Wine and the China Syndrome

A few years ago I edited a book on globalization for a New York Times series. I was given everything that was published in the NYT in the 20th century and asked to tell the story of globalization’s rise and fall and rise again. One of the things I uncovered as I studied the history of world trade over those 100 years was what I call the China Syndrome.

Nightmares and Dreams

The China Syndrome is both the dream that China will buy all the goods we try to sell her and the fear that she will return the favor and take over our markets. The Times was full of China Syndrome a hundred years ago. History buffs might want to look up an article called “The Future of our Trade with China” that promoted the dream on April 13, 1900 and an early suggestion of the nightmare in “Japan and China find a Ready Market Here” published on September 3, 1905. Both are reprinted in my NYT volume.

The same dreams and nightmares are commonplace today. I was reminded of this recently while reading the Grape Wall of China blog, a reliable source for China wine news and views.  An article by Jim Boyce (aka Beijing Boyce) caught my eye: “No Worries: Australian targeting China wine market at every level.” The article tells of Australia’s dreams for Chinese wine sales.

The Blunder Down Under

The Australian wine industry is dreaming about a Chinese future because their present reality is an emerging nightmare. Australian wine is being battered by a number of factors, both natural and market driven. Australian wine sales are falling here in the United States and in Britain, too, I understand. Although there are many distinctive and delicious Australian wines, “Brand Australia” is pretty much defined by one-dimensional Shiraz and over-oaked Chardonnay, both of which have fallen from consumer favor. The “brand” was easy to understand and promote, but it didn’t have legs. Many consumers seem to have moved on and there are plenty of options for them to choose from. The recession only makes things worse.

The situation in some parts of Australia is really dire. Constellation Brands, for example, is closing its second Australian winery for lack of either a market for its output or a buyer for its assets. The global recession puts the big multinationals like Constellation under more pressure than in the past. They are less able to afford to nurse along failing brands. That’s bad news for the particular part of Australian wine that seems to define the brand. It’s time to dream up a better plan.

Australia has adopted a new marketing plan called Landmark Australia that is meant to highlight the quality and diversity of its fine wine industry. It’s a good idea but a difficult one to put into practice — hard to un-ring the Yellow Tail bell, if you know what I mean. And I am generally suspicious of regional or national marketing plans because I think collective brands (especially quite diverse and ill-defined ones) are always harder to sell than private brands.

Working in China … or Not

The Landmark Australia plan may be working in China. Or maybe not.

Beijing Boyce reports that Australia is promoting its new image pretty vigorously and has risen to #2 in bottled wine imports after France. The French have 40% of the fine wine market to Australia’s 20-22%. The U.S., Italy and Chile trail far behind. So perhaps Australia will be successful in redefining itself in a new market and maybe, ultimately but with more difficulty, in markets like America and Britain where it is already established. The geographical proximity to China is certainly an advantage.

There’s evidence of the China Syndrome dream in the data, but also hints of a possible nightmare. It seems that Australia is doing even better (in terms of rising market share) in the bulk wine market than in sales of bottled wine. Grape Wall reports that

… in the first half of 2009, Australia ranked second as a source of imported bulk wine. While Chile (~15 million liters) represented half of the ~31.5 million liters entering China, Australia came second with a quarter. Argentina (last year’s number two, with a quarter share) and the United States (~6.5 percent each), Spain (~5 percent), and South Africa and France (just over 1 percent each). This is quite a leap from the past four years, when Australia represented from 2 percent (2005) to 10.5 percent (2007).

One reason for higher sales at the low end of the market is that surplus bulk wine is being dumped (sold below cost). Hard to compete with that, of course. I know it is better to get something than nothing for all that surplus wine, but it is hard to be optimistic when this market segment is Australia’s greatest Chinese success. Australia wants to get out of the bulk market, in terms of its brand, not deeper into it.

China versus Colorado

How real is the dream part of the China Syndrome for wine? I asked Tom Hedges of Hedges Family Estate (an important independent producer here in Washington State and a pioneer in the Red Mountain AVA) because he is particularly knowledgeable about export markets in Asia. Tom put the dream into perspective. Here is his take:

As an American producer, we have the U.S. market, which today is number one or number two in the world for total consumption.  An example is flying to Denver costs $300 round trip, and takes no time.  Our potential to sell in Colorado alone is equal to or better than that in all of China;  the Chinese consume very little wine, in total, of which 85% is Chinese production.  And, being [an emerging] consuming market, they want only two kinds of wine:  Famous and cheap.  About 99% of the world’s wineries are neither, which means you have to develop a market for your brand.  Costly!

Tom’s clear conclusion was that he could achieve more and do it more economically by focusing on Denver and Boulder instead of Shanghai and Beijing.The allure of China is great,” he says, “the economic reality not so great.  American producers still have lots of Colorados to conquer here in the U.S.

This view aligns perfectly with my own, for now at least. Not many of those folks who dreamed the China Syndrome dream a hundred years ago woke up to great wealth, although a few probably did. I guess that’s why the call them dreams.

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