China Consumer

Grapes of wrath

Yantai-based winery’s stock plunges over scare

Grapes of wrath

Whether it is theoretically possible to drink 100 bottles of wine a day, few would consider it a good idea to find out. Yet when China’s biggest winery Changyu sought to head off a PR debacle, it made matters worse with a references to consuming exactly this many bottles.

Earlier this month the company made the bold assertion that “even a daily intake of 100 bottles [of Changyu wine] will not cause cancer”. But newspapers like the Shenzhen Evening News were unimpressed. This sounded like an excuse, it suggested, implying that “because the poisonous content is little, drinkers can ignore it”.

Let’s backtrack a little. Changyu’s management was forced into its statement after it emerged that some of its wines contained pesticide residues. In fact, an inspection by China’s National Food Quality Supervision and Inspection Centre found that wines made by all three of the country’s major vineyards contained the pesticide carbendazim. In Changyu’s case, mind you, the levels detected were twice those of the other two producers.

Carbendazim is a controversial substance, having been banned as a pesticide in the US due to the risk that it might contribute to cases of liver cancer. So when media published the results of the tests, Changyu’s locally-listed shares plunged 9.83%, reaching their lowest point in 35 months.

The company later held an emergency conference call with investors in which it did not deny the report’s findings. Rather it emphasised that trace elements of carbendazim would not lead to cancer, and said its wine still met EU regulatory standards. It then outlined a strategy to counter the bad publicity, saying it would issue a clarification notice to the stock exchange and work with state broadcaster CCTV to better educate consumers about carbendazim and the safety of its wines.

That may not be enough. In a country plagued by food scares, the revelations come at a bad time, especially given Chinese winemakers were already losing ground to imports (with increasingly sophisicated consumers trading-up and quaffing ever more foreign bottled Sauvignon Blancs and Cabernet Sauvignons).

Changyu is China’s oldest winery, founded in 1892. It is situated in Yantai in Shandong, on the same line of latitude – so the company’s website claims – as Bordeaux. In terms of grape-based wines, it holds a 20% share of the Chinese market, making it the market leader, with local rivals Great Wall and Dynasty placing second and third respectively.

China’s consumption of wine has been growing fast in recent years, but its image as a wine producing country has not kept pace. Nor are production volumes particularly high. France remains the world’s top wine producer, bottling as much as 60 million hectolitres annually. By comparison, Chinese vineyards bottled 1.15 million hectolitres last year (though that was up 13% on the year before).

The latest news will not help Changyu, which Capital Week points out was already seeing sluggish growth. The magazine notes net profit growth was only 0.8% in the second quarter, far below the double digit figures recorded in prior years. In fact, Changyu’s homegrown wine sales actually declined 5.4% as it lost ground to French chateaux and New World producers.

After releasing the first half results, management explained: “The decline of China’s economic growth, coupled with the continuous influx of foreign wines has seen competition become fierce in the domestic market, which has increased the difficulty of companies achieving their business objectives.”

Changyu has three divisions, says Southern Metropolis Daily. One focuses on selling wine produced in its own vineyards, another distributes foreign wines, and the third focuses on selling brandy. The newspaper says the firm’s results would have been much worse were it not for growth in the brandy and foreign wine divisions. These offset the poor performance of Changyu’s own wines, meaning that profit for the six months still grew slightly to Rmb921 million ($144.9 million).

But unless it can bounce back from this latest pesticide scare quickly, analysts are forecasting that this won’t be a vintage year for Changyu shareholders.

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