Pressure Mounts For China’s Winemaking Hopefuls

China Imported US$1.1bn In Wine This Year, 24% Increase Over 2011

French imports dominate the high end of the wine market

Although upstart boutique wineries in China continue to gain accolades for the steadily increasing quality of their wine, and the country’s massive Changyu is set to hit store shelves in Britain, consumer preferences and quality control concerns are putting greater pressure on domestic winemakers.

According to recent Chinese customs reports, China imported 200 million liters of wine in the first half of 2012, a 12 percent increase year-on-year, with these imports valued at US$1.1 billion, a 24.1 percent over 2011. While domestic wines still account for around 75 percent of sales in the country, most sales remain at the low end of the market, meaning winemakers — particularly the country’s “Big Four” (Changyu, Great Wall, Dynasty and Dragon Seal) — are often engaged in a race to the bottom, both in terms of pricing and profitability.

As domestic winemakers fight to improve their competitive position against dominant Western winemakers, Wang Zuming of the China Alcoholic Drinks Association told China Daily this week that the rivalry between Chinese and imported wineries has “never been so intense.” Currently, France, Chile, Australia and Italy account for 82 percent of wine imports in China, with an ever-increasing number of small-time wine importers in China, a lowering of prices since 2008, and improved distribution and sales channels helping wine imports rise from 114 million liters in 2006 to more than 283 million liters in 2010.

According to Zhang Zhigang, an analyst at Rising Securities, based on current projections, imported wine may eventually account for 50 percent of the China wine market.

As imports have skyrocketed in recent years, domestic winemakers have seen profits drop (Image: China Daily)

Along with the perceptions of greater prestige that go along with drinking imported wine, status-obsessed Chinese consumers have also broadly turned to French or Australian wine because of concerns about the quality of domestic reds and whites. Though product quality has, by all accounts, improved dramatically over the past decade, China’s massive winemakers are not immune to scandals. Last week, Shanghai Daily reported that high levels of pesticide residue had been found in 10 samples from three wineries, including Changyu. (The news sent Changyu shares tumbling 9.8 percent last Friday to a two-year low, though they have recovered somewhat.) Though Changyu’s website said this weekend that the pesticide levels found in the tests were lower than limits set by the EU, the bad press in the wake of a number of food safety scandals is exactly what a Chinese winemaker does not need right now.

Regardless of recent media incidents, the country’s wine giants have simply had a bad couple of years overall. Great Wall’s sales fell 2.1 percent year-on-year in 2011, while Sino-French joint venture Dynasty saw a 10.5 percent tumble the same year. As for Changyu, its revenue fell for the first time in five years in the first half of 2012, dipping 2.5 percent year-on-year to 3 billion yuan (US$470 million). In an attempt to reposition itself as a premium winery, Changyu for one has gone on the offensive over the past few years, employing European consultant Lenz Moser to oversee some of its development work, building the sprawling Chateau Changyu-Castel with French wine company Castel in 2002, and planning to open a sprawling “wine city” in Yantai by 2016.

Emma Gao (高源), chief winemaker at Silver Heights (Image: Silver Heights)

While the Big Four continues to struggle for better profitability in the face of intensified competition from at home and abroad, opportunity clearly remains for China’s small boutique producers, which are positioned more highly up the value (and quality) chain than the likes of Changyu and Great Wall. Last year, the Ningxia-based winery Helan Qing Xue’s Jia Bei Lan Cabernet Dry Red 2009 won China’s first-ever “International Trophy” at the Decanter World Wine Awards — where Chinese wines took home 11 medals in all — and soon after, Ningxia-based wineries took the top four spots in the “Ningxia vs Bordeaux Challenge” in Beijing, a blind tasting of 10 wines judged by Chinese and French judges. At this May’s 2012 Decanter World Wine Awards in London, Chinese wineries increased their medal haul yet again, receiving 18 accolades in total: five commendations, 10 bronze medals, two silvers and one gold.

As Decanter publishing director Sarah Kemp put it, China’s continuing success at the 2012 Decanter World Wine Awards ”yet again confirms that it is a country to watch,” adding, “We are just beginning to see a glimpse of its potential.”


Market Analysis, Retail