January 2013 Issue of Wines & Vines

Eager Market Requires Strategy

Far East can be lucrative in exchange for risk, research, resolve

by Kate Lavin
As the past few years of wine surplus found North American companies searching for willing markets, many found eager trade partners in Asia. According to the U.S. Agricultural Trade Office (ATO) in Hong Kong, during 2011 U.S. wines became the third most-imported wines by volume and the fourth most-imported by dollars within the special administrative region of China.

In spite of this, U.S. wines are responsible for just 10% of the market share by volume and 6% by dollars for that location. The market leader, France, more than laps its closest competitor in every category. In U.S. dollar value, for example, French wines own 62% of Hong Kong’s foreign wine market.

Lindsey Gallagher, director of international marketing for the Wine Institute, says she spends a lot of time managing the expectations of California wine professionals with an eye toward the Far East. The lack of awareness about U.S. wine—and consequent lack of demand for the product—means that in China, “Anything going against French wine has its work cut out for it,” Gallagher says.

According to a 2012 report issued by the U.S. Agricultural Trade Office in Shanghai, China, “While U.S. wine exports to China continue to increase at double-digit rates, our share of China’s wine market is falling due to aggressive promotion by our competitors.”

The news is not all bad, however, as trade officials, economists and North American wine professionals alike contend that Asian wine consumers are eager to learn about foreign wines as well as buy them.

Getting started
Mike Wlodarczyk, general manager of Goose Ridge Vineyards, traveled to Asia in November to attend the Hong Kong International Wine & Spirits Fair and the Hong Kong Wine and Dine Festival.

“The contacts I made were phenomenal,” Wlodarczyk says of the trip. “It wasn’t just Hong Kong or China. It was for Taiwan, Japan, Vietnam, Australia; there was interest from all over the world. So we’re waiting to see what comes out of it and looking to sign some contracts.”

Goose Ridge, the 60,000-case winery in Benton City, Wash., that also produces the StoneCap Wines label, has been selling wine in Japan for about 10 months and this year expects to ship about 6,000 cases there. Wlodarczyk explains that U.S. wines are new to shoppers in Hong Kong and mainland China, where consumers are still discovering wine made from grapes. “They wanted to know about the wines and they wanted to taste them, but they are still learning,” he says. “Hong Kong is very fast paced: very go-go-go. They weren’t as passionate about wines. They were about getting it there and getting it sold.”

In fact, Wlodarczyk tells Wines & Vines, during the trip he met a representative whom he hopes will be facilitating his wine sales in Hong Kong, mainland China and Taiwan. “They have an office here in the U.S. and an office in Hong Kong,” Wlodarczyk says, adding that he feels more comfortable having a person on the ground to manage Goose Ridge’s business in Asia.

No one-size-fits-all
Erich R. Kuss, director of the ATO in Hong Kong, is quick to point out the differences among China’s regions. “Hong Kong and mainland are two completely different markets,” Kuss says. “Hong Kong is not only more open but more accustomed to western ways. There are less cultural misunderstandings.”

In 2008 Hong Kong announced it would eliminate all duty on wine imports. Consequently, some companies ship wine to Hong Kong with the intention of transporting it elsewhere. Kuss says that when his office sees a spike in the amount of wine coming into Hong Kong, it’s safe to assume that many of those bottles will end up in mainland China, where import duty on wine is 14% plus 17% VAT (value-added tax) plus consumption tax.

“There is a lot of wine that is hand-carried up the border or put in a truck and driven up through Shenzhen (which shares a border with the New Territories of Hong Kong.) It’s sort of a mystery but not hidden; it’s happening in plain sight,” he says of the transfer. According to the ATO, 14% of U.S. wine shipped to Hong Kong (by volume) is then re-exported elsewhere, and re-export figures are even higher for European, South American and Australian wines.

Of the wine re-exported from Hong Kong, 82% by volume goes to mainland China, 12% is shipped to Macau (another Chinese special administrative region, this one known for its tourism and large casinos), 4% is sent to Vietnam and 1% is shipped to Taiwan. Although mainland China receives the vast majority of re-exports by volume, Macau is the final destination for 30% of re-exported wine by value, according to ATO figures. The 11.3-square-mile territory draws 28 million tourists per year, brings in $33.6 billion in gaming revenues and boasts a per capita GDP of more than $65,000—almost double the figure in nearby Hong Kong.

The best candidates
If the question of where to ship is a complicated one, the idea of which North American wineries are best suited to doing business in Asia is even more nuanced. ATO director Kuss says ultimately it’s a volume game. “The person who succeeds is not the person with the best wine,” he says matter of factly.

“There are multiple markets (in Hong Kong.) There are two main supermarket chains that control over 80% of retail grocery sales,” Kuss explains, adding that these stores like to work directly with suppliers and deal in bulk table wines that sell for $6.45-$9 per bottle. And once again, U.S. wines are not well represented in this category. “It tends to be four shelves of French, two of Aussie and five (single) U.S. wines.”

Realistically it is difficult for American wines to compete with French, Italian and Spanish wines in the hypermarket category, according to Michael Parr, the export manager for Wente Vineyards who spoke at The Seminar Group’s recent event Exporting Wine to China. “Do you have the right products for their type of distribution? Probably not. They’re coming over for $1-$2 per bottle.”

For smaller boutique wineries looking to export, lucrative options include fine dining restaurants and hotels. “We have a lot of unique smaller specialty wine shops,” Kuss adds of Hong Kong, which boasts the highest per capita wine consumption rate in Asia at 4-5 liters per year.

The red wine myth
For years Asian wine importers have told their North American trade partners that Chinese consumers are only interested in red wine, prized for its color, which symbolizes happiness and good luck. But the insistence on red wine might have been a self-fulfilling prophecy that’s on the verge of change. Wlodarczyk of Goose Ridge in Washington state says that prior to traveling to Hong Kong he was told that Chinese consumers only drink red wine. Nonetheless, he brought some white wines to pour. “I asked if they’d like to try the whites and they absolutely loved them,” he says of the label’s Chardonnays and Rieslings. “They’ve always been pushed to buy red wines, but they were actually interested in the full variety.”

Consumers and distributors were equally receptive to Canadian ice wines, according to Beatriz Gil, marketing manager for Isabella Winery of Richmond, B.C., who attended the Hong Kong Wine & Spirits Fair. Owned by Taiwan-born Tony Ouyang, Isabella exports nearly 85% of its production to China, with Zhejiang Province being its No. 1 export market. Due in part to the winery’s location (20 minutes from the city center of Vancouver, where 17% of the population is of Chinese descent), Gil says several of Isabella’s staffers are bilingual and able to communicate with the winery’s distributors in Asia.

Buying the second bottle
Gift giving is a strong tradition in Asian culture, with the biggest occasions being Chinese New Year (the upcoming year of the snake begins Feb. 10) and the mid-autumn festival, which usually takes place in September or October.

Sam Lou of Nielsen Co. sums up the idea of wine as a gift by saying, “Wine is not seen as a gift for your business partner, government officials or boss, because people don’t know the value of the bottle.” Instead, wine is a popular gift choice for friends and family members.

Since the appearance that a bottle is high-end can be even more important than the wine’s taste, experts recommend heavy glass, natural cork and traditional labels. “Their philosophy is, ‘If they can spend that much on packaging, the wine inside must be good,’” Parr says.

Gallagher from California’s Wine Institute adds that getting consumers to buy wine as a gift is only half the battle. Imported wine is viewed as a valuable commodity in mainland China, so the next step is encouraging consumers to open that bottle, drink it and buy another, “and not just have it sitting on a shelf as a status symbol,” she says.

Kuss from the ATO echoes this sentiment: “Wine is a major gift-giving item, but they might have no intention of drinking this gift.”

Michael Parr, export manager for Wente Vineyards, says North American wine sellers may be surprised to learn what prompts consumers to drink wine in China, where wine imports were first sold in pharmacies. “Chinese pharmacists were selling them to their customers as treatments,” Parr says of imported wines, adding that heart and blood ailments were the most common problems to be prescribed a dose of imported wine. Consequently, many Chinese consumers still view wine as a healthful product.

“Men drink wine because wine is healthy. The lower alcohol content means they can drink more than baijiu,” a distilled liquor popular in China, says Nielsen’s Lou. “For women: Wine has an antioxidant agent that protects you from aging. Women like to drink to make them beautiful.”

Marketing your region
While identifying sub-AVAs can motivate North America’s regular wine drinkers to purchase bottles, consumers in Asia cannot be expected to know specific viticultural regions, and overly broad geographic terms can misfire as well.

“If you say ‘American wines’ or ‘wines from the United States,’ that may conjure politics or things people don’t agree with,” Parr says. “If you say ‘California,’ people think of sunshine and beautiful people.”

Kuss says that the nascent market for U.S. wine in Hong Kong can work to the advantage of non-mainstream winegrowers. “Given that it’s still a young market, they’re not going to have a negative opinion” about atypical viticulture regions, Kuss says. “If I tell people I have a great wine from Tennessee, people aren’t going to know” that’s not a conventional winegrowing area.

What’s to gain?
Even the most entrepreneurial wine salesperson can’t decide to start selling wine in Asia and have it happen immediately. The process takes at least a few months, especially when done correctly. “It’s going to take a real commitment and a lot of research,” Kuss said. “Especially for small wineries, it’s a big business decision.”

Michael Parr from Wente Vineyards adds, “It’s amazing to me how many wineries I meet in China who have no idea why they’re there.…Be clear of your objectives in entering the Chinese market.”

He says that trying to sell Chinese consumers (including those in Hong Kong, Macau and Taiwan) on a great everyday wine is not the way to earn their business. Rather, market your product as something for special occasions. And forget about trying to start a by-the-glass program, Parr says: It won’t work.

For wineries just starting out in the Asian market, Parr recommends trying to engage the corporate consumer, who is ordering wine at high-end restaurants and bars. Treating potential clients as VIPs goes a long way, he says, and once you get an account, be true to your word.

“Consistency is rule No. 1 to succeed in the (Chinese) wine business,” says Beatriz Gil of Isabella Winery. “Take things slowly. Listen. Learn where possible, and be patient.”

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