They call it their 'secret laboratory' - the shop in the corner of a hypermarket in southern China where a Hong Kong chain is meticulously scrutinising and monitoring the buying habits of mainland wine drinkers. A branch of Watson's Wine Cellar opened without fanfare in Guangzhou at the end of last year and daily reports on the shoppers who go there is providing the information that may determine the way the first chain of wine shops in the mainland will take shape. Later this year, the chain expects to open stand-alone outlets in Shanghai and Beijing and the long-term aim, according to Christian Nothhaft, director and general manager of A.S. Watson Wine, is to be the mainland's leading wine retailer. The business rationale is plain enough. Wine consumption in the mainland has for the past seven years grown at a rate of more than 11 per cent a year and new wineries are springing up rapidly as the government encourages the setting up of vineyards in the north and east. The potential for growth is enormous. The average person on the mainland drinks 0.3 litres of wine a year compared to one to two litres for people in Hong Kong and 30 litres for Australians. All of which makes the daily observations being recorded at Watson's Wine Cellar in Grandview Plaza, Guangzhou, so fascinating and important to Mr Nothhaft and his colleagues. 'It is a school for us,' he said. 'We learn how to deal with the customers and with the shop staff. We start to understand why they buy the product and how a shop should look. 'In the second half of the year we can act on what we have learnt. 'Every evening we have a sales report on what the people who came into the shop looked like, what they bought and feedback from our customers. 'We are teaching our sales staff to talk to the customers and ask them what they want the wine for. We are trying to teach our sales staff to find out what wine will suit the customer. 'There are specific reasons for buying wine. If it is for a gift, there are certain wines you should and should not recommend. It is a symbol of appreciation and very often the customer will choose a fine wine. 'If they are buying dinner for a friend it is a different matter. They can be more experimental. They will often try New World wines. 'Sometimes someone will have travelled home from Australia for instance and that will be the reason for the dinner.' Chinese wines like Dynasty and Dragon Seal are the biggest sellers in the Guangzhou wine shop by a long way, but what has surprised the shop's owners is that fine wines are selling surprisingly well - so much so that they are extending the fine-wine section to accommodate a larger range. There are also signs of huge untapped market potential. When the shop did a joint promotion with a mobile-phone company allowing customers to redeem credit points for a bottle of wine, it shifted 20,000 bottles in the space of four weeks. Mr Nothhaft said the sudden enthusiasm for wine on the mainland should not come as a surprise. 'People are aware of the health implications of drinking wine compared to liquor,' he said. 'It is also a lifestyle issue. 'Wine is a status symbol. It is something people want to know about because you have to know about wine at the dinner tables and at social gatherings. There is social pressure to know more about wine in China today.' It is also not the acquired taste the westerners might imagine. 'Wine has tannins. Tea has tannins,' said Mr Nothhaft. 'There are basic tastes in wine that go very well with the Chinese palate. 'We often think we need to teach people in China about wine. People make jokes about people drinking red wine with Coca-Cola. But the foundations are there. They like tannin. They like the bitter flavour. It is only a matter of time and this will be a huge market.' Symptoms of the mainland's growing thirst for wine have been increasingly obvious in Hong Kong in recent years, particularly since the launch of the individual visitor scheme allowing millions more visitors across the border from 2003. 'In Hong Kong we get more and more mainland Chinese customers,' said Mr Nothhaft. 'They are not tourists. They are manufacturers who need a corporate gift and they bring the wine across the border themselves. Once in a while you sell a case of expensive wine to someone who lives on the mainland and wants a good wine.' Tax on imported wine is lower on the mainland than in Hong Kong, where the financial secretary last week decided to resist calls to reduce the import duty from its current level of 80 per cent. However, there is limited supply on the mainland and other factors make Hong Kong a favourable option for buying wine. 'There have been a lot of forgery cases in China,' said Mr Nothhaft. 'People prefer to buy from a renowned merchant. 'Sometimes a buyer will come in and buy a case of Lafite or another fine wine for $10,000. They are really big sales and it takes us by surprise how much wine people can take across the border.' The taste for good wine on the mainland is nothing new, according to Bo Tan, analyst on the China consumer market for Macquarie Securities in Hong Kong, but it is only in the past 20 years that production has rocketed with the setting up of thousands of new wineries. Some labels like Chang Yu claim to date back to the late 19th century, but wineries were brought under state control and wine drinking was frowned upon as bourgeois and politically incorrect in the austere early years of the People's Republic from 1949 onwards. Now, according to Mr Bo, there are huge numbers of brands across the mainland, and brands such as Great Wall, Chang Yu and Xintian have become top sellers nationwide. What is less clear is whether in future Chinese people will buy more foreign brands or more domestic brands. Currently, 90 per cent of wine drunk is red wine and 80 to 90 per cent is domestically produced. Despite its growing popularity, it remains firmly beyond the pockets of most people in a country where eight out of every alcoholic drinks sold is beer. 'Only a small segment of the population is drinking wine,' Mr Bo said. 'They are buying wine for gifts or they are buying the wine for their own consumption - for banquets or for special dinners. We are not going to get to a situation where people consume wine like the French do.' Mr Nothhaft sees a future where international wine makers team up with Chinese wineries to produce brand-name bottles on the mainland in much the same way as most brand-name clothes are now made there. 'My feeling is that the future for wine in the mainland is Chinese wine,' he said. 'The really big business is going to be Chinese wine. 'The Chinese are going to acquire names and labels overseas and they will make the product in China. That is how it will be in 15 to 20 years. 'There are so many French winemakers already in China either as companies or as individuals. There is product knowledge there already and it is being developed. 'Next they will acquire some brands. Penfolds for instance might have production in China one day. 'In 15 or maybe 20 years, we will have really good Chinese wine and that will be the bulk of the business. 'They will be foreign wines but they will be produced in China. There is no reason not to do that. Low- and medium-level wine could be produced in China. There will be a limited amount of wine from 'mystical' vineyards outside China that will be sold at a very expensive price - but the bulk of the wine will be made in China.' Mr Bo sees a different scenario and says the biggest obstacles for foreign wine companies are distribution and brand-building in a market that is already saturated with Chinese products with strong indigenous identities. The way the market may develop, he believes, is by following the model of breweries, where foreign companies join forces with local breweries and mass-produce the established Chinese brand and produce a limited, higher-priced overseas label in tandem. 'The distribution system is very complicated,' Mr Bo said. 'Most international wineries are small in scale and because the Chinese wine market is not significant yet it is difficult for a company to justify the upfront investment at this stage. 'I think they should learn from the international breweries and how they entered the China market. They tried to build up greenfield projects on their own and they didn't succeed due to the distribution challenges and the brand-building. What they did later was keep the Chinese brand and place their own products as premium brands. 'That way the Chinese brand is available for a relatively low price for the majority of buyers while the premium brand is there for special occasions.' The lure of the mainland market is such that A. S. Watson looked into the possibility of going into wine production there itself. 'We had this debate as to whether we should go in there and do something in production but we think we can play a major role in bringing the product to the customer,' Mr Nothhafth said. 'We had discussions but in the end we decided we want to be the best wine retailer in China - although the key to that is to start small as we have done.'