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!
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