Will the slowdown in the Chinese wine market catch up with Australia and Chile?

World imports and exports have recently been in the news, not least because the world’s largest wine-producing region (Europe), the world’s largest wine-consuming region (the USA), and the aspirant to both crowns (China) have been doing political battle with each other, based, I think, on one of the early scripts for Game of Thrones. The tariff machinations are certainly just as convoluted and devious, and the future outcome just as uncertain — the Scandinavian word saga was invented for just this sort of situation.

This is, of course, having a seriously negative effect on wine producers, sellers and drinkers (Who suffers from tariffs on wine?). Exacerbating this situation, recent data show a slow-down in the rapid rise of China as a wine-consuming nation. Having recently been the world’s fastest-growing wine market, it is currently ranked as the number 2 still-wine consumer by value and number 5 by volume (IWSR predicts declining volumes but increasing value in the global wine market). Given the small size of current Chinese wine production, this makes China a significant import market, worldwide.

It is thus worthwhile to look at the current situation for the major countries exporting wine to China.

The data shown in the graphs below were released by the country’s official trade organization, the China Association for Imports and Exports of Wine & Spirits (CAWS) (taken from China’s top 10 wine importing countries in H1 2019).

The first graph shows the estimated bottled-wine imports for the first half of 2019, as both volume (millions of liters) and value (millions of US dollars), for the top 10 supply countries. Bottled wine accounts for 90% of the import value; and the listed countries account for c. 97% of those imports, with 63% for the first two countries alone.

As you can see, volume and value do not rank the countries in the same order. Chile has moved to the front of the pack in terms of volume, while Australia has moved to the front in terms of value. France, the long-term leader of bottled-wine imports, has dropped to third and second, respectively. *

This movement means that the average wine-price per liter (in US$) has also changed:

Australia Germany France United States Argentina Italy South Africa Portugal Spain Chile

$5.60 $5.29 $5.03 $4.94 $4.80 $4.17 $3.44 $3.19 $2.29 $2.09

So, Australia sells its wine at an average of 2.7 times the price of the Chilean imported wine. Clearly, the Australians must think that they are on to a good thing. Indeed, the increasing price per liter for Australian wine is a global trend (How Australian winemakers are distancing themselves from the country’s reputation for cheap bottles).

We can now proceed to compare the 2019 data with those from 2018. Overall, imports experienced substantial drops in both volume and value this year: 14.1% for volume and 19.5% for value. These are substantial numbers, and must affect the producing countries significantly. The percentage changes for the main 10 countries are shown in the next graph.

As you can see, all of the countries experienced drops in volume, except Chile, which showed continued growth of its bulk wine exports. All of the countries showed corresponding changes in value, except Australia, which maintained its ground in spite of a drop in volume — indeed, China now represents c. 35% of the value of Australian wine exports (see AAWE).

These drops have been attributed to China's slowing economy, the depreciation of the renminbi (RMB), and the uncertainties associated with the protracted US-China trade war. The latter point is particularly important, given the free trade agreement between Australia and China that came into effect this year. [The current US president has pretty much withdrawn from all of the free-trade negotiations that were ongoing at the start of his term of office, except the USMCA, and replaced them with a series of reciprocal tariffs, instead.]

Australian success

The results for Australia suggest that the Australians have a different strategy to everyone else. This is so because Australia has a fairly small population, by world standards, and the people can easily act together, as a single marketing group.

For example, the Australian federal government is currently implementing a A$50 million Export and Regional Wine Support Package (ends June 2020), which “has enabled the Australian wine sector to compete on the world stage like never before, delivering bold, eye-catching marketing campaigns on an unprecedented scale” (Wine brands encouraged to tap into export growth opportunities). The money has been used to participate in a major way in events like the China International Import Expo, the Wine Australia China Awards, ProWine China, and the Decanter Shanghai Fine Wine Encounter (Australian wineries Shanghai-bound as exports continue to grow in value). This is a long way from a trade war! There is even an annual China-Australia Wine Marketing Summit.

Also claiming active involvement has been the Australian Wine Research Institute. In recent years: “We placed our focus on value growth, rather than volume, and really getting to understand the consumers in emerging markets like China ... Our job was to go into China and look at consumer preferences while working with Australian producers to manufacture products that suited that market” (How Aussie wine has thrived over a decade of change).

It is also worth noting that wine is not the only large export to China — China represents approximately 20% of all Australian exports (Australian brands shine at second China International Import Expo).

As a counter-point to the single-country image, however, I should also point out that Australia is a continent, and therefore its wine regions are as different from each other as are any other continent’s. The fact that the only Australian wine you know of is Shiraz from the Barossa Valley reflects the fact that this wine is distinctive, not the lack of any other, very different wine styles.

This is relevant here, because the main wines being marketed in China come either from the Barossa or from Mclaren Vale, which is a short distance further south. These are the prime sources of the “soft fruity wines from well-known varieties that newcomers tend to enjoy, but also more refined styles that appeal to aficionados” (Why Australian wine is so successful in China). These are the wine styles referred to above.

In this regard, we should not overlook the role of the Penfolds wine brand (owned by Treasury Wine Estates, TWE), which is apparently responsible for two-thirds of the Chinese imports from Australia. Indeed, in recent years Penfolds has specifically targeted the Asian market as a whole (How Penfolds, a 175-year-old wine brand, is staying relevant and appealing to the Asian wine):

There are significant economic and demographic differences within Asia, which implies differences in demand and consumer behaviours. There are some trends that we observe in consumer behaviour in Asia. Firstly, the importance of millennials which form a significant part of the population — they are more social, more involved and tend to spend more than the Gen X.

There is also diversification of channels from supermarkets to online and specialty wine stores. Finally, luxury alcoholic beverages keep growing in the region, which shows a significant increase in affluent and middle-class consumers in Asia. This implies that brands need to continuously build their credentials and luxury appeal, to keep growing with that segment. as consumers will keep trading up as income increases.

The importance of the diverse retail channels, has been stressed elsewhere (Cracking China: what’s the best route to market for imported wine?):

Local analysts and trade consultants say the decision by Treasury in 2015 to switch from what had been an exclusive distribution deal for Penfolds with one importer, to go to a multi importer model, has been responsible for transforming not only the brand’s fortunes in China but the importer model for the whole country. Almost overnight it opened the market and different channels for multiple players to be working with effectively the same brands, helping take those wines to China’s mass market.

Perhaps we should also not overlook the importance of Western wine labels when presented to consumers who do not even use a Western alphabet, let alone speak one of the languages (Hong Kong in turmoil):

TWE struck it lucky because its Penfolds range is distinguished by bin numbers rather than words (Bin 389, Bin 407, Bin 707 and so on), making it easy for consumers to recognise the different labels. Better yet, the Wolf Blass range is characterised by colour coding, from the Yellow Label entry level range through to the ultra-premium Platinum range. This helped the company get traction with Chinese consumers early on.

Penfolds is not, however, the only large wine-producing group in Australia to specifically target the Chinese market. The Randall Wine Group, run by Warren Randall, the so-called King of Australian Wine, has been busy for the past couple of years buying up vineyards in the Barossa Valley and Mclaren Vale (Randall snaps up more vineyards to quench China’s demand for Aussie wine), with the stated intention of supplying the Chinese middle-class consumer. The group now has c. 3,500 hectares of premium red-wine vineyards in South Australia, and it is now the biggest vineyard owner in both the Barossa (1,600 ha, c. 20% of the area) and Mclaren Vale (750 ha). This will allow it “to consistently supply in excess of 12 m bottles of Barossa luxury red wine‚ a favourite among the booming Chinese market” — this is more than double what the entire USA currently supplies to China. It seems rather like: Putting all of your eggs in one basket.

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* It is worth noting the comment that: “China wine import stats in any given year must be taken with a huge pinch of salt, bearing in mind the fragmentation of brands and importers, and the frequent habit of trade loading and dumping that is so common in the region” (Nimbility Asia report). For example, the data from Nimbility Asia differ somewhat from that given above (Bottled wine imports to China declined sharply in H1, and market headwinds remain strong), although the patterns are roughly the same. However, for their volume data Georgia and Moldova replace Argentina and Germany, respectively, and for their value data New Zealand replaces Germany.