Although China's bustling metropolises and staid Bordeaux may seem worlds apart, the two are becoming intertwined.
Indeed, China recently overtook the traditional strongholds of Germany and the United Kingdom to become Bordeaux's largest export destination.
This transformation is particularly remarkable given the country's short history of mass wine consumption. Historically, beverages such as sorghum-based baijiu and beer have dominated Chinese alcohol consumption, with wine only recently gaining wide acceptance.
Bubbling to the top
In the past few years, China, the world's second largest economy, has risen to become one of the world's most important wine markets.
By volume, the country is the seventh-largest consumer of wine, with expected sales of 1.6 billion bottles in 2011.
In contrast, the US and France, the first and second largest consumers of wine, are expected to consume 4 billion and 3.9 billion bottles, respectively. Since 2006, the Chinese market has experienced more than 20 percent annualized growth, and experts predict it will double by 2014 to become the world's sixth largest.
Collectively, three major domestic producers account for nearly half the total wine sales in China. The largest brand, Changyu Pioneer Wine, is a unit of the major state-owned conglomerate China National Cereals, Oils, and Foodstuffs Corp (COFCO). Changyu and the other two primary producers, Great Wall Wine and Dynasty Wine, focus on domestic consumption, with 98 percent of their production remaining in China.
Foreign wine imports are also growing rapidly. In 2010, imports grew to more than 20 percent of total wine consumption, a four-fold increase since 2005.
Currently, an estimated 20 million adults drink imported wines on at least an occasional basis.
Given that this figure is a fraction of the overall estimated 200 million plus people who have the purchasing power to buy imported wine, the future for foreign wine appears bright.
In China, domestic wines are sold primarily at the lower end of the pricing spectrum, while imported wines are sold at the mid-to-higher end.
The average retail price at the lower end is 20-30 yuan (US$3-5) per bottle.
Mid-range wines sell for 30-80 yuan (US$5-13) per bottle and are aimed at consumers with higher disposable incomes and more exposure to wine.
Premium wines sell for 80 yuan (US$13) and up per bottle. Imported wines typically range from 80-400 yuan (US$13-66) per bottle and are in direct competition with high-end domestic wines.
Many factors have driven the growth of the wine market in China. In particular, the government's promotion of wine as a healthy alternative to baijiu and other spirits, declining tariffs on wine imports, and consumers' increasing purchasing power have given rise to an increased interest in wine.
Despite rapid growth, the Chinese market remains fairly immature.
Customer preferences are driven heavily by advertising, with top producers running mass-marketing campaigns to build brand awareness. This brand-driven environment, with a lack of emphasis on taste preferences, has also affected the market for foreign wine.
Regardless of brand or vintage, Bordeaux and Burgundy wines enjoy strong recognition among Chinese consumers. High-end consumer demand for first-growth French wines, such as Lafitte and Latour, has caused a tremendous jump in prices. Although consumer appreciation and knowledge of wine have improved in recent years, purchases continue to be driven primarily by brand-conveyed prestige and status.
Regardless of the product category, Chinese customers often have enduring "country-of-origin" biases, and wine follows this pattern. The association between wine and France is particularly strong, with domestic brands mimicking French imagery on packaging and vintage naming conventions.
While domestic wine brands have traditionally focused on lower price tiers, producers are increasingly looking to move further up-market, investing in world-class equipment and seeking out international best practices.
Some Chinese-produced wines have already received international recognition for their efforts, with one producer recently winning Decanter magazine's Middle East, Far East & Asia category for red wines. At the same time, with the increasing spread of wealth beyond the largest coastal cities, China's wine market is now expanding into smaller markets across the country.
Investing in terroir
Both Chinese nationals and foreign investors are seeking ways to capitalize on the booming Chinese wine market.
Recent examples of entries into this sector include Chinese purchases of foreign vineyards, full-service distributors catering to the unique qualities of the Chinese market, and high-net-worth Chinese investing in wine as part of their wealth management strategies.
Most attention-grabbing among these modes of market entry has been Chinese investors' acquisition of foreign vineyards. Among the first was the 2008 purchase of a Bordeaux chateau by the Cheng family of Qingdao, China.
After an extensive search, the Cheng family chose Chateau Latour-Laguens, a 150-acre property in southeast Bordeaux. Although the Chengs had been historically involved in importing wine from other global wine centers, such as South Africa and Australia, their search for property focused exclusively on Bordeaux.
Family member Daisy Cheng noted France's strong reputation in the Chinese market as the key factor in the selection: "The Chinese consider French wine to be the most authentic."
Since purchasing Latour-Laguens, the family has transformed the vineyard's strategy to focus exclusively on exporting to the Chinese market. To drive name recognition back in China, Cheng said that the family has done extensive newspaper advertising in target markets.
Following the 2008 acquisition and with the continuing strength of the Chinese economy, other Chinese parties have made foreign purchases. Perhaps most significant was the 2011 purchase of the Bordeaux property Chateau Viaud by COFCO (China National Cereals, Oils, and Foodstuffs Corp). This 100 million yuan (US$15.2 million) deal, by the owner of China's Great Wall domestic wine brand, was seen as legitimizing overseas acquisitions.
While Bordeaux has received the greatest attention, Chinese entities are broadening their scope to other major wine-producing regions. COFCO also purchased a high-volume Chilean winery in 2010.
In addition, deals have taken place in other wine production centers such as California's Napa Valley and New Zealand.
While this growing trend of overseas purchases shows no sign of abating, some wonder if resistance to Chinese ownership will grow. Past peaks in foreign acquisitions elicited significant protectionist concerns.
Palatable investment
Beyond the traditional business opportunities in production and distribution, China's developing wine market has also given rise to secondary investments. Because Chinese nationals face limited investment options of all types due to heavy government regulation, new opportunities like wine investment are particularly attractive.
In 2011, China approved the launch of the nation's first private wine investment fund. The Dinghong Fund will raise 1 billion yuan US$156 million) to invest solely in vintages from Bordeaux and Burgundy. For a minimum investment of 1 million yuan (US$160,000) and a lock-in period of five years, fund managers are promoting a potential 15 percent annual return.
The excitement around the Dinghong Fund is easy to understand in the Chinese context. Unlike countries with more mature financial services, China has a scarcity of private wealth management vehicles. Until recently, many wealthy Chinese invested their capital in the booming real estate market.
Source:china.org