Jacob Creek: Expanding Into China's Wine Market Essay.

Jacob creek is one of the major wine organization in Australia that aims to offer standard contemporary Australian wine along with high verity in expressing their service.   In this context, the organization was first launched in the year 1976. However, the name of the company is based on the Creek that passes through the Barossa Ranges located in South Australia. The company is founded by Orlando Wines in the year 1847 that began its tradition of wine manufacturing more than 160 years ago. The company offers different variety of wines such as Shiraz, Sauvignon Blanc and several other exclusive variety.

Jacob Creek's History and Service

China was chosen as a potential country for expansion of Jacob’s Creek international wine market after a thorough analysis and understanding of the Chinese market. It was also chosen  due to the potential customers and the ever growing market for imported wines. Further,this paper emphasizes Jacob Creek Wine in order to gain a deeper understanding of its overall sale, market share and trend of the wine industry. Also, social factors like culture in addition to income, are also critically important while analyzing factors which influence a given product in the market. Therefore, knowing the cultural aspects and the economic status of the target market is very crucial while analysis the success of the product in different markets.

Jacob Creek, an Australian wine Brand, was released by the Orlando wines in the year of 1976 (Wine-searcher 2017). It’s among the largest wine organizations operating in the Southern part of Australia. Its major aim as a company is to offer contemporary standard wine together with maximum verity while carrying out their services (Jacob's Creek 2018). The Company deals in more than one brand of wines and some of these include; Sauvignon Blanc and Shiraz.

In order to increase profits of the company, there is need for extension of company’s services into China. A choice of China was made because China has a favorable economic, technological, and political environment that could raise revenue for the company (Santander Trade Portal2018).

China has a strong economic climate. It has a very favorable climate for foreign investment that could possibly favor the establishment of international companies. Referring to UNCTAD 2018 World report on Investment (United Nations 2018), this country was graded the second biggest country with largest Foreign Direct Index close to the United States of America. China’s FDI (Foreign Direct Index) grew steadily from $133 billion in 2016 to $136 billion in 2017 (United Nations 2018.). The major reasons for these developments was because of trade liberalization in china, friendship with neighboring countries, as well as rapid population growth(Brian 2015).

The foreign exchange rates in china are very favorable, the current currency exchange rate was given to be 6.87 Chinese Yuan being equivalent to 1 United States dollar(Santander Trade Portal2018). China also has a very high population which givesit a large market base for the products produced and sold (Brian 2015). The large population would also be useful in providing cheap labor in the company. This country has over 1.68 billion people making it the country with the highest population in the whole world (Brian 2015).

Benefits of Expanding into China

 There is also a low corporate tax within china. This rate has always been constant at 25% thus favoring the growth of companies. The country also has low restriction policies to immigrants and foreigners thus making it a politically stable country as compared to other potential countries for Jacob’s Creek expansion.

A graph illustrating the corporate tax rate within china, source (Santander Trade Portal2018)

China has a very favorable economic policy. One of the components of this policy is the good economic relation between China and neighboring countries for example Australia. The also has a strong GDP (Gross Domestic Product) growth rate, the GDP for its economy increased by 6.8% in 2018 though there was a higher expectation for this rate (World Bank Group 2018). The country's per capita income is also recorded to increase to 7329.09 US dollars in 2017, this means there is an increase in family income within China (Santander Trade Portal2018). Politically china is operating under a single party. This happened after the birth of a communist state, therefore there will be peace for foreign Investment.

Thiswine industry in China industry has grown dramatically since 1980 economic reforms. This has made China one of the Top ten distributors of wine in the global market in tie with France (Julie 2016). The Chinese wine market for quite a long time has been overshadowed by a very well distilled spirit known as "Baiju" and "huangjiu" occasionally referred to as "yellow wine"(Wang 2017). China has over years has been operating with over 90 alcoholic beverage brands which have won a number of awards internationally and domestically (Julie 2016). Because of the many brands within china, there is an expectation of a stiff competition between Jacob’s Creek products and products produced within China.

Besides globalization and trade liberalization as some of main factors for increasing sales of Jacob’sCreek wine company in China, the country has the biggest population of people within the whole world (Centre 2014). The current population statistics in china show 1.68 billion people within the country, therefore there is a possibility for creating market for the Brand. One of the other brands that is internationally recognized within China is "Yantai Changyu group company Limited". It is ranked as China's leading wine in the wine industry occupying 25% of the wine market share(Centre 2014). The other top selling brands are "China Great wall Wine Co. Ltd" and “Tonghua Grape wine co. ltd". The Wine industry in China is characterized with 80% of the market share belonging to the locally distributed wines where 50% belongs to the listed three major brands (Julie 2016). The remaining market share belongs to the imported brands from other distillers for example from France and United States of America. The industry is also characterized with rapid growth because of the increased demand of wine in the country (Brian 2015).

China's Economic and Political Climate

 Strengths, Weakness, Opportunities, and Threats need to be understood by Jack Creek before investing in China (Chen & Funke 2009). The main reason why there is need to invest in China is to increase revenue for the company through increasing sales by expanding the market base.

Market Analysis

There is a growing market for wine in China due to the increasing number of customers who have knowledge and preference for foreign wines. This has been combined with the Chinese government’s plan to improve on the access of china’s interior market (Chen & Funke 2009).

Developed cities like Beijing, Shanghai, Guangzhou, and Shenzhen have the highest share by volume of imported wines (Julie 2016). However, with expansion of the economy in the developing cities and government improvement of the distribution, the markets of wine are expected to greatly continue growing (Centre 2014). On the other hand, the packaging and pricing are very important factors for the new wine consumers.

Market Environment

The size of China and its growing middle class level have made it a very attractive export market of wine producers around the world. China was ranked the most populated country in the world in 2015 with an approximation of 1.68 billion people. From the current population growth rate statistics of about 2%, it is expected that by 2020 the population would reached about 1.7 billion. China has one of the largest growing economies in the world with a GDP of about US$12.2 trillion in 2017. There is an increase in consumer spending (Julie 2016).

In addition, the increase in travels among the Chinese has increased the interest in the western culture that is taken to be more advanced, there is increase in modern life style. As reported in 2012, Chinese exceeded the Americans and Germans as the top world spenders on tourism. They took 83 million foreign trips and they spent US$102 billion. Still the number of foreign trips is being expected to go up to two hundred million by 2020 (Centre 2014). As the tourist increase their trips to wine drinking countries, they acquire knowledge and preference of foreign wines use it back in China (King & Mallesons 2012).

Consumption

The total alcohol consumption, as reported by Euro monitor international, increased by about 21.6% between the year of 2009 and 2014(Ceicdata.com 2018). The increase in the incomes of households has allowed consumers to enjoy a wide range of alcoholic drinks although Baiju the locally produced alcohol has been the highly consumed alcoholic drink. The imported drinks especially the wines have been taken as symbol of status and therefore considered a vital component of doing business. The new generation for consumers of wine is taking wine as part of the social life besides their work schedules (Lardy 2016). The segment of consumers that belong to this section are mostly graduates holding high paying jobs in their youthful ages of between 20 and 30 years (Santander TradePortal 2018).(Chi Keung Marco Lau 2015)(Chi Keung Marco Lau, 2015)(Chi Keung Marco Lau, 2015)(Chi Keung Marco Lau, 2015) Consumers at the elderly age tend to be more sensitive to prices of the drinks while the young and middle age are sensitive to brand as a way demonstrating dignity, honor and pride among the mates(Julie 2016).

China's Wine Industry and Competition

Consumers in the Chinese are also more concerned with the safety of products because of the many product issues that are exposed in the media. The concern of food safety attracts consumers to foreign brands because they are considered to be safer, conforming to the safety standards and therefore they are trusted more than the local products (Lardy 2016).

In the past few years, the market of health and wellness foods and beverages drinks in the Chinese  market increased by about seventy six percent 76% reaching US$116.6 million in 2015. The organic category of the wines got the most growth with about 244% increment from the year of 2011 to 2015. The growth of this category was followed by fortified at 81% and then naturally healthy at 70% (Santander TradePortal 2018). From these trends, there is an indication of a growth opportunity for organic and fortified wines (Lardy 2016).

Retails sales

The market for wine in the Chinese market had an estimated value of US$38.3 billion in 2015 and was still expected to increase by 17.8% by the end of the year 2016 making it to reach 45.1 billion US dollars. The market of wine in China increased by an annual growth rate of about 19.7% between 2010 and 2015 and it was expected though at a lower rate of about 15.4% in the next four years till 2019 reaching 69.3 billion US dollars (Lardy 2016). The volume of wine in the Chinese market also increased with a similar annual growth rate of about eighteen percent between the years of 2010 and 2015, taking it to an estimated volume of about 2.5 billion liters in 2015 (Wang 2017).

The most common alcoholic beverage category through the consumers in China is still wine, it represented approximately 96.8% of the value of wine in 2014. It was followed by fortified wine that took a market share of 1.8%(Lardy 2016). Red wine that occupies about 75.2% of total volume among the still wines is particularly popular because the healthy benefits are associated to it by the consumers. Its red color which is significant the Chinese culture which represents wealth good luck and power gives it a favor among the consumers. Rose wine is the smallest segment among still wines in regard to volume but has registered an increase in volume with 105% from 2010 to 2014 (Centre 2014).

Top competitors

In the target market, the top three companies by value of market share and volume are Yantai Changyu pioneer wine, China Foods Limited and the Weilong wine. Some other companies have also registered growth over the past years (Wang 2017). CiticGuoan Wine registered its most growth by volume with an increase of about 57.2% from 2012 to 2014. While the other first growing company is Tonghua wine that got a growth of about 50% increase by volume during the same period (Julie 2016).

Market Analysis of Jacob Creek's Investment

SWOT Analysis

Using SWOT analysis, the "Strengths", "Weakness", "Opportunities", and "Threats" of the company while operating within China where analyzed (Chen & Funke 2009). According to the research carried out, the following where analyzed:

Strength Ø Big market share Ø favourable foreign policy Ø Cheap labour due to large population. Ø Customer loyalty (Chen & Funke 2009).	Weakness Ø lack of product diversification
Opportunity Ø Increased advertisement Ø Potential market Ø Increased production to meet the market base	Threats Ø Stiff competitions to the company (Julie 2016). Ø Changing cultures since the Chinese culture is quite different from the Australian culture.

International strategy applied by the company is industry-based rather than resource-based. Industry-based is used as the strategy because of the cool business conditions within the wine industry in China (Centre 2014).Trade liberalization and globalization in China have managed to bring the wine industry in china on an international Scale thus creating a larger market base (Harvard Business Review 2018).

Entry mode

There are many options that Jacob’s Creek could choose for the entry mode that include licensing, export, acquisition and joint venture. However, depending on the motives and the resources of the company, the export entry mode is appropriate(Uche 2016). China has minimal trade barriers and this favors the export entry mode. Situating the company in the home country gives Jacob’s Creek and advantage of the value attached to the imported wines in the Chinese market. This mode also requires a low initial investment in expansion in the new and therefore gives Jacob’s Creek a competitive advantage related to costs(Uche 2016). This mode in addition gives the company control over its production and as there is a decrease in the average production cost per unit. For Jacob’s Creek to favorably compete with the other existing companies and brands in the industry, it would apply "direct exporting" which is a form of non-equity market entry mode (Lymbersky 2008). This will require direct involvement of the company into marketing their wine into China.

The Trade

In regard to importation of quality wine, France has been always ranked the supplier of wins to china. However, its growth has been moderate over the past years at a growth rate of about 56.7% (Becker & Elfstrom 2010).  Among the highest twelve ranked suppliers of wine to the China, Chile has registered the highest growth of its exports with the growth of about 191.6% during the past years, and it had a compound annual rate of growth of about 30.7% (Julie 2016).  Australia is the second biggest and most important wine supplier of China. It has registered a significant growth of its exports to China, it realized a growth of about 171.3 over the past five years. The United States and Canada are also among the countries that realized increase in their exports to china in the market (Newell 2018).

Growing Wine Market in China

Distribution channels

As reported by the Asian journal of Management Research, imported wines have the largest market share by volume in the developed cities like Beijing, Shanghai, Guangzhou, and Shenzhen. They account for about 53% by volume of the sales of imported wines, the on-trade channels represent 80% of sales in total (Julie 2016). This is attributed to the fact that these cities have the biggest number of expatiates and western educated young professionals who form a class consumers with knowledge and preference for foreign wine. With the program by the Chinese government focusing on the economic development of its interior and economic expansion of the tier 2 cities, the distribution channel with be greatly improved (Newell 2018). The interior cities will have easy access to the imported products and there by developing new markets for the imported wines. However, for these new consumers, the price and packaging of the wine is an important factor to motivate their consumption. It should be noted that packaging plays a vital role in stimulating demand thus bringing about product trial among new customers in the market. This in turn increases the level of market share thus leading to high levels of sales and revenues (Newell 2018).

New wine exporters can have access to the market in China in two ways; specialized importing and use of distribution agents. This can aid easy distribution directly to access points for consumers like supermarkets, restaurants and liquor stores. Imported wines are mainly sold in high profile places like hotels, restaurants and also can be sold through foreign retail while for the local wines majority is sold in supermarkets. Consumers trust products in international stores more because they believe that these ensure better of goods (Julie 2016). However, the challenge that Jacob’s Creek should be aware of is that there is undeveloped infrastructure and management of distribution relationships.

Given the market situation in China and the fact that to succeed in the Chinese requires a local distribution agency, Jacob’s Creek should have a global functional design. The company has similar product lines and requires to form department in China to responsible for market penetration and adoption(John and Kidger 1999). This will make it easy for the company to still maintain centralized control over their product sales and distribution.

For Jacob’s Creek to monitor their performance to attain the set goals, strategic control should be used as their control method. This control method helps in monitoring formulation and implementation of market strategies.

Market Environment in China

International Human Resource

Jacob’s Creek to properly manage the three function of human resource namely; procurement, utilization and allocation, in the new market. It should employ an appropriate and modern human resource strategy. There should be a balance between integration and differentiation of management policies(Wall 2010). These polices should interplay the two dimensions, that’s is to say, logic of product market and social cultural environment. It should apply a polycentric approach for global integration. Directors of the various departments like marketing and finance should be those familiar with the brand i.e. should be brought Australia. However, to reach the market effectively, distribution and other lower positions should be given to the locals.

Company growth forecast

Jacob’s Creek has potential to expand and capture the market in China especially with its red wine brand with has color favor and the Chinese culture. The pricing should be done carefully to enable the brand to the tier 2 cities. Basing on the sales of similar imported wine brands from other countries, Jacob’s Creek will grow by market value and volume, however, it needs to obtain a brand royalty among the customers. Advertisements through media and magazines are a potential avenue for market growth through this, sales are expected to grow steadily by volume and value. By 2022, the product will have reached into the interior and taking a greater portion in market.

Conclusion

Much as there is room in the Chinese wine market for more imported wines, Jacob’s Creek wine needs to consider intently the distribution agents used in the country. Wines should be well packaged and moderately priced for easy penetration into the new market. There is no special license needed for importing wines in china, however, Jacob’s Creek should use importers familiar with customs processes particularly regarding labeling.

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