China’s demand for wine has surged as a result of the continuing expansion of the middle class across the mainland, reports Hong Kong Means Business, the newsletter of the Hong Kong Trade Development Council.

This has led to the number of e-commerce sites and apps specialising in wine sales soaring in recent years. Online entrepreneurs have noted the sector’s potential as mainland wine consumption rose by 6.9 per cent to a total of 1.72 billion litres last year.

As wine imports for the first quarter of this year show a year-on-year increase of 8.7 per cent, the newsletter says the trend is set to continue.

While the online wine sector is relatively undeveloped, two companies have emerged as potential market leaders: Yijiu Yijiu (trading as 1919) and Liquor Easy. Both businesses have adopted the O2O (online-to-offline) model, selling a range of wines through multi-channels and offering both door-to-door deliveries – typically within an hour – and in-store pick-up.

As well as conventional outlets, both companies have embraced other sales channels including online shopping malls and collaborative ventures with China’s internet giants, notably JD.com, WeChat and food-delivery service Baidu Waimai. Both companies have also developed smartphone apps.

As well as their core offering of wine, they sell a selection of Chinese white spirits, imported spirits, beers, rice wine, soft drinks and drinking accessories.

Different approaches

As the larger player, 1919 has opened nearly 1000 stores across the mainland, 430 of these being added last year. By comparison, Liquor Easy is relatively small, but its development model may prove instructive to small- or medium-sized investors considering entering the sector, says the newsletter.

Liquor Easy started out in Henan, gradually extending north into Beijing and Xian. It now has 220 directly run outlets, with slightly more than half of them in Henan. In Beijing it has 92 sites including distribution hubs, and by the end of the year will have 11 outlets in Xian.

Most of the company’s Beijing outlets are in mid-market residential districts. Typically covering about 28 sqm, the stores are characterised by a high standard of merchandise display, a variety of seasonal sales promotions and knowledgeable sales staff.

At the end of last year, Liquor Easy made its initial listing on the National Equities Exchange and Quotations Company, the Beijing over-the-counter share-trading platform better known as China’s New Third Board. As with 1919, it trades on a membership basis.

Meanwhile, accelerated growth is forecast for online wine sales. Membership numbers are expected to soar, while both the level of repeat business and brand awareness are also set to grow.

In their initial phase of expansion, both 1919 and Liquor Easy were willing to work with individual investors to accelerate growth. As they became more established, both companies have changed their operational preferences.

Funding change

In the case of 1919, its forward-development plan commits it to working less with individual investors. Instead, it plans to raise backing from funding platforms, channelling proceeds into store openings. This approach is expected to enhance management consistency across outlets, ultimately boosting the profitability of each site while allowing them to compete more effectively.

By comparison, Liquor Easy still seeks to work with individual partners, especially those with knowledge of particular markets and experience in brand development. In such cases, the company is happy to work similarly to a franchise: it will provide support in terms of pre-openings, store operation and systems management, as well as central co-ordination of data and logistics, and sharing subscriber information and order allocation on a geographical basis.

Many overseas companies are also said to be eyeing wine-related e-commerce opportunities on the mainland. Inevitably, once such companies access China’s e-commerce channels, competition will intensify dramatically.

To prepare for the changes, some domestic players have already started optimising their offerings, such as developing new retail formats, improving efficiency and enhancing service and supply chains.

New models

New business models emerging include S2B (supply-chain platform to business) which directly links wine professionals and specialist outlets on a regional basis to wine aficionados.

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

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

The company also runs a range of smart wine-vending machines, primarily in first-tier cities. Orders can be placed via the company’s app, while the wine – maintained at optimum temperature – can be paid for remotely.

Despite the apparent vibrancy of the sector, many of the prominent players have yet to turn a profit. For instance, 1919 had a net loss last year despite almost doubling its sales revenue. The company says it chose to take a strategic loss while continuing to build market share.

Facing similar problems, Liquor Easy opted to scale down its expansion plans following its costly move into Beijing. However, it is planning extra distribution stations in residential districts to help trim running costs.

With these conflicting indicators of increasing sales but poor returns, would-be entrants to the sector are advised to consider how best to optimise and integrate offline and online sales channels, advises the newsletter. Harnessing big data is also essential to effectively manage supply chains.

• This article was originally published online by the Hong Kong Trade Development Council.