Chinese wineries are looking to secure resources and good PR by purchasing land in Bordeaux
Following the Chinese state-owned conglomerate COFCO's recent purchase of a 49-acre château in Bordeaux and takeover of the Chilean winery Biscottes, it appears that China's thirst for wine has pushed its "big three" winemakers far beyond their country's borders. Though domestically grown grapes account for the majority of wine sold by the COFCO-owned Great Wall and its main competitors Dynasty and Changyu, the stated ambitions of these wineries (which make up more than 90 percent of the Chinese wine market) to move up the value chain and potentially into international markets has seen them scouring the world's best wine-growing regions looking for bargains.
While the relative cheapness of land in places like Bordeaux or Chile is certainly a factor in the decision by Chinese companies to branch into uncertain lands, there are two arguably more important selling points: the quality of the land and the PR value. Though the quality of made-in-China wine, particularly from smaller independent wineries like Grace, is gradually increasing, once Chinese wineries get past a certain price point, most domestic consumers will simply pass it over for a similarly priced imported brand. Despite attempts by companies like Great Wall and Dynasty to overcome this tendency among their potential buyer base via elaborate packaging -- which makes these bottles ripe for gift-giving -- a general, subconscious preference for imports at the high end consistently stymies attempts by the "big three" to drop their low-end albatross.
Buying a chateau in Bordeaux -- the land of China's preferred plonk -- could bring COFCO a steady supply of comparatively high-quality grapes and French know-how, but will (with almost absolute certainty) give it an invaluable PR boost in China. And COFCO is not the first or only Chinese company to rely on the weight of the Bordeaux name in China -- as of this week, Chinese enterprises have purchased five wine châteaux in the region: Latour-Laguens in 2008, Richelieu in 2009, Chenu Lafitte in 2010 and De Viaud and Laulan Duclos in 2011. Industry analyst Chen Gang recently told the Global Times that these moves are a no-brainer, saying, "Wine culture is originally from the Western world, and people generally believe Western wine, especially French wine, is the best. Therefore, the purchase of a French chateau is absolutely a plus for the company's image." Continuing, Chen said that the wine production model at a chateau "represents premium production skills and higher quality, which is different from mass-produced wines."
COFCO Vice President Chi Jingtao (R) and Wu Fei, head of COFCO Wine & Spirits branch, attend a ceremony marking the purchase of the Chateau de Viaud in Bordeaux, France, Feb. 16, 2011 (Image: News.cn)
Though COFCO/Great Wall's French foray is unlikely to gain it many new customers in Europe, the domestic Chinese market should provide no shortage of opportunity any time soon. Wine consumption is expected to top 219 million gallons (828 million liters) in 2011, with industry analysts like Chen Gang forecasting around 20 percent annual growth in coming years. While COFCO Vice President Chi Jingtao (迟京涛) recently admitted that it'll be years before his wines make inroads among Western wine-lovers, he seems to be confident that COFCO's new "sell wine to Chinese, buy land overseas" strategy will pay off -- and he's got his sights set on even more distant trophies. From iFeng (translation by Jing Daily team):
Chi Jingtao stressed that COFCO's acquisition of wineries in Chile and France is focused on securing resources -- point of origin resources, brand resources, and product resources -- while helping to implement industrial chain management systems, from grape growing to wine production. COFCO has said that it will gradually increase its speed of international investment, and
in the future will target many wineries in countries like Italy, Australia, the United States and South Africa for takeover
However, COFCO isn't the only Chinese winemaker with eyes on acquisitions, not just abroad but at home as well. As iFeng continues,
Dynasty also wants to accelerate its pace of overseas expansion. The company recently acquired a winery in Australia and also plans to invest huge amounts of money into vineyards in France, New Zealand, Chile and other places.
High-quality grape-growing land in mainland China is also a hot commodity. In November 2010, Dynasty signed a cooperative agreement to secure wine-growing land from six divisions of the Xinjiang Agricultural Division, and winemakers like Grand Dragon (威龙) are also trying to increase the footprint of their vineyards. In recent years, leading winemaker Changyu has continuously snapped up land in Xinjiang, Ningxia and Shaanxi.
We're currently seeing some interesting trends forming in the battle for the Chinese wine glass -- trends that are somewhat contradictory. One one hand, major winemakers are fighting to secure more (and better) land in regions like Xinjiang and Ningxia that have grown grapes for centuries, yet these acquisitions will likely benefit production volume more than wine quality in the short to medium term. Winemakers likely won't worry that much, however, as internal demand at the lower end will sustain revenue for the time being.
On the other hand, these cashed-up winemakers see imported French, Spanish and American wineries dominating the Chinese wine market at the very high end (and at auction) and want to move up the value chain and compete based on quality rather than just packaging. That's where their foreign acquisitions come in. A bottle of Changyu, or Great Wall, or Dynasty Bordeaux that actually comes from Bordeaux might make the high price more palatable for Chinese consumers. But if pricing is set too high, Chinese consumers might just think, why should I buy a bottle of Bordeaux from a Chinese company when I can buy a French brand for the same price?
Leaving aside the potential issues that a giant Chinese state-owned conglomerate like COFCO might encounter while trying to take over a winery in places like the United States, overseas acquisitions are a rational next step for Chinese winemakers and PR-hungry entrepreneurs, one that Korean and Japanese companies took in the 1980s and 1990s. While they might make Chinese companies look good at home, and help them secure raw materials and know-how, whether they'll ultimately help these companies appeal to Western consumers, or compete with imported juggernauts like Chateau Lafite in China, remains to be seen.