Selling Shiraz in Shaanxi

Blame China. That was the message from Pernod Ricard a fortnight ago as it warned of falling profits. The spirits maker – which owns brands including Martell cognac – said Chinese demand had slowed substantially in the wake of President Xi Jinping’s austerity campaign. This had seen its earning hit as a consequence of fewer government-sponsored banquets and less gift-giving.

Diageo and Remy Cointreau have also blamed “Chinese government measures” for slowing sales growth in the latest quarter, according to the Wall Street Journal.

Nor is it clear if this is the ‘new normal’ for luxury spirits sales in China, with even Remy’s boss Frederic Pflanz admitting he can’t predict when the sluggish climate will reverse. “We don’t know when this will stop,” he says of the austerity.

Other executives in the drinks business are starting to wonder too if they need to adjust their sales strategies, including WiC reader Russell Badham. He has also been feeling the impact of the anti-extravagance campaign. As chief executive of Melbourne-based APW International, Badham oversees a service to Australian wine exporters akin to a traditional European negotiant. Over the past few years he has seen growing volumes of Aussie wine delivered to China with APW shipping roughly 250,000 bottles annually. Here Badham discusses the importance of the Chinese market to Australian vineyards, as well as how Xi’s measures are being felt by producers.

How important is the Chinese market for Australian winegrowers?

It’s very significant because of what we can loosely term as the ‘gentrification’ process underway with Chinese drinkers. We’ve seen the same thing happen before in other emerging markets. People who once drank beer or spirits start to drink wine. Now it’s happening in China, making it the biggest growth market for Australian wine anywhere in the world.

That’s very good news as Australian exports to the UK, Europe and the United States collapsed after the financial crisis. Our traditional customers have been feeling the financial pinch, especially as the Australian dollar stayed very strong, pricing our wine out of the market. Take the UK, where most people buying wine at less than £10 ($16) a bottle don’t care where it comes from. They just want a red or a white, or a dry or a sweet, and they choose primarily on price. Our wine became too expensive, so they bought from elsewhere.

How about in China? Where is Australian wine positioning itself?

Fortunately Chinese demand was strong enough to cushion us through the financial crisis, taking up some of the slack left by our other markets.

The nature of Chinese demand is also changing. Traditionally Australia has sold a lot of bulk wine to the Chinese for as little as A$1.20 ($1.13) a litre which is then bottled as local production. My guess is that more than half the wine sold under Chinese labels today is still being sourced in bulk from places like Chile, Spain and Italy. But as I mentioned, the ‘gentrification’ process – or the growth of the Chinese middle-class – means we’ve gone from selling very cheap wine to selling more mid-point and higher-priced bottles. So there’s a double benefit for Australian producers: they’re increasing their volume of sales but they’re also increasing their prices.

What does a typical bottle of Australian wine cost to buy in China?

It’s a tough question because there are so many different types of wine. But as a general rule, a bottle that leaves Australia for A$5 arrives duty-paid in China for about Rmb150 ($24.60). Landed at this price it would probably be sold to final customers for anything up to Rmb350, although there are shipments of wine leaving Australia at much higher wholesale prices than that.

Another reason it’s difficult to estimate retail prices is that we can’t assume the same mark-ups as other countries, where a wholesaler puts on a fairly standard percentage and the retailer or restaurant adds its own margin too.

In my experience we’ve generally not sold too much wine into “traditional” retail networks in China. Only one of my distributors sells directly to shops and restaurants at the moment, for instance. Instead, the huge majority is being sold to people who buy it for gifts and for banquets – or for what I call ‘oiling the machinery of Chinese life’. It means that Australian producers have less of a picture on where their wine ends up but my sense is that much of it is headed for local governments or business groups.

Demand also spikes around the key festivals like Chinese New Year. I have one customer who buys a thousand cases every year, slaps his own label on the bottles and then just gives them away.

Have sales been hit by Xi Jinping’s campaign against wasteful spending?

Yes. We may have been a bit optimistic in our predictions for the calendar year but we are down about 40% on target and I know other Aussie exporters who are doing worse in year-on-year terms. There was also a lot of discussion about the “frugality campaign” during my most recent visit to China in September.

Longer term, my take on the situation is that sales of top-end French wine are going to be hardest hit. Dining out and gift-giving are such a crucial part of Chinese business culture that they aren’t going to disappear completely. But they could become a little less lavish, which might even turn out to be good for Australian wines because they generally offer much better value. I’m certainly hoping so.

Do the Chinese have a sense of Australian wine as a national brand?

Wine production is much more diverse than national labels can denote. Try telling a producer from Burgundy that you are classing him in the same “French” bracket as one from Bordeaux. I know people from Bordeaux who won’t even drink from the Left Bank! But it’s also true that early-stage interest in wine is often shaped by perceptions about national labels, which can make it harder for the New World producers.

Drinkers with a limited understanding of wine, or those with unlimited cash and a desire to show off, gravitate first to what they think to be the top wines. As the French have hundreds of years of history in the industry, as well as the reputation for making the best, most expensive wine, they have an initial advantage.

Here’s an example of the French influence. Twenty years ago we started bottling our wine with screwcaps because they provide much more consistent closure than corks and today it’s difficult to find bottles in Australia without them. But our Chinese importers insist on bottles with corks because their customers think that if the French do it this way, it must be right. That means that China is the only market where we put our drinking wine under cork. Even so, I predict this won’t last long as the same thing happened with the Canadians, who learned their wine from the French and also once believed that bottles with screwcaps meant that the wine was cheap. Now the Canadians won’t accept a white wine under cork and increasingly they prefer their reds with screwcaps too.

So you’re saying that what worked in other countries can work for Australian wine in China too?

I think the basics can be similar in how wine is marketed, particularly the focus on value for money. What made Australia popular in the UK from the mid-1980s was that we sold fresh, clean and fruit-forward wine with a relatively high-alcohol content. We also demystified it. People could understand our labels, which wasn’t the case for most of the French bottles. But most of all, we offered wine that was great value-for-money and I think this is a key selling point today too.

There are people in Australia who think we should be marketing our wine to the Chinese on the basis of its diversity. But my view is get them drinking Australian wine first and we can try to sell them the nuances later.

Why not try to repeat what we did in the United States, the UK and Canada by blasting our way into the market on the basis of a fresh, uncomplicated and affordable taste?

What Australian wine do the Chinese want to drink most?

The simple answer is a single word – red – but in particular the Chinese want our Shiraz. Obviously they drink a swag load of Cabernet and Bordeaux blends from the Old World. But from Australia they are buying Shiraz, Shiraz and more Shiraz.

We experience this firsthand through shipments from our biggest seller Hoggies Estate but at national level the Chinese are buying Shiraz from almost any district and across all the price points.

Of course Australian vineyards offer a much wider range than Shiraz alone. We have some very good Pinot Noirs but demand for them is lower. Even the great Coonawarra Cabernets can be a struggle to sell in China. The exceptions are when brand and reputation trump popular trends – like Penfolds, which sells itself, no matter the bin or the varietal. Penfolds Bin 707 is as highly sought after in China as anywhere else in the world, for instance. I would love to make a dollar every time that I’m asked if I can source it.

More generally it sounds like you’re confident about prospects in China?

I’m optimistic, certainly. Of course, the market still has a long way to develop but it offers lots of new opportunities. For example, in the last few years I’ve been attending a major alcohol expo at Guiyang in Guizhou province where thousands of producers and distributors turn up. One of the largest halls is dedicated to baijiu, a spirit that the Chinese are very proud about producing. That’s fair enough but it bemuses me that so many Chinese customers refer to baijiu and some of its equivalents in conversation as ‘white wine’. It’s a bugbear of mine. Wine is made from grapes, not from grain or vegetables! Would you call whisky ‘brown wine’?

This makes the task of selling white wine more challenging. But even with whites, the opportunity is growing. Five years ago hardly any customers would ask me to open a bottle of white for tasting. But that’s starting to change and it’s the same with sales. Two years ago I was selling 40 cases of red for every case of white but now that’s down to about 15 reds for every white. As I said, the market is evolving quickly.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.