Voluntary Report - public distribution

**Date:** 8/3/2007

**GAIN Report Number:** CH7063

CH7063

**China, Peoples Republic of**

**Product Brief**

**China Spirits Market**

**2007**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy

**Prepared by:**

Steve Leu

**Report Highlights:**

China's spirits sales were \$25.1 billion in 2006, representing 43% of
all alcoholic drinks consumed and making it China's number one alcoholic
beverage in current value terms. Spirits consumption revolves around
baijiu, followed by whiskey and grape brandy. U.S. whiskey and bourbon
exports to China grew 118% in 2006, with total sales of \$5.9 million.
Foreign spirits currently make up 10% of domestic spirits sales with the
greatest growth potential in high-end baijiu, the burgeoning Scottish
whiskey sector, and "healthier" spirits alternatives. For U.S.
exporters, overcoming market barriers such as a lack of brand awareness
and a lack of consumer knowledge about different spirit types are vital
to competing against the emerging wine sector and popular beer market.
FAS China\'s Agricultural Trade Offices are available to provide export
assistance for U.S. spirits producers.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Beijing \[CH1\]

\[CH\]

**China's Spirits Market: *Overview***

China's spirits sales were \$25.1 billion in 2006, representing 43% of
all alcoholic drinks in current value terms. It remains slightly ahead
of beer as China's number one alcoholic beverage in total sales value.
Spirits consumption revolves around *baijiu* (a traditional Chinese
liquor), followed by whiskey and grape brandy (cognac). *Baijiu* is
estimated to make up 70%-90% of spirits sales.

Globally, China represents the largest consuming nation of spirits by
volume and the third largest by current value. China accounts for 20%
and 8% of global consumption by volume and value, respectively. At the
same time, China ranks much lower in per capita expenditures of spirits,
placing outside the top 20 by both consumption measures. Comparatively,
populous India ranks 15^th^ in per capita expenditures (value) of
spirits.

China's per capita rankings are expected to rise, as the rapid growth of
the young affluent demographic, its increasing desire for "Western"
tastes, and busier lifestyles are creating ever more social
opportunities for wine, beer, and spirits consumption. Spirits
consumption, however, remains heavily concentrated in the developed
metropolitan areas of Northeast and East China.

In recent years, growing health awareness in China \-- triggered by
SARS, bird flu epidemics, and international food safety issues \-- has
also brought attention to the harmful affects of excessive spirits
consumption, especially those of *baijiu*. The government of China (GOC)
has responded by attempting to reduce consumption by increasing the
taxation of local spirits and the number of government supported
consumer education campaigns.

**China Total Spirits Sales: 2001-2006**

![](media/image2.wmf){width="6.500694444444444in"
height="2.686111111111111in"}

*(Source: Euromonitor International)*

Since 2003, spirits consumption by volume has had minimal growth after a
17% decline from 2001-2003. Consumption over the last five years has
remained flat between 3,620-3,648 million liters annually. As Chinese
consumers move towards beverages with lower alcoholic content, the
beneficiaries of the stagnant growth have been light and "green" beers,
red wines, and soft drinks. Overall, with greater affluence and health
awareness, Chinese are increasingly interested in drinking *better*
rather than drinking more.

**Alcoholic Beverage Demand in China: *Bottoms Up, No Signs of
Slowing***

Overall consumer demand for alcoholic beverages continues to be robust
and exceed China's economic growth rates. Retail consumer expenditures
have grown an average 12.3% annually from 2002-2006, driven largely by
large growth rates in the beer and wine sectors. In 2006, overall
domestic alcohol consumption totaled \$59.5 billion.

Geographically, the East and Northeast regions dominate overall
alcoholic consumption in China, accounting for 28% and 29% of domestic
sales by volume in 2006, respectively. Traditionally, the Northeast,
with its cooler climate and higher average per capita incomes, has been
the largest consumer of spirits. In 2006, it outpaced all other regions,
accounting for 33% of sales by current value.

The South China region has experienced the fastest growth domestically,
with alcohol sales jumping 13% (value) and 7% (volume) in 2005-2006.
Rapidly increasing disposable income levels in the major cities of
Guangzhou, Shenzhen, and Dongguan and demand for more sophisticated
beverages other than beers have fueled this explosive growth. The sales
growth of beer in the region has lagged behind the rest of China.
Meanwhile, spirits continue to sell (2% volume growth in 2005-2006) even
as other regions have had declines in spirits volume sales. The
robustness of South China's spirits market is due to its preference for
a variety of spirits, lower demand for local economy spirits (i.e. 2% of
spirits sales by volume), and strong preferences for foreign brands.

**China Spirits Outlook: *Niche Growth Opportunities for High-End
Foreign Brands***

The long-term forecast for spirits sales is not as promising as compared
to that of the burgeoning wine sector. The China wine sector started
booming when average prices dropped following a reduction in wine
tariffs from 44.6% to 14% in 2005 to comply with World Trade
Organization (WTO) rules. Foreign spirits also enjoyed significant
tariff reductions \-- from 19.2% to 10% in early 2005 \-- but the impact
on its market prices has not been as significant as that for wine. In
2006, China revamped its consumption tax code, reducing the rate for
hard liquors (spirits) from 25% to 20%.

![](media/image3.jpeg){width="3.0416666666666665in"
height="2.0520833333333335in"}Over the next five years, industry experts
forecast continued, flat spirits growth in volume. This will be offset
by double-digit YTY sales growth in current value. These seemingly
contradictory forecasts are based on the expectation that Chinese will
drink the same volume of spirits but will move from economy local
spirits to higher-priced foreign imports. Foreign spirits currently make
up 10% of the market.

Enormous growth opportunities continue to exist for foreign imports at
the high-end, particularly for whiskey, cognac, and premium *baijiu*.
Flavored vodka, white rum, and ready-to-drink spirits (RTDs) including
herbal spirits have shown growth potential but are currently consumed at
low volumes. The market is ripe for healthier spirits alternatives to
*baijiu,* but improving consumer knowledge about non-traditional spirits
is needed. Opportunities also exist geographically, with the highest
volume growth rates in the South China region.

**Foreign Spirits: *Perceived as a Luxury Good***

Foreign spirits are limited to the premium/luxury end of the spirits
industry due to high import taxes, restricted distribution channels, and
fierce domestic competition. Luxury goods are highly attractive to
wealthy Chinese, who, in general, desire name brand, prestigious goods.
Those earning more than \$37,300 annually in China now total 15 million
(2006). The size of the urban middle class, a demographic crucial to the
continued growth of foreign spirits, ranges in estimates from 65
million - 300 million people.

**U.S. Spirits Exports to China: *All about Whiskey, Sales Up YTY since
2001***

Exports of U.S. spirits to China are dominated by whiskey (including
bourbon), comprising 79% of the category's export value (\$5.9 million,
2006) and 75% of its export volume between 2002-2006. Nearly all U.S.
whiskey exports to China arrive in bottled form (as opposed to bulk) in
containers no greater than 1 gallon (4 liters). Overall, the U.S. ranks
third behind the U.K. and Canada in global whiskey exports, with sales
up 17% in 2006.

U.S. spirits exports to China, excluding Hong Kong, saw a robust 73%
volume growth from 2005-2006, far outpacing the sector's general export
growth rate of 17%. The drop in Hong Kong's export volume during the
same period is likely due to more shipments heading directly to the
mainland after spirits tariffs were reduced in 2005.

While U.S. whiskey holds the dominant position among U.S. spirits
exports to China, it faces a fierce battle with other foreign whiskey
products, particularly blended and malt Scotch whiskey, which have made
enormous market gains in recent years. The popularity of blended Scotch,
in particular, vaulted China in 2006 into a top ten whiskey-drinking
nation with total sales of \$115 million.

U.S. whiskey exports sell for the second highest average price (\$6.88 /
liter, 2006) among all traded spirits. As such, its mid-term prospects
for the highest growth rates remain the most favorable. Rum and tafia
remain a distant second in current value among U.S. spirits exports.
Vodka exports have significantly decreased in the last two years.

U.S. Spirits Exports to China: Market Shares by Sector

  ------------------- ---------- ---------- ---------- ---------- ---------- --------
  **Value (% of       **2002**   **2003**   **2004**   **2005**   **2006**   **2007
  Market)**                                                                  YTD**

  (HS220830) Whiskies 54.0%      67.4%      82.8%      79.8%      79.3%      53.7%

  (HS220890) Other    4.3%       18.7%      2.9%       7.5%       10.0%      15.0%

  (HS220840) Rum &    38.0%      1.0%       0.1%       8.3%       5.2%       12.0%
  Tafia                                                                      

  (HS220870)          3.2%       6.4%       0.4%       0.3%       4.0%       4.6%
  Liquors/Cordials                                                           

  (HS220820) Grape    0.5%       6.5%       1.3%       N/A        1.2%       11.3%
  Brandy                                                                     

  (HS220860) Vodka    N/A        N/A        5.9%       1.4%       0.2%       3.5%

  (HS220850) Gin &    N/A        N/A        N/A        N/A        0.1%       N/A
  Geneva                                                                     
  ------------------- ---------- ---------- ---------- ---------- ---------- --------

  ------------------- ---------- ---------- ---------- ---------- ---------- --------
  **Volume (% of      **2002**   **2003**   **2004**   **2005**   **2006**   **2007
  Market)**                                                                  YTD**

  (HS220830) Whiskies 45.7%      52.4%      60.6%      69.5%      75.4%      54.2%

  (HS220890) Other    5.5%       32.2%      4.1%       11.5%      7.0%       10.2%

  (HS220840) Rum &    46.3%      2.1%       0.2%       11.2%      7.3%       16.0%
  Tafia                                                                      

  (HS220870)          1.7%       6.4%       6.1%       4.9%       7.1%       4.9%
  Liquors/Cordials                                                           

  (HS220820) Grape    0.7%       6.8%       1.9%       N/A        2.7%       12.2%
  Brandy                                                                     

  (HS220860) Vodka    N/A        N/A        27.1%      2.9%       0.3%       2.4%

  (HS220850) Gin &    N/A        N/A        N/A        N/A        0.1%       N/A
  Geneva                                                                     
  ------------------- ---------- ---------- ---------- ---------- ---------- --------

In general, the retail prices of spirits in China have become more
expensive in 2006-2007 due to the higher cost of ingredient materials
and a high consumption tax. As of July 2007, the average retail price of
a 700 ml bottle of Kentucky bourbon (whiskey) ranged from \$25 - \$40,
depending on the retail outlet.

U.S. Spirits Exports to China: Average Prices by Sector

  ------------------- ---------- ---------- ---------- ---------- ---------- --------
  **Average Price (\$ **2002**   **2003**   **2004**   **2005**   **2006**   **2007
  / Liter)**                                                                 YTD**

  (HS220830) Whiskies \$4.25     \$4.56     \$5.18     \$5.19     \$6.88     \$6.70

  (HS220890) Other    \$2.81     \$2.06     \$2.69     \$2.96     \$9.31     \$9.91

  (HS220840) Rum &    \$2.96     \$1.79     \$2.02     \$3.33     \$4.62     \$5.04
  Tafia                                                                      

  (HS220870)          \$6.92     \$3.53     \$4.35     \$2.74     \$3.67     \$6.30
  Liquors/Cordials                                                           

  (HS220820) Grape    \$2.51     \$3.37     \$2.66     N/A        \$2.96     \$6.26
  Brandy                                                                     

  (HS220860) Vodka    N/A        N/A        \$0.83     \$2.23     \$3.76     \$9.63

  (HS220850) Gin &    N/A        N/A        N/A        N/A        \$5.39     N/A
  Geneva                                                                     
  ------------------- ---------- ---------- ---------- ---------- ---------- --------

*(Source: U.S. Customs Data, U.S. Department of Commerce)*

**Competitor Spirits Exporters to China**

Foreign spirits constitute 10% of the total spirits market. Foreign
competition is dominated by UK-produced Scottish whiskey (\$94.8
million, 2006) and French grape brandy, which includes cognac (\$233
million, 2006). Remy Martin and Martell (parent company is France's
Pernod Ricard Group) hold the top two positions in cognac exports to
China.

The UK's dominant position in whiskey is led by Scottish Chivas Brothers
(the parent company is also Pernod Ricard Group), which produces Chivas
Regal, the number one whiskey product in China. Chivas sales volume
increased 60% in 2006, thanks to the highly successful "This is the
Chivas Life" national marketing campaign. Chivas Regal mixed with green
iced tea has proven to be extremely popular in up-scale nightclubs.

UK-based Diageo, the world's largest alcoholic beverage company, is a
holding company to many popular foreign imports in China, including
Scotch whiskey brands Johnnie Walker Black Label and Ballantines, the
number two and three whiskey products in China. Operating in China since
1995, Diageo operates a marketing and distribution joint-venture Moët
Hennessy (LVMH) of France under the name MHD Moët Hennessy Diageo Co
Ltd.

India-based United Spirits, owned by the UB Group and the number three
global spirits producer, has recently announced that it will enter the
Chinese market beginning in the East China region.

Overall, the Pernod Ricard Group holds a 42% market share among total
foreign imported whiskey, vodka, and cognac sales, compared to a 17% for
Moët Hennessy Diageo.

Other foreign spirits with sizeable exports include Japanese spirits
(\$1.4 million, 2006), Russian vodka (\$2.6 million, 2006), and Korean
soju (\$3.5 million, 2006).

**Locally Produced Spirits**![](media/image4.jpeg){width="2.0in"
height="2.170138888888889in"}

*Baijiu*, a "white liquor", is the most popular local spirits in China
and the world's best selling spirit by volume. Often confused as a white
wine, this grain-based white spirit is considered the national drink.
*Baijiu* is comparable in taste and potency (80 to 120 proof) to Russian
vodka and affectionately called the "Chinese vodka". Alcohol consumption
in rural parts of China, with an estimated 700 million inhabitants, is
primarily limited to beer and *baijiu*.

The distillation process for an average *baijiu* brand is only one pass
\-- as opposed to 4-5 passes for vodka \-- giving it its strong, biting
flavor. The best quality *baijiu*, distilled from sorghum, rice,
unhusked barley and other local cereals, comes from the Sichuan province
in Southwest China, home to three of the top four producing brands.
Other main production regions include Shandong, Guizhou, and Hunan.

High-end *baijiu* is consumed among the male-dominated business
community, during Chinese holidays such as Chinese New Year's and
Military Day, and during popular festivals such as the Spring and the
Dragon Boat Festivals. The *Maotai* brand (particularly the 52% proof
version) is traditionally consumed at official state banquets and
military celebrations. Today, the widespread availability of low-grade
economy *baijiu* in convenience stores has made it accessible year-round
at a low cost. In Beijing and Shanghai, an eight-ounce bottle of
*baijiu* costs as much as a can of domestic beer (RMB 2 / \$0.26).

Well-aged, higher-grade *Baijiu*, however, sells at a premium at prices
comparable to those of vintage wines. For example, a 500 ml bottle of
premium-grade top brand *baijiu* sells for an average price of \$38.
*Baijiu* sales have averaged 20% YTY growth (value) over the last
fifteen years and are expected to grow 15% YTY in the next five years.

*Baijiu* is one of the few remaining Chinese industries in which foreign
capital has yet to enter. In December 2006, Diageo became the first
foreign spirits company to significantly invest in the Chinese spirits
industry after it took a minority stake in a top *baijiu* producer. This
has marked the beginning of a series of foreign investments and joint
ventures with Chinese *baijiu* producers, as foreign spirits companies
seek entry into the lucrative premium *baijiu* market.

Overall, no more than two Chinese spirits producers can legitimately
claim to be a national brand. Both are positioned at the premium end,
compete directly against foreign imports, and have developed prestigious
brands. *Sichuan Yibin Wuliangye* is the largest such national producer,
competing against foreign imports and invests heavily in product
development, advertising, and promotions. *Kweichow Moutai Yunfeng* is
also considered an equally popular national producer with a presence in
all major markets except for the South China region.

The lower and mid levels of the Chinese spirits market are much more
fragmented. In total, China has over 18,000 liquor makers (2006), down
from 37,000 in 1989. Of the companies that dominate this segment, most
only target a single region. As examples, the Beijing General Distillery
is the market leader for local economy spirits in the Northeast China;
the *Jiangsu Shuanggou* and *Shangdon JingZhi* are top regional brands
in East China; and *Luzhoulaojiao* and *Wanjiuwang* are popular
mid-level *baijiu* products in South China, particularly Zhongshan and
Dongguan.

A major reason for the lack of a dominant economy spirits company is the
weak infrastructure between rural areas and production centers. The
growing income inequality problem in China also exacerbates market
segmentations and, consequently, the difficulty in developing a national
economy spirits brand. The growing health awareness has impacted
regional spirits players the worst, as "health taxation" has reduced the
affordability of its products, forcing consumers to shift to alternative
alcoholic beverages.

**Regional Market Differences: *Differences Based on Tastes and Local
Production***

China's vast size and scope presents problems for foreign producers
looking to enter the market. Depending on the goals of the producer,
most foreign spirits entrants target the Northeast and East regions to
reach the Beijing and Shanghai markets. However, strong growth
opportunities now exist in the South region for a number of reasons. The
market is geographically far from the main *baijiu* production centers
in the Southwest. Second, there is strong demand for more sophisticated
drinks (wines and spirits), away from the saturated beer market.
Guangzhou is viewed as a good entry point for spirits distribution.

The Central and Northwest China regions remain difficult markets for
high-end foreign spirits to enter due to low per capita incomes, a
market saturation of local economy spirits, a lack of foreign brand
awareness, and fewer retail channels. In addition, these less developed
regions are more tied to traditional tastes like *baijiu* and beer and
more adverse to switching to "exotic", pricier foreign spirits like
vodka, rum, and cognac.

# SWOT Analysis for U.S. Spirits Exporters by China Region

+--------+--------------+--------------+--------------+--------------+
| **Re   | #######      | **           | **Opp        | **Threats**  |
| gion** | ## Strengths | Weaknesses** | ortunities** |              |
+--------+--------------+--------------+--------------+--------------+
| ##     | \- Excellent | \- Fierce    | \- Increased | \- Premium   |
| # East | Distribution | Competition  | Taxation on  | Local        |
|  China |              |              | Low /        | Spirits      |
|        | \- Economic  | \- Franchise | Mid-Priced   |              |
|        | / Port Hub   | Dependence   | Spirits      | \- Wine      |
+--------+--------------+--------------+--------------+--------------+
| **C    | \- Large     | \- Weak      | \- Few       | \- Rice Wine |
| entral | Consumer     | Foreign      | Premium      |              |
| C      | Base         | Brands       | Players      |              |
| hina** |              |              |              |              |
|        | \- Good      | \- Few Chain | \- Premium   |              |
|        | Tr           | Retailers    | Whisky &     |              |
|        | ansportation |              | White        |              |
|        | Network      | \- Price     | Spirits      |              |
|        |              | Sensitive    |              |              |
|        |              | Market       |              |              |
+--------+--------------+--------------+--------------+--------------+
| **Nor  | \- Largest   | \- Local     | \- Healthy   | \- Abundant  |
| theast | Volume Sales | Spirits      | Spirits      | Counterfeits |
| C      |              | Dominate     |              |              |
| hina** | \- Political | (99% Market  | \- Up-Market | \- Rice Wine |
|        | / Economic   | Share)       | Spirits      |              |
|        | Hub          |              | Sales        | \- Premium   |
|        |              | \-           |              | Wine & Lager |
|        | \- Growth in | Restaurant / | \- Whisky /  |              |
|        | Retail Sales | Bar Focus    | White        |              |
|        |              |              | Spirits      |              |
+--------+--------------+--------------+--------------+--------------+
| **Nor  |              | \- Lowest    | \- Healthy   | -Red Wine    |
| thwest |              | Sales Growth | Spirits      |              |
| C      |              |              |              | -Beer        |
| hina** |              | \- Low       | \- Too Many  |              |
|        |              | De           | Local Brands | -Spirits     |
|        |              | mand/Unaware |              | C            |
|        |              |              |              | onsolidation |
|        |              | \- Poor      |              |              |
|        |              | Distribution |              |              |
+--------+--------------+--------------+--------------+--------------+
| *      | \- Best      | \- Local     | \- Malt /    | \- Wine      |
| *South | Volume       | Makers       | Scotch       |              |
| C      | Growth       | Dominate     | Whisky       | \- Domestic  |
| hina** |              |              |              | Beer         |
|        | \-           | \- Wine      | \- Cognac    | Produced     |
|        | Popularity   | Popularity   |              | Here         |
|        | of Cognac    |              | \-           |              |
|        |              |              | Re           |              |
|        | \- Knowledge |              | ady-to-Drink |              |
|        | of Spirits   |              | Spirits      |              |
+--------+--------------+--------------+--------------+--------------+
| **Sou  | \- High      | \- Most      | \-           | \- Beer      |
| thwest | Macro        | Local        | S            |              |
| C      | investment   | Spirits      | uper-Premium |              |
| hina** |              | Produced     |              |              |
|        | \- Strong    | Here         | \-           |              |
|        | Foreign      |              | Supermarket  |              |
|        | Brand        | \- Focus out | Access       |              |
|        | Awareness in | of Big       |              |              |
|        | Cities       | Cities       |              |              |
+--------+--------------+--------------+--------------+--------------+

*(Note: Glossary at the end of this report lists provinces in each
region)*

**Growing Health Awareness: *Spirits Perceived as Unhealthy More than
Ever***

Chinese consumers' growing health awareness is one major reason for the
decline in volume sales over the last five years. In 2005, the GOC aimed
to reduce excessive spirits consumption by increasing consumption taxes
for local economy spirits made of potato. The growing perception that
economy local spirits, principally *baijiu,* are unhealthy has led to
many consumers to move towards lower alcoholic content beverages instead
of moving up-market to higher-grade premium / foreign spirits.

Overall, the beneficiaries have been red wines --- for their perceived
benefits with cardiovascular health --- and to a lesser extent
traditional rice wines, light beers, new "green" beers, and
non-alcoholic drinks. Chinese herbal spirits have benefited, too, as
they are perceived as a healthier alternative. Sales volume grew 23% in
2005-2006 and 221% from 2001-2006. Herbal spirits made from Jing Brand
have become especially popular gifts for older friends and relatives.

![](media/image5.jpeg){width="3.1875in" height="1.8909722222222223in"}

**Spirits Distribution: *Retail Channels Lead the Way***

Retail sales dominate the spirits market, occuring mainly in
supermarkets (56%) and, secondarily, in specialist retailers (16%) and
independent food stores (15%). The proliferation of low-cost
hypermarkets such as Wal-mart and Carrefour are providing more one-stop
distribution channels, even for high-end spirits.

For specialist retailers, spirits represent over 80% of total sales.
Using personal ties to the local community and benefiting from a
long-standing reputation as a trusted seller, specialist retailers act
as an important gateway between foreign spirits and traditional, older
buyers. As China lacks a national spirits chain, supermarkets and
specialists will continue to dominate the retail channel.

Spirits enjoy more sales via the retail route than any other major
alcoholic beverage sector except cider/perry for several reasons.
Spirits, especially imports, are often perceived as a luxury high-status
item, worthy of gift giving, especially during Chinese holidays. In
addition, local restaurants, bars, and nightclubs have come to rely and
trust local specialist retailers to supply its beverage needs at
discounted, wholesale-like prices.

Markups by retailers differ by spirits product, brand, and retailer but
range from 15% to 40% \-- much higher than those for wine and beer (5%
to 10%).

**Marketing and Promotion: *Traditional Media Regulations Not Overly
Restrictive***

Since 1996, the GOC has regulated the amount of advertising on
traditional media outlets for alcoholic beverage producers. These
regulations do not appear to adversely impact the marketing options for
foreign spirits producers.

Specifically, for television, no more than two advertisements are
permitted per manufacturer per channel during the primetime hours of
19:00 to 21:00, with a limit of ten advertisements per channel daily.
Similarly, television channels are not permitted to sell more than two
spirits advertisements per hour. Note that beer and wine are exempt from
these restrictions. For print media including newspapers and magazines,
no more than two advertisements per manufacturer are allowed in a single
issue. Front-page and cover advertisements are prohibited.

In general, foreign spirits without a brand presence in China must
complement traditional brand campaigns with product placements in bars,
hotels, karaoke clubs, and nightclubs and sponsorship deals. Past
sponsorship deals with foreign brands have included Formula One grand
prix races, America's Cup yacht competitions, and matches of local
sports leagues.

Spirits consumption in China remains a luxury only available to a small
percentage. Foreign brands continue to be limited to this segment due to
the popularity of *baijiu* and the fierce competition of local producers
at the economy spirits level. However, even within the premium end of
*baijiu*, the top two producers, Wuliangye and JianNanChu, spent an
estimated \$140 million and \$70 million, respectively, on advertising
in 2006.

Overall, the high-end spirits market is extremely brand sensitive.
Foreign producers with well-known global brands may find themselves
having to build brand awareness from ground zero in China. Beyond price
and availability, Chinese consumers are switching from *baijiu* to
non-spirits due to a lack of knowledge about other spirits. Producers
must promote alternative spirits like flavored/light rum and vodka as
"healthier" options with lower alcohol content. New entrants may need to
initially invest its marketing dollars to educate consumers, bartenders,
and food & bar managers not only about its brand but also about its
general spirit category \-- specifically, its use and application in
mixed drinks.

Lastly, foreign producers should seek strong relationships with chain
supermarkets and specialist retailers. As these two groups dominate the
retail channels, they can help provide the legwork in distributing to
local restaurants, bars, karaoke clubs, and nightclubs.

*FAS China's Agricultural Trade Offices can also help U.S. producers
promote products at popular trade shows including Bar & Restaurant,
China Chain Store Expo, China Alcoholic Drinks Expo, Food & Hotel China
(FHC), and SIAL China. Refer to the end for contact info.*

**Seasonality: *Spirits Consumption High during Holidays/Festivals***

Not surprisingly, spirits consumption is seasonal, with sales boosts
during the two largest holidays \-- Chinese Lunar New Year's in
January/February and the Chinese Labor Week in early May. Trade figures
show that over the last six years, U.S. spirits exports were highest in
volume terms in Q1 and Q2, quarters that correspond with the holidays.
Average prices also are higher during winter months.

+-------------------------+----------+----------+----------+----------+
| **Total U.S. Spirits    |          |          |          |          |
| Exports to China        |          |          |          |          |
| (HS2208) Quarterly      |          |          |          |          |
| Averages (Q2 2001 to Q1 |          |          |          |          |
| 2007)**                 |          |          |          |          |
+-------------------------+----------+----------+----------+----------+
| ### Quarter             | **Q1**   | **Q2**   | **Q3**   | **Q4**   |
+-------------------------+----------+----------+----------+----------+
| Value (\$ Millions)     | 1.025    | 0.827    | 1.050    | 0.937    |
+-------------------------+----------+----------+----------+----------+
| Volume (Liters)         | 205,820  | 217,926  | 185,861  | 194,690  |
+-------------------------+----------+----------+----------+----------+
| Average Price (\$ /     | \$5.24   | \$4.97   | \$4.57   | \$5.59   |
| Liter)                  |          |          |          |          |
+-------------------------+----------+----------+----------+----------+

> *(Source: U.S. Trade Data, U.S. Department of Commerce)*

**Import Taxes on Spirits: *Recent Tax Cuts Leveling the Playing
Field***

Import taxes for foreign spirits containing less than 80% alcohol
content by volume are subject to the same tariff rates. Total import
taxes are based on three specific taxes: the import (customs) tax, VAT,
and a consumption tax. As of July 2007, the individual tax rates for
foreign spirits products were as follows:

+-----------------------------------+--------+-------+-----------------+
| ###                               | **     | **    | **Consumption   |
|                                   | Import | VAT** | Tax**           |
|                                   | Tax**  |       |                 |
+-----------------------------------+--------+-------+-----------------+
| **Spirits**                       | *      | **    | **20%**         |
|                                   | *10%** | 17%** |                 |
+-----------------------------------+--------+-------+-----------------+
| Grape Wine: Containers \< 2L      | 14%    | 17%   | 10%             |
| (Bottles)                         |        |       |                 |
+-----------------------------------+--------+-------+-----------------+
| Grape Wine: Containers \> 2L      | 20%    | 17%   | 10%             |
+-----------------------------------+--------+-------+-----------------+
| Beer: Unbranded or MSP \< RMB     | 0%     | 17%   | RMB 220 (\$29)  |
| 3,000 (\$400)                     |        |       | / ton           |
+-----------------------------------+--------+-------+-----------------+
| Beer: MSP \> RMB 3,000 (\$400)    | 0%     | 17%   | RMB 250 (\$33)  |
|                                   |        |       | / ton           |
+-----------------------------------+--------+-------+-----------------+

*(Sources: 2007 Customs Import and Export Tariff of the People's
Republic of China, Euromonitor International, Foreign Agricultural
Service)*

The effective tax rate is not as simple as a summing up the three
individual tax rates. Refer to Appendix B ("Formula to Determine Import
Tax for Wine") in GAIN Report CH6809
(<http://www.fas.usda.gov/gainfiles/200606/146208112.doc>) as a
guideline for calculating the effective tax rate for spirits.

In early 2005, the import (customs) tax which was reduced from 19.2% to
10% in order to comply with WTO rules.

On April 1, 2006, the consumption tax for foreign distilled alcohol was
reduced from 25% to 20%. This change was meant to unify all spirits
under the same consumption tax rate. On the surface, it appears to be a
favorable change for the competitiveness of foreign spirits. It not only
reduces the tax rate but also increases it for spirits made from
potatoes, which are primarily produced locally. However, if the GOC is
concerned that domestic spirits products are being adversely affected by
increased foreign sales, a hike in the consumption tax is the most
likely mechanism by which the GOC would protect Chinese spirits.

Note also that Hong Kong faces more regional competition from spirits
sold in Macao and the mainland. Hong Kong's import taxes for spirits
remain considerably higher.

**Taxes on Domestic Producers**

Domestic spirits distillers are subject to an income tax of 33%, a 17%
VAT (same for importers), and a 20% consumption tax (same for
importers). The actual amount paid in consumption taxes by Chinese
producers is estimated to be 10-15%. Chinese spirits producers looking
to export also receive an export rebate of 13%.

**China's Classification of Alcoholic Beverages: *Upcoming Revisions ***

In the second half of 2007, China is expected to announce changes to the
classification of alcoholic beverages (GB/T 17204-2006). Based on draft
versions of the new standard, China proposes to eliminate "restrictions
on the requirement for the upper limit for alcoholic beverages and the
regulation on the amount of alcohol content in the definition of
fermented alcoholic drinks and distilled spirits." Thus, the regulation
on the alcoholic content range for brandy, vodka, rum, and whiskey will
be canceled. Based on the current classification (GB/T 17204-1998),
distilled spirits are categorized as "alcoholic beverages with 18% by
volume \~ 60% by volume of alcoholic strength."

The impact of the new standard is that it allows distilled spirits with
a higher concentration of ethanol alcohol into the marketplace, as well
as "lighter" lower alcohol content spirits, particularly RTDs and
flavored (blended) spirits.

The new classification also proposes that "the aging period of malt
whiskey is changed to two years", and "juniper-flavored \[sic\] spirit
drinks (gin) is added" as an alcoholic beverage.

*(Source: National Standard of the People's Republic of China, GB/T
17204-2006 Draft, Issued by the General Administration of Quality
Supervision, Inspection, and Quarantine, AQSIQ, of the People's Republic
of China)*

**Labels for Spirits**

China requires a number of labeling requirements, including translation
into Chinese, for all pre-packaged foods. For full details on China's
labeling requirements as they apply to spirits, refer to the translated
versions of the "National Standard for Labeling of Pre-Packaged Foods"
and the "General Standard for the Labeling of Prepackaged Alcoholic
Beverages":

*GB10344 Labeling Prepackaged Alcoholic Beverages* (GAIN Report CH5006,
01/21/2005)

<http://www.fas.usda.gov/gainfiles/200501/146118532.pdf>

*GB7718-2003 Food Labeling Standard* (GAIN Report CH4026, 07/30/2004)

<http://www.fas.usda.gov/gainfiles/200502/146118826.pdf>

In 2006, the China inspection agency (AQSIQ) modified the regulations
involving the label approval process for imported and exported products.
Effective April 1, 2006, labels no longer must be pre-approved. Approval
of labels now can be conducted during the import inspection process at
the port of entry. For more information, refer to the following GAIN
report:

*China Streamlines Food Label Approval Process* (GAIN Report CH6020,
04/19/2006)

<http://www.fas.usda.gov/gainfiles/200604/146187516.pdf>

Note that aforementioned changes to the classification of alcoholic
beverages may invoke a revision to the label standards for prepackaged
alcoholic beverages. FAS China will provide updates to any such changes
through its GAIN reports.

Note: Bottled liquor is sold in two standard retails sizes in China: 350
ml and 750 ml. The latter size is more commonly sold at restaurants and
nightclubs.

**Counterfeits / Intellectual Property Rights (IPR)**

Counterfeiting remains a significant problem in China for high-end
foreign spirits. The most common reported counterfeit method is when a
manager, retailer, or a smuggler refills an empty premium foreign
spirits bottle with a cheaper spirit. As Chinese spirits consumers still
are relatively new to the spirits market, they may not be able to
discern the different grades in quality. In addition, producing fake
labels and bottles is a common practice.

FAS China recommends that spirit exporters take appropriate legal
measures to protect against IPR infringements. Foreign producers are
advised to trademark logos and brand names, as well as special
trademarks such as geographical indications and collective and
certification trademarks. The IPR office of FAS China has developed an
introductory guide to the trademark registration process in China and
can help assist exporters with navigating IP issues. Refer to the
following GAIN report for more details:

*Protect Your Trademark... before Someone else Trades your Mark* (GAIN
Report CH7035, 05/31/2007)

<http://www.fas.usda.gov/gainfiles/200705/146291256.pdf>

For further assistance on intellectual property issues, contact the IPR
office of FAS China:

+-----------------------------------+----------------------------------+
| Mailing Address:                  | Physical Address:                |
|                                   |                                  |
| Agricultural Trade Office         | Agricultural Trade Office,       |
|                                   | Beijing                          |
| US Embassy Beijing                |                                  |
|                                   | Kerry Center, South Tower        |
| PSC 461 Box 50                    |                                  |
|                                   | 24th Floor Suite #2425           |
| FPO AP 96521-0002                 |                                  |
|                                   | No. 1 Guanghua Lu, Beijing       |
|                                   | 100020                           |
+-----------------------------------+----------------------------------+
| Tel: (86-10) 8529-6418            | Fax: (86-10) 8529-6692           |
+-----------------------------------+----------------------------------+
| E-mail: ChinaIPR@fas.usda.gov     |                                  |
+-----------------------------------+----------------------------------+

**SWOT Analysis: China's Spirits Market**

+-----------------------------------+-----------------------------------+
| **Strengths**                     | **Weaknesses**                    |
+-----------------------------------+-----------------------------------+
| -   Less time to cook at home +   | -   Volume sales flat due to      |
|     more disposable income →      |     increased health awareness,   |
|     changing lifestyle: more      |     move towards beer and wine    |
|     dining out and socializing    |                                   |
|     activities → more alcoholic   | -   *Baijiu* consumption is       |
|     drink / spirits consumption   |     culturally ingrained and      |
|                                   |     readily affordable at low     |
| -   Sales growth (value) from     |     cost                          |
|     2001-2006 ↑ YTY               |                                   |
|                                   | -   Lack of mainstream awareness  |
| -   Foreign spirits symbolize     |     about non-traditional spirits |
|     luxury, prestige, and high    |     (rum & tafia, vodka,          |
|     social status, Chinese value  |     cordials, gin).               |
|                                   |                                   |
| -   Incredible growth rates of    | -   High prices of foreign        |
|     Scotch whiskey and cognac,    |     spirits make it unaffordable  |
|     led by urban youth            |     to average Chinese consumer   |
|                                   |                                   |
| -   Foreign spirits readily       | -   Combined import taxes prevent |
|     available in supermarkets and |     foreign spirits from          |
|     specialist retailers in major |     competing on price or         |
|     cities                        |     introducing lower cost        |
|                                   |     products                      |
| -   Foreign spirits remain a      |                                   |
|     desired gift item, especially | -   Distribution channels limited |
|     during holidays and festivals |     to supermarkets and           |
|                                   |     specialist retailers.         |
|                                   |                                   |
|                                   | -   Rural spirits consumption     |
|                                   |     largely beer & *baijiu*       |
+-----------------------------------+-----------------------------------+
| **Opportunities**                 | **Threats**                       |
+-----------------------------------+-----------------------------------+
| -   Marketing other spirits as a  | -   Perception that all spirits   |
|     "healthier" alternative to    |     are equally unhealthy (i.e.   |
|     low-grade local economy       |     *baijiu* and flavored rum     |
|     spirits                       |     have the same level of        |
|                                   |     alcohol content)              |
| -   Premium *baijiu* market still |                                   |
|     in its infancy                | -   Red wine becoming preferred   |
|                                   |     alternative to those          |
| -   Flavored drinks (vodka/rum)   |     switching from *baijiu* or    |
|     for women                     |     moving up-market from beer    |
|                                   |                                   |
| -   Healthy spirits like herbal   | -   Consumption tax could be      |
|     RTDs for older drinkers       |     raised if domestic producers  |
|                                   |     are adversely affected by     |
| -   Branding/educating the        |     foreign spirits               |
|     average drinker about spirits |                                   |
|     outside of *baijiu* and       | -   Counterfeiting by refilling   |
|     whiskey                       |     empty foreign bottles and     |
|                                   |     reusing labels                |
| -   South China region = highest  |                                   |
|     spirits growth                |                                   |
|                                   |                                   |
| -   Joint ventures or investments |                                   |
|     with smaller *baijiu*         |                                   |
|     producers                     |                                   |
+-----------------------------------+-----------------------------------+

**FAS China Agricultural Trade Offices**

U.S. spirits producers seeking to export and promote its products in
China should contact the appropriate Agricultural Trade Office for
export assistance:

+-----------------------------------+-----------------------------------+
| Agricultural Trade Office,        | Agricultural Trade Office,        |
| Beijing                           | Shanghai                          |
|                                   |                                   |
| Kerry Center, South Tower         | U.S. Consulate General, Shanghai  |
|                                   |                                   |
| 24th Floor Suite #2425            | Shanghai Centre, Suite 331\       |
|                                   | 1376 Nanjing West Road\           |
| No. 1 Guanghua Lu, Beijing 100020 | Shanghai, China 200040\           |
|                                   | Tel: (86-21) 6279-8622\           |
| Tel: (86-10) 8529-6418            | Fax: (86-21) 6279-8336\           |
|                                   | Office                            |
| Fax: (86-10) 8529-6692            | Email: <ATOShanghai@usda.gov>     |
|                                   |                                   |
| Email: <ATOBeijing@usda.gov>      |                                   |
+-----------------------------------+-----------------------------------+
| Agricultural Trade Office,        | Agricultural Trade Office,        |
| Guangzhou                         | Chengdu                           |
|                                   |                                   |
| U.S. Consulate General, Guangzhou | Opening August 2007               |
|                                   |                                   |
| China Hotel Office Tower 14/F\    | Office                            |
| Guangzhou, China 510015\          | Email: <ATOChengdu@usda.gov>      |
| Tel: (86-20) 8667-7553\           |                                   |
| Fax: (86-20) 8666-0703\           | Agricultural Trade Office,        |
| Office Email:                     | Shenyang                          |
| <ATOGuangzhou@usda.gov>           |                                   |
|                                   | Opening 2008                      |
|                                   |                                   |
|                                   | Office Email: Contact             |
|                                   | <ATOBeijing@usda.gov>             |
+-----------------------------------+-----------------------------------+

**Glossary**

In this report, certain region names are often used as short hand for a
cluster of provinces and municipalities by geographic area. The
following lists these associations:

[East China]{.underline}: Anhui, Jiansun, Shanghai (municipality),
Shandong, Zhejiang

[Central China]{.underline}: Henan, Hubei, Jiangxi

[Northeast China]{.underline}: Beijing (municipality), Heibei,
Heilongjiang, Jilin, Liaoning

[Northwest China]{.underline}: Gansu, Qinghai, Shaanxi, Shanxi

[South China]{.underline}: Fujian, Guangdong, Hainan

[Southwest China]{.underline}: Chongqing (municipality), Guizhou,
Sichuan, Yunnan

![](media/image6.jpeg){width="5.375in" height="4.45in"}

**Appendix I. U.S. Alcoholic Beverage Exports to China**

(HS2203 Beer, HS2204 Wine, HS2205 Vermouth, HS2207 \>80% Liquor, HS2208
Spirits)

<table>
<colgroup>
<col style="width: 25%" />
<col style="width: 11%" />
<col style="width: 1%" />
<col style="width: 10%" />
<col style="width: 2%" />
<col style="width: 8%" />
<col style="width: 3%" />
<col style="width: 7%" />
<col style="width: 4%" />
<col style="width: 12%" />
<col style="width: 12%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong>Value ($ Million)</strong></td>
<td colspan="2"><strong>2002</strong></td>
<td colspan="2"><strong>2003</strong></td>
<td colspan="2"><strong>2004</strong></td>
<td colspan="2"><strong>2005</strong></td>
<td><strong>2006</strong></td>
<td><strong>2007 YTD</strong></td>
</tr>
<tr class="even">
<td><h3 id="eth-alc-undnat80alc">Eth Alc, Undnat&lt;80Alc</h3></td>
<td colspan="2"><strong>2.044</strong></td>
<td colspan="2"><strong>2.377</strong></td>
<td colspan="2"><strong>2.722</strong></td>
<td colspan="2"><strong>3.373</strong></td>
<td><strong>7.387</strong></td>
<td><strong>1.158</strong></td>
</tr>
<tr class="odd">
<td>Wine Of Fresh Grapes</td>
<td colspan="2">3.370</td>
<td colspan="2">2.576</td>
<td colspan="2">5.398</td>
<td colspan="2">5.914</td>
<td>9.283</td>
<td>3.207</td>
</tr>
<tr class="even">
<td>Beer Made from Malt</td>
<td colspan="2">0.039</td>
<td colspan="2">0.315</td>
<td colspan="2">0.021</td>
<td colspan="2">0.091</td>
<td>0.221</td>
<td>0.088</td>
</tr>
<tr class="odd">
<td>Ethly Alco Etc&gt;80% Alc</td>
<td colspan="2">1.142</td>
<td colspan="2">0.075</td>
<td colspan="2">0.228</td>
<td colspan="2">0.381</td>
<td>0.247</td>
<td>0.023</td>
</tr>
<tr class="even">
<td>Flavr Wine,Vermouth</td>
<td colspan="2">N/A</td>
<td colspan="2">N/A</td>
<td colspan="2">0.126</td>
<td colspan="2">0.075</td>
<td>N/A</td>
<td>N/A</td>
</tr>
<tr class="odd">
<td><strong>Value (% Growth ↑)</strong></td>
<td><strong>2003</strong></td>
<td colspan="2"><strong>2004</strong></td>
<td colspan="2"><strong>2005</strong></td>
<td colspan="2"><strong>2006</strong></td>
<td colspan="3"></td>
</tr>
<tr class="even">
<td><strong>Eth Alc, Undnat&lt;80Alc</strong></td>
<td><strong>16.3%</strong></td>
<td colspan="2"><strong>14.5%</strong></td>
<td colspan="2"><strong>23.9%</strong></td>
<td colspan="2"><strong>119.0%</strong></td>
<td colspan="3"></td>
</tr>
<tr class="odd">
<td>Wine Of Fresh Grapes</td>
<td>-23.5%</td>
<td colspan="2">109.5%</td>
<td colspan="2">9.6%</td>
<td colspan="2">57.0%</td>
<td colspan="3"></td>
</tr>
<tr class="even">
<td>Beer Made from Malt</td>
<td>700.6%</td>
<td colspan="2">-93.4%</td>
<td colspan="2">340.2%</td>
<td colspan="2">142.9%</td>
<td colspan="3"></td>
</tr>
<tr class="odd">
<td>Ethly Alco Etc&gt;80% Alc</td>
<td>-93.5%</td>
<td colspan="2">205.3%</td>
<td colspan="2">66.8%</td>
<td colspan="2">-35.1%</td>
<td colspan="3"></td>
</tr>
<tr class="even">
<td>Flavr Wine,Vermouth</td>
<td>N/A</td>
<td colspan="2">N/A</td>
<td colspan="2">-40.5%</td>
<td colspan="2">N/A</td>
<td colspan="3"></td>
</tr>
<tr class="odd">
<td><strong>Value (% of Market)</strong></td>
<td colspan="2"><strong>2002</strong></td>
<td colspan="2"><strong>2003</strong></td>
<td colspan="2"><strong>2004</strong></td>
<td colspan="2"><strong>2005</strong></td>
<td><strong>2006</strong></td>
<td><strong>2007 YTD</strong></td>
</tr>
<tr class="even">
<td><strong>Eth Alc, Undnat&lt;80Alc</strong></td>
<td colspan="2"><strong>31.0%</strong></td>
<td colspan="2"><strong>44.5%</strong></td>
<td colspan="2"><strong>32.0%</strong></td>
<td colspan="2"><strong>34.3%</strong></td>
<td><strong>43.1%</strong></td>
<td><strong>25.9%</strong></td>
</tr>
<tr class="odd">
<td>Wine Of Fresh Grapes</td>
<td colspan="2">51.1%</td>
<td colspan="2">48.2%</td>
<td colspan="2">63.5%</td>
<td colspan="2">60.1%</td>
<td>54.2%</td>
<td>71.6%</td>
</tr>
<tr class="even">
<td>Beer Made from Malt</td>
<td colspan="2">0.6%</td>
<td colspan="2">5.9%</td>
<td colspan="2">0.2%</td>
<td colspan="2">0.9%</td>
<td>1.3%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td>Ethly Alco Etc&gt;80% Alc</td>
<td colspan="2">17.3%</td>
<td colspan="2">1.4%</td>
<td colspan="2">2.7%</td>
<td colspan="2">3.9%</td>
<td>1.4%</td>
<td>0.5%</td>
</tr>
<tr class="even">
<td>Flavr Wine,Vermouth</td>
<td colspan="2">N/A</td>
<td colspan="2">N/A</td>
<td colspan="2">1.5%</td>
<td colspan="2">0.8%</td>
<td>N/A</td>
<td>N/A</td>
</tr>
</tbody>
</table>

  ----------------- ------------- ---------- ------------- ---------- ------------- ----------- ------------- --- --------------- -------------
  **Volume          **2002**                 **2003**                 **2004**                  **2005**          **2006**        **2007 YTD**
  (Liters)**                                                                                                                      

  **Eth Alc,        **567,363**              **669,337**              **717,697**               **746,292**       **1,130,126**   **386,592**
  Undnat\<80Alc**                                                                                                                 

  Wine Of Fresh     2,536,988                1,286,476                2,142,479                 2,338,472         3,472,043       1,795,379
  Grapes                                                                                                                          

  Beer Made from    52,148                   596,293                  29,611                    124,942           183,049         202,866
  Malt                                                                                                                            

  Ethly Alco        N/A                      N/A                      N/A                       N/A               N/A             N/A
  Etc\>80% Alc                                                                                                                    

  Flavr             N/A                      N/A                      137,553                   32,652            N/A             3,840
  Wine,Vermouth                                                                                                                   

  **Volume (%       **2003**      **2004**                 **2005**                 **2006**                                      
  Growth ↑)**                                                                                                                     

  **Eth Alc,        **18.0%**     **7.2%**                 **4.0%**                 **51.4%**                                     
  Undnat\<80Alc**                                                                                                                 

  Wine Of Fresh     -49.3%        66.5%                    9.1%                     48.5%                                         
  Grapes                                                                                                                          

  Beer Made from    1043.5%       -95.0%                   321.9%                   46.5%                                         
  Malt                                                                                                                            

  Ethly Alco        N/A           N/A                      N/A                      N/A                                           
  Etc\>80% Alc                                                                                                                    

  Flavr             N/A           N/A                      -76.3%                   N/A                                           
  Wine,Vermouth                                                                                                                   

  **Volume (% of    **2002**                 **2003**                 **2004**                  **2005**          **2006**        **2007 YTD**
  Market)**                                                                                                                       

  **Eth Alc,        **18.0%**                **26.2%**                **23.7%**                 **23.0%**         **23.6%**       **16.2%**
  Undnat\<80Alc**                                                                                                                 

  Wine Of Fresh     80.4%                    50.4%                    70.8%                     72.1%             72.6%           75.2%
  Grapes                                                                                                                          

  Beer Made from    1.7%                     23.4%                    1.0%                      3.9%              3.8%            8.5%
  Malt                                                                                                                            

  Ethly Alco        N/A                      N/A                      N/A                       N/A               N/A             N/A
  Etc\>80% Alc                                                                                                                    

  Flavr             N/A                      N/A                      4.5%                      N/A               N/A             N/A
  Wine,Vermouth                                                                                                                   
  ----------------- ------------- ---------- ------------- ---------- ------------- ----------- ------------- --- --------------- -------------

  ----------------- ------------ ---------- ------------ ----------- ------------ ----------- ------------ --- ------------ ------------
  **Avg. Price      **2002**                **2003**                 **2004**                 **2005**         **2006**     **2007 YTD**
  (\$/Liter)**                                                                                                              

  **Eth Alc,        **\$3.60**              **\$3.55**               **\$3.79**               **\$4.52**       **\$6.54**   **\$6.76**
  Undnat\<80Alc**                                                                                                           

  Wine Of Fresh     \$1.33                  \$2.00                   \$2.52                   \$2.53           \$2.67       \$2.70
  Grapes                                                                                                                    

  Beer Made from    \$0.75                  \$0.53                   \$0.70                   \$0.73           \$1.21       \$1.23
  Malt                                                                                                                      

  Ethly Alco        N/A                     N/A                      N/A                      N/A              N/A          N/A
  Etc\>80% Alc                                                                                                              

  Flavr             N/A                     N/A                      \$0.91                   \$2.29           N/A          \$1.56
  Wine,Vermouth                                                                                                             

  **Avg. Price (%   **2003**     **2004**                **2005**                 **2006**                                  
  Growth ↑)**                                                                                                               

  **Eth Alc,        **-1.4%**    **6.8%**                **19.3%**                **44.7%**                                 
  Undnat\<80Alc**                                                                                                           

  Wine Of Fresh     50.4%        26.0%                   0.4%                     5.5%                                      
  Grapes                                                                                                                    

  Beer Made from    -29.3%       32.1%                   4.3%                     65.8%                                     
  Malt                                                                                                                      

  Ethly Alco        N/A          N/A                     N/A                      N/A                                       
  Etc\>80% Alc                                                                                                              

  Flavr             N/A          N/A                     151.6%                   N/A                                       
  Wine,Vermouth                                                                                                             
  ----------------- ------------ ---------- ------------ ----------- ------------ ----------- ------------ --- ------------ ------------

*(Source: U.S. Trade Data, U.S. Department of Commerce)*

**Appendix II. U.S. Spirits Exports to China**

(HS2203 Beer, HS2204 Wine, HS2205 Vermouth, HS2207 \>80% Liquor, HS2208
Spirits)

## 

  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- --------
  **Value (\$          **2002**              **2003**              **2004**              **2005**       **2006**   **2007
  Million)**                                                                                                       YTD**

  (HS220830) Whiskies  1.103                 1.602                 2.253                 2.692          5.859      1.403

  (HS220890) Other     0.088                 0.445                 0.079                 0.254          0.739      0.393

  (HS220840) Rum &     0.777                 0.025                 0.003                 0.279          0.382      0.313
  Tafia                                                                                                            

  (HS220870)           0.065                 0.152                 0.012                 0.010          0.296      0.119
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     0.011                 0.154                 0.036                 N/A            0.090      0.295
  Brandy                                                                                                           

  (HS220860) Vodka     N/A                   N/A                   0.160                 0.049          0.013      0.091

  (HS220850) Gin &     N/A                   N/A                   N/A                   N/A            0.008      N/A
  Geneva                                                                                                           

  **Value (% Growth    **2003**   **2004**              **2005**              **2006**                             
  ↑)**                                                                                                             

  (HS220830) Whiskies  45.2%      40.7%                 19.4%                 117.7%                               

  (HS220890) Other     404.9%     -82.1%                219.4%                191.3%                               

  (HS220840) Rum &     -96.8%     -88.3%                9489.6%               37.0%                                
  Tafia                                                                                                            

  (HS220870)           132.1%     -92.1%                -16.7%                2856.8%                              
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     1366.4%    -76.4%                N/A                   N/A                                  
  Brandy                                                                                                           

  (HS220860) Vodka     N/A        N/A                   -69.6%                -74.0%                               

  (HS220850) Gin &     N/A        N/A                   N/A                   N/A                                  
  Geneva                                                                                                           
  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- --------

  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- ---------
  **Volume (Liters)**  **2002**              **2003**              **2004**              **2005**       **2006**   **2007
                                                                                                                   YTD**

  (HS220830) Whiskies  259,486               350,954               435,204               518,505        852,001    209,349

  (HS220890) Other     31,409                215,727               29,573                85,893         79,432     39,613

  (HS220840) Rum &     262,837               13,926                1,440                 83,787         82,704     62,007
  Tafia                                                                                                            

  (HS220870)           9,443                 42,996                43,608                36,224         80,651     18,952
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     4,188                 45,734                13,671                N/A            30,466     47,230
  Brandy                                                                                                           

  (HS220860) Vodka     N/A                   N/A                   194,201               21,883         3,374      9,441

  (HS220850) Gin &     N/A                   N/A                   N/A                   N/A            1,498      N/A
  Geneva                                                                                                           

  **Volume (% Growth   **2003**   **2004**              **2005**              **2006**                             
  ↑)**                                                                                                             

  (HS220830) Whiskies  35.2%      24.0%                 19.1%                 64.3%                                

  (HS220890) Other     586.8%     -86.3%                190.4%                -7.5%                                

  (HS220840) Rum &     -94.7%     -89.7%                5718.5%               -1.3%                                
  Tafia                                                                                                            

  (HS220870)           355.3%     1.4%                  -16.9%                122.6%                               
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     992.0%     -70.1%                N/A                   N/A                                  
  Brandy                                                                                                           

  (HS220860) Vodka     N/A        N/A                   -88.7%                -84.6%                               

  (HS220850) Gin &     N/A        N/A                   N/A                   N/A                                  
  Geneva                                                                                                           
  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- ---------

  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- --------
  **Avg. Price (\$ /   **2002**              **2003**              **2004**              **2005**       **2006**   **2007
  Liter)**                                                                                                         YTD**

  (HS220830) Whiskies  \$4.25                \$4.56                \$5.18                \$5.19         \$6.88     \$6.70

  (HS220890) Other     \$2.81                \$2.06                \$2.69                \$2.96         \$9.31     \$9.91

  (HS220840) Rum &     \$2.96                \$1.79                \$2.02                \$3.33         \$4.62     \$5.04
  Tafia                                                                                                            

  (HS220870)           \$6.92                \$3.53                \$4.35                \$2.74         \$3.67     \$6.30
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     \$2.51                \$3.37                \$2.66                N/A            \$2.96     \$6.26
  Brandy                                                                                                           

  (HS220860) Vodka     N/A                   N/A                   \$0.83                \$2.23         \$3.76     \$9.63

  (HS220850) Gin &     N/A                   N/A                   N/A                   N/A            \$5.39     N/A
  Geneva                                                                                                           

  **Avg. Price (%      **2003**   **2004**              **2005**              **2006**                             
  Growth ↑)**                                                                                                      

  (HS220830) Whiskies  7.3%       13.6%                 0.2%                  32.6%                                

  (HS220890) Other     -26.7%     30.6%                 10.0%                 214.5%                               

  (HS220840) Rum &     -39.5%     12.8%                 64.9%                 38.7%                                
  Tafia                                                                                                            

  (HS220870)           -49.0%     23.2%                 -37.0%                33.9%                                
  Liqueurs/Cordials                                                                                                

  (HS220820) Grape     34.3%      -21.1%                N/A                   N/A                                  
  Brandy                                                                                                           

  (HS220860) Vodka     N/A        N/A                   168.7%                68.6%                                

  (HS220850) Gin &     N/A        N/A                   N/A                   N/A                                  
  Geneva                                                                                                           
  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --- ---------- --------

*(Source: U.S. Trade Data, U.S. Department of Commerce)*

**Appendix III. Discrepancies between U.S. and China Data**

**U.S. Spirits Exports to China, 2006 (\$ Millions) -- U.S. Data**

![](media/image7.wmf){width="5.1715277777777775in" height="3.18125in"}

(*Source: U.S. Trade Data, U.S. Department of Commerce*)

######## U.S. Spirits Exports to China, 2006 (\$ Millions) -- China Data

![](media/image8.wmf){width="6.626388888888889in"
height="4.0680555555555555in"}

*(Source: Chinese Customs Data)*

**Appendix IV. China's Alcoholic Drink Sales by Region**

*(Refer to earlier glossary for region descriptions)*

Regional Breakdown (%) of Alcoholic Drink Sales by Current Value, 2006

![](media/image9.wmf){width="6.500694444444444in"
height="3.990972222222222in"}

**Regional Breakdown (%) of Alcoholic Drink Sales by Volume, 2006**

![](media/image10.wmf){width="6.500694444444444in"
height="3.9972222222222222in"}

*(Source: Euromonitor International)*

**Appendix V. China's 2005-2006 Sales Growth of Alcoholic Drinks**

![](media/image11.wmf){width="6.511111111111111in"
height="3.984722222222222in"}

*(Source: Euromonitor International)*