On April 22, 2018, Changyu A (000869, SZ) released its 2017 Annual Report. Faced with fierce impact brought by foreign alcohols and widespread decline in the performance of domestic companies, the sales revenue and net profit of Changyu both showed a trend of picking up in 2017 instead.

It is considered a sign of the forthcoming spring that the Chinese wine market is going to have after the chilly winter that it has gone through for years. With a new round of major consumption upgrading in China, Changyu Company predicts that the year of 2018 is hopeful to become a turning point for the market and that the China’s wine industry is going to usher in a “Golden Decade” yet again.

Pickup in Performance Indicates a “Golden Decade”

According to the Annual Report, the sales revenue of Changyu A was RMB 4.933 Billion Yuan in 2017, increasing by 4.56% compared to that of last year; during the same period, the net profit of the Company was RMB 1.032 Billion Yuan, rising by 5.01% year on year.

As the saying goes, the duck knows first when the river becomes warm in spring. The pickup in two major performance indicators of Changyu seems to indicate that the entire Chinese wine market is going to get out of the winter and usher in a spring.

The Chinese wine market has gone through ups and downs since 2002, the year in which China joined WTO, its economy rose rapidly, and the Chinese wine market entered its first “Golden Decade” in the 21stcentury. China’s local wine output increased sharply to 1.38 billion liters in 2012 from 280 million liters in 2002, increasing nearly fivefold, accounting for about 75% of the Chinese market. During the decade, Changyu kept a yearly growth rate of more than 20% or even over 30% occasionally.

Since the introduction of the “Eight-point Regulation” in 2012, the official business consumption that had been out of control was contained. From then on, the Chinese market started to shrink as a whole. The wine consumption in China dropped to 131 million cases in 2015 from 139 million cases in 2014, decreasing by 5% in general. Meanwhile, with even more foreign wines flowing into China, China’s wine industry turned into a chilly winter under combined impacts brought by the above factors.

Customs data indicate that the total volume of China’s imported wines has doubled during the past three years. By 2017, the volume of China’s imported bottled wines had reached 552,000 kL, increasing by 14.62% year on year. In contrast, under the impact of foreign alcohols, the output of Chinese companies suffered a constant decline. In 2017, China’s wine output reached 1.001 million kL, dropping by nearly 12% year on year. The average decrease was about 6% for five years consecutively. During this chilly winter, China’s wine companies even suffered extensive losses.

According to the judgment of Changyu in its 2017 Annual Report, “From the long run, as people’s income level keeps increasing, there will be increasingly more consumers who are in pursuit of healthy and fashionable lifestyles. People will be fonder of wines that match the level of consumption trend, which will continuously increase the demand for quality wines.” It seems that the long winter will be gone soon, and a feast of consumption upgrading will dispel the chill in China’s wine industry.

What is valued most by the global wine industry is that the consumption base of China’s wine market is high while the average consumption volume is merely 1.25L per year, way lower than the global average level of 3.35L. As what is written in the Annual Report of Changyu, “China’s wine industry has a huge potential for market development.”

Reshape the “Troika”

While a spring for the market is coming, not every company is able to bathe in the spring sun. Some wine experts have pointed out that China’s wine consumption level is upgrading, the consumption structure is diverging, and the atmosphere will be filled with fiercer competition. Only those who are capable of keeping up with the times, mastering the consumption trend and adapting to changes in the market can take the lead in getting out of the dilemma and benefit more from industrial changes.

As China’s economy enters a new era in 2018, China’s wine industry is going to have a new “Golden Decade”. Early this year, Changyu finished its management replacement, after which this wine company with a 126-year history stepped into a new era as well.

In terms of the development plan for 2018, Changyu has noted in its Annual Report that the Company is carrying out new reforms and upgrading this year, covering various levels ranging from the corporate strategy, market strategy, business structure, sales system to product planning and packaging.

According to the plan, Changyu will focus on the development strategy of “mid-to-high end, high quality and major single item” in the future. At present, faced with the trend of China’s major consumption upgrading and the fact that foreign wines are flowing in and contending for the market cake, Chinese wine companies are also starting a trend of industrial upgrading. ChangyuA (000869) has chosen a path of achieving transformation toward a mid-to-high end brand by means of its global layout.

Currently, Changyu is having a series of overseas mergers and acquisitions in France, Spain, Chile and Australia, adding such elements as raw materials, products, techniques, talents and business performance from all over the world into the company with a century-long history. Changyu has become the fourth largest company globally with layout in four continents, 21 factories across the world and wine bases that cover an area of 350,000 mu.

According to the 2017 Annual Report that was just released, Changyu “is working on building raw material bases in high-quality wine grape production areas such as France, Chile and Australia, improving the scientific management level of domestic bases and guaranteeing stable supply of quality wine base; it regards the global leading level as its standard, firmly pushes forward the high quality strategy, enhances the intrinsic quality of products and improves the outer image of products in order to achieve all-roundtranscendence in main competitive products.”

At the same time, the business structure of Changyu has also evolved from being the “single outshining one” among domestic wines to including three business sections of “domestic wine + imported wine + brandy”, a shift from the “single outshining one” to a “troika”. As was mentioned in the 2017 Annual Report, it would “comprehensively implement the development strategy of putting equal emphasis on wine and brandy” while choosing brandy as a new focus of Changyu in the Chinese market.

According to customs statistics, the volume of imported liquor in the Chinese market has maintained a considerable size and growth. In 2017, the total amount of China’s imported liquor was about RMB 6.75 Billion Yuan, increasing by 8.03% year on year. Among which, the total amount of brandy reached RMB 5.52 Billion Yuan, increasing by 34.76% year on year, accounting for about 81.8% of the total amount of imported liquor.

According to prediction of Zhou Hongjiang, the new Chairman of Changyu, there are different wind gaps specific to different phases during the development of the wine industry. Foreign alcohols—brandy in particular—will undoubtedly become a mainstream wind gap of the future Chinese wine industry. In 2018, Changyu will invest twice as much in the brandy market as in 2017 and set up a marketing system specific to brandy.

In 2018, Changyu will make major adjustment to its Chinese market by benchmarking itself against international competitive products. At present, it has reformulated, upgraded and improved its product positioning, product quality and packaging, organizational structure, the marketing team as well as the distributor system, which is meant to be an advance layout to welcome the new “Golden Decade” of the Chinese market.

According to Zhou Hongjiang, “The future of Changyu is promising, yet the effects of adjustment will not be visible immediately. It requires time. Hopefully, there will be an obvious change by the end of this year.”

Now there is such a thought spreading within the wine industry—as China has a large wine consumption base and yet a very small per capita wine consumption volume, China will exceed the U.S. to become the world’s largest wine market after the next prosperity period of the market. Who will become the biggest beneficiary of the rise of the Chinese market? (News from eeo.com.cn,N Reporter Chong Ang)