Monday, November 30, 2009

Emerging wine country: China's wine boom since 2000

Picture: The Great Wall --- China

Source: Greg Mankiw's Blog, November 23, 2009

This is an interesting chart which shows the shares of various regions in world GDP.

Within the past 40 years, the shares of the three main regions --- EU, USA and Asia/Oceania --- have converged to around 27 percent, with the US going steady, the EU falling by roughly 10 percentage points and the Asia/Oceania region increasing by this amount. If you do a trend projection, than you end up, say in 40 years, with something like on the left-hand axe, with the only difference that the top line at above 35% is Asia/Oceania and the line in the middle at 15% is Europe. There is a dramatic shift in purchasing power going on and will continue to go on, with implications for the wine market.

This article will focus on one of the main drivers behind the rise of the Asia/Oceania region, China, and in particular --- this being a wine blog --- wine production and wine consumption in China. The Chart with the shares in world GDP is a useful reference for that.

Amazing things have been going on in China, both in terms of wine consumption and wine production, which, in a globalizing world will have major repercussions on wine production and consumption in other countries. Just take the recent wine auction in Hong Kong with very high volumes and high prices for the top French wines. Everyone in the world will have to pay now these Chinese prices.

Production of Wine in China

China has a long tradition of producing all kinds of wine, but produced practically no vinifera wine before the economic reforms of the early 1980s. Since then, hundreds of wineries have sprung up. Initially, the wine was exported abroad because the domestic demand was weak. But since 2000, when the economic boom finally reached the consumer, things are changing rapidly. At the same time, imported French wine has become very popular in China.

China now ranks 7th in terms of world production, ahead of Germany, South Africa and Chile and almost at par with Australia and Argentina, and it is likely to overtake Australia soon. To reach the level of the 4th placed --- the US --- it will need to double its production.

Looking ahead, experts are very optimistic. Britain's wine merchant, Berry Bros.&Rudd has come to the conclusion that China is set to become a leading wine-producing country. It estimated that China's current 400 wineries would increase more than tenfold in the next 50 years, with perhaps a quarter of them producing fine-quality wine. It also predicted that China would be the world's leading producer by 2058, overtaking France, Italy, Spain and the US. In addition, China has "all the essential ingredients to make fine wine to rival the best of Bordeaux" including "the right soil, low labor costs and soaring domestic demand," the report said.

Consumption of Wine in China

China already ranks behind Germany on fifth place in terms of wine consumption. Given current trends, China will soon overtake Germany.

There are two market segments that are of expected to grow particularly fast. First, the lower end mass wine market. Growth in demand in this market segment --- the easy drinking, low quality cheap wine --- is expected to be high. In this context, China is negotiating with Morocco to set up a bottling plant in China for Moroccan wine. Morocco is exporting in bulk to Europe but is now looking for China to export.

The other market segment, where China will be increasingly present is the top wines. Since 2000, expensive red wines, in particular from France, have become very popular in China among the rich and the famous. Red wine, in particular French red wine, has become a symbol of the elite and the rich. Reflecting that, in 2007 the Chinese wine importer St.Pierre became the most important buyer of Chateau Latour wines. Another wine that has become exceptionally popular in China is Lafite Rothschild. Against this background, Lafite Rothschild is in the process of setting up a winery in China to produce grand cru wines there. Within a decade or so, China’s rich have gone from mixing red wine with cola to checking Parker points when ordering a wine and being ready to pay top dollars to put a couple of cases of these wines in their cellar. They have become a major player in the top market segment.

The November 23, 2009 edition of the New Yorker contains a fascinating article by Evan Osnos on Donald St. Pierre, a Canadian and a prominent importer of wine to China. He arrived in China in 1985, a few years after the economic reform process started, thanks to a position with American Jeep. Ten years later, he started importing wines after forays into other things such as scrap metal, lingerie, and Chinese and Russian ammunition. Dr. Vino's Blog contains a short summary of the article, including an interesting series of comments. The whole article is only available to subscribers of the New Yorker.

To conclude, here is the comment of Chris Robinson, which I found very useful: “The market in China has changed so markedly that no one would claim to be able to meet the diverse range of market demand in China. Leaving aside the huge differences between provinces in China it is clear that there are two market extremes for imported wines – the cheap and cheerful, velvety textured, red only wine, under US$10 and the LafMoutTrus segment where unless it has a Parker 95 plus US$100 plus retail price and can be pronounced by any drunken cadre over a corruption-funded dinner it is going nowhere. The Hong Kong auction market has to be the best indicator of the stupidity of this latter segment. A narrow range of wines sell to mainland Chinese buyers at auction some 20-30% above the retail prices one can pay for them in Hong Kong on the same day as the auction. This is all about one thing the mainland Chinese are masters at – showing off. It will be many years before a serious middle tier develops in China – and therefore many years before any wine marketer a la the West can claim to be a China success story. One amusing experience sums this up. At a recent auction in Hong Kong a rather attractive young mainland Chinese lady of about 20 years of age sat next to me. She was clearly struggling with the English and all the action of the auction. Being a “nice guy” I offered her a few tips and introduced her to some of the things she needed to understand if she was going to bid. She then told me her boyfriend had given her the equivalent of US$100K to buy wine and she was there to buy “Beetroot”, which of course rather threw me. it was only some 20 lots later that I discovered beetroot was in fact Petrus. When mistresses no longer bid on Petrus at auctions we can probably then conclude the wine industry in China may be appraaching maturity, until then today’s heroes are almost certainly tomorrow’s losers. As the Chinese would say, the industry is best described as ” playing a violin in front of a cow”. It will be years before serious wine interest catches up with the marketing bull…”

A good source for what is going on in China is Grape Wall of China, an English-language site about the wine scene in China.

China is clearly the most important emerging wine country, with potentially major implications for consumers and producers of wine around the world.

Schiller Wine --- related postings:

Emerging wine country: Russia --- After the breakdown of the Soviet Union, many important wine growing areas became foreign for Russia, October 24, 2009

Emerging wine country: Poland --- The early days of a climate change gainer? October 21, 2009

Emerging wine country: Serbia --- Still in the early days after the break-up of Yugoslavia, October 12, 2009

1 comment:

  1. Very interesting post! There's incredible dynamics in the Chinese wine market for sure! Very curious about the future development and how it will affect other wine markets! Cheers, Alex