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Surge in Mainland Middle Class Drives Expansion of Online Wine Sector

Sales of online-ordered and home-delivered/in-store collected wines have taken off across China, spurring the growth of dedicated apps and innovative retail solutions, although many of the sector's pioneers have yet to turn any real profit.

Photo: Liquor Easy: A market leader in the burgeoning mainland online wine market.
Liquor Easy: A market leader in the burgeoning mainland online wine market.
Photo: Liquor Easy: A market leader in the burgeoning mainland online wine market.
Liquor Easy: A market leader in the burgeoning mainland online wine market.

Among the many consequences of the continuing expansion of the middle class across the mainland has been a surge in demand for wine. Given that this has coincided with online purchasing becoming ever more ubiquitous, it should come as no surprise that the number of e-commerce sites and apps specialising in wine sales has soared in recent years.

Many digital entrepreneurs have been swift to see the sector's potential. The fact that, in 2016, the mainland's overall level of wine consumption increased by 6.9%, to a total of 1.72 billion litres, has been incentive enough for many. With wine imports for the first quarter of 2017 showing a year-on-year increase of 8.7%, it also looks as though this is one trend that is likely to be sustained.

O2O Options

Although the online wine sector is still relatively undeveloped, two companies have already emerged as potential market leaders – Yijiu Yijiu (1919) and Liquor Easy. Both businesses have adopted the O2O (online-to-offline) model and sell a variety of wines through a multi-channel approach, offering both door-to-door deliveries – typically within one hour – and in-store pick-up.

As well as operating their own conventional outlets, both companies have embraced a variety of other sales channels, including online shopping malls and collaborative ventures with a number of China's internet giants, notably JD.com, WeChat and Baidu Waimai (food delivery only). Both companies have also developed proprietary smartphone apps. In addition to their core offering of wine, all of these channels also give consumers the chance to purchase a selection of Chinese white spirits, imported spirits, beers, rice wine, soft drinks and a range of drinking accessories.

Of the two, 1919 is clearly the largest player. To date, it has opened nearly 1,000 stores across the mainland, with 430 of them opening in 2016 alone.

By comparison, Liquor Easy is relatively small in size. Its chosen development model, however, may prove to be instructive to any small or medium-sized investors considering entering the sector.

The company first began operating in Henan, gradually extending north into Beijing and Xian. Currently, it has 220 directly operated outlets, just over 50% of which are in Henan. In Beijing, including its distribution hubs, it operates across 92 sites, while, by the end of the year, it will have 11 outlets in Xian.

In terms of Beijing, most of the company's outlets are located in mid-market residential districts, areas where the locals have considerable purchasing power. Typically about 28 sq m in size, Liquor Easy's stores are characterised by a high standard of merchandise displays, a variety of seasonal sales promotions and knowledgeable sales staff.

At the end of 2016, the company made its initial listing on the National Equities Exchange And Quotations Co, the Beijing over-the-counter share-trading platform perhaps better known as China's New Third Board. As with 1919, it currently operates on a membership basis.

Photo: Wine-ordering via smartphone app.
Wine-ordering via smartphone app.
Photo: Wine-ordering via smartphone app.
Wine-ordering via smartphone app.
Photo: On-app pickup points and delivery options.
On-app pickup points and delivery options.
Photo: On-app pickup points and delivery options.
On-app pickup points and delivery options.

Overall, online wine sales are largely seen as set for period of accelerated growth. Membership numbers are expected to soar, while both the level of repeat business and brand awareness are also set to increase.

It is perhaps worth noting that, in the initial phase of their expansion, both Liquor Easy and 1919 demonstrated a willingness to work with individual investors in order to accelerate their growth, despite having to then share any profits with their backers. As the two companies became more established, however, both have changed their operational preferences.

In the case of 1919, its forward-development plan commits it to working less with individual investors this year. Instead, it is looking to raise backing from a number of funding platforms, with this then channelled into a series of store openings. It is believed that this approach will enhance management consistency across all of its outlets, ultimately boosting the profitably of each site, while allowing them to compete more effectively with any newcomers to the sector.

By comparison, Liquor Easy is still keen to work with individual partners, especially those with knowledge of particular local markets and experience in brand development. In such cases, the company is happy to work on an almost franchise basis, providing support in terms of pre-openings, store operation and systems management, including the central co-ordination of data and logistics and the sharing of subscriber information and order allocation on a geographical basis.

Intensifying Competition

As well as the emergence of a number of domestic players, many overseas companies are also said to be eying wine-related e-commerce opportunities in the mainland market. Inevitably, once such companies successfully access China's burgeoning e-commerce channels, competition in the sector will dramatically intensify.

In order to ready themselves for this changed market reality, a number of the domestic players have already begun to optimise their own offering. This has seen them look to develop new retail formats, improve overall efficiency and enhance both their service and supply chains.

As well as new entrants to the sector, a number of new operating models are also said to be making something of an impact. One such model – S2b (supply chain platform to business) – sees wine professionals and specialist outlets directly linked, on a regional basis, to local wine aficionados.

Taking the lead in this particular approach is the Jiudating (Wine Inquirer) platform. Essentially, the platform allows local wine professionals/wine shops to share their expertise with would-be wine drinkers via social media. Guided by the experts' insights and recommendations, consumers can then order particular wines, with Jiudating handling all logistics, payment processing and credit guarantees.

Another innovative approach has been piloted by Songjiuxia, a Beijing-headquartered discount chain specialising in mass-market imported wine. With only a small investment required, its members are primarily small off-licences, typically based in third- and fourth-tier cities, county capitals and small towns.

The company also operates a range of smart wine vending machines. Primarily sited in tier-one cities, orders can be placed via the company's proprietary app, while the wine – constantly maintained at the optimum temperature – can be paid for remotely and collected at the purchaser's convenience.

Despite the apparent vibrancy of the sector, it is worth bearing in mind that many of the most prominent players are yet to turn a profit. In 2016, for instance, 1919 recorded a net loss, despite the fact that its sales revenue had almost doubled. According to the company, it chose to take a strategic loss for the year while it continued to build market share.

Faced with similar problems, Liquor Easy has opted to scale down its own expansion plans following its costly move into Beijing. It is, however, planning to open a number of additional distribution stations in the residential districts as a means of cutting operating costs.

Photo: Increasingly popular: Offline collection points.
Increasingly popular: Offline collection points.
Photo: Increasingly popular: Offline collection points.
Increasingly popular: Offline collection points.
Photo: Red wines: Now just a mouse click away.
Red wines: Now just a mouse click away.
Photo: Red wines: Now just a mouse click away.
Red wines: Now just a mouse click away.

Faced with these conflicting indicators – increasing sales but poor returns – would-be entrants to the sector are advised to consider how best to optimise and integrate the offline and online sales channels. It is also believed that harnessing big data will be essential when it comes to effectively managing the required supply chains.

Yuan Zhen, Special Correspondent, Beijing

Content provided by Picture: HKTDC Research
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