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Why Australia will be the wine to watch in China in 2019 - Analysis

www.just-drinks.com by Olly Wehring13/12/2018  

Australia's wine producers will be looking forward to 2019, as wine tariff rates in China, the industry's largest export market, hit the maximum benefit next year from the Free Trade Agreement signed three years ago.

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On 1 January, the tariff rate on wine from Australia to China will drop to zero, having come down by 2.8% per year from a 14% level in 2015. The move, a result of the China-Australia Free Trade Agreement secured in 2015, will give the country's wine category a strong advantage in the country. With Europe paying 14% import duty and the US at 29%, Australian wine will hope to increase its 19% (and growing) share of imported wine into China.

Not only is there a zero tariff rate to look forward to, but the geographical proximity of Australia to China also helps the former's wine producers compared to their peers around the world. In a note to clients today, analysts at Bernstein estimate that shipping costs from France are twice as high than Australia's, with those from Chile a startling 24% higher.

"Following the tax change, we estimate that Australian wine producers will capture a circa 50% share of the value chain compared to 49% for Chilean producers, 41% for French producers and a 37% share for American producers," Bernstein writes. "We estimate that the tax reduction will translate into an incremental circa RMB25-per-case saving for Australian producers based on a wine selling in retail for RMB150 (US$21.90) per bottle."

Best-placed among Australia's wine companies to benefit next year is Treasury Wine Estates, according to Bernstein. With an estimated average price point of RMB150 per bottle in China, Treasury should also do well from the premiumisation trend that is gripping wine consumers in China. "We expect premium wine to grow at a 15% CAGR through 2022 and we expect TWE to increase their segment share by 4% points," Bernstein says. "We expect TWE's premium volumes to grow at a 30% CAGR and their overall China volumes to grow at 27%."

Much as the move to a zero tariff rate could tempt wine companies to reduce pricing, though, this growth of premium suggests the savings ought to be spent elsewhere, specifically on marketing.

China is poised, then, to be a healthy hunting ground for Australian wine in the coming years. And, much as the market carries perils and pitfalls, getting it right in the country could see Treasury boom in 2019.