Wine importers uncork new markets in China

China's government-directed austerity drive has exposed the distortions in the market for fine wine, but the country's growing middle class will present wine importers with a long-term opportunity.

When an angry mob of up to a thousand protestors barged their way into the private banquet of a local communist party official in Jiangsu province last year, they had no way of knowing the effect they would have on China’s wine industry.

The protestors had rushed to the dinner of minor local official Zhang Aihua after seeing pictures on social media showing the expensive treats he had laid out for his guests.

Clearly there was more on offer at the dinner than the austere “four dishes and one soup” President Xi Jinping had stipulated as the limit for such functions.

Among the expensive cigarettes, premium liquor and near-extinct Yangtze scabbard fish the protestors meticulously recorded on their smartphones were bottles of Australian Yellow Tail red wine.

Realising his grave mistake, Zhang clambered up onto a table, knelt down before the angry crowd and, clutching a megaphone, pleaded for forgiveness. The images immediately went viral on the Chinese internet. He was fired two days later.

For John Watkins, CEO of China’s largest wine distributor ASC Fine Wines, the incident marked the end of a period of uninterrupted growth for imported wine in China.

“It was big news that put a chill on any other government officials who were thinking about having meals outside of their homes,” he says.

“It really just put an overnight chill on the whole market”.

The government-directed austerity drive has highlighted the extent to which China’s wine market has been distorted by rampant gift-giving on the public purse.

Overall, wine consumption went on to drop 2.5 per cent in 2013, the first decline after 10 years of uninterrupted growth at 25 per cent per year, according to a Vinexpo survey.

The effect on Australia’s wine exports has also been dramatic. Recent figures show a 12 per cent decline in exports to 37 million litres for the 12 months ending March 2014.

“There are estimates that up to 50 per cent of all the premium wine was being purchased with government money,” says Watkins.

Importers who had built their whole business around that distorted market ended up taking a big hit. Even ASC Fine Wines, which has a highly developed distribution network throughout the country that delivers their products directly to hotels, restaurants, convenience stores and nightclubs, was affected.

“We did take a hit but not like some of the other companies. We had to rebuild our business,” says Watkins.

For Watkins, the change in the market was an opportunity to focus on the “real market”, which is made up of urban professionals who have developed an appreciation for good (but not necessarily expensive) wine.

“The mid-market makes up the bulk of wine buyers, the Chinese middle and upper-middle class who live in the cities and have some Western affiliation. They are the future for the commercial wines that we sell,” says Watkins.

Central to his company’s recalibration is a shift towards more long-term strategies that leverage the country’s rising middle class and the rapid growth of the e-commerce sector.

China’s business-to-consumer ecommerce sales could surpass US$180 billion this year due to expanding middle-class incomes, rising internet usage and improving distribution networks, New York-based market research firm eMarketer estimates.

Watkins says that the ecommerce boom prompted a radical rethink on their retail strategy. When he took over the role one and a half years ago, the company had planned to set up 200 shops across the country.

“When ecommerce took off, I hit the pause button on our retail strategy so we could really understand what was happening,” he says.

“Now we’ve hit the stop button on retail and we’re taking all that money and we’re reinvesting it in ecommerce.”

The new strategy brought in close to 30,000 new customers last year, most of who are aged under 30 and with 90 per cent of sales below 100 yuan (A$17).

Without government money flowing around freely, wine importers will have to get used to this more frugal customer base. The good news is that that base can be expected to grow even bigger as China continues to transform itself into a more consumption-based economy.

While an exact figure is hard to come by, Wine Intelligence estimates there are currently 20 million drinkers of imported wine in China. They estimate that number to increase to 80 million by 2020, with the bulk of new wine consumers coming from China’s rapidly expanding Tier 2 cities.

And with the rise of ecommerce, foreign labels now have the best opportunity to market their product directly to the Chinese consumer.

Instead of retreating from the market, wine importers should focus on the real market as the whole industry recalibrates towards being more sustainable and consumer-led.

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