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The perils of selling wine in China

Two firms control the market — which they have helped to create.

A waiter prepares the tables for a wine tasting session at Vinexpo 2006 in Hong Kong, May 25, 2006. (Bobby Yip/Reuters)

SHANGHAI, China — China might now be the world’s sixth-largest wine producer, but 15 years ago, it had no such thing as a distribution or wholesale network for imported wine.

Don St. Pierre Jr., the managing partner of ASC Fine Wines, helped changed that — but not without a fight.

“The first four to five years were extremely difficult, primarily because there was no distribution channel we could sell into,” said St. Pierre. “We needed to find good customers everywhere in China. Wherever there was a five star hotel, we needed to be able to supply it. Also, finding people that knew anything about wine was virtually impossible. We had to hire on character and teach people about wine.”

Then, in 2007, St. Pierre spent three weeks in detention on charges of underpaying his import duties.

“There was a national investigation that was launched against all wine importers in China that focused on declared values. A long story short, we were involved and cooperated 100 percent and the issue has been resolved,” he said. “From a broad perspective it is a good thing. What you need in China is a level playing field. We are the largest premium wine importer in China and if everyone is playing by the same rules we feel very confident in our ability to compete.”

In much of the world, wine importers sell to wholesalers and distributors, who then pass the product on to restaurants, wine shops and private clients. In China 15 years ago, this network simply didn’t exist. Instead the Shanghai-based ASC had to find its own clients and build out its own method of distribution — all with employees who had never even tasted wine.

The latest headache is the smugglers. Also in 2007, around the same time St. Pierre was detained, Hong Kong abolished all duties and taxes on wine. Mainland China, meanwhile, maintains a total tax and duty rate of 41 percent. This is a smugglers dream. Simply walk across the relatively lax border from Hong Kong into the mainland and you’ve made yourself a 41 percent profit.

“The smugglers either take wine over with a train or simply carry it over the border. It is a difficult thing to check,” said Tara Sheehan, public relations manager for Summergate Wines, ASC’s only national rival, which opened offices in Shanghai and Beijing in 1999. “It has definitely hurt our higher-end wines. The consumer willing to buy those very expensive wines usually has a house, apartment or cellar in Hong Kong.”

Both Summergate and ASC recently opened up offices in Hong Kong, hoping their customers will purchase the duty-free wine from them directly and then walk it over the border legally.

Despite those challenges, being a wine importer in China has its perks. China’s wine consumption is growing at a lightning pace, even during the economic downturn. For the first time in decades, wine consumption fell in most major European countries in 2008, including in France, Italy and Germany, and worldwide wine consumption was down 0.8 percent in 2008. However, Chinese wine consumption has grown about 61 percent since 2003 and is expected to grow another 36 percent by 2012. As a result, ASC and Summergate Wines have averaged 40 to 45 percent growth for the last several years.