THE Chinese are increasingly consuming wine, including foreign wine. This is not because they are toasting an end to corruption or celebrating the democratic credentials of their leaders, but a result of their rising prosperity and changing social customs.
It is lucky for the Australian wine industry that they are. To put it delicately, our wine industry is in manure up to its earlobes. A lot of cashed-up city people who had evidently never heard of deer, angoras or ostriches invested in vineyards in the last 20 years, with the result that there are now far too many grapes being produced. And that was before the slump in international markets and the rise in the Australian dollar.
An interesting report just released by Rabobank examines the Chinese wine market and some of the factors that Australian wine exporters will need to address if they are to benefit from its growth.
That growth is impressive. The report estimates the supply of grape wine to the Chinese market rose 14 per cent to roughly 1.4 billion litres in 2011, of which approximately 17pc or 241 million litres was supplied as foreign bottled wine, a 65pc increase.
A further 120 million litres of bulk wine was supplied, much of it sold as domestic product. Bulk wine is subject to higher duty than bottled wine, the opposite of most markets, as it is viewed as an industrial input. It is also quite price sensitive; Australia sold a lot of bulk wine to China in 2010 but much of this was replaced by lower priced European wine in 2011.
Despite the growth, awareness of wine among Chinese consumers is low and the market remains embryonic. Each wine consumer drank an average of six bottles of wine in 2011 with just a quarter of those drinking four or more bottles in the past six months. This is ridiculously small compared to Australia’s average of 40 bottles per adult over 15 years of age.
Demand for wine is concentrated in the biggest cities and among the more prosperous members of the 20-40 age bracket. Apart from the time lag, this is similar to other markets for western food and perceived luxuries that have emerged with rising living standards.
That does not make it predictable or easy to capture. Some aspects of the Chinese wine market are quite unique. For example, wine is typically consumed outside the home in a social setting rather than with meals. This is in contrast to the consumption of beer and baijiu (a popular white liquor distilled from sorghum or rice), which are commonly consumed at home with meals. And although female consumers are more important in the wine market than the market for beer and baijiu, all three are dominated by males.
Given its potential size and growth, Australia obviously needs to develop a secure position in the Chinese wine market. Our glut of grapes would quickly become a shortage if enough Chinese were to decide wine is preferable to beer or baijiu.
But for that to happen, the Rabo report suggests, there are all sorts of logistical, marketing and government obstacles to overcome.
Distribution is highly fragmented, making market access complex and requiring thousands of distribution relationships. Associated with that is whether and on what basis to establish partnerships with local companies.
Fortunately for foreign wine suppliers, the growing appeal of imported wines is expected to encourage domestic companies to promote it. But domestic companies also receive assistance from provincial governments to increase supply and raise the quality of local wines, often with foreign wine company guidance, and there are foreign ownership regulations, taxes and tariffs, and public policies regarding alcohol consumption to navigate.
Continued market growth will depend on growing consumer awareness and understanding of wine. Provided they maintain their quality positioning relative to domestic product, foreign bottled wines should automatically benefit from any growth that occurs.
In that context branding will become important as consumers learn that not all wine is the same. But branding in such a huge market will be enormously expensive and Australian exporters may need to consider whether to establish a Brand Australia as a way of maintaining differentiation.
Currently the French have the biggest share of bottled imports in China, with Australia in second place but a long way behind. It is not difficult to envisage Chinese consumers beginning to recognise wine as originating from France, Australia or Chile, and perhaps knowing the difference between the major grape varieties, but it is hard to see them recognising individual labels any time soon.
Those people who invested in vineyards in the hope of a wine-funded retirement could do worse than serve a glass of wine to Chinese visitors to Australia. The exposure of Chinese consumers to the outside world is one of the factors driving an increased appetite for western products including wine.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at email@example.com