CHAMPAGNE: A new year in China

Since wine duty was abolished in Hong Kong in 2008, it has become a mecca for Champagne houses eager to get a foothold there and in mainland China. An unsophisticated market and existing brand dominance complicate matters, however, finds Jane Parkinson.

Fit to burst with wines trying to break into its markets, Hong Kong and mainland China are seeing a cornucopia of Champagne houses knocking on their doors right now. Determination to succeed in Hong Kong is fierce, not only as a market in its own right but also as a gateway into the propitious future cash cow of China.

But it’s not as easy as it looks.

The intrinsic complications of entering these markets are manifold. Notwithstanding importing laws and costs, you must also overcome the understanding and appreciation of a different alcohol-drinking culture.

Couple these with the historical dominance of a handful of large brands presiding over the market, and the complex Champagne consumption trends and habits of a nation are formed.

Based in Hong Kong, Christian Pillsbury, managing partner, Asia, at consultancy firm Terravina, has witnessed first-hand the development in these markets over the last few years. Pillsbury says: “The issue for Champagne houses in Hong Kong and [mainland] China is similar to that of other emerging markets, where large houses own the market, leaving niches to smaller independents with smaller budgets, and less on-the-ground sophistication.”

Big boys’ tax breaks

Two of the large houses to which Pillsbury refers have unquestionably been Moët & Chandon and Veuve Clicquot. Brendan O’Toole, partner of Summergate, an importer, distributor and marketer based in Hong Kong, provides an estimate of their dominance when re-exported into China. “These two brands probably account for two-thirds or more of all the volume. This doesn’t leave much for the remaining brands. But of the rest, brands like Piper-Heidsieck and GH Mumm will have a reasonable share.”

One of the overwhelming reasons for these houses’ dominance is that up until last year (when wine duty was abolished in Hong Kong) the luxury of a Champagne house being part of a group which also owns its own distribution business gave these particular houses a serious pricing advantage over their competitors.

O’Toole elaborates: “This [distribution business] allows them to transfer price aggressively into the markets so they can declare very low invoice values on their shipments and thereby avoid paying high taxes.” Such a competitive advantage makes it “virtually impossible for any of the other Champagne brands to compete, certainly at the entry level low-price end of the Champagne market”, adds O’Toole, who predicts the likes of Laurent-Perrier and Bollinger will also have a reasonable proportion of shipments to China.

However, “all the rest are probably scrapping over no more than a 20,000 case market across China. This means most are probably only shipping no more than a few hundred cases to a container a year into China. Small beer really,” O’Toole adds.

Challenging markets

To exemplify the difficulty of breaking into these markets, even houses like GH Mumm and Laurent-Perrier, which O’Toole believes have succeeded in making headway in the market, can find them a challenging prospect.

GH Mumm was one of the first Champagne brands to start exporting to China and even today, greater China and Hong Kong together account for 5% of the combined Perrier-Jouët and GH Mumm export volumes. Yann Soenen, regional director for PJ and GH Mumm, Asia-Pacific, at Pernod Ricard, says: “It’s a difficult market to penetrate for several reasons.

First of all, Champagne is a new drink for the Chinese drinking repertoire, a subtle taste very different from the usual hard spirits consumption habits. The second reason is the fragmented distribution network and import barriers make it difficult for a foreign brand to be available in China with consistence in quantity and quality. Finally, important work is still being done to develop appropriate places for Champagne consumption where it will be served properly by knowledgeable sommeliers, bar managers and their staff.”

Laurent-Perrier, which has been in Hong Kong for 25 years, only entered mainland China six years ago, and has recently changed importers for both HK and China to further consolidate its success. Stéphan Tsassis, chairman of the management board for Laurent-Perrier, explains: “We have recently changed our distributors in both HK and mainland China. In China, we have chosen Jebsen as our next importer. They have a long history in China in building high-end luxury goods by understanding the changing mentalities of the Chinese. In HK, we are now distributed by one of the oldest and most established wine merchants, Berry Bros & Rudd.”

Meanwhile, sole Hong Kong distributors for Piper-Heidsieck and Charles Heidsieck, Telford International, says strong marketing investment of the brands has helped to develop the markets for its Champagnes, notwithstanding Piper-Heidsieck Brut NV’s award for Best Value Sparkling Wine under HK$400 (£30.70) at the inaugural Hong Kong International Wine & Spirit Competition earlier this year. General manager of the Wine & Spirits division of Telford International, Wendy Chan, said: “Rémy Martin has invested a lot in marketing and promoting the brand, sponsorship tie-ins with brands like Hermès are also good for its reputation. Plus, and I know it sounds funny, but the colour red is very lucky here,” referring to the bright red label on Piper-Heidsieck’s Brut NV.

Level playing field

Even if the market is “small beer” to any Champagne house, this doesn’t lessen the resolve of those wishing to get their foot in the HK and mainland China door. At this stage of China’s relatively unsophisticated appreciation of Champagne, merely gaining a listing somewhere would surely be regarded a triumph and the abolition of taxes to Hong Kong has now with the abolition of wine duty, meant this dream is easier to realise for the whole of the Champagne industry rather than just the privileged few.

Illustrating the halcyon era such a tax break could create are houses such as Louis Roederer and Pol Roger, with the latter’s CEO Patrice Noyelle saying: “Our sales exploded in 2008 when taxes disappeared in HK and we are very confident that the HK market will continue to grow steadily.” Meanwhile at Louis Roederer, international export director Frédéric Heidsieck says: “The  Hong  Kong  market  has  changed  greatly  over the last few years, mainly influenced by the trade duty cuts. The decision to render Hong Kong a duty free market has indeed attracted many wine companies.”

As was the objective of the Hong Kong Special Administrative Region’s government in lifting the duty, attracting more names is exactly what this move has done, to the point at which, “It’s cut-throat here,” says James Yates, assistant general manager of Montrose Fine Wines which recently started importing Deutz into Hong Kong. He added: “If you’re going to be successful you have to get in fast, especially now as people are starting to understand Champagne better and so they realise that there are other good Champagne houses out there.”

Further proof that life has been made simpler for Champagne names that want to make it in HK and China can be found in the number of houses and importers that were present at last month’s Hong Kong International Wine & Spirits Fair, a trade event (and for consumers on the final day) which has doubled in size since its inaugural show last year.

Champagne exhibitors at the fair, of which Yates at Montrose Fine Wines was one, said they were impressed by the influx of potential importers to China at the fair, and yet houses were equally realistic about the likely outcome of potential importers with good intentions.

Karambir Khanijou of TSA Wines, a Singapore-based importer which currently imports Moutardier into Asia, commented: “We’ve seen lots of potential people [at the fair] but we don’t know how genuine they are. We will wait to see if they send us emails next week, only then will we know,” and as he spoke an importer from the previous day arrived at the stand anxious to have further discussions.

Hopeful too is Charles-Henry Fourny of Champagne Veuve Fourny, which currently has wines listed in upmarket UK department store Fortnum & Mason. “Hong Kong and China are somewhere between discovery and reality. But it’s important to be here because you have to prepare for the future,” says Fourny. For Champagne Pannier, export manager Terence Kenny said that Champagne in Hong Kong is still largely an “ex-pat product”. However, he also added that Champagne will undoubtedly “develop beyond that. They will learn to love Champagne, just look at how much they love Bordeaux”.  

Perhaps the most convincing demonstration of Champagne’s progress in HK so far has been the work of The Champagne House, part of importer Boutique Wines. The Champagne House is an importer of “non-branded” Champagne names, whose website states: “It is frightening to realise that the top five Champagne conglomerates represent over 97% of the export market. We are proud to offer you some of the other 3%.”

Jocelyn Yot from The Champagne House, who was accompanied at the fair by one of his clients, Erick de Sousa of Champagne De Sousa & Fils, explained the developments witnessed by his company in the last three years. “The Champagne market here [HK] was boring because
you were seeing the same thing everywhere. But two and a half years ago I started to discover more and more quality Champagnes from smaller houses and now we have a range of premium Champagnes and represent 18 different but popular names,” including the likes of De Sousa, Vilmart and Guy Charlemagne.

Notwithstanding the lift in wine duty, consultancy firm Terravina says there is a crucial role to play in providing assistance in terms of brands’ breakthrough strategies, as Pillsbury explains: “Most brand owners do not have the reach or specialisation to act strategically on the ground, or to see potential problems before they become brand crises. It takes quite a strong hand with a winery’s distribution partner and firm control over messaging to get it right.”

Consumption habits

There’s no doubt many houses have got it right already, and thanks to their insistence, the knowledge of Champagne continues
to increase in sophistication in these markets, albeit Hong Kong is more advanced than mainland China.

And now, with more choice emerging in the off-trade and on-trade, coupled with a younger Chinese generation that is eager to understand and adopt Western practices, Champagne is becoming more of a natural choice as an apéritif at a bar. As Soenen from Pernod-Ricard suggests, “It is now more and more frequent to encounter groups of some young Chinese men ordering a bottle of Champagne when accompanied by ladies.”
Moreover, better education about Champagne means it is not served over ice as it has been in the past, and courses at places such as BBR’s new Wine Centre help this understanding to permeate its way through society.

The on-trade is seen as a key target area for brands to develop themselves in both markets, and houses such as Laurent-Perrier explain a typical end-goal for many Champagne houses. Tsassis comments: “We are present in more and more high-end restaurants, five-star hotels, etc. It means more opportunities to sell.”

The opportunity at the high-end section of the on-trade is well-illustrated by The Champagne House’s Yot who has created the “Champagne Festival” to encourage high-end restaurants to list some of the lesser-known but high-quality Champagnes his company represents. “For the Champagne Festival scheme, restaurants such as The Spoon at the InterContinental and the Landmark at the Mandarin Oriental in HK swap around and feature a different Champagne producer each month. The festival’s reputation is growing.”

One of those best placed to understand a Champagne consumer’s current train of thought in Hong Kong is Nick Pegna, managing director of Berry Bros & Rudd Hong Kong, who explains the omnipresent nature of Moët and Veuve (as well as the inherent pros and cons). “Champagne is drunk as an apéritif and also substantial quantities are drunk as an after-dinner drink by our customers, who are 80% Chinese by demographic.

Customers seek advice on Champagne purchases as much as they do on still wines and as we are also the agents for Jacquesson (as well as Laurent-Perrier), this encourages explanation. Customers are certainly wary of ordering either Moët or Veuve Cliquot as there is a risk that they are too successful and are everywhere, hence not the discerning choice.”

It seems a successful image in HK and China can potentially and perhaps unfairly be a tarnished one too. Chan at Telford International adds: “Supermarket wine is seen as being for beginners, there isn’t much choice and it’s mainly price driven. Because of that they will get international brands on the shelves.” She adds: “If your wine is in a supermarket it is hard to gain listings in the on-trade,” reflecting Pegna’s earlier observation.

However, this issue is something that one of HK and China’s most famous Champagne names, Moët & Chandon, is aware of. In order to retain its hugely successful market share, which has been built up since it first came to the markets in the 1920s, Moët & Chandon has invested heavily in establishing its wines in these markets. Currently it employs more than 350 people to work on the Moët Hennessy portfolio on the ground in this region.

Jean Berchon, vice-president of corporate communication for Moët & Chandon, comments: “Moët enjoys a fabulous market share in HK due to its pioneering vision and efforts. The name of the game, today, is to remain at the top of the on-trade pyramid, which means that we are and will be quite selective in terms of distribution channels,” demonstrating that even one of the most successful Champagne names in Hong Kong and mainland China needs to stay on its toes to keep this ever-evolving market interested in its brand.

Jane Parkinson, December 2009