Winning Strategic Case 1: Up the Price Ladder with ChangYu

China's oldest wine producer moves upscale, heads offshore.

By Laurie Underwood

While China’s grape wine industry dates back to the Han Dynasty, it has historically remained a fringe industry far overshadowed by other beverage categories. On one hand, Chinese beer has long held the low-price end of the spectrum. On the other, baijiu (China’s distilled sorghum spirits) held the upscale end of the spectrum.

During the two decades following China’s reopening, (wine production dwindled after 1949 and remained low through the 1980s), several Chinese wine producers including Great Wall and Dynasty have tried to take the drink to the mass market. So far, however, Yantai ChangYu Group has been the most successful. In fact, the Shandong Province-based company now reigns as the largest wine producer not only in China but also in Asia. For this reason, CEIBS Marketing Professor Per Jenster named the company as his top choice example of successful marketing for this cover story.

ChangYu is China’s oldest wine producer, with roots dating back to 1892. (The company was patronized by Dr. Sun Yat-sen and won a gold medal for its brandy at the 1915 World Expo.) After nearly going bankrupt in 1949, the company laid low for nearly 40 years as a government-run entity. When ChangYu began reviving after 1989, it faced the challenge of basically rebuilding China’s wine market from scratch. As Prof. Jenster writes in his case study ChangYu ? Ready to Go Global? “Before the 1980s, few Chinese knew what grape wine was.” Those who did, referred to it as yangjiu or “Western alcohol” ? an utterly foreign drink.

From this modest starting point, ChangYu set about building its wine brand in China. Before the mid 1990s, more than 50 percent of the company’s production was in brandy, with less emphasis on wine. In 1997, ChangYu made a dramatic shift toward production of high quality wine. The company “moved up the price ladder” reports Prof. Jenster, to focus on mid- and top-range wines priced over RMB100 per bottle. ChangYu began following a “4 + 1” strategy in which it opened four chateaux and developed one core product: “Jiebaina” (Chinese for “cabernet”). This strategy would soon prove successful.

From 2001 to 2007, the company opened four wineries and tourist destination chateaux in Liaoning and Shandong provinces, Beijing, and New Zealand. These estates began producing a range of mid- to high-end wines, as well as attracting well heeled patrons as “wine culture clubs.”

The 4+1 strategy quickly proved successful in strengthening the brand and growing sales. Between 2004 and 2006, ChangYu nearly doubled its wine sales, to RMB1.6 billion, while sales of its other beverages remained flat. ChangYu now holds roughly 20 percent of China’s wine market by volume and 45 percent by profit.

Effective distribution is another factor in ChangYu’s success, says Jenster. The company increased its sales team from three people in 1989 to 1500 in 2006. Last year, ChangYu wine was sold in 3,000 retail outlets nationwide and is now served on Lufthansa’s Asia-bound flights.

Product development has been another strong suit in ChangYu’s business plan, says Jenster. He is particularly optimistic about the company’s venture into the niche business of “ice wine” ? a sweet wine made with frost-frozen grapes. The company now bottles ice wine in New Zealand, in a venture with Aurora Ice Wine Co., and is becoming a market leader in this sector. In China, the product is being targeted at young women.
Such bold initiatives have been noted by the media. In 2006, BusinessWeek teamed with Interbrand consultancy to rate the 20 best Chinese brands in terms of profitability and growth potential. ChangYu ranked 16th in the survey, with brand value calculated at US$290 million.

Going forward, consumer education will be a major thrust for the company. This year, ChangYu has invested RMB200 million in a campaign to strengthen the Jiebaina image. This follows on the company’s 2003 move to register the Jiebaina name as its trademark ? causing outcry from competitors who claim the term is a Chinese translation and not a trademark. The company also gives some 160 wine lectures around China per year, and has successfully raised its profile by having its products selected as gifts to VIP visitors to China including Jack Welch in 2004 and Bill Gates in 2007.

The “next big thing” in ChangYu’s expansion has been, not surprisingly, to take its brand offshore. Already, the ChangYu label is being sold in 14 European cities, and is also building a name in New Zealand. In fact, when investing in the ChangYu-Karikari Chateau, ChangYu reportedly did not invest capital but instead granted Karikari the right to trade under the ChangYu brand name.

By all accounts, ChangYu’s “up-the-price-ladder” strategy is working. Between 2004 and 2006, the company’s revenue jumped from RMB1.3 billion to RMB2.2 billion, while profits climbed from RMB204 million to RMB444 million. Last year, the company claimed 47 percent of the total profits of China’s wine industry, while competitors Great Wall and Dynasty combined claimed only 34 percent. Next, look for the ChangYu label on the supermarket shelves next time you are in Europe or other developed markets.