Voluntary Report - Public distribution

**Date:** 1/8/2008

**GAIN Report Number:** CH8802

CH8802

**China, People's Republic of**

**Wine**

**Shanghai\'s Specialty Retail Wine Shops**

**2008**

**Approved by:**

![](media/image1.wmf)Wayne Batwin

U.S. Consulate

**Prepared by:**

Sarah Wegmueller

**Report Highlights:**

Shanghai\'s specialty retail wine shops are a new phenomenon in Shanghai
and are unique alternatives to traditional state-owned tobacco and
liquor shops and other retail outlets. These shops have found a niche in
the retail market due to their unique marketing strategies, educational
events, and store locations. Nearly half of all imported wines entering
China arrive through the port of Shanghai, and almost twenty wine shops
have opened in the last few years to increase distribution options. From
wine tasting parties and definitive flavor labels to wine and food
matching seminars, these small specialty shops offer a growing and
personalized introduction to imported wine.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Shanghai ATO \[CH2\]

\[CH\]

Table of Contents

Introduction [3](#introduction)

Shanghai's Retail Wine Market: General Overview
[3](#shanghais-retail-wine-market-general-overview)

Drivers of the Shanghai Retail Wine Market
[4](#drivers-of-the-shanghai-retail-wine-market)

The Venue: Shanghai's Specialty Retail Wine Stores
[5](#the-venue-shanghais-specialty-retail-wine-stores)

Merchandising [7](#merchandising)

Marketing for a New Culture: Education
[7](#marketing-for-a-new-culture-education)

Location [9](#location)

Competitive Situation [9](#competitive-situation)

Retail Wine Forecast [10](#retail-wine-forecast)

Appendix A: List of Required Product Information on Chinese Labels
[12](#appendix-a-list-of-required-product-information-on-chinese-labels)

Appendix B: Formula to Determine Import Tax on U.S. Wine
[12](#appendix-b-formula-to-determine-import-tax-on-u.s.-wine)

# Introduction

This report focuses on Shanghai's specialty wine shops in the emerging
grape wine retail sector. These shops are a new phenomenon in Shanghai
and are unique alternatives to traditional state-owned tobacco and
liquor shops and supermarket and hypermarket retail outlets. Specialty
retail wine shops are gaining popularity among locals because of
marketing strategies, educational events, and store location. This
report also includes a brief review of the overall Shanghai wine market.
For a more complete picture of the Shanghai wine market, please see the
previously released ATO report
[**CH6809**](http://www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp).

Please note: Although grape wine imports are growing, they constitute
only a small percentage of wine consumed in China. Imported grape wine
accounts for only 2% of volume sales in China, with rice wine and
domestic wines dominating (*Euromonitor*). Rice wine is an important
tradition in China, dating back more than 2,500 years. However, evidence
indicates that imported grape wines are increasingly popular. In this
report, all further mentions of "wine" are in reference to grape wine
except where noted.

# Shanghai's Retail Wine Market: General Overview

![](media/image2.wmf){width="3.875in"
height="2.6569444444444446in"}Shanghai, the most cosmopolitan metropolis
in China, is also the nation's largest market for imported wines. As one
of the major ports in the world and the access point of the entire
Yangtze River Delta, Shanghai is a magnet for imported wines consumed in
the region and beyond. As ex-patriots move to the coastal cities of
China, the demand for imported wine has grown rapidly throughout the
country. Since 2001, the amount of grape wine imported to China has
increased in value by almost 600%; in 2006 alone imports nearly doubled
from 2005 (*Global Trade Atlas)*. The present popularity of U.S. wines
in other booming East Asian markets bodes well for the opportunities
presented in the China market as its economy continues to expand.

The value of U.S. wine exports to China increased more than fourfold
from \$1.4 million in 2002 to almost \$7 million in 2006. Due to their
late entry, U.S. winemakers have yet to gain a significant market share
relative to their French and Italian counterparts, or relative to other
latecomers such as Australia and Chile. In fact, although imports
increased steadily over the past three years, the United States dropped
in rank to 6^th^ place among the top wine importers to China, following
France, Australia, Chile, Spain, and Italy (see Table 1). The unit price
of Chilean and Spanish wine has actually decreased over time, which
suggests that more bulk wine may be exported to China compared to
previous years (*Euromonitor*).

![](media/image3.wmf){width="3.8744094488188976in"
height="3.7299212598425195in"}Nearly half of all imported wines entering
China arrive at the port of Shanghai. In 2006, global winemakers shipped
\$56.4 million worth of wine to Shanghai, a growth in value of 76.6%
from 2005, and nearly three times the value of imports in 2004
(*Shanghai Customs)*. Shanghai is home to over forty 5-star hotels and
more than 130 top-end Western restaurants, as well as countless wine
lounges, members-only wine clubs, specialty stores and hypermarkets.
These retailers attract not only foreigners, but also an increasing
number of locals who are educated and curious about wine. Imported wines
are gaining popularity, and the established, highly-recognized French
and Italian wines are now in competition with New World wines, including
wines from Australia, Chile, and the U.S.

# Drivers of the Shanghai Retail Wine Market

![](media/image4.wmf){width="4.375in"
height="3.1118055555555557in"}China's Yangtze River Delta, which
includes Shanghai and its prosperous satellite cities in Jiangsu
Province to the north and Zhejiang Province to the south, is a key
consumer market. Shanghai's 20 million residents have the highest per
capita disposable income in China, estimated at more than \$7,000 in
2006. Urban residents in nearby provinces are not far behind: in
Jiangsu, the per capita GDP in 2006 was almost \$3,600, compared to the
national average of only \$1,970. Zhejiang Province reached \$3,975 in
2006. Shanghai and its neighboring provinces account for almost 30% of
the mainland China's GDP (*U.S. Consulate*).

Key trends influencing the Shanghai wine market include:

-   Enjoying four times as many top-end Western restaurants than their
    Beijing counterparts (*Goodwell China*), Shanghainese are more
    inclined to try new foods and flavors. Specialty wine shops attract
    ex-patriots as well as young, white collar Chinese locals who are
    open to new and fresh imported trends. Young Shanghainese are
    wealthier and spend money more easily than their parents' and
    grandparents' generations.

-   As tourist visas become easier to obtain, the number of local
    Chinese who have traveled internationally is growing; upon their
    return to the mainland, Shanghainese are eager to enjoy memorable
    treats discovered abroad. Wine retailers estimate their consumer
    base to be half local Chinese and half foreigners (including
    Taiwanese and Hong Kong-ese).

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-   Imported wine is believed to be healthy and implies a certain social
    status and cultural sophistication. It is considered a fashionable
    alternative to traditional Chinese rice wines and alcohol and a
    classier choice over imported hard liquor and beer.

-   The recent food safety issues and trade tensions between the U.S.
    and China have alarmed Shanghainese and sparked a new trend in
    Shanghai as well. Shanghainese purchase foreign products, including
    food and beverages because of an initial high level of trust in
    foreign brands. While consumer trends prove difficult to change,
    patterns seen in Shanghai are similar to those in the rest of the
    world: as consumers recognize the advantages of wine over hard
    liquor and beer, they will begin to drink wine more casually: first
    in bars and restaurants, and then at home and with friends.
    Consumers are interested in buying products with better long-term
    value, which is reflected in their desire to purchase high quality
    imported wines.

-   Due in part to low disposable incomes, mid-price, domestic wines
    still dominate the market. The strongest sales in 2006 were in
    "mid-priced" wine ranging from 20 RMB to 59.99 RMB (about \$2.67 -
    \$8) per liter (*Euromonitor*). Thus, wine importers cannot compete
    on price alone: an inexpensive import still retails at about 60 RMB
    (about \$8).

# The Venue: Shanghai's Specialty Retail Wine Stores

The intricate web of importers, distributors, wholesalers, aficionados
and retailers provides an increased supply of high quality imported
wines to Shanghai. Consumers can now find educational events on fine
wines, social gatherings promoting imported wines, other locals
interested in this new product, and salesmen more than ready to offer
suggestions.

Hypermarkets like Carrefour and Metro offer a wide range of imported and
domestic wines. These wines are most often distinguished by country of
origin. One Carrefour store in Shanghai has five rows of imported wines,
ranging in price from 20 RMB to 1500 RMB (about \$2.67-\$200). The wine
displays in these hypermarkets are strategically located next to other
foreign liquor and are one row away from the imported foods section.

The newest venues to find specialty wines and educational and social
events are **specialty wine shops**, which are popping up all over in
Shanghai. While state-owned tobacco and liquor stores selling rice wine
nourish the rest of China, and large scale retail shops offer wine
selections without explanation of taste or quality, independent wine
shops with distinctive merchandising and character have become more
common in certain sections of Shanghai. Individual importers carefully
select exclusive wines to promote in these small stores, and the
ambience of each store is refreshingly peaceful.

\*These importers/distributors will take orders and deliver to customers
but do not have a physical retail store.

**Ownership**

The majority of specialty retail wine shops, wine lounges, and boutiques
have been in Shanghai for less than two years (a few large-scale
importers and distributors have been around since the mid-1990's). Many
opened their first shops in the first six months of 2007 and have
contracts for second and third retail shops throughout the city. As
Shanghai's retail wine market develops, some specialty wine shops are
being opened by importers who also profit from wholesale sales to
restaurants, hotels and clubs.

Specialty wine shops are often run by importers selling an exclusive
selection of wine. For example, the specialty retail wine shop **Napa
Reserves** sells Californian wines from small wineries at premium
prices. With a single supply of family-owned wineries, this shop caters
to the wealthy upper-class local Chinese and expatriates who are aware
of California's distinguished vineyards. According to Ellen Gu, store
manager at Napa Reserve, "Chinese are hesitant to pick up a bottle of
American wine simply because they do not recognize the U.S. as a culture
of wine and food." Due in part to franchise giants like KFC and
McDonalds, in China the U.S. is still largely associated with fast food.
However, as trends change in the U.S., its exports to Shanghai will grow
and develop a stronger identity.

# 

# 

# Merchandising

Specialty retail wine shops feature a variety of imported wines shelved
on hardwood racks. Typically, the storefront is glass, allowing
potential buyers the chance to glimpse into the shop to see the wine
selection. Most wine shops have warm lighting and low ceilings,
providing a "cozier" environment than larger retailers. In many stores,
soft music is playing as well. With a few exceptions, the wine is
categorized as follows: first by country of origin, then variety, and
finally by price. Gift displays are found at the front of the stores.
These displays typically hold a collection of premium red wines and gift
boxes.

Shanghainese most often purchase wine as an elegant and tasteful gift to
share or for others to enjoy. In China, the presentation of gifts is
extremely important. Larger gift boxes may include 2 bottles of wine and
a corkscrew or wineglass, all resting on a "satiny pillow" (a plastic
mold covered with attractive fabric).

![](media/image5.jpeg){width="2.6458333333333335in"
height="2.0131944444444443in"}

Wine conveys the same affection and respect as a gift item as it does at
a banquet, to be given on special occasions such as Chinese New Year or
a housewarming party. Gift packaging in the form of a sturdy, ornate
wooden display box is standard.

The concept of "face" is ingrained in the Chinese culture, and is
well-acknowledged in Shanghai. As incomes increase and lifestyles become
more luxurious, there is a common desire to manifest one's success
through material possessions. Wine represents the "good life", and
through online, print, and televised advertisements, it has become a
sign of success. It is one symbol by which Shanghainese can show
publicly how much "kuai" (money) they possess. Shanghai wine importers
and retailers are aware of the significance of "face", and market their
wine and wine products accordingly.

![](media/image6.jpeg){width="2.1444444444444444in"
height="2.0208333333333335in"}

Red wine is overwhelmingly more popular than white wine in Shanghai. The
color red is associated with good fortune and happiness. Also, the
tannins in red wine allegedly evoke a taste similar to that of tea,
which is the most commonly consumed beverage in China. French wines are
most popular because they are most well-known among Shanghainese.
However, U.S. wines still compete with unique assortments and gift
ideas. One retail shop features a Californian wine containing dazzling
flakes of real gold floating in rose or white wine. Gold is auspicious
in China, and this particular wine, which is marketed as a gift item
with two wine glasses in a well-built box, is a top seller among premium
wines.

# Marketing for a New Culture: Education

The most important measure taken to help fuel interest and growth in
this market is education. Wine shop owners and wine importers recognize
the influx of imported wines entering Shanghai and the distinguishable
and growing wine culture here, and have utilized creative means of
educating local Chinese on the benefits and advantages of wine.
Entrepreneurial shop owners and managers recognize that, while imported
wines are popular because they are new, trendy, fashionable, status
symbols, they are still foreign to most Chinese.

![](media/image7.jpeg){width="2.2604166666666665in"
height="1.7in"}Shanghai's wine shops spread the culture of imported wine
through multi-media advertisements. During a drive down a busy Shanghai
street, video billboards flash images of a happy couple smiling over a
glass of red wine. Entertainment magazines like *City Weekend* publish
wine tasting events and deals in Chinese and English. Chinese websites
cover wine promotions too, such as California Wine Institute events with
detailed explanations.

![](media/image8.jpeg){width="2.8958333333333335in"
height="2.2708333333333335in"}, a company less than one year old,
successfully strategizes it viticultural venture with a unique
educational approach. Its retail display strategy is the only one of its
kind in Shanghai. Rather than distinguish wines by country of origin,
wines are separated by flavors and more detailed sub-categories: fresh
versus rich; oaky or spicy, grassy and nutty or more toasty or fruity.
This helps Shanghainese discover at first taste the essence of different
wines. Upon entering the wine store and lounge, pine wood wine racks are
stacked with wines from the Old and New Worlds, but one hardly pays
attention to the country on the label, as there are colorful stickers
providing quick descriptions of each wine. This unique labeling system
allows easy access for the unseasoned Chinese consumer, and allows
better market access for country-competitive wines as well.

Another means of educating the masses is through wine tasting. Some
small shops offer potential buyers a small glass of wine upon entering
the store. With a brief introduction of the wine, including flavors,
country/region of origin, and year harvested, shoppers are able to match
words with taste. A salesman remarked that, "After trying the wine and
understanding its life, approximately 80% to 90% of shoppers will feel
confident enough to buy a bottle of wine." He added that Chinese tend to
buy less than foreigners and are more enthusiastic to taste samples, but
that this service helps to familiarize Shanghainese with imported wine.

At one local shop, a wine tasting and luncheon is held monthly. Lasting
two hours, approximately 25-30 guests attend an educational wine tasting
and luncheon. The group is kept small (target number of about 20 people)
because a small-scale event is more effective, and breeds less of a
"party" atmosphere. During the lunch, an "ambassador of wine" will give
a presentation on the wine served at the lunch. The group is usually
comprised of half Chinese and half ex-pats. The wine-tasting event is in
cooperation with different wine suppliers in Shanghai: the wine lounge
provides the food, venue and supplies, and the wine distributor provides
the wine and ambassador.

Another store has done a great deal of educational and promotional work
for Californian wines. Sales representatives explain in Chinese and
English the unique soil quality found in Napa Valley, with volcanic
residue that creates an ideal soil for vineyards. Although Shanghai's
demand for U.S. wines is still developing, many retailers and importers
agree that U.S. wines will sell better in Shanghai if greater efforts
are made to provide mid-range priced wines with a brand or flavor
advantage over Old World and Australian wines and if U.S. promotional
programs increase.

#  Location

![](media/image9.jpeg){width="2.5541666666666667in"
height="3.3958333333333335in"}When marketing such a new product that is
indeed foreign to the consumer, store location is key. Without brand or
product recognition, a new product purchased in a familiar setting
provides a legitimizing factor to local consumers. The shops in Shanghai
are concentrated in a small area: there are as many as four wine
boutiques on Weihai Road, an ebullient shopping street lined with
fashionable clothing stores, foreign restaurants, and high end imported
goods. Another locale is Dagu Road, where three shops are in close
proximity to one another. The reason for these concentrated selling
areas is simple. Chinese are unlikely to initially trust independent
wine shops. Since local consumers are still relatively unfamiliar with
foreign wines, they are hesitant to buy a bottle because even if it is
labeled "premium", they will not know if it is a high quality product or
not. It is difficult for an untrained palate to differentiate a bad
bottle of wine from a good bottle. For a consumer who knows little about
wine, a young wine shop harbors the buyer's fear that he/she is not
getting the "real deal" of high quality wine.

The fear of being cheated is a strong sentiment that inhibits specialty
wine shops from gaining the trust of local consumers. Thus, Chinese
consumers who are initially interested in wine may first buy a bottle or
two in a more "comfortable" setting such as a department store.
International department stores or retailers like Isetan, Carrefour, and
Sogo, have separate displays for wine, which elicit high interest among
consumers who are used to the department store layout. Even upscale
supermarkets like City Shop provide a safe ground for consumers to test
new products. Also, these types of shops carry brands that are often
recognized and advertised in Shanghai as well.

Still, small retail shops bring awareness and local recognition to the
product, and many shops focus on educating a new culture as well as
selling their wines in the wholesale market.

# Competitive Situation

Specialty wine shop retailers have a distinct advantage over larger
retail shops in their ability to access consumers through small-scale,
personalized social and educational events. Also, the Shanghainese'
adaptation to Starbucks coffee shops is a trend similar to that
anticipated to develop for specialty retail wine shops. Market
researchers speculate that the Shanghainese' ability to enjoy an
unfamiliar drink like coffee in a cafe setting could be a prelude to the
growing popularity of specialty wine shops.

Although market approaches vary widely, most importers, distributors and
retailers alike agree on one thing: the Shanghai market is fiercely
competitive. For starters, wine license restrictions have decreased and
importing is becoming easier. The consumption tax dropped from 14% to
10% in 2005 (*Euromonitor*). (For more information on total import tax
on U.S. wines, please see Appendix B.) One importer described the
overflow of wine imports in 1996, when one million cases of wine were
imported into Shanghai, only to sit in warehouses and eventually be
thrown out. The supply was readily available, but the demand for
imported wine was still quite weak. Imports did not reach the same
volume again until 2005. While shipments are increasing and filling the
supply channel, the demand for imports is still growing.

In Shanghai, imported wines account for a larger market share than the
rest of China, but they are still not as popular as domestic wines. In
fact, in recent years there has been an influx of premium local wines. A
few wines from Xinjiang, Shanxi and Henan are retailing at 300 RMB and
selling in hotels and restaurants for as much as 800 RMB. The quality
and brand recognition of local wines are increasing. Also, Chinese
brands recognize that packaging is important to Chinese, since a large
amount of wine is bought as gifts. Nestled in a red satin cloth inside a
hardwood box, domestic wines with intricate, sophisticated labels are
extremely popular with local Chinese.

However, the rise in local production has actually helped the imported
wine market. With local brands selling at such high prices, they have
created a price-acceptable category that is higher than many believed
Chinese would pay for wine. When Chinese jump to this ultra-premium
price category of domestic wines, they do not have to pay much more for
imported premium wine.

Of course, certain shops cater to higher-end consumers, with bottles
starting at 150 RMB, but part of the intrigue of this market is that it
is popular among all income levels. A step into Lianhua, a common
Chinese supermarket, reveals a limited number of imported red wines on
display front and center of the store. Labels of Chinese Shaanxi and
Xinjiang wines are becoming classier, resembling French Bordeaux labels
down to the Chinese "chateau vineyard".

Australian wine is becoming more popular, too, due both to the country's
close proximity to China and the less expensive, wide selection
available. Many overseas Chinese travel to or study in Australia, and
witness firsthand that wine is a large part of the Australian culture.

# Retail Wine Forecast

# While competition in Shanghai's wine retail market is strong, the focus of most wine importers is simply to expand the market in general, rather than emphasize a particular brand. As general demand and interest in imported wine grows, wine importers will be better able to market specific brands and varieties of wine. Education remains a strong focus of Shanghai specialty retail wine stores, and will continue to be until Shanghainese fully understand imported wines. In order for new wine products to succeed in the Shanghai market, exporters should concentrate on: 

-   Competitive pricing, high quality, and a unique brand image

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-   Launching a product in proper sales channel

-   Targeting appropriate customers

-   Marketing events and communication

-   Sales strategy and promotion

-   Distinctive advertising compared to competitors

-   Great before & after sales services

# 

# Since the aim of specialty retail shop owners and importers is to expand the wine market, U.S. vintners interested in entering the Shanghai market should consider specialty retail wine shops as potential venues to market and sell their products. Large importers like ASC and Torres are available as resources for the retail market as well. Shanghai's specialty retail wine shops are still developing an identity, and may best be used by new importers to access the retail market after their presence has grown and become more widely recognized in Shanghai.

# Appendix A: List of Required Product Information on Chinese Labels

A.  Name/Brand

B.  Ingredients

C.  Net volume (ml)

D.  Alcohol content (%)

E.  Production place

F.  Production date (yy/mm/dd)

G.  Packer/distributor/importer (Name and address)

H.  Country of origin

I.  Quality guarantee or storage period (yy/mm/dd)

J.  Sugar content (g/L)

*Source: China Administration of Quality Supervision, Inspection, and
Quarantine, 2007*

# 

# 

# Appendix B: Formula to Determine Import Tax on U.S. Wine

Total import taxes for bulk and bottled wine factor in an import tax,
consumption tax, and VAT:

Import tax rate (ITR)

Bulk wine 20%

Bottled wine 14%

Consumption tax rate (CTR) 10%

VAT rate 17%

Rather than being the simple sum of these percentages, however, the
total import tax is calculated using a compound formula. Using bottled
wine for an example, the compound rate is calculated as follows:

  -------- --- -------- -------- ---- ----- -------- ---- ------- -------- ---- ------ -------- --- ------ ---------
  Total    =   ITR      (0.14)   \+   CTR   (0.10)   \+   VAT     (0.17)   \+   (ITR   (0.14)   X   VAT    (0.17))
  import                                                  rate                                      rate   
  tax                                                                                                      

               1 -- CTR                                                                                    
               (0.10)                                                                                      
  -------- --- -------- -------- ---- ----- -------- ---- ------- -------- ---- ------ -------- --- ------ ---------

Simplifying,

  ----------- --- ------ ---- --------- --- --------- --- -------- --- ------------
  Total       =   0.41   +    0.0238    =   0.4338    =   0.482    =   **48.20%**
  import tax                                                           

                  0.9                       0.9                        
  ----------- --- ------ ---- --------- --- --------- --- -------- --- ------------

*Source: 2006 Customs Import and Export Tariff of the People's Republic
of China*

We can calculate that the total import tax on bottled wine is 48.2
percent and on bulk wine is 56 percent.

## 

#