Is China a Long-Term Play for U.S. Wine?

Viewpoint Column: Why American wine lags in the Chinese market and how to fix it

by Jim Boyce
As wine exports to China have more than doubled in recent years, U.S. wine has lost market share to other wine producing nations such as Australia and Chile. Photo Wiki Commons.

San Rafael, Calif.—It sounds crazy but the United States sent less wine to China in 2017 than 2011 despite the imported wine market more than doubling there from 26.8 million to 61.5 million 9-liter cases. The Wine Institute listed 1.58 million cases of exports to China last year, down from 1.79 million cases seven years earlier, a performance as flat as week-old Schramsberg.

While the value numbers are better, the U.S. has nevertheless lost much ground in the China market. It is now a distant sixth as a wine source, behind France, Australia, Chile, Spain and Italy and has less than half the market share it held in 2011.

This reality check comes at a time of major change for U.S. wines in China. On the distribution front, a key story is the parting of importer Nanpu from E. & J. Gallo Winery and its Carlo Rossi brand, which has represented a major chunk of U.S. sales in China.

On a macro level, China put an extra 15% tariff on U.S. wine this year in response to U.S tariffs on Chinese goods (see related article, May issue Top Stories). Plugged into a formula with value-added and consumption taxes, it means the fee to enter China is now roughly 67% instead of 48%. That is a substantial burden given competitors like Chile and Australia, with free trade agreements with China, can soon or already avoid the default 14% import tariff.

But even without Gallo's issues and that extra tariff, U.S. wine sales have long been stagnant. Why is this so, what could change the situation, and should anyone care?

Wine pros
U.S. wine sellers have big advantages in China. Food safety is a key concern — clients in China have some 30,000 "personal shoppers" in Australia alone to source items like vitamins and baby formula — and U.S. products are typically deemed high quality. U.S. producers also tend to use grapes that consumers are most likely to know, such as Cabernet Sauvignon, Merlot and Chardonnay. And the U.S. is a key destination for Chinese tourists, students and workers, thus providing exposure to American culture and products, including wine. Even those who do not visit tend to know quite a bit about the U.S., certainly more than the other way around.

There have also been intriguing U.S. wine promotions in China. A shining example is the 21-city California wine master class tour by The Wine Institute from mid-2015 to mid-2016, followed by a second tour last year. That got U.S. wines to key opinion leaders in emerging markets far beyond Beijing and Shanghai—more than 100 cities in China now have a population of over one million.

Along with the master classes, the Wine Institute has organized wine fair pavilions, export tours for wineries, and tasting events for trade, consumers and key opinion leaders, including at the U.S. Embassy in Beijing. Last year, it organized a six-week promotion with restaurant chain Element Fresh, which specializes in California-style food in a dozen cities. Other U.S. wine entities have also tapped the China market, most notably Napa Valley Vintners.

With these advantages and initiatives, why are import numbers so low?

Wine cons
Price is a key issue. When President Xi Jinping slashed luxury goods spending by officials and state-owned enterprises five years ago, expensive trophy wines were hit hardest. Consumers have since buoyed the market but many tend to be lower-volume, price-sensitive clients. Sellers seeking the high margins of the past are turning to big markups on cheap wines—the average Spanish bottle is claimed at U.S. $1.50 at customs — or private labels that, in essence, dupe consumers. That makes cheaper U.S. wines largely a no-go, especially as they tend to leave a price trail on sites like wine-searcher.com.

Then there is visibility. U.S. wines are relatively rare on store shelves and restaurant menus. I took a Napa Valley Vintners delegation on a retail tour of Sanlitun, a Western bar and restaurant hub in Beijing, 20 months ago. We visited wine bars, shops and supermarkets and found few U.S. options: David Stone wines in a corner shop, an OEM Zinfandel in a wine chain, a Silver Oak-like label in a supermarket. Yet we saw craft beer from California, Oregon, Vermont, Michigan and elsewhere, selling for far more than local brews and showing a demand for higher-priced, quality U.S. products.

There is also the issue of urgency. France, Chile, Italy and Australia are more dependent on exports, while the U.S., the world's top wine market, drinks most of what it makes. On a well-organized Sonoma County Vintners trip a few years ago, I was puzzled at how few trade people asked me about China. When I pushed, I was told sales to China were negligible, or even nonexistent, with a market like Canada more important.

A look at the numbers bears this out. Wine Institute figures state that only 12.5% of production is exported and, in 2017, only 3.7% of that went to China. That translates to about 1 out of every 250 bottles, one-sixth of what is shipped to Canada.

That doesn't mean China is irrelevant by any means. Consider the Hong Kong factor: in 2017, that duty-free zone ranked fifth by volume for California exports (behind the EU, Canada, Japan and China) and, impressively, third by value (behind the EU and Canada) as a destination for U.S. wines. And it offers a gateway to China.

“With a population of just about 7.3 million, we didn't empty all the 80 million bottles [we imported] ourselves—about half of the wine imported into Hong Kong was re-exported," said Paul Chan, Hong Kong’s Financial Secretary, at last winter’s Hong Kong International Wine & Spirits Fair. "It shouldn't surprise anyone here that the massive market of the mainland of China is the key destination of our wine re-exports.”

But even with China and Hong Kong combined, the total volumes and values are still relatively modest. The lure of a potential billion customers might glow but there is also the reality of where you are going to make your money next year.

Finally, there is market readiness. For all the talk of a new wave of Chinese consumers who buy wine based on taste and who are targeting the mid-range niche, the market still sees polarization between those who seek trophy wines, still typically from France or the Australian brand Penfolds, and those who circle the bargain bin for the cheapest wine possible.

U.S. wine consumers, on the other hand, seem to be more well-informed. I've written for Wines & Vines before about how faking U.S. wines is less lucrative because consumers of such labels are more knowledgeable. And those already committed to paying more than the minimum for wine provide some insulation from price rises due to tariffs.

In other words, a lot of factors — pricing, a (lack of) a sense of urgency by producers, and a still emerging taste-based market — suggest U.S. wines might simply be a longer-term play. You can't always force a result.

The long game
Does this mean we lack ways to encourage more Chinese to drink U.S. wines now? Approaching the market on a national, rather than a state or regional level, might help. Both for those who don't know that the U.S., let alone California, makes wine, and for those who have studied, worked or visited beyond in wine-producing states such as Oregon, Washington, New York and Virginia. To this end, American Wine Merchants recently teamed with the U.S. government to make online sales easier for U.S. wines as a whole.

Reaching out to consumers with U.S. experience would also help. Last year, the American-owned wine club Sig Wine organized a Beijing tasting for 130 U.S. alumni group members. These are attendees who have extensive stateside experience, are interested in wine and are flush with disposable income. The tasting was not for U.S. wines but easily could have been.

And, in a similar vein, further pushing wines in venues with an American theme would reach people already predisposed to U.S. products. Going to an "American" restaurant that serves De Bortoli by the glass does not inspire.

Beijing-based Canadian Jim Boyce has covered China’s wine scene since 2005. He founded the website Grape Wall of China in 2007, has written about the wine market for a wide range of publications, and regularly organizes wine events for consumers and trade.

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