What's Souring Western Wine & Spirits in China?

Announcements from the luxury group LVMH stated that its Wine & Spirits category is still performing well in China and that the country did contribute to the brand’s category growth during this year’s third quarter. But despite this news, the market remains weak, and a wakeup call might lie ahead for winemakers and spirits brands in the final months of 2019. Pernod Ricard, the second-largest spirits group in the world after Diageo, recently released its first-quarter revenue figures, and it showed softer demand in both China and India compared to the previous year. According to Reuters, China is a particularly weak spot for the beverages giant, with sales growth in the country reaching only 6 percent in the first quarter — a large drop from the 27-percent quarter it saw a year ago. Pernod noted that Chivas sales have declined in China due to “challenging market conditions.” The spirit undoubtedly wasn’t helped by the U.S.-China trade war, a devalued yuan, and an overall anti-conspicuous-consumption atmosphere leading up to the 70th anniversary of the founding of the People’s Republic. Pernod did see its Martell cognac benefit from a price rise in China but noted that sustainable inventory management impacted volumes. Observers are also watching Pernod’s largest competitor, Diageo, to gauge the impact of uncertain market conditions in China this year. The group painted a cautiously optimistic global picture in its recent 2019 fiscal earnings report while admitting that it’s “not immune” to changes in global trade policy (i.e., the U.S.-China trade war). The vastness of Diageo’s wine and spirits portfolio, and its use of partnerships like a recent whiskey venture with Jiangsu Yanghe Distillery, means risk is somewhat mitigated for the company in China when a certain spirit or wine sees a drop in popularity, is impacted by currency fluctuations or tariffs, or is targeted in anti-corruption initiatives. The wine market is another vertical under close industry scrutiny, as winemakers wait to see the impact an uncertain China market will have on both importers and domestic wineries. Last year, China imported 404 million (2.86 billion yuan) of wine — a lackluster year that saw imports shrink by nearly 9 percent and value level off with a mere 1.1 percent rise. Wine importers and winemakers widely expect much of the same in 2019. However, there are still a few signs of new life in the wine market in China. Last month, Château Lafite Rothschild uncorked its first bottles of domestically produced wine, the Domaine de Long Dai 2017. Wine critic James Suckling rated the wine as “outstanding,” adding that Lafite built “what must be the best winery in China,” while wine writer Jancis Robinson said that Domaine de Long Dai “is as bone dry as the Bordeaux first growth, utterly correct if not absolutely stunning” and said that she expects the 2018 vintage “to be even more beguiling.” Regardless of how Lafite’s 155 (1,100 yuan) 2017 vintage fares in China and abroad, the market is continuing to evolve, as are China’s drinkers. Over the past two years, winemakers have generally seen that Chinese consumers are increasingly willing to spend more on quality wine while the lower end of the market is softening. So, for 2019, the most likely outcome will be a continued slide in wine imports and perhaps a conservative increase in value, with China’s active wine lovers buying less but better wine. Mass-market drinkers will likely continue to favor South American, Australian, and sometimes domestic wines to the detriment of Californian producers. The big picture shows that little has changed to increase optimism since this past summer when the managing partner of importer and distributor for Torres China, Alberto Fernandez, said that he expects China’s wine market to remain flat for 2-3 years.

Sectors

Insights

Company

What's Souring Western Wine & Spirits in China?