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Winemakers Ask, Is China’s Market Worth It?

www.winespectator.com by Suzanne Mustacich08/10/2021  

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Shanghai's skyline is one sign of China's amazing growth in the past century; the country's newfound wealth has attracted the wine industry. (Kevin Frayer/Getty Images)

The worst-case scenario was a 50 percent tariff on bottled wine. That’s what most insiders in the Australian wine industry were thinking in fall 2020 after tensions spiked between the Chinese and Australian governments over the origins of COVID-19 and Australia’s ban on Huawei’s 5G network. Once again, it looked like the wine community was about to become collateral damage in a political dispute.

But when Chinese authorities announced a tariff of 218 percent? It was mind-boggling. “The tariffs were much higher than anyone anticipated,” admitted Rachel Triggs, general manager of corporate affairs and regulation for Wine Australia.

The trade fight was the latest blow to international winemakers working to build a market in China. Since Chinese Premier Li Peng praised the health benefits of wine during the National People’s Congress in 1996, the country’s growing economy and consumer population have attracted wineries from around the globe trying to gain a foothold. With 52 million wine drinkers and a total population of 1.44 billion, the growth potential is enormous.

But so is the risk: Beijing’s government is not afraid to actively intervene in the economy, cracking down on wine-loving, free-spending government officials and business leaders. Celebrities are its latest target, including an actor who owns five Bordeaux chateaus. Wines from Australia, the United States and France have all been caught up in international disputes that have nothing to do with grapes. A decade ago, China was projected to be the world’s second-biggest wine market by 2020. Instead it’s sixth, according to the International Organisation of Vine and Wine, an intergovernmental agency based in France.

With all these challenges, is China still worth it?

Pain Down Under

In 2015, China and Australia’s governments signed a free-trade agreement that began a phased removal of import tariffs on Australian wine, until they fell to zero in January 2019. Aussie winegrowers had every reason to believe they had the fastest-growing wine market in the world by the tail.

Ninety-five percent of the wine cargo heading across the South China Sea from Australia was premium red that year. Premium Aussie wine was so popular that Chinese merchants came to Australia to film live video feeds of harvest, winemaking and bottling so their clients could see for themselves that the wine was authentic, grown and bottled in Australia. “It wasn’t as big as people think, but it was significant—10 percent of our average production, 33 percent of exports in value and 13 percent of exports in volume,” said Triggs.

The tariffs, which went into effect in March 2021, were officially spurred by a complaint lodged by the China Alcoholic Drinks Association (CADA) against Australian producers. CADA alleged that Australia’s government was illegally subsidizing its wineries and that those wineries were “dumping” wines on the Chinese market—selling them below cost to gain market share.

Analysts speculated that the anti-dumping and anti-subsidy investigations were moves to protect China’s domestic brands from competition. “We’re confident that Australian wines weren’t dumped in the market,” said Triggs. And there was plenty of evidence that the moves were retaliation for a growing political divide between Beijing and Canberra.

Sales collapsed under the crushing tariffs, and competitors have quickly filled the void. “Chile has effectively replaced most of the volume left by Australia in the entry-level segment, while the premium [wine segment] has been absorbed by France and the rest of the world producing premium wines with some sort of recognition,” said Alberto Fernandez, managing partner of Torres China, which imports and distributes over 40 wine brands from around the world. Bordeaux, Burgundy, Italy and Spain have rebounded after dipping in recent years.

Even wines from the U.S., which have struggled to get going in China, have benefited. Christopher Beros, director of greater China and Southeast Asia for the Wine Institute, which represents California vintners, told Wine Spectator that while the Californians were mindful of the difficulties Australian wines were experiencing, “American wines serve as a natural substitute in terms of variety and taste profile.”

With little choice, Australia pivoted to other markets. “Exports increased to the U.K., Singapore, South Korea, Malaysia, Taiwan and Hong Kong by a combined $240 million, but they did not offset the decline in exports to mainland China,” said Triggs.

Aussie Pain, French Gain?

Amid Australia’s troubles, France has once again soared to No. 1 in the imported wine category in China. Bordeaux ships over a fifth of its exports to China, generating more than €500 million annually. Burgundy is in demand. Champagne is growing. But it’s been a roller-coaster.

Bordeaux winemakers expected some ups and downs. The crazy speculative bubble a decade ago, when Chinese merchants eagerly bought up 2009 futures and then walked away from subsequent en primeur campaigns, was predictable. And chateaus adapted as they fought local companies trademarking the rights to Bordeaux winery names and sometimes blatantly counterfeiting the wines.

But many admit they did not foresee Chinese President Xi Jinping’s 2013 crackdown on freewheeling government officials and lavish business entertainment. When anti-corruption investigators targeted conspicuous consumption, including the wine-fueled banquets between business leaders and government officials, Bordeaux’s profits sunk. Then it got worse. Amid a trade dispute over solar panels, China’s commerce ministry launched an anti-dumping and anti-subsidy investigation of European wine imports, based on a complaint from CADA.

CADA represents Chinese domestic producers, who weren’t doing so well. The year before, Europe had shipped €763 million worth of wine to China, with France responsible for €546 million. China’s big volume wine companies were watching their profits evaporate. In the end, the investigation was settled, with the French government agreeing to send winemaking experts to China and facilitate Chinese access to training in France’s elite wine schools.

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China's President Xi Jinping, right, and French President Emmanuel Macron raise a glass during the 2019 China International Import Expo in Shanghai. ( LUDOVIC MARIN/AFP via Getty Images)

An Uphill Climb for California and Other American Regions

Blessed with the world’s largest wine market as their home turf, Americans were late to enter the game in China. “California wines have been exported to China since the mid-1990s but really started ramping up in the mid 2010s,” said Beros. More than 95 percent of U.S. wine exports come from California. “[They reached a high point of over $80 million in 2016 and exceeded 5 percent market share in 2016 and 2017.”

Then came a trade war over steel and aluminum. Starting in April 2018, China raised tariffs on U.S. wines in stages. “Total tariffs and taxes (including VAT) have increased from 48.2 percent to 93 percent today,” said Beros.

Yet remarkably, Californians are clawing their way back. “Through July 2021, the value of U.S. exports to China are $21.4 million, up 120 percent compared to 2020, and market share has almost doubled from where it was in the prior year,” said Beros. “But for American wines to really become a major player in China, the tariff situation will have to be resolved and more wineries will have to recognize the opportunity and invest in the market.”

The Challenges of Doing Business

It isn’t just the trade wars and politics that make China a tricky market. Jean-Pierre Rousseau, president of the négociant Diva Bordeaux, points to a messy pricing structure wineries face. The same wine might have three different prices, he explained: untaxed or smuggled wines; wines traded through cross-border e-commerce, with half of the import tax imposed; and wines properly imported, with 48 percent taxes imposed (or more for countries facing tariffs).

An artificially low price for a wine limits the room for margins for importers and retailers. “Some products, once exposed online with an old, low price that can’t be achieved today, will be abandoned by importers,” said Rousseau. “They will quickly find replacements since there are so many.” It makes it very difficult to develop a long-term growth strategy.

China’s main attraction—its size—also makes it tricky. “We are talking about a huge country, with very different realities by region, by channel and with many different types of consumers,” said Fernandez, who has lived in Shanghai since 2000. “It is a complicated market for those that are trying to find associations with Western consumption patterns.”

Two differences are key, he adds. “First, alcohol consumption in general happens during social gatherings, with very little being consumed at home.” This difference was easily perceived during the first months of pandemic lockdowns. Wine sales in China collapsed, just as retail sales in the West skyrocketed.

“Second, and for me even more important, volumes of wine consumed are still mainly driven through corporate business entertainment and gifting,” Fernandez explained. Executives don’t go to a restaurant or store and buy a bottle of wine. A company buyer sources wine for them, and they bring it to a dinner. “When one is thinking of young sophisticated wine drinkers in big cities, those are a growing and important [segment], but still are probably less than a third of the market.”

That also makes it hard for individual brands to reach customers and build loyalty. While Bordeaux as a whole is a brand, “for a great percentage of the Bordeaux chateaus, there isn’t much brand awareness,” said Rousseau.

And the drinks industry is not immune from China’s arbitrary rule of law, opaque judicial process and retaliatory censorship. On Sept. 23, the former chairman of Kweichow Moutai, Yuan Renguo, was sentenced to life in prison for taking bribes and using his position to secure distribution deals for Moutai baiju, China’s most popular luxury spirit. All of his personal wealth was confiscated.

Cognac sales agent Thomas Menier has spent the past four years in a Chinese prison, accused of double invoicing in order to pay lower duties. He was also fined.

And then there’s Zhao Wei, a popular Chinese actor and a billionaire businesswoman who owns five chateaus in Bordeaux. She was purged from Chinese media this summer, her movies and TV shows disappearing overnight. The fate of the distribution of her wines in China is unclear; her name has been removed from online promotional materials. The censorship came as part of the China Cyberspace Administration’s special operation against celebrity worship.

Jack Ma, co-founder and former chairman of Alibaba, purchased a Bordeaux chateau in 2016. He has disappeared from the public eye for the past year, after speaking out against Chinese financial regulators.

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Australian winery Monteperle hosted a seminar at the China Food and Drinks fair in Chengdu. (JESSICA YANG/AFP via Getty Images)

But China Still Holds Promise

So the wine market in China remains complicated. Is it worth it? Veterans say yes, but also say winery owners need to understand the challenges. They need to both adapt quickly and remain patient.

“I think it’s different,” said Triggs. “Relationships are everything.” Those relationships take time and require frequent travel to China.

And it changes fast. “It’s just so big, with so many players coming in and out,” said Rousseau.

At Torres China, Fernandez has watched sales grow from $400,000 in 1997 to $22 million today. “There have been many big challenges during those years,” he said. “But the biggest challenge has always been the same—to spur the business in new directions in a market that changes continuously.”