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What Will the Chinese Spirits Market Look Like in 2020?

05/11/2018

While China has been experiencing continuous growth in its spirits market, industry analysts expect the current growth to extend for at least another five years.

The Chinese spirits market is currently experiencing unprecedented growth, and industry analysts expect the current growth trajectory to extend for at least the next five years. The Chinese spirits market is growing at a compound annual growth rate (CAGR) of 15%, putting it on pace to become a $450 billion market opportunity by the year 2021. Amidst all this growth, how will the Chinese spirits market change and evolve?

Foreign spirits will win market share from domestic speciality spirits

In today’s Chinese spirits market, the domestic speciality spirit known as baiju plays a vitally important role. According to the latest industry surveys, baiju accounts for 94.2% (by value) and 98.2% (by volume) of all spirits sold within Mainland China. That leaves only a narrow sliver of the pie for all other spirits. Put another way, the combined value of all foreign whiskey, brandy, vodka, gin and tequila sold in China today represents anywhere from 2-5% of the total marketplace.

Needless to say, this is one major change that is coming to the Chinese spirits industry by 2020: foreign spirits producers are going to start winning market share away from domestic spirits producers. We’ve seen much the same picture emerge in the Chinese wine industry, first with prestigious Bordeaux wines from France, and now with mid-range red wines from Australia and Chile.

We can already see the first signs of this trend taking hold in the Chinese spirits market – all you have to do is examine the data on foreign spirits imports. Over the 9-month period from January to September 2017, import volume was 27.69% compared to the year-earlier period. This phenomenal growth in imports can largely be attributed to imports of brandy and cognac. Brandy now represents a staggering 76% of all spirits imports. Moreover, this category is growing at a 44.4% year-over-year rate. Expect to see double-digit growth rates for other international spirits as well.

The rise of the young Chinese millennial will result in changing tastes and preferences

As in other spirits markets around the world, the rise of the new millennial generation is having a huge impact on tastes, preferences and behaviours in China. For the older generation, expensive foreign spirits are primarily reserved for special occasions and gift-giving opportunities. In other words, you wouldn’t buy a bottle of expensive Scotch whisky for your own home – you’d buy it as a present for a family member or business partner. For the newer millennial generation, however, expensive spirits are increasingly viewed as a form of social prestige. Being able to order an expensive spirit while out with friends is a form of social recognition. And that trend is only intensifying with the unprecedented growth of the Chinese middle class.

Another major change in tastes and preferences is the shift in focus to an active bar culture in major cities like Beijing and Shanghai. These cities are now becoming known as international hot spots – and just like trends in cocktail bars and lounges can sweep over a city like Los Angeles or New York and then be transmitted to the rest of the nation, the same thing is taking place in cities like Shanghai. It’s already possible to find articles about how to market to the hipster demographic in China, and that’s going to lead to a sea change in how spirit brands get in front of consumers – think pop-up retail concepts, festivals, and plenty of emphasis on special events, like the special Single’s Day event on November 11 (11.11), which has been touted as a special occasion to drink.

The result of this cultural change in the way spirits are consumed and enjoyed could have a huge impact on per capita consumption. Right now, annual per capita consumption of spirits in China is 7.3 litres. By 2021, that figure is expected to grow to 14.4 litres. In short, annual per capita consumption is on a pace to double within a relatively short period of time.

Digital commerce will change the way spirits brands enter the marketplace

When most foreign spirits brands think about entering the Chinese marketplace, the first thing that they typically think of is finding the right importer who can then get their bottles on the shelves of retail locations in the most important urban destinations. This has led to a primary emphasis on getting products into urban supermarkets and hypermarkets, which are the No. 1 channels for spirits, with a 54.4% market share of total spirits sales volume.

The Chinese embrace of digital commerce and social media, however, has fundamentally changed the way spirit brands can interact with consumers and increase overall brand recognition. For now, the two most important Chinese social media platforms are WeChat (with an estimated 900 million users as of December 2016) and Weibo. The easiest way to think of these two social media platforms is that they are the Chinese equivalent of Facebook and Twitter. And just as Western brands carefully cultivate their brand images on these Western social media platforms, the same type of activity is now happening on Chinese social media.

And, of course, the sheer size of the Chinese Internet (now larger than the U.S. Internet) means that e-commerce platforms like Tmall, Taobao and JD.com are increasingly important as a distribution channel. If you are a big Western brand trying to enter the Chinese market, you need to take into account how you will get your products sold via digital e-commerce platforms. The same type of activity is happening with the Chinese wine market, where new Direct-to-Consumer (D2C) platforms are making it possible to reach the end consumer without any investment whatsoever in a traditional retail presence. Think of Tmall or Taobao as online storefronts for selling premium, high-end spirits.

Looking ahead to 2020

So, as can be seen, a lot of changes are on the way to the Chinese spirits market between now and 2020. Look for more foreign brands to enter the marketplace, for traditional Chinese baiju to lose market share to international spirits, for the young millennial consumer to change the way people buy and consume spirits, and for Internet and mobile commerce to fundamentally shift the overall playing field. For Western spirits companies thinking of coming to China, there could not be a more exciting time.

 

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