The perils of selling wine in China

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.

The high growth in the industry has enticed wineries around the world. Winemakers, like most other salesmen, dream of China as the land of opportunity. However, there is a high barrier to entry into the market; namely, St. Pierre or his peers Ian Ford and Brendan O’Toole, managing partners at Summergate.

Both companies have full portfolios and are not likely to pick up any new wineries anytime soon. In fact, they generally recommend staying away, unless a winery really has the passion and commitment to making it in China.

“Bringing your wine to China will not be worth it in the short-term. It may be worth it in the long-term, but it would be a serious investment,” explained Sheehan. “You need to be prepared to know that although China is a huge market, that doesn’t mean that you are going to be huge in China.” And if you can’t get Summergate or ASC to distribute your wine, chances are you won’t be huge in China. “There are a lot of new distributors entering the market. It is the boom mentality of it. Once in a while we’ll see someone import 200,000 cases in one month and then you never hear of them again. They made a go of it and failed. They either got caught up in customs or just couldn’t sell them. They probably still have 200,000 cases in their warehouse somewhere,” Sheehan said.

But the two importers say that their exclusivity is not their fault. Chinese wine drinkers have specific tastes — they generally like wines that will make them look rich and prestigious. This has been a boon for Bordeaux and Burgundy wines, especially Domaines Barons de Rothschild Laffite, the most celebrated wine brand in China and one of the most storied in Bordeaux. But for great wines from other countries, Chinese wine drinkers are still a tough crowd.

ASC and Summergate might be dominant now, but they have been working to open up the market and educate consumers. ASC holds four to six different events every day. They have also begun choosing premier wines from Australia, the United States, Italy and other countries unfamiliar to the Chinese, with the hope that they can use their market power to change perceptions of fine wine.

“We’ve really focused on trying to get some high-end non-Bordeaux wines that the market is not necessarily ready for,” Sheehan said.

But St. Pierre at ASC remains confident of his company’s ability to make or break any wine in China. “We do have a strong ability to create success for a brand in China within reason,” concluded St. Pierre. “I wouldn’t necessarily say we are kingmaker. We are just the best at what we do.”

Read on to learn about Chinese wine production.