Bottle Shock? California Wines Seek Recognition in the Chinese Market
SAN FRANCISCO, September 27, 2012 — Asia Society Northern California hosted a program examining the challenges and rewards of exporting California wines to China. Moderated by Tempe Reichardt, founder and CEO of The California Place, the panel featured Jay Behmke, Managing Director of Yao Family Wines (Yao Ming's Napa winery); Mark Bright, Partner and Sommelier of Saison; Jack Duan, founder and CEO of Gliding Eagle; David Duckhorn, President of Via Pacifica Selections; and Loren(zo) Trefethen of Trefethen Family Vineyards. Coblentz, Patch, Duffy & Bass LLP hosted the evening's panel discussion and reception at their Ferry Building offices.
Reichardt set the scene for the sold-out audience, noting that wine is a relatively new alcoholic drink for Chinese consumers, and that red wine is currently being promoted as a healthier alternative to traditional distilled liquor such as baijiu. China, she said, is now the seventh largest wine consumer globally and is slated to be the sixth largest by 2014, creating huge opportunity for California wine producers.
However, numerous challenges face California wines — currently sixth in market share — in their bid for a greater piece of the Chinese market. These challenges include competition from relatively recently established Chinese wineries, as well as competition from old world wines, particularly those from France, who currently enjoy a 50 percent share of the Chinese wine market. In addition, California wines are relatively unknown to Chinese wine drinkers, who tend to believe that French wines are superior. Creating a strong California wine brand, along with educating Chinese consumers about Napa and Sonoma wines, is among the toughest and longest-term challenges California wineries face today, said Reichardt.
Reichardt, the founder and CEO of The California Place, a Ferry Building-like venture in Shanghai, asked each speaker to share how and why they became involved in the Chinese wine market. Duckhorn and Trefethen, who both first visited China six years ago, were impressed by the potential for business growth; Trefethen noted that China is now the largest export market for his family's wines. Behmke, a wine attorney, saw an opportunity when he learned that Yao Ming was interested in California wines. The Yao Family cabernet sauvignon was launched last December. Duan founded Gliding Eagle to leverage the important Chinese tradition of gift giving. He estimates that 40 percent of wine sold in China is gifted, and his premium California wines are packaged and sold specifically for that purpose. Bright, a Sommelier and winemaker, decided to export wines to mainland China to share his love of California wines and the winemaking process with those who are new to the industry.
Reichardt also asked the panelists to speak on why California is behind the curve in the Chinese wine market. Behmke pointed out that California has always been able to produce for its own market, while foreign winemakers produce more than their own nation consumes, so we are naturally behind in export trends. It was not until the effects of the recession and decrease in domestic demand, Trefethen added, that California winemakers felt the push to look abroad. "China is a market that finally captured our interest," Trefethen said. Now that California producers are more interested in China, the challenge remains to convince Chinese consumers that California's brand is strong, reliable and, perhaps most importantly to a label-conscious society, a luxury.
The panelists presented varying approaches to establishing the California wine brand in China. While education on wine production and consumption is important, Duckhorn pointed out that it must be kept non-academic, not over the top, casual and direct. Bright emphasized that winemakers and sommeliers from California must be willing to travel to China to infuse passion and energy into the education process. Duckhorn suggested that this can be accomplished in creative ways: he recently conducted a wine tasting via live Skype call to a Hong Kong retail store. Reichardt is also utilizing the power of the internet with an e-commerce site that will provide information on California products being sold in China. Duan underlined that the marketing and education approach cannot be focused solely on sales — attention must be paid to developing the story of California wines and creating a yearning and desire among Chinese consumers.
Beyond education, however, there was some disagreement as to the best approach to product placement and advertising. Duan pointed out that without government funding, resources are limited. Regardless of funding, whether California wines should be promoted via subway billboards or more small-scale targeted marketing to specific demographic groups is also a question that remains debatable. Ultimately, it is clear that the Chinese market for California wines is promising, and it is up to the individual producers to determine the best approach for their wine. As Trefethen suggested, it will be interesting to see who will try and who will succeed in sticking around in China after the US market for California wines returns.
Heavy taxation on luxury import products in China has also been a perceived threat to profitable sales of California wine. Behmke estimated about 33 percent of the sticker price of a bottle of California wine in China comes from taxes — a combination of duty tax, consumption tax, and VAT (value-added tax). Trefethen and Duan agreed, however, that in a country that values luxury goods and status symbols, the higher price might not be such a bad thing. Trefethen explained, "The more expensive a product, the better it is assumed to be."
Responses to Reichardt's final question of the evening reaffirmed the optimistic attitude among these industry experts. Given the challenges, why do it? Duan enthusiastically replied, "Consumption is going up. That is the wind behind our backs."
Following the panel discussion, guests enjoyed tastes of fine wines generously donated by all of the speakers.
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