Wednesday, July 18, 2007

My China travel diary – Part 3

China is not a contiguous wine market. Currently Hong Kong consumes slightly more wine than all of mainland China combined and has long been the driver of wine growth in China.. Hong Kong is referred to as a ‘Special Administrative region’ (SAR) by Beijing and has slightly different rules to those in mainland China. But things are changing quickly and it is forecast that for the first time in 2007, mainland China will surpass Hong Kong consumption (by volume) and the theory is that things will never be the same again. Hong Kong still commands by far the largest proportion of the Chinese per capita value spend on wines as witnessed by the smaller population with a disproportionately higher per-capita income and massive ‘ex-pat’ population which kind of skews the picture. There are a lot of foreigners in Shanghai and the party scene is hot!

It would therefore seem logical to use modern westernized Hong Kong as a ‘beachhead’ for a successful Chinese market launch. This is probably not a good idea. Hong Kong and China require separate licenses and to penetrate these two markets will require separate strategies. Another up-and-coming and oft under-reported market is the gambling paradise of Macau which, by some accounts (I have not been there) already generates a larger per-capita gambling revenue than Las Vegas with all the American gaming companies represented. Again, this lucrative market demands another license – so nothing is simple. There is no reason to believe that things are going to change either as powerful distributors lobby for the right to protect their turf, a situation similar to what has been experienced in the US for decades. What is clear is that the wine market is attracting the interest of Chinese investors and as a result will start developing and growing as education and investment spur experimentation. I might add that one of the largest drivers of growth in the Chinese wine market is the informal, but substantial educational effect and cultural influence that the army of ex-pats working in China bring into this market. An ex-pat army well versed in the tradition and culture of wine is playing a significant role in ‘westernising’ the tastes and social activities of their top Chinese business counterparts providing a strong, but subtle, top-down aspirational marketing effect which should not be discounted.

The importance of holidays
Like Christmas, Birthdays and Easter in South Africa, China too has a disproportionate focus of sales congregated around a couple of major holidays which are completely dissimilar to ours. Chinese Lunar New Year which falls in January/February and the Chinese ‘Mooncake Festival’ on the 15th day of the 8th month in the Chinese lunar calendar are by far the most significant holidays. At this time, the moon is at its fullest and brightest, marking an ideal time to celebrate the abundance of the summer's harvest – and drink lots of wine. Another difference is that a huge proportion of the purchases around these dates are slanted towards the Chinese tradition of ‘gift-giving’ which is pervasive and something that potential Asian wine marketers should bear in mind. Is their a fundamental difference in selling or marketing technique as a result of the variation in intention of the purchaser? Of course there is and it felt to me, at many times, that the wine industry is not capitalizing on this opportunity. This brings me neatly to a topic that caught my eye repeatedly. Packaging …

Every wine that comes into China requires a Chinese approved back label. This, unlike the norm in South African exporting, is not simply a small sticker at the base of a back label informing the potential imbiber of the importers details, but rather a completely unique back label with a full translation, in Mandarin, of every detail of the back label. The vast majority of wines on the shelves and in the restaurants that I visited had poor quality, cheap, wrinkled back labels which were clearly an ‘afterthought’ and were simply (and awkwardly) pasted over the existing back label to acquiesce to the onerous legislative requests of the overzealous wine authorities. It was clear to me that the whiskey and champagne producers had (again) stolen a march on the wine industry by sorting this issue out and generally had sophisticated and beautiful packaging specifically designed for the Chinese legal requirements. It should furthermore be taken into consideration that all existing marketing material, printing resources, websites and presentations have limited use in this country for the development of brands unless it is translated and, more importantly, contextualized to Chinese custom. Very few wineries had made the effort to design a Chinese back label and adapt their marketing materials. This is another small opportunity that potential SA exporters might seize to steal a small advantage on the competitors.

Overall, the Chinese market is in it’s infancy with much investment education and development ahead, but there is no reason why things could not change rapidly. There is potential here and it is really going to be interesting to watch the development of this and other Asian countries.

Monday, July 09, 2007

Vilafonte in China

Shanghai is not as expensive as everyone makes it out to be. It turns out that it is only relatively expensive when compared to the earning power of the average Chinese worker. Based on a number of discussions, the average wage for a factory worker is about RMB800 (about R700) per month in Shanghai. It was further explained that wages in the big cities are ‘much higher’ than in the country. I visited a massive factory and the workers were well dressed, the factory so clean it appeared sterile, the mood jovial and all were equipped with cellphones for the smoke breaks. (everyone smokes in China) It is not surprising after witnessing this spectacle of efficiency that China is heading for world economic domination.

The scale of the construction projects in China are also difficult to comprehend. In a one-party communist party with a trillion dollar budget surplus, the ability to conceive and then implement massive projects is astounding and it is difficult to even explain the enormity in words. I probably passed a hundred massive skyscrapers on the 1 hour taxi drive (crawl) from the airport to downtown with a similar number of uber-buildings under construction. I made liberal use of the METRO underground system which was certainly the most sophisticated train I have ever been on. There is something surreal about traveling underground at 160 km/h in almost complete silence, with live TV on the in-train plasmas and perfect unbroken 3G cellphone connectivity as standard. A return ticket costs about RMB4 (about R3) and even the stations are as clean as you could possibly imagine. There are 4 underground lines in Shanghai and the Communist party is currently building another 8 underground train lines, simultaneously, to be completed in time for the Shanghai expo in 2010. This makes the Green Point football stadium saga really look like a storm in a teacup!

Despite all the obvious wealth and a rather South African-like juxtaposition of wealth against poverty, the potential for wine in this market needs careful consideration. The obvious size of the population should never be seen as an indication of the potential for wine sales in China. The market for wine is tiny and can be likened, perhaps, to a single American state. Despite a vinous gold-rush of new wines onto the market, there remain few credible distributors and even fewer with national reach. ASC and Summergate are the two dominant distributors in the market. Wine lists are routinely bought and, again, it makes the aggressive market activities of Distel and DGB in South Africa look like child’s play. Access to many of the larger restaurants and chains is completely blocked by the ‘list-buying’ strategy of these market dominant distributors. Retail too remains dominated by these companies and it sometimes feels that a few independent smaller distributors are fighting for the scraps from the table. The private sales market shows great potential and is a channel that many smaller distributors pursue aggressively. This is a wine market for the bold and for the patient – but a market that will show exponential growth, despite the low base.

Restaurants routinely mark up their cost price 5 or 6-fold making the cost of even a basic bottle of wine on a top wine list prohibitive. Added into that formula is a punitive import tax regime which further adds significant cost to the equation. On-trade purveyors expect significant kick-backs, freebies, promotional activity and the underwriting of their functions before they will consider cooperation. The Champagne suppliers subsidise significant ‘free-flow’ pouring activity where a restaurant or bar will offer a fixed price for a ‘drink-as-much-as-you-can/want’ event. Many accounts will simply not deal with you if you don’t bring these tidbits to the table. Some of the larger hotel buyers are not even vaguely interested in quality and simply focus on ‘what can you do for me’ negotiations.

Despite the doom and gloom of the previous paragraph, there are a handful of new ,young, hungry distributors fighting back with more interesting hand-chosen portfolios of international boutique producers engaging the large distributors head-on with superior service, knowledge and selection. It is gratifying to see this and it provides hope that one day China will become a market significant enough to pour resources into. Right now, I would consider this market one of a new handful of emerging new markets showing enormous potential, but as yet not operating at full speed. Dubai, India and Russia are other markets showing similar potential. The good news is that there is no apartheid ‘baggage’ for South African wines. We can operate on an equal footing with producing countries from around the world. There are few of the obvious prejudices that South African producers routinely come up against around the world. While France again has the foothold here and are marketing aggressively, there is no reason why a small number of high-end producers can not craft and nurture a positive image for South Africa as a whole. It is going to be interesting to see how this all pans out.

Watch this space!

Thursday, July 05, 2007

Shanghai launc h for Vilafonte

I touched base in Shanghai after a marathon – cross-Pacific fourteen hour flight from Chicago to find an environment like a sauna! Forty degree temperatures and 90% humidity is enough to scare the hell out of a budding wine marketeer attempting to peddle luxury red wines into the world's largest market.

There is nothing small about China and arriving into this former communist country combines feelings of trepidation with elation at the potential that this economic powerhouse offers. I had taken good advice and had studied closely local traditions and customs, and had at least a basic idea of what to expect, how to communicate, and how to avoid social embarrassment by embracing the ways of the locals.

I was met by my interpreter, Sharon, who was to shadow me all day for the four days that I am in China. At US$80 per day, she is one of the better paid people in Shanghai. In a country where the average wage is about the same as my weekend stay in a relatively nice hotel, she was worth every penny.

Mandarin, (the local language) bears no resemblance to English or any European language. I can honestly say that in my four days I did not ever (ever!) understand a single word that was said. Routine tasks like taking a taxi become challenging endeavours and, apart from rudimentary sign language, there is no way to communicate with your average Shanghainese.

On the positive side, the same communication issues that I experienced appeared routine for the locals as they were very comfortable with interpreters. A further barrier was that despite an excellent interpreter, there appeared to be a number of English concepts which did not translate into Mandarin and this complicated my voyage of discovery.

Even educated, affluent and urbanised Chinese are generally not familiar with even the basics of wine appreciation. Wine has simply never been part of the culture here and it is a tribute to an insatiable appetite to comprehend Western traditions that the body of knowledge is growing at a frenetic pace. It was told that even basic concepts like the difference between red and white needed to be explained.

I overheard a story that an affluent Chinese gentleman had a fight with a sommelier that had recently decanted a Bordeaux first-growth that he had ordered. It took a lot of explaining to the business man that decanting would indeed improve the wine and that the sommelier had not just ruined a perfectly good and ludicrously expensive bottle of wine. The same sommelier explained to me that he had a hard time explaining to people that winemakers did not actually add ‘gooseberries’ to Sauvignon Blanc and that a grape could produce the flavour of something else. Again, basic stuff...

I had arrived in China wanting to dispel the urban legend that the Chinese ‘mixed’ their wines with Coca-Cola. I could not! Simon Zhou, an extremely knowledgeable local wine merchant, explained to me that Chinese wine is by far the most common wine consumed in this market, but that the quality of the wine was generally of an extremely low level. ‘Great Wall’ appears to be the most prominent local brand which is unencumbered by local content and vintage restrictions.

Apparently the big local producers are a bit slack in updating the vintage on the labels and a vintage from the '90s has been on sale for the past five years, despite the vintages progressing apace. It is also not uncommon to find that the ‘Chinese’ wine is in fact a bulk import of low-quality juice from Chile or Argentina.

Not all was like this however; I made a point of experimenting with some local wines and found a recent vintage ‘Grace Vineyards’ Chardonnay Reserve to have a deep minerality, a welcome freshness, recognizable character, and a lovely integration of oak. Surprise, surprise! I immediately set about securing a couple of cases of Chinese and look forward to presenting a tasting for twenty people in the Vilafont√© boardroom in a couple of months. (I will offer four places to the first reader to request a seat on our blog at

I would suggest that anybody who underestimates the ability of the Chinese market to innovate and make a chameleon-like transformation into a quality wine producing country would be a fool. Over and over I read and heard about massive construction projects coming in ahead of schedule and under budget.

The energy, industrious nature and commitment of the Chinese people is obvious after even a few hours in China.