Bright Lights beyond Beijing

The lucrative Chinese market is well known to winemakers, but much of its potential lies in the less-affluent regions, writes Mark Graham

The most affluent cities in China have bustling wine bars, supermarket shelves stocked with a decent array of imported labels, and a rapidly growing number of foreign wine distributors keen to capitalize on the surging demand from the ever more wealthy population.

But venture beyond the richest metropoleis – Beijing, Shanghai and Guangzhou, all located along the eastern seaboard – and the picture is rather different. For most of the 1.3 billion Chinese, wine drinking remains an impossibly exotic pastime, reflected in the nation’s frugal consumption of just over one billion bottles annually.

Outside the main cities, if the Chinese drink at all – and bear in mind that this is still a poor nation with per capita average urban income of £1,600, significantly less in the countryside – it is likely to be beer, or the foul tasting, awful smelling grain liquor, bai jiu, which is cheap and potent. A supermarket standby such as Wolf Blass Yellow Label would cost around £16 in China, double the price of the UK and way beyond the reach of Joe Public.

But the one constant in the contemporary Chinese wine business is change – incredibly rapid change that is seeing sales rocket. Most importers, already well established in the affluent eastern-seaboard cities of the vast nation, see the so-called second and third tier cities as the places where the quickest growth will take place in years to come.

The only way is up

“Wine is seen as glamorous in China and there is only one way business will go… up,” says Damien Shee, China deputy general manager for the Spanish wine giant Torres. “It is impossible for the Chinese to quit drinking, it is part of the culture and wine is seen as a healthy alternative to spirits. At government functions wine is featured more and more.

“In previous years, growth has been 40 or 50% a year. This year it will be 25% at least and it will keep growing for the next three years – volumes have increased but values have decreased.”

The Torres China turnover for last year was €16.3 million (HK$169m), with a figure of €21.5 forecast for this year. China sales now account for 10% of the giant group’s revenue, second in size only to Spain.

All the wine that Torres China imports to the country is made by family-owned vineyards; a fundamental business tenet of the Spanish company is to nurture and support privately owned operations.

“We get called every day, or receive emails, from people who want to distribute their wines in China,” says Shee. “For us to be interested, you have to have be a family-owned company and have to have a reputation.”

A direct Torres rival, Shanghai-based ASC Fine Wines, was founded by renowned American entrepreneur Don StPierre, with backing from the Swarovski jewellery family, and later expanded by his son Don St Pierre Jr. More recently, the company was acquired by the giant Japanese group Suntory, which retained Don Jr as chief executive officer.

Among the companies on its books is DBR (Lafite), a stellar name to have, given the insatiable Chinese demand for Bordeaux in general, and Lafite in particular, which has been one of the main drivers in pushing up auction prices to stratospheric levels in recent years. Lafite has also announced long-term plans to operate a winery in China, a joint venture with one of the state investment arms, CITIC.

“In terms of overall growth in demand for wine in China over the next 10 years, I believe China will become both a massive producer and a massive importer of wine,” says St Pierre Jr.

But founding – and running – a business to capitalise on that increased demand is far from easy; China, the world’s last major remaining communist nation, has a labyrinthine bureaucratic system that makes it tough for outside companies to set up shop.

Add to that swingeing duties and taxes that add up to almost 50% by the time the imported wine reaches the warehouse, an unsophisticated national distribution system and the widespread existence of nefarious business practices and it becomes clear that China is not for the faint-hearted, or those who are not prepared to commit for the long haul.

Torres, for example, has been in the country for more than a decade, but took a long time before becoming profitable.

A joint venture, once the most practical way of gaining entry to the country, was later abandoned in favour of a wholly owned company.

“Many years ago we saw China as the future,” says president Miguel Torres. “But when we first started to import our wines the market was very small and concentrated in Shanghai and Beijing. It cost us millions of dollars of losses in the earlier days. We believe in China. The way of doing business in China was very different and we had to adapt.”

Making a statement

Despite the hurdles, more and more smaller distributors are setting up in China. It helps to speak the language and know the culture, as long-term resident Campbell Thompson does. The Australian entrepreneur who is in partnership with the Rathbone group of Australia is predicting sales of £1.9m (HK$22.6m) this year.

“When you look at consumption of quality wine it is amazing how quickly it has grown,” says Thompson. “Amazing, but not surprising because with the benefit of hindsight, it is not surprising that China has grown as strongly and quickly as it has and emerged as the world’s second-biggest economy. These things are never guaranteed but China has always had the energy and ability to have a robust economy.

“The are two things driving wine consumption. One is the intrinsic demand for the finer things in life, the other is the symbolic side; wine, like fashion, is a statement that people can use to communicate something about themselves.

If I order Lafite it tells you something about me; whether we enjoy the wine is not the issue, it is a statement. For many ordering Lafite is like ordering lobster or abalone, it is a shorthand way of giving, and receiving, face.

“The real growth engine is very much the local market. In the early days wine was bought by the resident expats, business travellers and tourists and the local returnees who had spent time overseas. More and more locals have been exposed to wine, first in the context of international food in a hotel. As well as the four main markets of Beijing, Shanghai, Guangzhou and Shenzhen you see rapid growth in Wuhan and Chengdu and Shenyang and even the third- and fourth-tier cities.

“You hear different figures on the number of importers, but there was data from China customs saying that more than 2,000 companies have imported wine into China and I am fairly sure that number is multiplying rapidly as a lot of small, and mid-sized, local companies are getting into wine. A lot of them are traders who will get into anything if there is a margin. It is a product that you can buy and sell and it is perceived as being a fairly high-margin business.”

Another rapidly growing importer is East Meets West Fine Wines, founded by local Shirley Tan, who previously worked for the Champagne producer Veuve Clicquot, a job that gave her insights into Chinese alcohol-spending patterns. The addition of two other partners, Edouard Duval, of the Champagne-making Duval Leroy family, and Chinese-speaking businessman Gregory Bielot, gave the company a broader spectrum of international expertise.

A shrewd staff signing was Frenchman Olivier Six, who ran a wine bar in the capital and now looks after the Beijing portfolio, which has 300 different labels from 11 different countries.

Red wine is by far the most popular choice in China, accounting for up to 80% of sales; partly that is down to the supposed health benefits and also because in Chinese culture red is traditionally associated with happy, and celebratory, occasions. “From what I am seeing the growth here in Beijing is a minimum 50% a year,” says Six.

“In a typical Chinese restaurant you see young people drinking wine whereas a few years ago it was not like this. You can see different wines now, not just Bordeaux; it is Burgundy and New World wines. The big surprise for me was that people in the trade who are buying wines for restaurants and hotels want to have many wines from different regions and countries, all the different grapes.

“We specialise in family estates, not the big-name wines, and we target five-star hotels and restaurants and private customers. You won’t find us in Wal- Mart, or Carrefour, only a few places like high-class wine stores.”

Extradionary Potential

Precise figures of the number of wine drinkers and the volumes they consume annually are difficult to come by; China’s rulers attempt to control all information, and issue selective statistics that are often eyed with cynicism by industry observers. According to figures from Vinexpo, which represents  Bordeaux wine producers, 1.1 billion bottles are sold annually, some 42% of them filled with wine from France.

A Vinexpo study predicts that in the next four years Chinese wine consumption to grow by a further 20%, putting the country at sixth place in the world wine-consumption table. Wine companies with aspirations to grow ignore China at their peril.

“When the level of consumption per inhabitant is compared with per capita rates of the other top 10 large consumer countries, the extraordinary potential of the Chinese market becomes clear,” says Vinexpo chief executive Robert Beynat.

Shining stars of China Wine

Oenophiles are generally scathing about wines made in China  – with a few notable exceptions.

Two of the country’s top-rated wines, produced by Grace Vineyard and Silver Heights, have been helped to prominence by Torres China, which markets and distributes them throughout the nation.

The most extraordinary wines are, arguably, those made by Emma Gao at Silver Heights. With modest means, hard work and steely determination, she is making wines at the familyowned property in the remote and dirt-poor Ningxia province that are earning praise from industry experts.

Silver Heights makes just two red wines, both a blend of Cabernet Sauvignon, Cabernet Franc and Cabernet Gernischt grapes; the terroir where they are grown leads to different characteristics.

Although the current production is limited to around 10,000 bottles, the winery has expansion plans which will ultimately allow 30,000 bottles annually, assuming the right quality grapes can be grown, or bought. Already the winery is making a small profit and the sought-after wines feature on the cartes of the ultra-exclusive Aman resorts in China.

“It is a very slow process to get back the investment when it is so small a winery,” says Gao, who is married to Thierry Courtade, the winemaker at Calon-Ségur in Bordeaux. “At the winery we do everything ourselves. Me and my father look after the wines, my mother is the analyst and my sister is the accountant. We do almost everything by hand… bottling and labelling.

“At Silver Heights we are surrounded by mountains, which break down the wind and stop the erosion. We also get a regular supply of water for irrigation from the melting snow and 3,200 hours of sunshine a year. We have very good grapes here, we don’t have any disease and we don’t use pesticides, only in special cases, so you can say it is an organic wine, unfiltered.It has a pure aroma.

“China is not very developed in viticulture. We buy grapes from farmers and other wineries. With farmers they tend to treat growing grapes like apples or pears. They don’t have a notion of the quality needed for wine, even though we give them education. The first year I did sorting grapes and leaves before harvest by myself, and the farmers thought I was crazy, they didn’t understand why I would prune the vines and cut things down.”

Over at Grace Vineyard, in Shanxi province, boss Judy Leissner had similar problems in trying to educate local farmers on the entire process of growing grapes for wine. It is working well – Grace wines are also earning accolades in, and beyond, China.

“We are small and very different to existing Chinese wineries,” says Leissner, the company president, whose wines are also distributed by Torres China. “We are still brand building that is why we go to the five-star hotels and shouldbe- seen restaurants. We don’t go for volume.

“When we started, we had no experience of retail or marketing, as our family business was in utilities. At first we let staff in China do the design and packaging but people thought it looked like a soy sauce bottle – the packaging was not very good. We got questions like ‘why is so sweet’? and that was a bitter experience for us.”

The early years of Grace saw plenty of hiccups, but the company was helped by positive wine critic reviews and guidance from Alberto Fernandez, of Torres, who was impressed by a tasting of Grace wines and offered a distribution deal, allowing the various vintages to gain a high profile in restaurants, bars and stores. The winery now produces almost a million bottles annually and is planning a second operation, near the terracotta-warrior city of Xian.

“What distinguishes us from other wineries is quality,” says Leissner. “We are serious about wine and I think wine is here to stay in China. You don’t need to teach people how to enjoy life: when they have money, then they will learn how to do it very quickly.”

Feature findings 

• Chinese consumers has been well documented, for the vast majority of the population wine is an impossibly expensive indulgence. However, change is apace and the lower-tier cities are where the greatest growth will come from.

• Demand for wine in China will continue to grow and the country is predicted to become a huge producer and importer.

• Growth is driven by consumers’ desire for the finer things in life and also by the status statement fine wine makes.

• A Vinexpo study predicts that in the next four years Chinese wine consumption will grow by 20%, putting the country at sixth place in the world wine-consumption table.