 1,000> 78%

Market Share by brand

Carlos Rossi 13%

Rivercrest 21%

Franzia 9%

Chile Wines ¥ 1,000> 49%

Market Share by brand

Concha y Toro 31 %

Santa Carolina 10%

San Pedro 9%

the future for australian wines

The Future for Australian Wines

How can we accelerate the growth in the large current and potential markets?

How big is the prize?

blue sky projections
Blue Sky Projections

2003-2009 CAGR: 7% 5% 20% 4%

what about china
What About China?
  • In 2003, imported wines market grew by 17% to 437K cases led by France (40%) and Australia (15%). But overall New World wines show the strongest growth rate (30% vs. 20% for Old World)
  • China has its own local wine production - new drinkers start with Local Chinese Brands such as Great Wall (2.5m std cases in 2003) and Dynasty (2.1m std cases in 2003).
  • Drinking French wines remains a status symbol and a way of displaying wealth and success.
  • To succeed in China, Australian wines need to become aspirational to urban young emerging ‘middle’ class aspiring to a trendy/contemporary lifestyle.
what about china34

Old World

French wine industry is waking up and several producers are offering a new and more accessible market-oriented approach

French and Italian wine industries will focus on China.

New World

Influence of growing numbers of Chinese travelling abroad (1st arrival in Australia around 9th Century!)

China more open than Japan – less of a set mind-set, less fidelity/reverence towards cuisine/wine relationship.

What About China?
  • China could be compared to HK. Strong growth of Australian and New World wines but no ‘domination’ like Singapore and Malaysia because:
what about china35

Watch Out (!) – Increasing improvement in quality of Chinese Wines

  • Increasing number of expatriates (Asians as well as Westerners) relocating to China
  • (impact on drinking culture)
  • Huge long term potential for expensive and Iconic wines – strong interest for Luxury brands
  • Strong and growing interest in European culture but many deep cultural traditions are (re-) emerging – expensive Chinese Restaurants, architecture, design, etc.
What About China?
what about china36
What About China?
  • Major urban centres:
    • Beijing (Government, Culture, Business)
    • Greater Shanghai (Business, Culture)
    • Guangzhou / Pearl River Delta (South) (Business)
  • Explosion of International Hotel Chains & Restaurants
    • Olympics, Beijing 2008
    • World Expo, Shanghai 2010
  • Explosion of Hyper-market business –increasing distribution network

(Carrefour, Shanghai; WalMart, Shenzhen; DairyFarm opening in 2006)

what about japan
Explosive growth of International Hotel Chains – “Lost in Translation” etc.

Australian wine friendly F&B – high proportion being foreigners who are open-minded about New World wines, especially Australian wines

Only in International 5-star hotels do Japanese restaurants succeed in selling a lot of wine

New World (especially Australian) wine – a good match for Fusion cuisine which represents an increasing share of the restaurant market in Japan (Tokyo/Osaka)

What About Japan?
what about japan38
What About Japan?
  • Younger, wealthier consumers – more open to New World / Australian wines
    • Travel a lot especially to Australia, including young sommeliers - increasingly more Australian wine specialised on/off-trade premises being created
what about japan39

Arisotei (New style Kaiseki restaurant in Aoyama)

Arossa

(Fusion restaurant specialized in Australian wines)

Aoyama

Aoyama

What About Japan?
  • Also in Tokyo are some top-end Japanese restaurants (Kaiseki) in trendy places like Aoyama, Nishi-Azabu
    • Otherwise, 90% Japanese restaurants use Sake / Beer to go with meals
what about japan40
What About Japan?
  • New Retail Licensing Laws:
    • Convenience stores and home delivery food companies (Pizza/Asian cuisine) can sell alcohol
    • Regular supermarkets can now sell liquor
    • More specialised food and wine offerings are available in supermarkets situated in affluent areas
    • Discounters will become less important (?) as these other outlets gain more influnece
    • At the moment, Convenience stores sell low/very low end wines
australian wine industry
Australian Wine Industry

AREAS TO EXPLORE:

  • Communication
  • Wine Education & Programs
  • Distribution
communication
Communication
  • Brand Australia
  • Australian Wine Export Council
    • Conducts marketing activities in Europe, Japan, USA, Canada & Asia (through Austrade)
      • A number of good events organised in Asia region by AWEC – Trade Fairs, Consumer and Trade Tastings, and sponsored visits of key journalists and trade personnel to Australia
  • Austrade – assists entire Australian wine industry by presenting a collective and collaborative image development via its marketing activities in key export markets (have offices in most Asian markets)
key points for australian wine producers to consider
Key Points for Australian Wine Producers to Consider:
  • Emphasis on viticultural regions and diversity

(ie) “Terroir”– especially relevant for Japan

  • Invitations to visit Australia - Lifestyle Press/Publications and TV stations with influential Lifestyle programs
  • Be more involved and influential with Japanese Sommeliers
    • Young Sommelier Award (?), Sponsored trade-visits to Australia (?), More visits to Japan by very famous winemakers (?)
  • Need of real commitment in investing in long term brand building activities
  • Better understanding and analysis of channel or distribution
wine education programs
Wine Education Programs
  • Proper educational materials in the local language (e.g. Mandarin, Japanese)
  • Australian wine courses delivered in the local language – designed separately for the trade and the consumer – could be held locally and also in Australia
  • Recognition of the key prescriptors in each market (e.g. Japanese Sommelier’s Association)
  • Collaboration with the leading Tour operators from China, Japan, Korea and Taiwan to arrange properly structured wine tours (currently very ad hoc) to Australia in the correct language
growth opportunities in asia pacific for australian wines

NE ASIA:

  • China – EXCEPTIONAL (CAGR 20+?%s)
  • Taiwan and Korea - GOOD
    • (CAGR 7% and 12% respectively, over Short, Medium and Long Term)
  • Japan - Short, Medium and Long Term growth
    • Market growth and market share growth
    • Scale opportunities are OUTSTANDING

NE ASIA

Growth Opportunities in Asia Pacific for Australian Wines
  • SE ASIA:
  • Singapore, Malaysia, Thailand, Philippines, Hong Kong, Indonesia (?)
    • CAGR 4-8% over Short to Medium Term
    • Long Term?
  • NEW LONG TERM MARKETS:
  • India
  • Vietnam
improving distribution
Improving Distribution
  • Distribution is the most neglected area for all Australian wine companies, big and small

Australian Wine Company

(Export Manager based home)

CLASSIC MODEL

Local Agent

  • Adopted by most wine companies but some innovation emerging by establishing own subsidiaries or joint ventures
    • Still slow to adopt, even in major markets
    • No accident Australian wine companies attached to international groups develop most quickly!

Australian Wine Company

(Head Office in Home country)

Australian Wine Company

Local Market Subsidiary

distribution models
Distribution Models
  • Various models adopted by wine companies today:
    • Export Model
    • Local Subsidiary
    • Local Joint Venture
    • Joint Venture alliances with other Australian wine companies for developing specific overseas wine markets
  • Today, all of these models exists in Japan – French, Italian and US wine companies are present in each format
distribution models48
Distribution Models
  • More control over Distribution, means:
    • More control over Pricing
    • Can work directly with Trade Customers
    • More control over Marketing and Communication
  • Add 20% to 40% to see-through Gross Margin
  • One the other hand, more risk and more initial cost
distribution models china
Distribution Models – China?

Completion of accession timetable of WTO membership in China means that all these models will be possible in China from January 2005

CHINA

distribution models china50
Distribution Models – China?
  • Wholly owned foreign entities (WOFE) prohibition on engaging in any sales activity for wine & spirits distribution in China will be abolished from 1st January 2005.
  • Today, companies set up in the Free Trade Zones (e.g. Waigaoqiao, Shanghai) can import and sell wine into China.
  • WOFE can set up companies outside the Free Trade Zones to get involved in consultancy services of wine & spirit business.

2004 OPERATION MODEL

china 2005 onwards
China: 2005 Onwards
  • WOFE can apply for importation and distribution rights under the “Measures for the Administration of Foreign Investment in the Commercial Sector” issued in April 2004.
  • Waigaoqiao distribution company can be maintained owing to the duty and tax privileges in the Free Trade Zone.
  • Consultancy company outside the Free Trade Zone can turn into a distribution company selling directly to customers.

2005 TARGET

OPERATION

MODEL:

improving distribution52
Improving Distribution
  • Assumption that local agents have strong economic interest to develop an agency always need to be reconfirmed
    • frequently, contractual targets lead to price destruction

Choice of local agents limited & local presence will be key to managing these challenges:

Focus and share of mind

Building the brand in the trade

Managing the conflicts between on-premise and off-premise distribution created by off-trade accounts trying to import directly

Multi-channel distribution

Price structure management

improving distribution53
Improving Distribution
  • Few single wine agencies represent a majority of economic profit for importer/distributor
  • Distributor’s total margin approx. 40% total see-through gross margin
  • Difficult to manage length of contract:
  • Local Presence can be progressive:

Too Long (Japanese style) contracts : too little incentive to perform

Too short: venture plagued by doubt and shot term thinking

Base winery representative in-market

Export Manager becomes Business Development Manager

Develop joint ventures or local subsidiaries as next steps

challenges today
Challenges Today

Building superior trade profitability to take share from other wine suppliers

Deepen understanding of channels of distribution (e.g.) Chinese restaurants in China, but NOT Japanese restaurants in Japan!

Building communication and education programs – develop trade and consumer awareness. The ‘automatic’ interest in wine is much less strong than in the USA or UK

Understand the power of local brands and identify the best price/profit opportunity. Typically Asian/Japanese pricing gives opportunities for superior profitability

Consistent pricing and promotion activities

challenges today55
Challenges Today

Winners in the next phase of development of the wines markets of NE Asia will depend on which country’s wine industry develops the more effective distribution strategies.

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