More than 1300 days after China Alcoholic Drinks Association (CADA) spearheaded an inquiry into Australian wine imports, that led to tariffs of over 200 per cent, the relationship between China and Australia might soon return to what I have heard some trade people call ‘normal.’
Numerous media reports, including this one, this one and this one, indicate that China has drafted a proposal to end the tariffs, with a final decision expected in the coming weeks, which fits snugly with Australia’s invitation to Chinese Foreign Minister Wang Yi to visit in late March.
Eight thoughts about this situation.
‘Normal’
‘Normal’ suggests a prolonged period with a standard pattern, something that is hard to find anywhere in Australia’s tumultuous romance with China’s market.
Consider a dozen years ago: Australia’s best-case scenario was generally seen as a bridesmaid to France, then with a seemingly ‘insurmountable’ lead in imports. In 2011, for example, France’s wine imports were over 350% higher than Australian ones, both by volume and value.
Then, Australia caught the bouquet, in the form of a free trade pact with China in 2015, thus delivering it a key advantage versus other suitors of Chinese wine consumers. A few years later, it was Australia’s ‘big day’ as it reached USD1 billion in year-on-year in wine imports, the top spot in the market.
But rocky times soon appeared as, starting in 2020, the COVID crisis devastated a wine scene where sales are often dependent on socializing, such as business dinners and banquets, with Australia also upsetting China with comments re that country’s possible role in the global health crisis.
Finally, the ‘divorce’, as the complaint by CADA–which has now turned its attention to European brandy–led to those tariffs, in turn, Australian wine imports falling to near zero.
Now, it seems the couple might get back together, and there are lots of things to consider.
Peak Australia
Peak Australia was just before the COVID crisis hit, when import value topped USD1 billion and the sky seemed the limit. Australia was leveraging its good reputation for food safety, quality products and, in terms of wine, ‘bottled sunshine’ plus its familiarity with Chinese tourists, students and workers.
Wine Australia’s China office–now closed–was active with high-profile tastings, wine forums, trade fair activities and other promotion.
And Chinese investors in Australia’s wine industry, in some cases inspired by gaining residency, shipped production back home and helped boost those import numbers.
Peak Penfolds
That time might also be called Peak Penfolds, as that and other brands from parent company TWE had a substantial slice of the market. As I posted just before COVID broke, inside sources pegged TWE’s shares of Australian imports in China at 30% to 40% by value and 10% to 15% by volume.
Consider January to August 2019: TWE sent an estimated 10.3 million liters out of Australia’s 82 million liters of bottled wine, ranking it sixth among *countries*, with double the volume of the United States or Portugal, and 40 percent of Italy’s share. Or as much as South Africa, Argentina and Germany combined.
The value numbers were even more stunning. A 35% slice meant a huge USD194 million of Australia’s USD553 million in imports, the same as Chile, roughly double Italy or Spain, and eight times more than the United States.
And one claim that Penfolds share was much bigger pushed those numbers much higher.
The gap between volume and value also meant TWE / Penfolds was responsible for Australia’s overall high value per bottle.
Full Cupboard
The post-tariff years revealed just how much excess Australian stock was in the market. Reports of more than 100 full containers of wine at Customs / in storage persist. And it’s just one viewpoint, but I can still find Australian labels on shop shelves in my neighborhood.
Of course, some bigger Australian brands needed to take action.
Penfolds launched its ‘One’ series, with wines from China, France and the United States. Others, such as Jacob’s Creek and YellowTail, turned to South America to fill up bottles–I wonder how many consumers realized the wine inside was not from Australia?
Hardys, using South African wine bottled in China, sells at a discount shop in my Beijing neighborhood for RMB19.9 / USD2.80 per bottle.
In other words, the goodwill built by Australian wine was in some cases reduced to the brand name on the bottle rather than what was inside it.
Persistent Penfolds
At the same time, TWE / Penfolds remained active in China: organizing product launches, working with KOLs / marketing mercenaries, importing its French and U.S. labels and awarding scholarships at Chinese universities. Penfolds also released a wine using Cabernet Sauvignon from Yunnan and Marselan from Ningxia named CWT 521, with critic Shuai Zekun of jamessuckling.com ranking it number 99 in the top 100 China wines.
TWE also partnered with CADA, making a “long-term, multi-faceted strategic co-operation agreement” with the organization enabling the tariffs in the first place.
Reportedly, TWE has loads of stock ready to push into the China market. Perhaps, it can recapture the romance of the good old days, when Penfolds was seen as a status buy / dependable luxury gift by people who knew little else of wine — who remembers Bin 620! Maybe Lu Yang, the winner of the first Penfold’s China Sommelier Competition, and other big-name KOLs can help!
‘New Normal’
And perhaps not. The China wine market looks significantly different compared to three and a half years ago. As I wrote about the 2023 import stats:
“The bad news is bottled wine imports in China fell 17.6% by value and 29.1% by volume in 2023, a year we hoped would deliver a big rebound after three years of ‘zero-COVID’ restrictions from 2020 to 2022.”
“The really bad news is this crash isn’t part of a similar disaster for imported alcohol in general, as both spirits and beer performed far better, and that underscores that wine faces a particularly serious crisis.”
At a deeper level, the struggles of the China wine market go back much further. In a recent Grape Wall newsletter, I covered local production from 2008 to 2023: “output fell 89.6%, revenue fell 87% and the number of producers fell 58.5% from their highest points over the past 15 years.”
What we see now is both the imported and local wine trade falling further behind craft beer, spirits et al, with much of this due to falling status-based buying for gifting and business entertaining and banquets, usually for the big red wines for which Penfolds / TWE and other Australian producers are known.
Wakeup Call
This situation has been a wake up call for China’s producers. When the tariffs hit, I heard some claim that the tariffs were a golden opportunity, namely, a chance to fill the vacuum left by Australia and give local wines their supposedly rightful place. Of course, France, Chile and others also had this idea of grabbing that share.
The big revelation is how all of these competitors are focused on redistributing China’s shrinking wine market rather than growing it.
As wine loses ground to craft beer, whisky, brandy and [fill in the blank], the trade at large needs to focus on attracting consumers of such products rather than redistributing the small group of followers they do have. Fortunately, we do see a growing niche of importers and producers who realize this.
Wakeup Call 2
This should also be a wakeup call for Australian producers. They remind me of many who are lured by the prospects of a huge market but who find, after putting in the blood, sweat and tears, the payoff is much smaller than anticipated, if they receive any payoff at all.
Yes, Penfolds may do well once the tariffs lift, given its financial strength and ability to appeal to the status-based buyers out there. But most will have to adjust their strategies and their expectations substantially as they rebuild a market share many feel they never should have lost in the first place.
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