Challenges and Opportunities in China's Wine Market

Wine importer St. Pierre delivers Walt Klenz Lecture at UC Davis

by Ted Rieger
Former Beringer CEO Walt Klenz introduced ASC Fine Wines co-founder Don St. Pierre, Jr. who discussed the wine import market in China as part of the Walt Klenz Lectureship Series at UC Davis last week. 
Davis, Calif.—China’s imported wine market grew at an average rate of 60% each year from 2003 to 2013, expanding from 600,000 cases per year to 31 million cases per year; however, market growth declined for the first time in 2014. While China offers good opportunity for wine sales, recent changes in government policy and the economy also present new challenges. This was the message from Don St. Pierre Jr., co-founder of ASC Fine Wines, the largest importer and distributer of premium imported wines in China, who discussed the history, challenges and future of China’s wine market during a lecture at the University of California, Davis, on Nov. 6.

St. Pierre spoke as part of the Walt Klenz Lectureship Series, sponsored by Treasury Wine Estates, and named in honor of former Beringer Blass CEO Walt Klenz. The series started in 2006 and is presented by the UC Davis Robert Mondavi Institute and the Department of Viticulture & Enology to have wine business leaders share insights and experiences with students, faculty and industry attendees.

During his introduction, Klenz recalled how St. Pierre and his father came to Beringer in the early 1990s with a proposal to sell Beringer wines in China. Klenz said they did a great job introducing the brand when the Chinese market was starting to grow. Klenz observed, “I don’t think anybody in the world knows more about the wine market in China than Don.”

ASC background
In the mid-1980s Don St. Pierre Sr. was an auto industry executive in China, where he saw opportunities as the country’s economy expanded. St. Pierre Jr. and his father founded ASC Fine Wines in 1996. Today, ASC is the largest premium wine importer and distributor in China and the exclusive importer of more than 100 wine brands from Argentina, Austria, Australia, Canada, Chile, France, Germany, Hungary, Italy, New Zealand, Portugal, South Africa, Spain, and the United States. ASC represents U.S. wine brands including Beringer, Cakebread, Chateau St. Michelle, The Hess Collection, Joseph Phelps and St. Francis Winery & Vineyards

In 2010, global beverage company Suntory Wine International acquired majority interest in ASC. St. Pierre served as CEO of ASC until 2012, when he assumed the position of executive chairman of the board. In May 2014 he was named senior advisor to Suntory and continues as a member of the ASC Board.

China’s wine market history

Chinese residents’ interest in wine began increasing in the 1980s, when government policies supported domestic grapegrowing and wine production in an effort to shift alcohol consumption away from domestically produced high-alcohol spirits made from Chinese grain. Wine was viewed as a healthier alternative beverage, and the grain used for alcohol production was needed for food. China’s domestic wine production and sales expanded. But as St. Pierre explained, “The prices of domestic premium wines kept going up. The quality of the wine was not getting better, but the packaging was.” He further explained, “Chinese consumers started to understand that domestic wines were not so good, and they were not offering the same quality and value as imported wines.”

An important driver in sales during China’s economic expansion was that wine purchases were strongly tied to entertaining and gift-giving by government and business officials for building relationships. Bordeaux wines dominated the import market, totaling nearly 50% of all Chinese wine imports.

“An important part of our success is that we didn’t know a lot about the Chinese wine industry, so we began with no preconceptions,” St. Pierre said. “We developed a ‘China first’ strategy (focused on the Chinese consumer and culture) and a wine strategy second,” he added. He listed four challenges ASC encountered in the Chinese market and how the company successfully addressed them.

1. Low consumer understanding of wine. ASC focused on education for wine service professionals and consumers, being the first company to bring Wine and Spirits Education Trust (WSET) training to China. As a result, ASC became the most trusted source of premium imported wine.

No effective distribution system in China. St. Pierre said, “We had to build our own. This created our sales/distribution channel, and we became a more sustainable business.”

3. Understanding Chinese regulations and regulatory agencies. In the early years, ASC did not have relationships with the government, but it later began educating government officials about wine with the same approach it used to educate consumers. “ASC is now viewed by the central government as the largest and most professional importer in China,” St. Pierre said.

4. Increasing fake and counterfeit wines creating uncertainty in the wine market. “This became an advantage for us, because we were more trusted than any other wine company,” St. Pierre said.

At the end of 2013, there were a total of 4,500 registered wine importers in China and total sales of $1.3 billion. ASC was the No. 1 wine importer based on volume and value in 2013.

Trends, challenges and opportunities

St. Pierre said the recent decline in wine sales growth is related to changes in government policy with an anti-corruption and austerity campaign instituted by new Chinese president Xi Jinping, who became leader in late 2012. To combat corruption, government officials, the military and government-owned enterprises are now banned from hosting the kinds of lavish dinners and excessive gift giving considered acceptable when the government was promoting economic growth. China is undergoing a massive economic restructuring away from government infrastructure investment and business investment, and this has affected many business sectors in China.

St. Pierre summarized: “On the whole, people are more interested in wine. They think it is more healthy than other alcoholic beverages, and this trend will continue. But government spending and its effect on wine sales has gone away.” He listed several positive trends to be aware of in the current wine market in China.

• Wine buyers are now the wine drinkers. It’s a more real market, and that’s a good trend.

• A much broader base of consumers are being exposed to imported wines, and the wines represent a broader range of source countries, styles and varietals. There is less dominance by Bordeaux.

• Consumer knowledge levels are increasing.

• Opportunistic and less successful wine traders are exiting the market, and consolidation is occurring in the supply chain.

• There is higher use of online channels to learn about and buy wine.

• Wine growth trends include more younger consumers and female consumers. Noting that just 15% of the Chinese wine market by volume is white wine, St. Pierre said higher numbers of female wine consumers should increase white wine sales growth.

At the end of 2013, ASC had more than 1,000 employees and offices in 20 Chinese cities. St. Pierre said the company is in the process of consolidating offices to focus on a target market in about 10 of China’s largest cities. With the government consumer market gone, St. Pierre said, “All our investment today is to bring wine closer to the end consumer.” He also noted, “China is a great place to sell wine because people drink it at the dinner table.”

In some ways, the regulatory environment in China is more favorable than in the United States. “There is relatively little regulation as to who can sell wine,” St. Pierre said. He continued: “As an importer, I can set up a retail shop if I want. There is no three-tier system, so it’s possible to be vertically integrated for sales.”

St. Pierre believes there is good opportunity for U.S. wineries in China. There are more Chinese tourists and investors visiting the United States, where they become familiar with American wines. San Francisco, Calif., is a popular destination for Chinese tourists, and Napa Valley is a side trip for many of them. St. Pierre summarized, “The opportunities for U.S. wines are tremendous in China, but there are also good opportunities for other wine-producing countries.”

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