Slump in China’s wine market forces shake-out, rethink

Mainland wine imports in the first quarter fell 20.7 per cent year on year, forcing suppliers to adopt different strategies to make up for lost sales

PUBLISHED : Tuesday, 03 June, 2014, 10:41am
UPDATED : Wednesday, 04 June, 2014, 2:50am

The sudden slowdown in wine sales to the mainland is forcing merchants to refine their sales strategies, attendees at last week's Vinexpo trade show in Hong Kong said.

Such moves might include changes to distribution, the introduction of e-commerce and educating a middle-class consumer base deemed vital for the industry's long-term growth.

"We are right in the middle of a major structural change to the business. We need this shake-out and all these unprofessional companies to go into a new business," said Don St Pierre Jnr, co-founder of ASC Fine Wines.

The impetus for change has been President Xi Jinping's anti-corruption drive. The campaign targets conspicuous spending by officials and state-owned enterprises and went down like a corked claret among wine merchants used to seeing the China market as a bottomless vat.

Wine imports in the first three months of this year fell 20.7 per cent year on year to 88 million litres, according to customs data. For all of last year, wine imports dipped 6.8 per cent in value to US$2.4 billion.

Many merchants supplied high-ticket wines and spirits that were used in a thinly veiled form of bribery. Fearful of attracting unwanted attention in the current political climate, the customer base has dried up.

We are right in the middle of a major structural change to the business
Don St Pierre Jnr, ASC Fine Wines

Ninety per cent of Dynasty Fine Wines' market base has been affected by the austerity measures, and "this explains why as a responsible listed company we have already issued a profit warning", financial controller Rex Yeung said.

A collapse in spending by SOEs has forced China's third-largest wine merchant to shift gear. Dynasty is hiring young salespeople and investing in e-commerce and social media platforms, Yeung said.

Trading in Dynasty's Hong Kong-listed shares was suspended last year. The 2012 and 2013 annual results are incomplete, and the company is in the middle of an internal investigation following an anonymous tipoff to Dynasty's auditors at PwC in relation to a transaction.

Last month, the company announced a search warrant had been issued on its Hong Kong office. Yeung declined to comment on the investigation.

Sales of expensive first-growth Bordeaux wines in China have fallen 70 to 80 per cent, said Patrice Ricard, president of Vintex, a French negociant - wine market middleman - that represents more than 100 vineyards. Ricard said his firm now focuses on wines priced at €5 (HK$53) a bottle.

Consuming negligible quantities of imported wine less then 15 years ago, Chinese drinkers now imbibe the world's fifth-largest amount of still and sparkling wines - 1.54 billion litres last year, according to the industry research group International Wine and Spirit Research (IWSR).

That works out to only 1.5 litres per adult in annual consumption, giving the industry plenty of future demand to raise a glass to.

By contrast, French adults consumed 51.9 litres each last year, while Americans each quaffed on average 13.3 litres per year, according to IWSR data.

Market trends are maturing. Consumers are just starting to drink white and sparkling wines alongside red wines, which still make up 90 per cent of the market, according to data from IWSR.

The emergence of wine shops in fourth-tier cities and mainland Chinese studying at French and Australian viticulture academies are important milestones for the wine market's development, several expo attendees said.

"Nothing will stop the growth of wine production and consumption in China," Vinexpo president Xavier de Eizaguirre said.

A former managing director of winemaker Baron Philippe de Rothschild, de Eizaguirre sees a relative decline in Chinese nouveau riche buying status wines and a growth in middle-class drinkers.

The market needed to be "more rational" after a decade of rapid growth, said Judy Chan, president of Shanxi-based Grace Vineyard.

The company produces two million bottles of wine annually, and sales fell 15 per cent last year. She blamed the anti-corruption crackdown and said a lot of restaurants had closed down.

"I am one of the few to welcome the austerity measures," said Cristian Lopez, Asia chief executive of Chilean wine producer and distributor Vina Concha y Toro, which focuses on mass-market wines sold via retail and e-commerce channels.

"The majority of people selling wine in China have no idea what price their wine is, where it is being sold, or why it is being sold," said Lopez, whose sales were up 45 per cent last year.