China is seen as the main growth driver for global wine sales over the next few years, so the world has been focusing on cities like Shanghai because they are the most accessible in terms of language and location. Shanghai is mainland China’s most international city and a major wine market because of the sheer size of its population. Yet because of its popularity, Shanghai could be close to saturation as a destination for wine imports.
The International Wine and Spirit Research company (IWSR) predicts that by about 2016 the global wine industry will return to the growth levels observed between 2000 and 2005, after several years of falling consumption in Europe. Last year China became the world’s fifth largest wine-producing nation behind France, Italy, Spain and the US. By 2016 the IWSR predicts China will produce 166.6m cases a year of the 2.87bn cases worldwide.
Ali Nicol publishes Wines Times HK, one of the region’s best-known blogs, and has been based in Asia for more than 30 years. “The Shanghai market is slow and has been so since the arrival of the new government. It looks like the fight against corruption and counterfeiting will continue and this is a good thing for China but not that good for gifting and hence has an adverse affect on sales.” Nicol predicts some of the city’s wine importers will not survive the slow-down.
The Shanghai difference
In November 2013, Debra Meiburg MW – who the drinks business magazine named the wine world’s seventh most powerful woman in 2012 – published Meiburg’s Guide to the Shanghai Wine Trade. Meiburg is a respected wine judge and journalist who has lived in Hong Kong for more than a quarter century. She said that trying to write a single book about China’s wine industry would be like “trying to write a book on ‘European’ wine”. She and co-author Sarah Heller chose one market that everyone is interested in that “could also serve as a synecdoche of the market as a whole”.
Meiburg described Shanghai as “one of the most solidly diverse” in China in terms of products. But it is challenging to get accurate information about markets, she said. Six of her staff worked for almost 24 months assembling the list of suppliers in the book, phoning and e-mailing for clarification.
Meiburg advises companies seeking to sell into Shanghai to be patient. The process could take four to five months, and often longer, because regulations change regularly. “The process is convoluted and lined with pitfalls, but there are many parties willing to help you through, not least your importer. However, as always, every layer of assistance adds to your cost,” she and Heller wrote. Importers were under so much government scrutiny that they could not break any rules, which explained why the process was so long. Shanghai importers value fidelity above all. “In our discussions with Shanghai importers, it was emphasised again and again how critical it is for an importer to know that they have exclusive rights to manage your brand for China.”
Nicol said that because of a “vast number” of suppliers in the city there would likely be continued confusion as to who was “legitimate”. “This will continue until the market there is regulated further. The fact that Château Margaux has recently released a list of only 10 suppliers they see fit to do business with in China as a whole says a lot about [what they think about] the thousands of smaller wine distributors not only in Shanghai, but around the vast country that is China.” Heller estimates about 4,700 people are involved in importing wine in China.
David Pedrol, CEO of wine importer Macro Asia, describes the Shanghai market as the “most competitive” in China. “We find a lot of wine business going on in top restaurants and top-class hotels. But we also have a great scene of wine bars and more affordable places to drink wines for the new generation and young crowd. Shanghai is one of our strongest places to sell in China.”
Wine in China is heavily taxed, especially compared with Hong Kong, which abolished tariffs in 2008. Taxes on imported wine consist of a customs tariff for things like insurance and freight (14%). On top of that is an excise of 10% and then a value added tax of 17% of the value of the previous two taxes. This effectively adds 48% to the cost of a bottle. Only the final two taxes apply to locally produced wine, which adds about 30% to the cost of a bottle of domestic wine.
Meiburg believes those taxes will be “adjusted” over time, but it is unlikely they would be removed entirely. Sarah Heller pointed out that taxes were designed to protect the domestic industry, so it is unlikely the customs portion of the tax would be reduced.
Tersina Shieh, a wine marketer, confirms that Shanghai is China’s main wine market with a wide range of consumers. “Young, curious consumers are open to wine from every country, not only France (or Bordeaux). It depends on the sales person. I was at Cape Grape, a small but lively bar selling only South African wine in what the locals called ‘The Bar Street’. The owner is very enthusiastic and business is thriving. There are consumers who just go there to try South African wine.” Shieh said Shanghai was an expensive place for wine because of the various taxes plus mark-up by middlemen. “The price of wine must come down to a more reasonable and affordable level if we want to reach out to the real, average consumers.”
About 85% of all wine consumed in China is locally made. And wine remains a luxury. Average incomes in Shanghai are about 30,000 RMB a month (about $5,000). While this is a good salary compared with the rest of China, it is not enough for an extravagant lifestyle.
Kelly England is president of the China Wine & Spirits Awards, which claims to be the biggest and most prestigious wine and spirits competition in China. She noted that the recent development of a free trade zone (FTZ) in Shanghai could boost the city’s established wine market. “Regardless of how the FTZ developments happen, Shanghai will continue to be an incredibly sophisticated international wine city. China is booming and these measures to benefit trade will assist to meet rising consumer demand.”
Frank Lavin is CEO of Export Now, which helps American companies sell products online in China. In Meiburg’s book, Lavin emphasises the importance of getting companies to use digital marketing channels like social networks. But social networking has its limitations unless wine marketers write Mandarin and appreciate the range of dialects in China. “We need to think of it [China] as 33 different countries,” Meiburg said. She is referring to the fact that Shanghainese people do not necessarily understand the dialect in a major city such as Ningbo, only three hours drive to the south. “But wine companies can ask their customers to have conversations on social networking platforms like Weibo [the Chinese version of Twitter] to facilitate discussion about wine.”
Meiburg said very few wine reviewers had influence in China, which made platforms like Weibo potentially powerful. People in Shanghai used word of mouth to influence others. Heller said some of the larger wine companies had brand ambassadors whose job is to post on Weibo to develop discussion about wine. “Make use of your existing fans in China because they will get the word out for you,” Meiburg said. “Find creative ways to encourage them to post on your behalf.”
Annabel Jackson runs The Wine Connection (Asia), a company that focuses on wine education and marketing. Jackson said Shanghai remained an important port city with a long tradition of foreign influence because it is willing to embrace new ideas and practices. She noted that 85% of wine consumed in China is red, but Champagne is the “darling of the fashionable clubs in Shanghai” – indicating how that city acted differently from the rest of the country. “Think about all the fancy restaurants on the Bund [the most fashionable street in Shanghai]: they call for something other than Dynasty, surely? Wine lists need to cater to them.”
Pedrol confirmed the interest in Champagne. “The night scene in Shanghai is one of the top in China for consumption of expensive wines, including some top Champagnes.”
Meiburg’s book contains refreshingly frank advice: “There are actually a limited number of businesses with whom we would personally suggest you deal.” It points out that “only the foolhardy would try to get wine into China without an importer lined up”. And trying to do marketing and public relations on your own, or with a non-Chinese branding partner, “can only end in disaster”.
In terms of intellectual property, one of the biggest concerns Meiburg and Heller noted is intentional mis-labelling of wines, such as Benfolds instead of Penfolds, as opposed to outright counterfeiting. “One of the most frightening aspects of IP protection in China, but one of the most basic facts that you will have to accept to work in this market, is that at the end of the day you cannot fully trust anyone, even your importer,” they advised. “For example, even if your importer helps you come up with your Chinese name, even if it is the most brilliant stroke of genius in the history of branding, make sure it is you who registers the trademark, not your importer. Break-ups happen, and it’s key to protect your interests.” Winemakers should register their brand with the China Trademark Office. “Your best friend today could be the person suing you for misappropriating ‘their’ brand name tomorrow.”
It costs money to develop any new market. As with any investment, the critical thing is to ensure return on investment. “Our advice to winemakers? It’s a hard pill to swallow, but them’s the breaks,” Meiburg and Heller concluded.