Monday, May 10, 2021

So, why has China gone off the boil?

There have been several reports over the past few years about the declining wine market in China. Indeed, wine production in China is currently listed as the 6th fastest declining industry in that country (Fastest declining industries in China by revenue growth (%) in 2021). So, it seems worthwhile to gather in one place some pictures of the situation, given that China has been the second largest wine market in the world (The wine market in China).

We can start with a look at the simple economics in recent years. Here is a graph of the estimated market size (in USD) over the past few years, from the IBISWorld industry statistics:

The decrease over the past few years is obvious. This decrease is reflected clearly in estimated wine consumption, as shown in the next graph, which goes all the way back to 1960. (This and all subsequent graphs are from the Annual Database of Global Wine Markets, compiled by Anderson, Nelgen and Pinilla, supplemented by the OIV's State of the World Vitivinicultural Sector In 2020.)

Wine consumption in China 1960-2020

The decrease in consumption dates from 2016, and is continuing rapidly as I write. Note that this timing pre-dates by 3 years the decrease in market size illustrated above, which suggests an interesting incongruity.

Moreover, there is no equivalent decrease in the Chinese area under vine, which is shown in the next graph. This has plateaued recently, but not decreased.

On the other hand, there has been a dramatic decrease in wine production, despite the stable vineyard area, as shown in the next graph. Interestingly, the decrease in production started in 2012, 4 years before the decrease in consumption. Is this prescience?

Wine production in China 1960-2020

Clearly, these patterns cannot be reconciled in too many ways. It has been argued that production is being decreased to match decreasing consumption (even though it pre-dates the decrease in consumption), while the vines themselves are either not being grubbed out or their reduction is not being recorded. The reduction in Chinese production could, of course, be a shift from quantity to quality — bulk wines being replaced by fine wines (Fine wine and caviar — made in China?).

It has also been suggested that China’s wine production has been dropping due to competition from imported wines, but this cannot be so. In fact, there has been a dramatic recent decrease in imports, which matches decreasing consumption, since it also starts in 2016, as shown in the next graph. Note that imports were effectively zero before 1995. Clearly, it is not just domestic wine that is going off the boil, but the foreign stuff, as well.

Wine imports to China 1960-2020

So, it is the decreasing production that is anomalous. The decrease starts before the decrease in consumption, and is not matched by any decrease in vine area. So, what is going on? It has been noted that an economic slowdown has been occurring in China, and there has been a trade war with the USA, and now also with Australia. Also, wine may well be finally losing the cachet that it started to acquire among Chinese consumers after the Cultural Revolution, back in the 1970s, and which accelerated in the 1990s. A 2014 even that might explain some of the observations is the Chinese government's official crackdown on business / political graft in 2014, which curtailed formal gift-giving (For liquor makers, cheer dries up in China).

Finally, by way of contrast, it is worth noting that Chinese beer consumption has plateaued recently, but not decreased, as shown in the final graph. Note that beer consumption increased at the same time as wine, but greatly exceeds wine consumption by a factor of 30. A beer market, clearly, not a wine market.

Beer consumption in China 1960-2020

An interesting alcohol market, obviously. So, why is the Australian wine industry concerned about losing the Chinese market (China ‘indefinitely suspends’ economic talks with Australia)? It is declining, anyway; and any forecasts from the graphs above do not promise that it will remain a major market for too much longer.

Thanks to Bob Henry for some of the above suggestions.

1 comment:

  1. Those free spending Chinese Communist Party apparatchik members, admonished by President Xi Jinping to reduce their conspicuous consumption of (say) expensive wines, have been slowly replaced as drinkers by luxury consumers who work in private industry.

    Quoting The Wall Street Journal (circa 2015):

    "Sales of expensive alcohol took a hit in China in 2012, when President Xi Jinping took aim at boozy banquets and lavish gift-giving. Now, cognac and wine sales are showing signs of life, indicating that luxury consumption may be on the way back.

    . . .

    "The resurgence reveals a pocket of strength among Chinese luxury consumers, who in recent years have determined the fortunes of manufacturers of everything from expensive handbags, to diamond-encrusted watches and pricey bottles of alcohol.

    . . .

    "Taking their place are young, upper-middle-class drinkers who are spending their own money and opting for lower-price bottles. While the young drinkers aren’t splurging like their predecessors, they represent a much larger group of consumers."