A Marketing Analysis of Italian Wine in the Chinese Market - Dissertation Example

?A Marketing analysis of Italian wine in the Chinese market Findings and discussion Table of Contents Findings and analysis 3 PESTLE analysis 3 SWOT analysis 7 Porter’s five forces analysis 11 Marketing mix 4C analysis 16 Summary of findings 18 Reference List 19 Findings and analysis PESTLE analysis The PESTEL model would help to analyze the macro environment in China in which the liquor and wine industry operates. The discussion presented below represents the findings from the research made on the macro factors affecting the wine market situation in the country. It gives an overview of the “political, economic, social, technological, environmental and legal factors” (Xiu et al., 2013) that influence the industry. Political Political factors play an important role in the performance of businesses in the long run. In China, political risk is relatively low compared to other emerging economies in the world. This is because China follows a one party policy, which reduces chances of political parties among opponents. The central government of China has recently revised its taxation policy in order to help it encourage wine business in the country. The government has taken the initiative to provide funds for the infrastructural projects that would help the wineries in their process of production (Daft, Kendrick and Vershinina, 2010). In case of a political framework, in which there is the existence of more than one party, as the ruling party changes, it leads to the change of ideologies and policies. The one party policy in China acts as a favourable factor for any business operation in the country. Therefore, the wine industry faces positive thrust in China. Import of bottled wine has increased between 2004 and 2009 as shown in the graph below. It can be seen from the figure that imports from Italy have increased considerably after 2006. Figure: Imports of bottled wine by China (Source: DPI, 2013) However, there is little transparency in the political system of the country. There are wide assortments of different rules encompassing the businesses in all industries in the country. Such regulations increases challenges for the investors that are currently investing in the country or are willing to invest in the near future (Collins, 2013). Economic China is the largest economy in the world in terms of population and the ranks third in the world in terms of purchasing power parity (CIA, 2013). According to 2012 estimate, the real growth rate of the nation is 7.8 percent and per capita GDP is $9300 (CIA, 2013). There is a rising middle class in China that possesses high purchasing power. This middle income group in China makes very high demand for luxury goods in the international market (Zhou, 2010). With rising income of the people belonging to the middle class in China, their exposure to the international market is increasing and they are becoming more accustomed to the western culture. This develops taste among the population for luxury products, such as high quality refined wine. This provides positive incentive for the wine manufacturers to increase their operations in China. According to comments by experts, in years to come, the Chinese “middle class” would become one of the greatest stakeholders for the wine firms. With evolution of the Chinese economy the society is also advancing. A greater proportion of the population is entering the middle class (Okonkwo, 2007). They are having high average earning and are influenced by the western culture to a greater extent. These people are becoming loyal customers of wine. Besides, increasing price differentials in the international market is a major factor that brings about growth in the Chinese wine market. Social China has a long history of brewing wine and there is a tradition of wine consumption in the country. Research shows that the consumption of wine by the Chinese population has been increasing over the last decade. Researchers have claimed that consumption of wine in China would double by 2014 (UPENN, 2012). The reason behind this change is the economic as well as social development of China. China is trimmed as an emerging economy and the country’s wine industry is developing as well. Apart from the traditional base of wine consumption, the habit of consuming wine is also becoming fashion for the young generation, particularly the urban population. In the corporate business platform, wine consumption is considered a signifier of class and dignity. A person with a taste for quality wine finds a sense of distinction from the people that drink other hard liquor, i.e. spirits (Hoggart, 2012). Besides, the demographic change in the society has also affected demand for wine. In the twenty-first century, women are taking part in the labour force in higher numbers. The majority of them are joining sophisticated jobs (in both domestic and multinational companies) that make higher payment. This is a noteworthy boost upwards for the demand for wine in the Chinese market. The culture of drinking wine is gradually becoming knitted into the social fabric and the people are moving beyond the domestically produced wine and expressing greater preference for finer imported wine. Technological The world is undergoing rapid technological changes mid 20th century. The wine industry is one of the beneficiaries of this technological advancement. Quality wine is considered a luxury commodity. It is generally consumed by the people that have high purchasing power and has developed a taste for such product over a long period of time. The Italian wine is one such high quality wine that is generally demanded by the well off families in China. Keeping these facts in mind the wine manufacturers aim at making the bottling and packaging of wine in a very attractive manner. It enhances the level of satisfaction of the people that purchase it. In this regard, modern technology helps the manufacturers to design their product packaging in a modern and eye-catching manner. The use of internet has further improved the marketing and branding strategies adopted by these firms. They can now reach larger audience within a short period of time. Environmental The issue of sustainability has become an important concern in the modern business world. The Italian wine producers are one of the important players in the Chinese wine market. China is emerging as one of the fastest growing economies in the world and therefore, economic activities by this country are under strong public scrutiny. Certain activities of breweries cause harm to the environment. The manufacturing firms make efforts to focus on sustainability of their production process and satisfy the corporate social responsibility of these organizations. Environmental concerns create considerable impact on the overall performance of the firms in the industry. The factors that firms have to take into consideration are environmental legislation, availability and cost of energy and the level of energy consumption in the economy. Legal There is strong government regulation on the production and consumption of wine in China. The government has made various environmental legislations that pertain to the breweries, regulations on the public consumption of wine and the minimum age of the people that are eligible to consume wine legally. Legal factors are also involved in the business of wine. China is gradually moving from being a centrally planned economy and is adopting the policies of liberalization. China follows the policy of state capitalism in a vertical economic structure; the key industries are monopolised by the state while private enterprises are allowed to enter the downstream industries (Li, Liu and Wang, 2012). The Italian wine producers that operate internationally are getting the opportunity to enter into the China market. With globalization, wine business in China has become less complicated than it was in the mid 19th century. The government has passed a number of acts that have made policies with regard to the wine business easier. Promotional programmes launched by the government have increased awareness among the populations. These programs educate the people about the benefits of wine over the local ‘baijiu’. This facilitates the firms as demand for imported wine rises. Advertisement by private manufacturers has also become increased with liberalization. Laws regarding healthy and safety, taxation and subsidy, foreign trade and foreign investment into the domestic economy also affects the Italian wine business in Chinese market considerably. SWOT analysis The SWOT analysis helps to identify the internal factors, such as, the strengths and weaknesses of the Italian wine industry in China. It also helps to recognize the external factors, such as the opportunities and threats that affect the industry in the present business situation in China. The wine industry has a long history of development in China. The fermenting and manufacturing of wine has been a tradition in the China since the prehistoric times (G. G. Brostrom and J. Brostrom, 2008). Studies of the ancient times of China reveals that wine manufacturing was started in the country almost 5000 years back. The Chinese market for Italian wine attracts large number of investors for investing in the domestic brewing industry of the country. With the evolution of China as one of the fastest growing economies in the world, the wine industry in the country has caught the attention of the international firms. Drinking of wine holds huge cultural and traditional value among the Chinese masses. Mostly, grape wine is translated as general ‘wine’ in China (Li, 2011). Consumption of high quality wine was a trend among the elite class of the population since ancient periods and even few decades back; the merging middle class in China has brought about noteworthy changes in the demand for fine wine by the country in the international market. China is the seventh largest wine producer and consumer in the world (G. G. Brostrom and J. Brostrom, 2008). Italian wine is one of the finest varieties of wine in the world and the firms producing and distributing it internationally have started to consider the potential of the Chinese market. Realizing the latent opportunity of the Chinese market, Italian wine manufacturers are willing to make sumptuous investments in this market. Strengths China has risen to the position of one of the most important wine markets in the world and since 2006, the market has shown annual growth rate of 20 percent. According to experts, consumption of wine is expected to become double by 2014 (UPENN, 2012). This shows that the industry is healthy and is growing at a steady rate. In 2010, Chinese import of wine crossed 250,000 tons. Figure: Import of wine by China (Source: Wine culture China, 2010) In China emergence of the middle income group makes a serious implication and brings major changes in the economy and society of the country. Supported by their high purchasing power, the people belonging to this class pose huge demand for luxury goods. Some scholars claim that the increase in demand for Italian wine in China is a result of huge rise in demand for the item by the Chinese middle class (Assenmacher, 2011). There is a high incidence of rural-urban migration in China (Li, 2011). People from rural areas are moving into the city areas in search of a better standard of living. They land up in better paid jobs in the cities than in the villages. With rise in income, these people also get exposed to the western culture and develop a refined taste for luxurious goods, such as, the Italian wine. This phenomenon represents noteworthy increase in demand for Italian wine in the country. Due to the high potential of the market for wine in Chain, Italian wine manufacturers are making increased investments in the Chinese market. This is further boosting the industry (Ebers and Wied, 2007). Weaknesses The most common form of wine in China is the yellow wine that is made from rice. Fine grape wine has not yet gained much popularity in the country. Most wine consumers prefer wine that has high sugar content or has a strong proportion of alcohol that lends it the taste of hard liquor. Hence, Italian wine finds it difficult to make its place in the Chinese wine market. China is the largest economy in the world in terms of population but consumes only 150 mc wine thereby occupying the fifth position in world ranking in terms of wine consumption. This is due to low per capita wine consumption in the country (G. G. Brostrom and J. Brostrom, 2008). There is strong government regulation in China on the minimum legal age for drinking wine, beer and alcoholic spirits. An individual below the age of 18 years is not legally allowed to drink wine (ICAP, 2013). Wine storage and transportation facilities in China are not modernized. Absence of temperature controlled warehouses and transportation vehicles (that would convey the glass bottles of wine without incurring losses due to breakage, act as significant barrier for the growth of the wine industry in the country. Opportunities A number of factors act as drivers of growth of the Chinese wine market. Although there is strict government regulation on the consumption of wine within the country, the government has recently decided to take steps to encourage wine consumption in the country. Several government programs have been launched that promote “wine as a healthy alternative to baijiu and other spirits” (UPENN, 2012). With change in monetary policies in the country, the Italian wine producing firms are facing a good opportunity to expand their business into the Chinese market. Declining tariff on import of wine and increase in purchasing power of consumers has increased overall demand for wine in the country. In China, consumption of wine remains a special tradition in occasions and festivals. Wine is exchanged as gifts on two important days of the year, “the Chinese New Year and the Mid-autumn Festival” (China Briefing Media, 2006; 2005). During these periods consumption of wine increases. Chinese government makes considerable investment in the tourism sector. Rise of the tourism industry leads to the convergence of people from different cultures in the country. This provides the opportunity for the expansion of the wine industry. Threats A study of the tradition and culture of the people of China shows that the people tend to prefer hard liquor over finer varieties of wine. This is a fundamental setback for the market for Italian wine in China. Domestic production of ‘huang jiu’ (or yellow wine) made from rice is encouraged by the Chinese government. ‘Putao jiu’ (or grape wine) is not much popular with the common masses. This causes hindrances in the growth of market for Italian wine in China. Promotional activities for wine, although started recently by the government, still lack vigour. There is lack of awareness among the people regarding wine. 95 percent of the population of the country possesses limited knowledge on fine wine, such as, Italian wine (DPI, 2013). Porter’s five forces analysis Analysis of Porter's five forces helps in understanding the forces operating in the industry that shape the current industry structure. It is a strategic framework that helps in understanding the industry’s competitive positioning. Porter (2008a) had recognised five forces that operate in an industry; bargaining power of buyers, bargaining power of suppliers, threat of substitution, threat of new entrant and rivalry among existing firms. A comprehensive study of all these forces helps in understanding the overall industry position. Figure: Porter’s five forces analysis (Sources: Porter, 2008b) An analysis of the five forces operating in the Italian wine industry in China has been presented below. Porter’s five forces analysis has been incorporated into the findings and analysis part with the aim of providing the reader with a view of the industry situation. This would help the reader to understand the marketing analysis of Italian wine in the Chinese market. Bargaining power of buyers: Moderate to low The wine industry faces three segments of buyers. They are the retail sellers, wholesalers and direct consumers. Direct consumers Direct consumers for the wine producers are mainly the foreigners that come to visit the country. Research shows that foreign tourists are inclined towards drinking wine. Therefore, besides visiting the parks or museums, these tourists would be inclined to frequent the bars and wineries that offer unique products since these are highly valued by the tourists. This reduces the bargaining power of these consumers. Wholesalers There are few wholesalers in China that deal wine business. Hence, they can put influence on the producers substantially. Thus, wholesalers enjoy higher bargaining power over the wineries. Retail outlets There are quiet a large number of retail outlets that sell Italian wine in China. This number is obviously much greater than the number of wineries. Therefore, bargaining power of the retailers is low since number of wineries is low. Bargaining power of buyers is moderate to low. Bargaining power of suppliers: High Bargaining power of suppliers depends on the demand supply relation between the buyers and the suppliers. In China, there are 1.25 million acres of grape vines. Half of these grapes go into wine production (G. G. Brostrom and J. Brostrom, 2008). Italian wine is prepared with the best quality of grapes. Since the number of suppliers of raw material is low, bargaining power of suppliers is expected to be high. Supply also depends on other factors, such as harvest in a year and climatic conditions. These factors combined boost the bargaining power of suppliers. Threat of new entrants: Low Italian wine belongs to a specific genre of the wine industry. It requires high skill, sophistication and dedication to produce the high quality wine. Not many entrepreneurs can enter this industry. New entrants face high barriers to entry. Besides having strong knowledge on the process of production, high awareness regarding the complex activities of the industry is necessary. Therefore, existing firms face low threat of new entrants. Threat of substitutes: Moderate to Low Several options are available in the beverages market in China. China has a long tradition of drinking ‘jiu’ or wine. The majority of the population drink yellow wine. There are alcoholic as well as non-alcoholic beverages, such as beer, sparkling, wine and other liquors. Considering these options it might be asserted that the threat of substitutes of wine is very high. However, Italian wine is a special category of wine that caters to a target segment of customers that are loyal to the product. Hence, on considering the customers those have a taste for this product and consume it regularly, it is revealed that the threat of substitutes is low. Rivalry among existing firms: High A few sellers occupy the majority of the market for quality wine in China. The Italian wine is supplied by a number of distributors and there is strong rivalry among the sellers for market share. Since bargaining power of the buyers is low for sellers consider customers’ loyalty as an important aspect of their business. In the recent business situation, wine sellers are facing growing competition from other spirits, such as beer and other forms of liquor. Hence, they depend on the loyalty of customers to a great extent. Sellers make sincere efforts to pull more customers in within their target market segment. The wine industry in China is not yet saturated. China is a growing economy and the international merchants find huge scope for expansion in the Chinese market (Demiray and Sever, 2011). Hence, there exists very steep rivalry among the sellers that cater to the market presently. Marketing mix 4C analysis The 4C marketing mix was developed in the year 1993 by R.F. Lauterborn (University of Hull, 2006).This marketing mix works simultaneously with the long established 4P marketing mix. The 4C marketing mix is comprised of the four elements, consumer, cost, communication and convenience. Unlike the 4P mix, this has been developed by strategy makers keeping in mind the perspectives of the consumers that are the end buyers of the products (Liu, 2008). The steps in this model are; designing the products that are wanted by customers, setting the price that is acceptable to all customers, selling the products at those places that are found to be most convenient for the customers to visit and the making the process of communication and product promotion most effective. Consumers Sellers consider consumers as one of the most important factor that affect their business decision. Italian wine is a highly sophisticated product and it is consume d by customers that have a test for quality wine. Research shows that these consumers belong to the middle class Chinese population and are inclined towards the consumption of various luxury products. Therefore, the distributors take into account the particular preferences of the consumers that purchase these products (Dunlop, 2008). Cost Italian wine is a luxury product that is offered to the consumers at a pretty higher price than the other alternatives available in the market. The sellers need to consider the current level of consumption of this particular wine by the target market and compare the data with the level of consumption of the other products. The cost of obtaining other varieties by the consumers has to be compared to the cost borne by the consumers for obtaining a particular brand of Italian wine. Sellers would have to consider their long term revenue and profit objectives and revise product pricing and the retail outlets at which the products are shelved. Communication Communication is an important factor for the success of any business. In order to maintain the competitiveness of the firm in the industry, the needs and wants of consumes have to be taken care of. Businesses need to remain updated with the evolving preferences of the consumers. This would help wineries to developed new products with modified tastes. This requires maintenance of good communication with the customers. Besides, good communication with the wineries would also help retailers to maintain their stock of wine so that they do not over stock the product or run out of it when demanded in greater amounts by customers (Dinkhoff, 2011). Convenience Convenience refers to the ease with which the products reach the target customers. Distributors aim at placing the products at the stores with the most strategic locations, such that the customers would be able to get the product easily. Since the Italian wine is an item of luxury, customer that demands it would also be on the lookout for elegant service. Store locations play an important role in the level of consumer demand since the more conveniently the consumers can obtain the product; the more encouraged they feel to demand more quantities of the product. Summary of findings This section has been incorporated in the paper with the aim of presenting the findings from the research made on the marketing of Italian wine in the Chinese market. Information for this paper has been collected from secondary sources. The information has been analysed in the form of SWOT analysis, PESTEL analysis, Porter’s five forces industry analysis and the analysis of the 4C marketing mix. The discussion above provides a detailed and in depth view of the position of Italian wine in the Chinese market. Analysis of both the internal and external environments has been presented for a better understanding of the firm level performance. The five forces analysis shows that the bargaining power of the sellers in the wine industry is moderately low. There is steep rivalry among the sellers to gain market share. This sets the scenario of a strongly competitive market. Reference List Assenmacher, K., 2011. Chinese economy: Threats foreign companies face when investing in China and what Chinese authorities are doing to combat them and sustainability of the current rapid growth in the Chinese economy. Munich: GRIN Verlag. Brostrom, G. 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