Outline. Comparison of Wine distribution channel systems in Germany and China. Introduction: setting a problem. Literature review

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1 Comparison of Wine distribution channel systems in Germany and China Lessons learned Outline Introduction: setting a problem 1. Literature review & Research questions 2. Research Design and Methodology 3. The German Market 4. The Chinese Market Discussion & Conclusions Tatiana Bouzdine-Chameeva, Wenxiao Zhang, Jon H. Hanf 2 Introduction: setting a problem The complexity of marketing channels decisions is increased by widely different social, cultural, economic, and political patterns. The wine industry is one of the most globalized industries in the world = > It becomes crucial to understand the distribution channels system development on these markets. Studies on international distribution channel are limited : Cabaniss 1991; Griffith and Ryans 1995; Rosson and Ford 1980; Samiee 1993, Seifert and Ford 1989 Wine distribution channels in wine sector remains a much understudied research field Wine production follows a rigid yearly cycle, wineries must allocate production across several sales channels before demand is known, and wine distribution is challenging due to the complex rules and restrictions (Camp, 2004). We compare a typical mature market (Germany) with an emerging wine market (China) and focus in particular on wines significantly present on both markets. Literature review The distribution channel is the key to any company's success. (Stern et al. 1996,p. 502) However, the choice of channel is often made haphazardly, with limited information. (Cabaniss, 1995). The distribution policies should be considered together with the characteristics of products. (Miracle, 1965) (Wine production follows a rigid yearly cycle. Grapes are harvested once a year and bottled subsequently in a few months. Wineries must allocate production across several sales channels before demand is known.) The selected distribution channel should constantly be under observation to make sure it is utilized in an effective manner. (Segerstedt, 1999) There is an important shortage of the studies of the distribution channels in the wine sector (Beaujanot et al., 2004; Orth et al., 2007)

2 Main Distribution channel theories Main theory Main schools Authors Microeconomic Behavioural Transaction cost theory Systems Institutions (intermediaries creating utilities.) Functions (channel structure based on functions) Commodities (Channel structure based on products) Power, Conflicts, Cooperation, Control, Dependence, Discrimination, Flexibility, Monitoring, Motivation, Reciprocity, Satisfaction, Trust, International distribution channel Reduce distribution costs Network,organizational Sheth, Gardner and Garret, 1988; McCammon, 1963, Stiegler, 1951; Bucklin,1966; Ajzenand Fishbein, 1980; Mallen, 1973; Rangan et al., 1992 Rhoades, 1927; Copeland's, 1923; Sheu and Hu, 2009; Stem and Gorman, 1969;Bello and Gilliand, 1997; Bello and Gilliand, 1997;Yeung et al., 2009; Kim, 2003; Yavas 1998 Balabanis, 2005, Bello and Gilliland, 1997; Karunaratna and Johnson, 1997; Rosenbloom and Larsen, 2003; Moore 1992; Marshall, 2003; Bello, Chelariu, and Zhang, 2003; Williamson (1975, 1979, 1981, 1991); Harvey and Novicevic2002;Kinn2001;KinnandDaniels1991; Kim,Nugent,andYhee1997;KleinandRoth1990, 1993;McNaughton2002;MyersandHarvey2001; Rialp,Axinn,andThach2002; Alderson and Mc Carthy, 1960; Per Andersson, 1992; Stern and El-Ansary, 1996 Distribution channels (DC) The distribution channel literature can be divided into design and management subject areas. Channel design research (e.g., Williamson, 1985) examines the organizationof the distribution channel system and the rationale for having intermediaries such as sales force, agents, distributors, wholesalers, and retailers. Channel management research examines how channel systems can be managed once they are in place. Most of this research pertains to how manufacturers and distributors to use their power base(beierand Stern, 1969; Gaski, 1984) to influence the achievement of their business objectives (Frazier and Roby, 1991). Concepts of conflict and cooperation are central to this line of research (Anderson and Narus, 1990; Stern and Brown, 1969). 5 6 Six factors influencing a DC choice Environment Consumer Market Product Company Intermediaries Interest rate Economic goals Target focus on Replacement rate Range of Experience in mass market products products Information Frequency of Intensity of Gross margin Goals and Relations with technology purchase competition strategies local government Legislation and Waiting time Technological Perishability Order size Retailer investments politics change Social culture Self-Affirmation Searching Time Market Share Communications Significance purchase Rapidity consumption Symbolic meaning of of Social influence and experiential impact Geographic concentration Unit value Desire of After-sales service control capability Product complexity Number of Long-term support relationship programs Product life-cycle Promotion Distribution stage budget expenses Volatility of demand Reputation with Power of solving suppliers, the storage or customers, and displaying banks problems Brand positioning Size of the firm Knowledge/use of on quality promotion Technical pre-sales Sales organization and after-sales and quality of services sales force 7 Yellow cells are those factors which are important for wine sector Different markets, different es to DC choice The distribution channel decisions are complex because of the widely different social, cultural, economic, and political patterns (Ensign, 2006). Wine distribution is especially challenging due to the complex rules and restrictions. (Camp, 2004). The result is that many wines that have garnered are not available to many consumers who may wish to purchase them (Wiseman and Ellig, 2003). Some of the literatures suggest that the distribution/retailing systems in developping countries willand /or oughtto look more likethe countries whichhave alreadythe mature distribution structure. (Kaynak,1980, Wadinambiaratchi, 1965, Hall, Knapppand Winston, 1961)

3 Types of DC structure Research Objectives Analyze the characteristics of wine distribution systems at the different stages of wine market development. Types of Characteristics of each structure distribution Producer- consumer -Cutting out distributor profit margin.(jobber, 2001) Producer - retailer - If the retailer is big enough, it becomes economic for producers to supply consumer. retailers directly rather than through wholesalers.(jobber, 2001) Producer - wholesaler - For small retailers with limited order quantities, the use of wholesalers makes retailer- consumer economic sense.(jobber, 2001) Produce-agent/distributor -retailer-consumer/ Producer - agent/distributor - wholesaler - Retailer- consumer. This channel is most common when companies enter international markets (Jobber, 2001) due to low sales volume, high start-up costs and local knowledge (Coelho et al, 2003). Some companies use multiple channels to distribute their products for the market share consideration.(jobber, 2001). Analysis of wine distribution systems versus wine market development. Does new developing market (Chinese as an example) wine distribution follow the trends similar to mature market (German) distribution system? What are the differences of the new developing wine distribution compared to mature market distribution system? existing on German and Chinese wine markets; analyze their differences and explain the reasonsof these differences. Study the evolution of channels, find the best match for the wine exporters and the distribution channel systems to use in German and Chinese wine markets Why Germany and China? 1. Typically mature wine market in Europe versus a new developing non-europe market. The German market : Wine Distribution system 2. Both countries are producing wine and also importing wine. 3. Both countries possess high market importance/potential for wines Germany The firstmarket of wine for the last 3 years, Mature market, well developed Imported wine 65%of total consumption, (2010), mainly imported from France, Italy, Spain. Despite of the Crises, the wine expeditions to Germany remained stable, both in volume and value in 2012 (+0.02% and +0.69% compared to 2011) Source: UbiFrance. 11 China The highestincreasedmarketand the fouth market of wine Newly developing market Imported wine 25%of total consumption, mainly from France, Italy, Spain. China reported an increase of more than 65% each year from , and an increase of 25.6%in the year Reference: Hanf. J et al. (2012)

4 Who? Research Design Step 1 : the information collected from research papers, online sources, government reports, consultant reports and medial search Step 2 : the interviews 1.The producers/ negociants/ brokers 2.The Chinese importers/ distributors 3.The German importers/distributors How? 70 minutes demi-structured face to face interviews. Where and How many? France China Germany Producers (2) Negociants /Exporters Importers/ distributors 3 (1 ) (5) Brokers 2 (2) 0 0 Total To track the evolution trends from an emerging market to a mature market. The Chinese market : Wine distribution channels 13 Data from OIV, 2012; Chinese 14 custom data, 2012; Wine intelligent, 2012 Chinese importedwine distribution channels system Germany & China markets/ importers : Comparison in field studies Respondent Germany market / importers Chinese market/importers Producer 6 - right straight - difficult to enter - well organized -You have to exchange with importer -no plan -not stable -not very confirm market -a market of opportunity -prefer classic labels. -market grow Negociant 3 -professional customers -have their customer basis -mature, long tradition -rich experience -more competitors -faithful to the brand -Customer are mature, have more knowledge -do not know how to sell the wines -one-time business, never hear again -long process -more costs -has lots of ideas -Translation problems -supermarket in China is more complicated. 15 Data from Rabobank, 2011 Producer & Negociant 1 -very old market, -Important market and stable market -people knows about wine -the channel are very stable -long-term relationship 16 -creditable market -new market -learning quite fast -many people just start do wine business -do not know about wine -they can invest money -rising market -secret channel within china

5 Discussion : Chinese wine distribution start following the trends similar to German distribution system Comparison of the distribution channel in new developing and mature markets. 1. More balanced rate of the ratio imported wine/ Local wine The consumption ratio of imported wine/ local wine in German wine is 65%/35%, In China, the percentage of imported wine keeps increasing (more than 65% growth each year during the last four years), the percentage of imported wines increased from 5% (in 2008) to 25% (in 2011) (China government report, 2012). 2. Local wine focus on off-trade channels. In both countries, there is a focus on off-trading channels (Supermarket, discount stores) for the local wine sales (Germany 80% compare to China 54%). 3. A switch to off-trade consumption. Off-trade increased from 80% in 2008 to 82% in 2011 in Germany (Deutsches Weininstitut, 2011/2012).In China from 20% ( in 2010) to 35% (in 2012) for imported wines, mainly sell in the major foreign retails (156 Carrefour, Metro 39, 30 Auchan...) (Wine intelligent, 2012) Conclusions A simplified picture: - the Chinese wine market is one of the most dynamic and fastest growing markets; -the German wine market is rather stagnating since twenty years. -the Chinese market is low in competition the German one is very competitive. A more realistic picture: China : - High growth rates is due to tier 2 and 3 cities while in tier 1 cities it is moderate. - Luxury wines face pressure due to governmental policy shifts in the last two years - Demand grows for moderate prices wine => Spain & Italy. Thank you for your interest! wines Germany: - The main rivals for wine exporters in Germany are Spain & Italy - The high competition has driven prices down while the basic quality has increased. - The generic attributes (quality, grape variety, country of origin) compose the selling proposition; brand building starts getting more important. The usage of generic selling propositions on the Chinese wine market could result in a price competition, and come up with good quality for moderate prices. producers selling their wine today should focus : - in China on quality as a key argument for future sales; - in Germany on brand building. 19 Germany 20 China