Distribution of Wine in China

China is an enormous land and has a very fragmented market. Opportunities can be huge, but to find the right partner is difficult and competition among foreign brands is fierce, especially in top tier cities (Beijing, Shanghai, Shenzhen and Guangzhou).

The average consumer has a very low awareness and tends to trust only known brands, which control a big share of the market. Another important obstacle is language, both in establishing relations with distributors and trading partners and for the promotion and sale of the products.

A sore point of the Chinese market is the wine counterfeiting: Chinese authorities estimate that more than 20% of the wine on the market is counterfeited. This appraisal is probably even low.

Another critical issue is represented by “trademark squatting”, namely the hoarding of foreign trademarks by a third party, which registers in China prior to the rightful owner. Unfortunately this happens very frequently and it is arduous and expensive to counter.

Therefore, the first thing to do when entering the Chinese market is to register your word (e.g. "Cantina Rossi") and figurative marks (the logo or the label as a whole, if it has any distinctive character) .

To register a trademark in China you may follow two alternative procedures: (1) file the application directly to the Chinese trademark office (CTMO); or (2) register an international trademark to the WIPO and request its extension to China. It is advisable to register your trademark directly at the CTMO, since the Chinese system does not exactly match the international one and the extension of an international registration could be less effective.

The procedure is completed within about 15 to 18 months, but the precedence on the trademark is acquired once the application is filed. Registration lasts 10 years and is renewable.

It is also worth considering whether to register the mark along with a Chinese ideogram version: this may prevent any attempts, done in bad faith, to register assonant marks and could guarantee a greater recognisability of the mark by the public.

In addition to trademark registration, any technological solution available on the market should be evaluated in order to prevent the counterfeiting. One of these is affixing a QR code to the label, by which the consumer will be allowed, with a simple scan, to connect to the producer’s website (or, even better, to a WeChat account), verify the products authenticity and get engaging information such as: grapevine and organoleptic characteristics, recommended pairings etc.

If you wish to know more about trademark registration in China, you can read this article.

The legislation is very complex and constantly amended. At the moment these is the minimum amount of information to be reported in Chinese on the label:

• name and type of the wine; • volume, alcoholic content and a list of ingredients;
• country of origin, name and address of the producer and the distributor; 
• date of bottling and conservation conditions; 
• the importer's license number and the original barcode;
• warnings about the risks of consumption (minors and pregnant women).

Law provides specific requisites of writing, positioning and codes for each information. Furthermore, the standards are interpreted by several authorities in different ways. So it is advisable to consult a local importer and to be ready to modify labels, entering additional data that may be required at customs inspection.

It will also be necessary (usually the importer / distributor takes care of this) to subject the labels to a verification by the China Inspection and Quarantine (CIQ) by filing an application containing a copy of the label in Chinese characters, a copy of the importer's business license and any documental proof of awards / certifications / marks of origin, which are shown on the label. The procedure – entirely in Chinese – provides that within 10/15 days the CIQ delivers an opinion: if negative, it will lead to the blocking of the goods; if positive, it will lead to the “certificate of import food labelling verification”, valid for two years.

All foreign wine producers and exporters need to register on the web platform of the Administration of Quality Supervision, Inspection and Quarantine (some parts are in Chinese), by submitting various data about: company, importer, type of produced/exported goods and production/export methods.

Therefore, before starting to export, it is advisable to check that the importer is correctly registered, as a failed or incorrect registration can even lead to the block of the goods at customs.

Before the goods arrive at customs, the importer must have already prepared and filed an application for customs clearance. As the products arrive at the port of destination they are subjected to customs inspection (it usually takes between 1 and 3 weeks), which verifies the content and the labelling.

Tax legislation is rather complex, but, in a nutshell, the total taxation of wine products in China amounts to about 50% of the goods value and is divided into the following items:

Custom Duty Tariff (14%): Chinese customs office quantifies duties of all imported goods, verifying their prices. In case of a significant divergence between the price indicated by the importer and customs database, the latter will estimate the value of the goods and quantify duties.

Value Added Tax (VAT) (13%): It is computed on the basis of the import price, including customs duties, and collected as soon as the goods enter China.

Consumption Tax (10%): Alcohol is subject to the consumption tax.

Since 2016 a preferential tax regime for retail sales through offshore e-commerce websites (where the goods are sold directly from a foreign country or a free trade zone in China) in favour of occasional customers has been in effect (up to around € 250).

The Chinese market is increasingly moving towards the digital world and even the wine sector is populated by important online players. The platforms can be divided in general marketplaces, on which are sold all product categories, and vertical ones, specialized in the wine sector.

Considering merely the key players, among the first the two dominant subjects are Tmall (Alibaba group, holds approximately 58% market share) and JD.com (22%), while Yesmywine.com, Jiumei.com, GJW.com, Vinehoo.com and 99mi.com are leading the specialized sites.

Omnichannel does not mean (only) ecommerce, but describes a much more complex system, which requires a clear strategy for communication, promotion and sale of products, through an integrated action on various channels, among which brick-and-mortar store is still fundamental.

Open a virtual store or have a virtual store on Tmall or JD.com without having drawn up an omnichannel strategy first, often entails very high costs for start-up and management, which unsustainable in a medium term, especially if sales, as often happens, struggle to take off.

Therefore, it is essential to have clear ideas and a solid strategy, resulting in a business plan focused on omnichannel distribution drawn up by advisors expert on the Chinese market. In fact, there are many aspects to be taken into account: protection of the brand, import of products, warehousing and logistics, agreements with the virtual store manager and distributors (both online and offline), management of promotional activities on the internet and social media, customer care, etc.

Below are some of four main advices for negotiating a distribution contract:

• who is your distributor? Chinese companies often show up with a Latin company name, but this has no official value: the only valid is the one in Chinese characters. Using that name it is possible to obtain the business licence and verify the fundamental data of the company and the name of the legal representative. The same holds true if you are promoting your sales in China through commercial agents: you may refer to this Guide on Legalmondo to know more on this.
  
  
• beware of internet scams. It often happens that manufacturers receive expressions of interest in their products from potential Chinese customers who come into contact with them through social media or the company's website. Unfortunately, many of these requests conceal attempts at fraud. The contract for the sale of large batches of wine is really just a means to get in touch with the producer, without a real interest in fulfilling the agreement. In these cases the objective of the phantom buyer is to extort from the foreign producer a series of payments for administrative costs prior to the order, such as advance payment of notary fees, customs fees, trademark registration costs in China. A lot of attention should be paid to these spontaneous contacts, especially if advance payments are requested. We refer you to this article for further information on this kind of scams and how to prevent them.
  
  
• clearly define the business model. One-off sales, distribution, license to open single-brand stores or sell online through a virtual store: it is essential to have clearly defined how the distributor or business partner will operate in the market before starting to negotiate any contract, especially if there may be various players operating in different areas or channels.
  
  
• draw up the contract in English and Chinese. An English only contract is perfectly valid, yet it is advisable to use a bilingual agreement, both to avoid misunderstandings and in case the contract needs to be used at some time in China, since Mandarin is the only official language (e.g. for filing at certain registers or in case of litigation in court or customs).
  
  
• the best way to proceed is to prepare your own standard contract, have it translated into Chinese and have it reviewed by a Chinese speaking lawyer, and then to propose it to the counterparts and work on that text.
  
  
• to be on the safe side, it is better to have the contracts stamped: the company chop is normally owned by the legal representative, the only one having the power to bind the company. For more on this topic, please refer to this article on Legalmondo.
  
  
• grant exclusivity only at certain conditions. China is a market of continental dimensions: exclusivity in favour of the distributor should be considered carefully and limited to certain geographic areas or distribution channels (e.g. a certain online marketplace), in which the distributor guarantees to obtain a certain minimum turnover. It is also essential to draft a seamless online and offline strategy, in order to avoid conflicts of interest among the different players in the distribution network.
  
  
• applicable law and jurisdiction. Don’t fight for your home court and law: it is often a bad idea. At least in the large cities, subject to international investments, State courts have improved considerably, costs are low and time for a judgment in first instance fast (around 6 months). One should therefore evaluate carefully Chinese jurisdiction and application of Chinese law in the contract, especially if it is foreseeable that the judgement will need to be executed in China, as in case of debt collection, contrast to counterfeiting or unfair competition. Arbitration can also be a valid alternative, as China is a member of the New York Convention of 1958 and enforcement of an arbitral award is in most cases easier and faster than the process of recognition of a foreign court decision. For more on this topic, please refer to this article on Legalmondo.