There’s little left to be unsure about when it comes to how much Chinese drinkers love wine. Uncertainty be damned, China has risen to the fifth largest wine market in the world, and they have swirled, sniffed, sipped, and guzzled their way to becoming the biggest consumer of red wine, surpassing mainstays France and Italy. In fact, they uncorked 1.9 billion bottles last year alone according to a report by Vinexpo and The International Wine and Spirits Research. Not surprisingly, there is a robust economy surrounding such enormous consumer demand. The recent ascension to wine superpower has seen the notoriously fickle Chinese market experience telltale ups and downs, but their influence is undoubtedly on the up as Chinese investors have realized gains utilizing wine as both commodity and real estate investment in vineyards.
This particular surge of capital began in France in 2005. The Bordeaux region, as well as those of Burgundy and Champagne, have been of long-standing interest to foreign investors, but the past decade has seen Chinese investment overtaking more traditional western investors. Within China, collectors poured money into the fine wine trade, again focusing on French wines, driving prices every which way, ultimately leading to a turn that left many wineries reaching for answers. And now — no longer green, with a second more substantive and widespread surge on the way — their influence is undeniable.
With this transforming landscape, the wine industry would be good to ask a handful of questions. What is the focus of these investments? What do they mean to the world wine market? What does the future of Chinese wine investment look like?
Before the Crash, a Land-Grab
Typically, with a rise of wealth in emerging markets, those accruing the wealth will go to great lengths to protect it. This often means employing infrastructures outside their own developing yet less-sophisticated infrastructure. The Chinese market reflects this. WealthInsight, a database tracking high net worth individual’s interests, reports that wealthy Chinese have a staggering $658 billion stashed offshore; other organizations have that number at a $400 to $500 billion. But all agree that as of last year, Chinese had 13 percent of their wealth overseas — including in vineyards.
“The older guard are most interested in getting money out of China,” says Sean Maher, principal at advisory and brokerage firm Maher Advisors in Napa Valley. “They’ll look at wine and other crops as well as real estate. For modest returns even.”
While there had been Chinese investments back in the 1990s from investors in Singapore and Hong Kong, those investments were limited and there hadn’t been much investment from the mainland. But that changed with the more recent swing, which was in fact steeped in mainland wealth, and effectively multiplied the earlier investments to outsized sums. This especially persuasive surge of capital not only affected market values but, in turn, affected how the market both viewed and responded to Chinese investments.
“It changed the way people approached China as a market,” Justin Gibbs, Co-Founder and Sales and Marketing Director at Liv-ex, one of the most well respected global marketplaces for professional buyers and sellers, explains. “This was a time the people felt more at ease with China. Back in the nineties China was emerging from behind the communist cloak and not many people knew much about it.”
Looking Back to China
This newfound familiarity was important, especially during the global financial crises of 2008. From 2005 until the crash, while the Chinese became increasingly involved, China remained a secondary market — most money still came from traditional markets, which is where fine winemakers continued to focus on. But then the traditional markets fell, and fell quickly. What was left was this newer Chinese market that basically bolstered the fine wine market with their investments, keeping it afloat. Vineyards, as might be expected, shifted focus.
“[The Chinese] took it on post-Lehman Brothers,” Gibbs explains. “There was already the momentum in there, but that final great burst was what was Hong Kong and China.”
At first glance, the outlook was all sunny vineyards and bacchanalia, for both China as well as the foreign regions they were entering. But this indefinable boom, which is basically what happened before 2011 and 2012, was exactly that: indefinable.
“By 2010, especially with the awesome quality of Bordeaux in that vintage, the prices were off the chart,” Gibbs says. “That was, I suppose, the major impact: the confidence of the chateau to sell at prices that traditional markets simply wouldn’t pay.”
And it got well beyond the reach of the traditional market. All of the sudden the United Kingdom and the United States were being ignored for the promise of the Far East. The moment the fine wine markets turned in June 2011, right at the end of the aforementioned 2010 Bordeaux campaign, those very high prices began to look excessive. And when the Chinese saw the prices were falling, they simply weren’t interested in the varietal anymore. Overall, the market fell 15% in 2011 and another 9% in 2012. Any momentum left had halted and, without the traditional market, wine makers and exporters were unsure of who exactly they had been selling to.
“What no one knows, regardless of what they say, was the full measure of the Chinese demand for fine wine or its consumption. It’s effectively a black hole,” Gibbs says. “80% of the market is a grey market. You could go to the ‘official’ importers but they only tell part of the story. The rest is unaccountable. And no one really knows when the market is full. It seemed an insatiable demand; people thought there was never going to be enough Bordeaux. We were beginning to believe it was an almost unstoppable trend.”
But it wasn’t. And to compound the fall, the then one-dimensional popularity was succumbing to the problems that have become somewhat expected in emerging markets, the most prominent being corruption in the government and the misappropriation of public funds for these celebratory or “official” events as well as the exchange of gifts. President Xi Jinping, elected into office in 2012, chose to have none of it and took immediate action. As fraud ensued, a swift response by his regime with regard to the gifting of liquor caused significant hampering of sales for fine wines. Additionally, there was an increasing awareness that investments in French vineyards were being used to launder money, utilizing the then rampant overvaluation of wine. In a like-minded effort to Jinping’s, France’s Finance Ministry issued a 2012 report calling for increased vigilance in selling vineyards to foreign investors.
“They were cracking down on corruption and the transfer of elicit fund so it was tough, especially with the new Premier,” Mayer says, “but there was still a strong desire to get money out.”
As the market turn and parallel government interventions decreased the sales for fine wines, there was a silver lining: the void revealed that the market had grown to include a strong middle-class contingency as consumers were increasingly purchasing relatively midrange bottles.
“Demand didn’t go away,” Gibbs says. “They just moved to the same [original] price point with a different wine.”
After the Fall
Thus, as of a couple years back, Chinese investors began entering so-called second grove regions, such as Australia and Chile. As well as Napa Valley and South Africa. They’re entering these markets looking to do more than repeat past mistakes. With each new terroir, the Chinese become better educated in wine, and with that that they are becoming better drinkers. What began as a simple obsession — a trend or status symbol, really — grew into a truly comprehensive market of size, reach, and what has evolved into a much more diverse palate. And rather than simply import the vino, investors are going straight to the vines, taking even more control over what they drink by considering more intelligent approaches to foreign markets as well as producing re varieties domestically, where they have become the fifth largest producers. They are no longer merely interested in the present or short-term value of wine but are interested in long-term investments, ones where they invest even more than capital.
“We met a Chinese businessman who came over looking for viticultural land — his big interest was not only getting into viticulture but something that was sustainable, he wanted something organic,” says Mike Brown, Winemaker at Gemtree Vineyard in the McLaren Vale region of Australia.
This has had a positive effect on the fine wine market as well: 2013 saw a relatively modest fall of 1.4%, down nearly 8% from 2012. And by the end of 2013, there was a good 60 to 70 chateaux in Bordeaux under Chinese control, with many real estate agencies hosting dedicated China desks to facilitate these transactions and encourage future ones.
“They’ve learned something in the process,” says Gibbs, “It’s no longer in this boom-bust cycle. China has been very firmly introduced to the fine wine market so they’re going to have an on-going impact.” Wine is truly a part of the Chinese vernacular. And now they uncork nearly 2 billion bottles of red wine a year.
Perhaps Gemtree best exemplifies the level of commitment Chinese investors are willing to put forth. Whereas before they had been more interested in the cash flow or, again, obviously palpable value of wine the commodity, there is a much greater appreciation and respect for the process and what it entails. The Chinese investor first showed this appreciation by first setting up an expansive distribution platform for Gemtree’s product — “second to none” according to Brown — with cellar doors in seven different provinces (looking to double this year) and a large Chinese sales force. They also respected Gemtree’s familial roots, allowing the family to be the one determining how the vineyard and region were represented to a huge market of thirsty oenophiles.
“It’s an amazing opportunity in a country that is essentially embryonic in their understanding of wine,” Brown says. “They understand luxury. They understand that it costs them money to buy quality — they were fascinated with Bordeaux. We’re introducing them to McLaren Vale which is amazing quality wine and we’re introducing them to Gemtree which is affordable.”
And the engagement has evolved into a partnership. The Chinese investors have made a $30 million investment into Gemtree — arguably the largest in Australia to date — and while there has been a nationalistic outcry of sorts from some, this capital is again not in the commodity but in the foundation and process, promising to build Gemtree’s base to allow them to grow an Australian company on Australian soil making for better mutual relationships with a chance for longevity. The money they were once so boldly and, quite frankly, naively pouring into ventures abroad has transformed into smart money. And it will only get smarter with exposure, from one-vineyard operations to comprehensive distribution networks — this time on a stronger more experienced and sophisticated infrastructure that is able to properly service the wine industry.
Chile has experienced a similar influx of Chinese influence: between April 2012 and March 2013, in one year's time, a reported 2.4 million cases were exported from the South American county to China. They have even gone as far promote their wine utilizing an internet campaign through initiatives led by ProChile, a Chilean governent program.
“The Chinese market will continue to become more sophisticated,” says Maher. “I think those importing wine back to China need to create a large volume — a large book of wines at an aggressive price of distribution. I think the trick is to get value priced wine in good quantities. Once you start establishing broader distribution you can layer in higher priced wines and higher margin items.”
However, ultimately, though investments are increasing in Australia, Chile, and Napa Valley, China’s future in wine may very well follow the path of many products before: made in China. While vineyards and plantations are decreasing in places like France and South America, China now has more vineyard hectares than the United States. Whichever way China proceeds, they are an undeniable influence force and force, even, in the wine industry with no sight of that role diminishing.
“China is going to be a significant part of the fine wine market moving forward, but it’s going to be a wiser market,” Gibbs says. “One is going to have to be cleverer and not expect such leaps and bounds for the price of your wines that we had in the initial gold rush."
Michael Woodsmall is a writer and editor based out of Santa Monica, California. He cut his teeth through consulting on a number of editorial startups and a handful of apps, and previously served as the Managing Editor of The New York Observer as well as Co-Creator of Supecompressor. He is now a Contributing Editor for The Inertia.
Watch our video interview with Gemtree Wines owner Mike Brown.
"What he had done in China is set up a distribution platform that I believe is second to none. We currently have seven cellar doors set up in seven provinces. That will double by this time next year. We have 300 full time sales people selling Gemtree wine full time in China."