Will the thirsty Chinese dragon save the Australian wine drop?

After such a bleak period in Australian wine production, it is not surprising some see exports to China as a potential river of gold. But it is important to temper some of that enthusiasm with reality. Over half of the Australian wine sold in China is bulk wine on slim margins. Those margins will have to improve if China is to become the industry’s saviour: Australian producers will need to market and sell more premium-branded wines at sustainable price points.

So many Australian wine makers are now placing their hope in the mighty dragon from the north and a potential export market of 1.4 billion Chinese citizens. In particular, it’s the growing taste for wine among the emerging middle class, with an estimated 350 million potential wine drinkers, that’s catching the attention of Australian wine makers. But the question is: will it be enough to save the Australian wine industry? It is estimated that China will need to import 275 million litres a year to save all Australian vineyards under threat – a 400 percent increase is a huge ask!

Marketing Strategy

The Australian wine industry is now increasing its marketing efforts in China. Leading Australian wine makers have moved quickly, increasing their marketing spend and opening cellar doors to tap into the increased spending power that has come from growing Chinese affluence. The good news is that the latest data from Wine Australia shows the biggest jump in wine exports to China was in top priced bottles. Red wine was the drink of choice with exports rising 42 per cent, while whites fell 4 per cent. In contrast, bulk wine shipments to China fell as cheaper bulk wine from countries such as Spain and Chile took preference.

Marketing Australian wines in China is not easy– the Chinese population is made up of hugely varied cultures and tastes. It is also not commonly known that China grows its own grapes and is estimated to soon have more vines than Australia. Many large plantings haven’t yet come into production and the quality is currently very low, but if the last couple of decades have taught us anything, it’s that Chinese are quick learners and will improve and perfect the art of wine production. China’s own domestic production should not be discounted as a future competitor in the Chinese market.

Chinese generally prefer to drink red wine, with 83 percent of bottled world wine exported to China last year being red and, of that, 85 percent were bottles valued at or under $5. However, bulk white wine is still Australia’s largest export into China. As with other wine export markets, bulk wine makes up the majority of Australian exports to China – 55 percent. The main concern of Aussie growers is that it’s the bulk wine that is increasingly vulnerable to increases in China’s domestic production. While it’s hard to estimate when China’s domestic production will meet domestic demand, Australian export growth looks strong for at least the next three to five years.

However, the Australian wine industry needs to look to the future. Long-term growth is expected to be determined by the success of sales of Australian-branded bottles, emphasising the importance of Australian wineries promoting and establishing long-term brand awareness in China. Currently the most well known and visible Australian wine brand in China is Treasury Wine Estate’s (formerly Foster’s) Penfolds. Also, to be successful in the Chinese market it’s imperative to partner with a wine distribution business which already has well-established distribution channels.

Chinese interest in overseas wineries

Chinese interest in Australian wine is already growing beyond a focus on what is inside the bottle (or the bulk container) to the vines and the soil itself, with a growing number of Chinese investors expressing interest in buying Australian wine assets. Whilst some minority holdings have occurred so far, there has been a reluctance to take a significant or game-changing stake.

This is not the case in France, where the Chinese fascination with Bordeaux wines has translated into a number of significant purchases of struggling chateaus: four in 2011. Last year, Bordeaux exports to China grew by 67 percent, making it Bordeaux’s biggest customer.

The growing Chinese interest in luxury goods and a burgeoning middle class has locked in the Chinese market for top-end French wine. It is exactly this sector that Australian wine producers need to focus on to lock in those margins and start transforming the value of the Chinese market. Success here could translate into more significant interest and investment in Australian wine assets. In the meantime, there are plenty of suitors but not many grooms.

The future?

The future is far from clear, but after many difficult years the Australian wine-producing industry may be at a critical juncture in regaining its profitability. If our winemakers can find the right product for the Chinese market and market it correctly, we could see a new future for the industry.

Critical in making this succeed will be finding the best product and price point to sustain firmer margins. To go down the road of discounting for the sake of sales volume is to take a decidedly short-term view of what must be a long-term strategy and relationship. For the industry's sake let's hope they get it right.