Building business in Asia Pacific New Distribution Models

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Building business in Asia PacificNew
Distribution Models
By Mark Bedingham, Moet Hennessy Asia Pacific
Ltd. Regional Managing Director Asia, Japan,
and Australasia
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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 GDPUSD160.9bn Popn
6.845 m GDP/headUSD23,350
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
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Japanese Market
JAPAN GDP Growth 2.5 GDP USD 4,317.8 bn Popn
127m GDP/head USD33,941
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Global Asia Wine Market
Total Vol 50.059mil
Total Wine Market Still Sparkling
Wine Source IWSR, June 2004/Sopexa/Industry
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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
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Outlook for the Future

• Forecast volume growth in Key Asian Markets incl.
  Japan

Growth in vol (2009 vs. 2004) 29
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The Consumer in Japan
Life Style of Japanese wine consumersaged
between 25-35years old
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Asian Wine Consumers
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Japan Where do they consume?
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Asia Where do they consume?
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Still Wines Consumption per capita
Tokyos consumption per capita is 2.7 times the
National consumption!
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Purchasing Power Parity in China Key Regions
Shanghais GDP per capita is 4 times that of
China, and Guangzhous is more than 5 times!
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Australias Position in Asia
Value based on Import Value Total Volume of Still
Bottled Import Wines
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Australias 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
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Australias Position in Asia
Source IWSR, June 2004/Sopexa/Industry
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Australias Position in Asia
Total Still Imported Wines
Source IWSR, June 2004/Sopexa/Industry
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Australias Position in Asia
Total Still Imported Wines
Source IWSR, June 2004/Sopexa/Industry
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Australias Position in Asia
Total Still Imported Wines
Source IWSR, June 2004/Sopexa/Industry
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Duty and Taxes A Key Factor for Imported Wines
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Duty and Taxes A Key Factor for Imported Wines
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Duty and Taxes A Key Factor for Imported Wines
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Consumer BehaviourThe Success of Australian
Wines in Asia

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

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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..)

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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.

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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

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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

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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.

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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

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Old World Markets The Case of Japan

• Specialist Wine magazines
• Circulation 30,000 copies/month
• Target Sommeliers/chefs
• Mainly focused on French/Italian wines

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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 companys portfolio they achieve
  the lowest price pouring contracts.

Domestic wines 1,000gt 84 Market Share by
brand Ureshi Wine 13 Bistro 11 Bon
Rouge 9
German Wines 1,000gt30 Market Share by
brand Valckenberg 14 (Liebfraumilch) GA
Schmitt 12 Racke 7
1,000gt 65
Market
US Wines 1,000gt 78 Market Share by
brand Carlos Rossi 13 Rivercrest 21 Franzia
9
Chile Wines 1,000gt 49 Market Share by
brand Concha y Toro 31 Santa Carolina 10 San
Pedro 9
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The Future for Australian Wines

• How can we accelerate the growth in the large
  current and potential markets?
• How big is the prize?

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Blue Sky Projections
2003-2009 CAGR 7
5
20
4
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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.

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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

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What About China?
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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)

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What About Japan?

• Explosive growth of International Hotel Chains
  Lost in Translation etc.
• Australian wine friendly FB 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)

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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

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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

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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

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Australian Wine Industry

• AREAS TO EXPLORE
• Communication
• Wine Education Programs
• Distribution

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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)

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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

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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 Sommeliers 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

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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

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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
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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

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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

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Distribution Models China?
CHINA

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

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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
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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
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Improving Distribution
Choice of local agents limited local presence
will be key to managing these challenges
Focus and share of mind
Price structure management
Multi-channel distribution
Managing the conflicts between on-premise and
off-premise distribution created by off-trade
accounts trying to import directly
Building the brand in the trade

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

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Improving Distribution

• Few single wine agencies represent a majority of
  economic profit for importer/distributor
• Distributors 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
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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
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Challenges Today
Winners in the next phase of development of the
wines markets of NE Asia will depend on which
countrys wine industry develops the more
effective distribution strategies.
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THANK YOU!