Uncorking China's wine market(2)
After an extensive search, the Cheng family chose Chateau Latour-Laguens, a 150-acre property in southeast Bordeaux. Although the Chengs had been historically involved in importing wine from other global wine centers, such as South Africa and Australia, their search for property focused exclusively on Bordeaux. Family member Daisy Cheng noted France's strong reputation in the Chinese market as the key factor in the selection: "The Chinese consider French wine to be the most authentic."
Since purchasing Latour-Laguens, the family has transformed the vineyard's strategy to focus exclusively on exporting to the Chinese market. To drive name recognition back in China, Cheng said that the family has done extensive newspaper advertising in target markets. In addition, the winery received a tremendous amount of attention within both the Chinese and international press for the acquisition, providing significant exposure. The family has subsequently worked to upgrade the winery. As Cheng noted, "we have invested in the most advanced equipment in order to produce the highest quality wine. We have also restored the historic premises."
Following the 2008 acquisition and with the continuing strength of the Chinese economy, other Chinese parties have made foreign purchases. Perhaps most significant was the 2011 purchase of the Bordeaux property Château Viaud by COFCO. This RMB100 million (US$15.2 million) deal, by the owner of China's high-volume Great Wall domestic wine brand, was seen as legitimizing overseas acquisitions. Property agents in Bordeaux report an increasing number of inquiries from potential Chinese investors, sparking talk of a wave of Chinese purchases in coming years.
While Bordeaux has received the greatest attention, Chinese entities are broadening their scope to other major wine-producing regions. COFCO also purchased a high-volume Chilean winery in 2010. In addition, deals have taken place in other wine production centers such as California's Napa Valley and New Zealand. In 2010, Dynasty Wine announced plans to spend up to RMB900 million (US$150 million) to acquire vineyards overseas, although it has yet to make a purchase. After the Chilean and French acquisitions, Wu Fei, COFCO's wine and spirits branch head, discussed the company's commitment to additional purchases, noting that "the next purchase might happen in Australia or the United States, and we are also eyeing other places."
While this growing trend of overseas purchases shows no sign of abating, some wonder if resistance to Chinese ownership will grow. Past peaks in foreign acquisitions elicited significant protectionist concerns. In the Chinese context, however, issues have thus far appeared relatively muted and limited to minor cultural challenges, e.g., a misunderstanding between Chinese investors and a French vineyard over which nation's property laws should apply to the acquisition. Instead, Chinese investors -- and, even more importantly, Chinese consumers -- were cited as the "saviors of Bordeaux" by The Financial Times, helping to revive a region struggling through declining demand from recession-battered developed markets as well as increasing New World competition.
Bringing Wine 'In'
Further along the value chain, distribution is another channel through which businesses and individuals can enter the Chinese wine market. However, consumer education is the key to success for this burgeoning industry.
Major distributors in mainland China include ASC Fine Wines (majority-owned by Suntory Holdings), Aussino World Wines and Summergate Fine Wines, all founded in the 1990s and currently marketing themselves as both purveyors of fine wine and educators. This informational aspect of distribution is necessary, given the relative immaturity of the Chinese wine market. For instance, ASC runs its own wine school, which the company promotes as suitable for "wine lovers from all walks of life." This program helps ASC target and guide consumers to its own imports. At the same time, ASC builds credibility as one of the first organizations in China to certify wine professionals.
Within this environment, new distributors also need to emphasize education. Altruistic Boutique Wines (ABW), based in Hong Kong and Beijing, imports boutique wines primarily from California. The company's founder and CEO, Rai Cockfield, considers wine education an integral part of his distribution strategy, particularly given the lack of awareness of New World wines. The Chinese wine market is where the U.S. wine market was 30 years ago, but "China will catch up faster," says Cockfield, who is expecting an enhancement in Chinese consumers' global wine awareness. Regarding the domestic product, Cockfield has already sampled many Chinese wines and believes the Chinese domestic wines will eventually rival some of the top wines in the world as Chinese vineyards come of age in the next few decades.
As part of its efforts to promote American wines, ABW has organized major events in Hong Kong to showcase U.S. boutique wines. The company also plans to hold similar events in Shanghai and Beijing. However, Cockfield notes that Hong Kong is a more sophisticated market, and mainland Chinese consumers will require more active guidance. When asked about ABW's different approaches to mainland China and Hong Kong, he said that tastings in China need to be "more casual and educational, focused more on making clients feel comfortable judging wines."
A Palatable Investment
Beyond the traditional business opportunities in production and distribution, China's developing wine market has also given rise to secondary investments. Because Chinese nationals face limited investment options of all types due to heavy government regulation, new opportunities like wine investment are particularly attractive.
In August 2011, the Chinese government approved the launch of the nation's first private wine investment fund. The Dinghong Fund (also known as the De Rouge Fund) will raise RMB1 billion (US$156 million) to invest solely in vintages from Bordeaux and Burgundy. For a minimum investment of RMB1 million (US$160,000) and a lock-in period of five years, fund managers are promoting a potential 15% annual return. According to Ling Zhijun, the fund's founder and manager, Dinghong expects to raise its first tranche of RMB200 million (US$320,000) easily by the end of its first month. The difficulty will be limiting the number of enthusiastic investors.
The excitement around the Dinghong Fund is easy to understand in the Chinese context. Unlike countries with more mature financial services industries, China has a scarcity of private wealth management vehicles. Until recently, many wealthy Chinese invested their capital in the booming real estate market. But, with growing fears of a housing bubble, there is a push for alternative asset classes. Fine wines and other luxury assets (e.g., art or rare gems) are perceived as being more stable investments and having a low correlation with traditional commodity markets. With an annual expected return of 15%, the Dinghong Fund offers high-net-worth Chinese a stable and desirable hedge against domestic inflation.
Also in August 2011, Changyu, the country's largest domestic producer, partnered with Bank of China to issue a new wine investment product that would give investors an opportunity to buy a stake in Changyu's new vintage, Century Cellar Ping Zhong Li Quan. For a minimum investment of RMB1.08 million (US$168,804) and a lock-in period of 18 months, investors are guaranteed a 7% annual return, double the current one-year bank deposit rate. Like the Dinghong Fund, the Changyu investment product has found eager investors -- nearly all the initial release was subscribed within three days of its issuance.
Considerable differences exist between these investment choices. However, whether purchasing a vineyard directly, expanding distribution or investing in wine funds, the outlook appears strong. China's growing demand for luxury experiences, its rapidly developing economy and the limited investment alternatives have combined to create an ideal climate for wine investments.
Today, many industry experts note the relative lack of sophistication in China's wine industry, particularly when compared to the West. Yet the market has shown rapid development in the past 10 years. Educating consumers and developing wine knowledge take time, requiring both purchasing power and customer desire. Just as appreciation of, and demand for, wine in the U.S. has grown over the past few decades, the Chinese wine market should continue to develop in the coming years. With the right blend of investment strategies and a little patience, it should be easy to uncork the tremendous potential of the Chinese market.
This article was written by Ulysses Auger, Jeanne Chen, Catherine Ho and Andrew Rowe, members of the Lauder Class of 2013.
