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Meininger’s: Your office is in Shanghai. What brought you to China?
St Pierre: My family moved to Beijing in 1985 when my father became president of Beijing Jeep, a joint venture between the Chinese government and American Motors. At that time, though, I had just left for university back in the States, so I came to visit only during the summers. That was my first real exposure to the country. Then, in 1995, my father and I decided to start a business together. He was again living in Beijing, working for in the automobile industry, and I was running two separate sporting goods companies in California. We pooled our resources and, after studying several different business opportunities including baby care products and publishing, decided on wine because we wanted to enter the consumer goods business on the import side. We were convinced that the Chinese consumer class would grow and demand for wine with it. At that time, there were not many companies importing or distributing wine, so after we managed to convince our first brand owner to drop their Hong Kong importer in favour of one based in China, we were off and running.
Meininger’s: The Chinese market seems to have been one in which a single big importer has been dominant. Is that the sign of an immature market?
St Pierre: China is certainly still an immature market. It is also an incredibly inefficient and difficult place to operate – and one that places a premium on experience. When you add all that up, it means a company like ours that has both long experience and strong financial backing will be much better able to deal with all the challenges and opportunities China presents.
Meininger’s: It has been estimated that the bigger, established importers and distributors like yourselves, Torres, Summergate and so on handle only about 40% of imports, with the rest is being moved by smaller firms spread around the country. Is this true?
St Pierre: Yes, and you can add both Aussino and Jointek to the list of established importers who, together, probably account for only 50% at most of volume imports. If you look at value, however, it is a completely different story. The companies listed above import about 70% of value. ASC alone accounted for approximately 20% of total import value in 2007 and we believe our share will increase this year.
Meininger’s: At present, China's wineries and brewers have great national distribution for their own products, but have shown little interest in imports; but that's changing. Isn't that the biggest threat to companies like ASC?
St Pierre: Yes and no. Local Chinese wineries will surely start to import more wines, but their wholesale channels are mostly not compatible with imported wines. Their clients have become used to higher profits, but margins are much lower on imports than domestic |
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products. It takes effort to sell imported wine. You cannot merely depend on the margin to incentivize the trade. Most of the wholesalers are box movers, not real distributors.
Meininger’s: At present, imports into China benefit from the poor quality and high price of most domestic wine. Do you see this picture changing?
St Pierre: Not in the short term. Prices for ‘super premium’ domestic wines continue to increase, but quality is not getting much better.
Meininger’s: Are you becoming involved with wine production in China?
St Pierre: We would very much like to be producing and distributing Chinese wines, but must be confident in the quality or at least the potential for quality, and not just relative to what is already made here, in any local winery with which we become involved. There are about 400 wineries in China, so there is potential. That said, we don’t want to sell Chinese wines if we do not have an equity stake. We do enough of that type of business with all the wines we currently import. Ideally, we would prefer having a well-known foreign wine producer as our partner in a project like this. Our role would be to promote and sell wine; our partner’s to produce it.
Meininger’s: You set up operations in Macau, the old Portuguese protectorate, and are planning to open an office in Hong Kong. How is this developing?
St Pierre: The future success for wine sales in Macau is tied to both the convention and the lifestyle tourist traffic. We have not yet seen a sufficient increase in either of these two areas, but are confident this will happen in the next two years, especially now that duties have been removed. There are a huge number of new five star hotels rooms coming on line and these will be needed to accommodate the increased convention traffic. Once we start to see a pick up in this sector, the lifestyle tourists from around Asia as well as Europe and North America will come, too. When they do, ASC will be well positioned to provide the products and services needed by the big gaming and hospitality operators.
Meininger’s: What effect are the abolition of duties in Hong Kong and now Macau going to have on your business in China?
St Pierre: Since we had already decided to open up operations in both cities before this change, the overall effect, once our offices are fully functional, will be positive. In the short term, however, it is hurting our business because some of our private clients in mainland China are buying wines in Hong Kong to save on duty. More troubling, the smuggling of wine from Hong Kong across the Chinese border has increased dramatically.
Meininger’s: Can you really treat China as a single country and market? What differences do you see from region to region?
St Pierre: Wine is perceived much the same |
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by consumers throughout China, namely as a sophisticated, healthy alcohol towards which many people gravitate as they become more successful. In that sense the country is not that dissimilar from the north to the south. Saying that, however, the specific details of how business is conducted are quite different from north to south and east to west. To cover such a wide market, you must have strong regional teams that understand the local way of doing business, but which nonetheless stick to the overall company strategy.
Meininger’s: Have you hunted the expatriates from abroad for given skills?
St Pierre: No, not really. Most of them are people who were already in China and understand the culture. Knowing a lot about wine and nothing about China is a recipe for disaster.
Meininger’s: It is often said that the most interesting area of growth for China lies in the ‘second cities’ with populations of 1m to 5m. Is that true? And if so, how do you service them?
St Pierre: I think that is an over-simplification. There are still enormous growth opportunities to be had in the first tier cities because local consumers are only just now beginning to understand and appreciate imported wine. There are also hundreds of new restaurants and hotels opening up in these cities. Having said that, I agree that the second tier cities provide fantastic opportunities as well, which is why we are expanding the number of offices we have in China and will focus more and more on developing distribution into those somewhat smaller cities whose consumers are showing a growing interest in imported premium wines.
Meininger’s: You were under arrest for misreporting duties. What exactly happened?
St Pierre: In early March 2008, ASC was visited by Chinese customs as part of an industry wide review of import procedures for all wine companies operating in China. The investigations focused on the declared value used for the most expensive imported wines, mainly top Bordeaux. As you know, the value of some of these Grands Crus has increased dramatically since their release and customs felt that there was a discrepancy between their current market value and our declared value. Because I am the legal representative of ASC by Chinese law, customs had the right to detain me for up to 30 days while they conducted their investigation. I was released after 28. ASC and China Customs then agreed to a maximum discrepancy between our declared import value and their view of actual value of RMB1.8m ($263,876/€170,000). Given that the investigation reviewed our entire import history from January 2006 to March 2008, this sum represents less than 1% of the total duty we pad – and at no time during the investigation did China Customs interfere with our day to day operations. It was not just ASC. Many companies were and still are involved in this industry wide investigation. Overall, we |
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feel that the end result will be positive for both ASC and the industry as a whole as it will level the playing field and ensure more consistent and clear policy procedures in the future.
Meininger’s: You not only announced record sales in 2007, but also strong growth in a stagnant market for the first months of 2008. Is this sustainable?
St Pierre: Though July 2008 our sales revenue was still growing at a rate of 45% year on year, so that we now expect total sales in 2008 to exceed US$100m. Further, we have full confidence that this type of growth is sustainable into the future given the large number of opportunities that exist.
Meininger’s: What effect did the Olympics have on your business?
St Pierre: They had a positive effect not only because of the large number of new hotels and restaurants that opened in Beijing, but also like it did for Seoul in 1988, the Olympics have changed the world’s perception of China and, perhaps more importantly, China’s perception of itself. Most people outside China do not yet realize that the country’s future growth will be fuelled more and more by domestic consumption and less by low cost exports. The more exposure China has to the outside world, the more likely local consumers will be interested in products like wine.
Meininger’s: Where do you see the market in ten years?
St Pierre: China imported 18.6m litres of bottled still and sparkling wine in 2007. We estimate that this figure will increase by about 35% this year to 25m litres, or some 2.8m cases. The total domestic market for wine in 2008 will likely be approximately 60m cases, hence imported bottled wine will account for only 5% of the domestic market by volume. In 10 years, I expect bottled wine imports to exceed 17m 9 L cases, with the domestic market for wine growing to about 100m cases. If that happens, imports as a share of volume would increase from 5% to 17%.
Meininger’s: Can you describe your core customer?
St Pierre: If we define a customer as the end consumer, it is likely a local Chinese working in a privately held company, whether Chinese or foreign, making more than the RMB equivalent of $4,400 or a foreigner living and working in China making more than $14,720 a month. If we define customer as trade, it would be a four or five star international hotel, an independent Western restaurant or a high end Chinese restaurant.
Meininger’s: Is the on-trade truly such an important factor? Do you see the on-trade continuing to dominate the market?
St Pierre: The on-trade makes up about 55% of our business by value, the off trade, including wine shops, about 33% and direct sales to private or corporate clients the other 12%. The latter, however, account for only 3% of volume. Moving forward, I definitely see the |
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on-trade continuing to make up the largest share of our business, especially with the growth opportunities for high end Chinese restaurants.
Meininger’s: How is the off-trade changing?
St Pierre: For imported wine, the off-trade is still poorly developed and dominated by a combination of foreign owned hypermarkets like Carrefour, Wal-Mart or Tesco and high end department stores with fine wine shop in shops. All the foreign owned retailers have massive expansion plans, so they will continue to play a very important role, but eventually the local retailers will start to catch up and demand a larger selection of better quality imported goods to compete against the foreign owned retail chains.
Meininger’s: Do you differentiate between supermarket and hypermarkets?
St Pierre: Yes, the supermarkets tend to be more for city shoppers and often higher margins. The hypermarkets demand volume discounts and work on lower margins so they generally have aggressive prices.
Meininger’s: What price points work in China?
St Pierre: Off premise, you need a retail price of RMB50 to RMB90 per bottle ($7.30 to $13.00) to move any significant volume. On premise, most wine moves at RMB300 ($43) to RMB800 ($117) per bottle. You also have demand for the ultra premium price segment, but that is primarily the top chateaux from Bordeaux.
Meininger’s: How do prices work in China? What is the shelf price of a bottle that leaves the cellar in southern France at €2?
St Pierre: Off premise, it would cost about RMB65 or RMB70. As freight, excise, duties and such have a smaller impact on more expensive wines, the mark up diminishes. A €5 bottle would probably retail for RMB150 to RMB170. Above €10, we might be talking about as little as RMB250, which, in a way, means that the more expensive wines are comparatively cheaper.
Meininger’s: How much of the retail price is freight, duty and the like?
St Pierre: About 15-30%, depending on the retailer and the mark up used.
Meininger’s: It is said that listing fees in China can be exorbitant. Is that true?
St Pierre: Yes, the market was weaned on the beer and spirits model, so this is definitely a major challenge for wine distribution, especially as you focus more on local Chinese market penetration.
Meininger’s: It is sometimes said that the Chinese have no ‘wine culture’. What is your view?
St Pierre: China has a strong culture for alcohol, but certainly not a ‘wine culture’ as we define it. There are, however, similarities with their Huang Jiu, or Yellow Wine, in that it is aged and usually consumed with food – and there are even stronger similarities |
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between China’s tea and our wine culture. Overall, though, I do not see their lack of wine culture as being a barrier to the future development of wine sales. They understand the importance of place or site from tea, they understand the importance of aging from yellow wine and other alcohols and they understand the concept of food and beverage matching.
Meininger’s: What sort of wines work particularly well?
St Pierre: A brand that has strong labels from the entry level up to the super premium price point usually does well. Santa Rita [from Chile], for example, has received international recognition for its value for money entry level range, good marks for its excellent wines in the Reserva range and then accolades for some of the highest rated wines from Chile. That is a concept that consumers here understand.
Meininger’s: Santa Rita is from Chile. Don’t French wines have the largest market share?
St Pierre: Yes, by far, in particular if you look at value rather than volume. About half of our turnover in value is done with French wines.
Meininger’s: After France?
St Pierre: Australia follows with 20%, Italy with 8% and the USA with 7%. South America, including both Chile and Argentina, does about 7% as well. South Africa is only half of that.
Meininger’s: Are rising prices for the finest French wines affecting your business?
St Pierre: We still sell a lot of high price claret, but, yes, value is becoming an issue, especially for regular drinkers. This is why Chilean Cabernet Sauvignon, in particular for banquets, is beginning to take off. However, the gatekeepers are influencing this development. There are still so many new consumers coming to the market as occasional drinkers and they generally want the best.
Meininger’s: How many Chinese actually drink wine?
St Pierre: I have no idea. There are still so many poor people here who don’t even know what wine is. Probably only 400m Chinese out of the total population have the means or interest to even try wine. Of those, I would guess 2.5% might drink wine on anything near a regular basis. That would nonetheless be about 10m. Wine is only 5% of total alcohol consumption in China – and that includes Chinese wine, which in many cases might not be wine at all. It doesn’t take much imagination to think that wine might be 10% of the market in ten years time, with a larger percentage of that being either imports or better Chinese wines.
Meininger’s: Chinese prefer red wines, but don’t whites work better with the food and climate?
St Pierre: Generally speaking, yes. White wine works better, but not so much because of climate, more because of food. The Chinese normally have a wide variety of dishes on the table at |
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one time, which everyone shares. Somewhere within the mix of food there is going to be spicy or sweet foods, which do not work very well with wines that have a lot of tannin. The consumer, however, prefers red, which as a colour is associated cultural with strength and power, so we normally recommend a less tannic red wine.
Meininger’s: Where do you see the opportunities?
St Pierre: There are so many opportunities. Demand for imported premium wines will continue to grow and we will work to ensure that our company is positioned properly to deal with the many opportunities that result from this increase demand, via geographic expansion of our distribution points within China, acquisition of premium local growing and production facilities as well as continued improvement of our internal management systems.
Meininger’s: What threats to your business do you see?
St Pierre: As I said earlier, the large local wine companies will develop a strong interest in the imported wine segment. This will not be much of a threat in the short term, because the current distribution channels for domestic wines are not compatible with selling imported wines. However, the market is changing quickly and eventually they will become a larger competitive threat than some of the current importers we are now competing against.
Meininger’s: Has China now become your new home?
St Pierre: My wife is from Shanghai. We have two daughters, so I’ll be here for a long time.
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