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The conversion of Hong Kong from a high-duty wine trading environment to a duty-free zone has been effected with remarkable speed and efficiency over a two year period. The process was driven by the Department of Trade and Industry whose objective was to turn the region into the fine wine hub for the Asian market.
With Hong Kong the best established wine market in Asia there was something of a simple logic to this thinking. Hong Kong had other obvious merits of which the most important was probably the transportation and logistical network destined to imbue users with confidence that the unique specifications of wine handling could easily be met. It was also an important gateway into mainland China, for whose wealthier citizens Hong Kong delivers a degree of product authenticity not easily guaranteed elsewhere in the Republic.
Driven by China
By the time the authorities had taken the decision to abolish the tariffs on wine, they already knew that over 20% of fine wine auction turnover and as much as 40% of the UK's fine wine sales are attributable to greater China. Some - but not all - of this demand emanates from Hong Kong. However, as long as a duty and excise arrangement which effectively doubled the final cost to purchasers remained in place, investors generally elected to leave their acquisitions in bonded storage in the West.
Part of the gamble – the trade-off between revenue loss and increased economic activity - resided in how Oriental speculators would respond to this new opportunity. Would they continue to act as before, keeping most of what they bought close to where it could easily be sold and only repatriating a small percentage destined for home consumption? Would they take the risk of moving the wine and creating a localised trading environment through which to generate their own exchange?
Given the growth of interest in fine European wine amongst wealthy consumers in India and South Eastern Asia, part of what was at stake was whether China could become in time a first port of call for this new generation of wine buyers. It was a matter of equal concern whether Hong Kong could profit from the anticipated growth in the fine wine trade in China. By 2012 China is forecast to be the eighth largest wine market in the world. Much of this business is at the very commercial end of the spectrum, where margins only allow for the most cost efficient logistical arrangements – and these would necessarily preclude any indirect transaction. However, if Hong Kong were to become a springboard for a more premium selection attempting access to the total Chinese market, the business case for surrendering limited customs and excise revenue from domestic consumption in Hong Kong could easily be justified.
The Trade Department also saw an opportunity to develop the storage and logistical capability of Hong Kong – at least to the extent that the requirements associated with fine wine handling create new opportunities |
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News Analysis |
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for growth and business activity in this sector. With fewer than 10 000m2 of appropriate warehousing available, and a perceived demand for roughly ten times this amount, this aspect alone could come to justify in new revenue the loss of tax income.
Volume or value?
The abolition of the wine duty took place over two years: the first cut saw a 50% reduction in the prior tariff. A year later, the balance was removed – making wines consumed in Hong Kong or dispatched to another tax regime entirely duty and excise-free. In very little time there would be an opportunity to test the assumptions upon which the strategy had been based – beginning with the question of what would happen to consumption patterns in the domestic market.
One of the questions arising from this strategy was whether it would encourage the consumption of greater volumes of wine, or whether wine drinkers would elect instead to trade up. Since the Hong Kong authorities were ready to embrace the idea of wine as a relatively healthy alcoholic beverage (particularly compared with the spirit culture prevalent in many parts of China) they were prepared for either outcome. In the first year alone the average ex-cellar price of wine purchased by Hong Kong consumers increased from HK$40/L to HK$50/L This trend continued into the second year, although exchange rate weakness, as well as what people in Hong Kong like to call “the financial tsunami” has obviously played a role.
At this stage France is the dominant supplier to Hong Kong, with year-on-year growth from 2007 to 2008 showing 23% by volume and 61% by value. The US however – working admittedly from a smaller base – has seen a volume growth of 82% and a value growth of 141%. Volume out of Italy remained stable, but the value component has increased by 31%. Overall volumes into Hong Kong grew by 30%, while the value increased by 80%.
There is no doubt that this trading shift has led to something of a polarisation in what is sold. The literage increases partly reflect the better value message in outlets servicing Hong Kong's middle classes and the tourist contingent. The locals appear – on the strength of anecdotal evidence – to have more or less maintained their volumes and to have used the windfall to buy wines which in the past would have been vastly more expensive. In the hotels and restaurants however, tourists are probably buying wine more frequently than would have been the case when duties totalled 100% of the wine value.
Fine wines boom
On the auction front however, business has taken off. Several major auction houses – including Bonhams, Acker Merrall & Condit, Zachy's and Christies - have hosted massively successful sales since the duty abolition. Judging from the record prices attained, even after the collapse of international markets in September last year, it seems fair to assume that this component of the purchase mix |
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News Analysis |
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Page 3 of 3 |
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will continue to create its own momentum.
Boris de Vroomen, managing director of MHD (Moet-Hennessy) and co-chairman of the Hong Kong Wine and Spirits Coalition – which lobbied for the tax change – is, unsurprisingly, delighted with the result. "One year after the government decided to abolish the tax we conclude the impact has been very positive,” he said. “As a matter of fact the development of Hong Kong as a fine wine hub has been taking place much faster that I had imagined before the tax was scrapped.....(In) the wine auction business Hong Kong has already overtaken London. All major auction houses are present in the market and are holding two to three auctions per year.” He went on to say that the business impact on Moet-Hennessy “has been certainly positive and the abolition of the tax provided a strong stimulus to our Champagne and wine business, especially for the luxury Champagnes such as Dom Perignon and Krug."
Nicholas Pegna, managing director of Berry Bros in Hong Kong is pleased with progress so far, but has expressed some reservations about the future: “The longer-term effects are more difficult to assess - Hong Kong's aim to become a wine hub requires a number of factors: a large amount of world-class wine storage facilities in Hong Kong; a large number of low duty jurisdictions nearby and the continued growth of the China market next door. The arrival of a large number of merchants and auction houses has certainly boosted the competitive edge to the market and made it extremely attractive to be buying wine as a consumer in Hong Kong.
In the final analysis, the boost to the Hong Kong market from the scrapping of duties has cemented Hong Kong's position as the key market in the Asia Pacific region.”
There is no evidence that the decision to scrap all customs and excise duty on wine imported into Hong Kong has produced any negative or unintended consequences. The merchants had been prepared for it so duty paid trade stocks were relatively low as each tranche was removed. Very few licensees were left holding large parcels of suddenly over-priced wine. The trend – evident at least until now – of buying up rather than buying more has not spawned an epidemic of alcoholism. The booming auction market suggests that the big hitters are shopping, despite the global financial crisis and the conventional retail market seems surprisingly steady.
Of course, there are still question marks: will Hong Kong remain as buoyant as the recession and the contraction of the banking sector takes its toll? Will the larger Chinese market bring any real benefits to traders working through Hong Kong? Will the logistical infrastructure be ready for the demand, if and when it arrives, and will it be able to compete with the costs of fully amortised storage and stock management arrangements in the UK? Getting the first part right has been a good start. The road however is long, and it is not without potholes.
This article first appeared in the June/July edition of Meininger's Wine Business International, only available by subscription.
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