Bordeaux and China
FIRST PUBLISHED WINE BUSINESS INTERNATIONAL, MAY 2011
There was an excited whisper following one particular group during the Bordeaux en primeur tastings this year. It was repeated at each of the most illustrious chateaux, and every time would be followed by the people in question being swept off into a private room and attended to by the chateau director or owner.
You won’t be surprised to learn that the excitement was prompted by a group of senior directors – not even wine buyers – from Air China. And the whisper that followed them was, ‘They are going to be the largest airline in the world in the next few years.’
There were a few other tell-tale signs of how the market has shifted. During a week when 6,000 wine professionals from almost 70 countries had travelled to the region, at almost all the top name chateaux, vintage reports were piled on tables in a choice of just three languages – French, English and Chinese. Several estates, including Chateau Haut-Brion and Chateau Cos d’Estournel, had Chinese-speaking staff on hand, some freshly hired for the occasion. And there was plenty of speculation that even at 2009 prices – or higher – the majority of the 2010 vintage would be heading eastwards.
To say that Bordeaux is full of optimism for the Chinese market would have most observers snorting into their cornflakes. On paper, the figures back up the optimism – China, including Hong Kong, became the world’s largest importer of Bordeaux wines in 2010, importing some 33.5 million bottles at a cost of €330 million, according to figures from the Bordeaux Wine Bureau (CIVB). Bordeaux accounts for around 30% of all French wine imports to China, and the latest figures reflected a value increase of 98% for China and of 126% for Hong Kong. The UK, from January to October 2010, imported wine to a value of €221m, reflecting how this most traditional of Bordeaux markets is being eclipsed by the Far East – even if right now more Bordeaux imports to Hong Kong come from England than from Bordeaux itself.
In 2011, according to the Chinese Academy of Social Sciences, the country is due to overtake the Japanese as the world’s largest consumer of luxury goods. Already in 2010, they consumed US$9.4 billion worth of luxury goods, leap-frogging the United States into second place globally. And the top estates of Bordeaux, despite still professing to be ‘drinking wines’, are in reality fast repositioning themselves as luxury goods.
‘China has contributed hugely to exhausting any inventory that the 1855 chateaux were holding in stock – and this has inevitably put pressure on prices. But once a wine bypasses the €1000 a bottle mark,’ says Jean-Pierre Rousseau of Bordeaux wine merchants Diva (a company which counts over half its turnover from Asia), ‘it is necessarily limiting itself to a tiny number of buyers – and right now, those buyers are almost entirely in China. To pretend otherwise is simply not realistic.’
But although this is nothing new (the appetite for drinking top Bordeaux has now been obvious in China for at least five years), the effect of the ‘Chinese Invasion’ – as a local newspaper described it a few months ago – is less clear, but potentially game-changing. Not least because the Bordélais are realising that they cannot entirely dictate the terms of engagement.
Firstly, there is the obvious effect – price rises in the market, and a skewering of the export destinations for the wines. Some estimates for the 2010 en primeurs expect prices to move upwards of 30% from 2009 for the top estates, and most believe that the Super Seconds (which now include the second wines of the First Growths) will try to match the price rises of the Firsts. Besides the obvious question of whether they will find buyers at these prices, commentators suggest that the price rises are changing the very fundamentals of the Bordeaux system; where a group of négociants have historically parcelled up small segments of chateaux production and distributed them widely across the world, thus ensuring controlled supply, slowly increasing prices and effective brand-building. Increasing numbers of alarmist headlines suggest that the market is getting dangerously dependent on one country, and that no matter how closely chateaux monitor their distribution, wherever it is initially sold, the wine will still end up in China, where the prices are highest.
Of course, to date, the Chinese have only really been buying the very top and the very bottom end of Bordeaux. And many other wine-producing countries (and smaller chateaux within Bordeaux) would love to be facing the same problems. Marc Soccio, senior analyst at Rabobank, commented in his Global Wine Quarterly report, ‘French wine producers formed deep distribution channel partnerships and strong consumer associations with their products owing to pioneering efforts since the early 1980s. With the general level of consumer appreciation of wine (in China) at an elementary level, distributors play a critical ‘gatekeeper’ role in influencing what consumers purchase and how they perceive value. With wine consumption still predominantly based around customary entertaining and gift-giving occasions, Chinese consumers are primarily interested in making a ‘safe’ purchase that can confidently convey a suitable level of prestige, status and respect. More often than not, this means French.’
Thomas Jullien, the CIVB’s representative in Asia, based out of Hong Kong, thinks talks of an over-reliance on the Chinese market is absurd. ‘Overall around 5% of Bordeaux production goes to China, while 60% goes to France. If we worry about over-reliance on one market, it should not be China, particularly when you look at the depth of the market, and the growth rate of its economy. If you take a longer-term view, you see that high-end Bordeaux wines have always been sought-after by emerging economies – that has been the long-term history of the Bordeaux wine trade.’
Soccio to a large extent agrees with him, certainly in the context of the current economic reality. ‘It's a difficult balance to strike. I wouldn't say they're over-dependent at this stage, but this market has undoubtedly gained in significance and provided welcome and lucrative sales during the global economic downturn. They're right to capitalise on their market development efforts in China, especially when other more traditional markets are struggling, but they need to be mindful of maintaining service to long standing customers around the world.’
There is another interpretation possible though. Although it has certainly been the history of Bordeaux to export its best wines – only 40% of its overall production leaves France, but 70-80% when you take the classified estates (whether 1855, Pessac Léognan or Saint Emilion) and the top Pomerols. The really interesting question is, now that Chinese businessmen are replacing Robert Parker as the single most important price-indicator for Bordeaux wines, what does this mean for the trading system? Are the Bordélais fooling themselves that they continue as before, without realising how fundamentally different the Chinese approach is likely to be?
Until now, as new markets came on board, access to them was controlled by Bordeaux merchants, and to a certain extent by English merchants who have secured large allocations over centuries of trade. The Chinese, or so it seems on current evidence, are not interested in following this system, and are buying estates with the stated intention of shortening the chain between producer and consumer.
This makes it possible to see the influx in recent years of Chinese property purchases in Bordeaux as a potential launch-pad, as opposed to an end in itself. Purchases started small in January 2008 with Chateau Latour Laguens in Entre deux Mers and most recently (March 2011) had moved upwards to the more prestigious Cru Bourgeois estate Chateau Laulan Ducos in the Médoc. After each of the sales (seven in total, three this year alone), the distribution of the wines moved entirely to China. Even Laulan Ducos, a wine that traditionally has been sent to around 40 countries worldwide, will now send its entire 150,000 bottle production to China, bypassing the traditional network of brokers an merchants – and has been given a packaging makeover to suit Chinese consumers.
But the most interesting development came in February 2011, with the acquisition of Lalande-de-Pomerol estate Chateau de Viaud by a government-backed agri-business conglomerate, COFCO. Speaking at the signing ceremony (in itself highly unusual), COFCO vice chairman Chi Jingtao said that the Chinese government was interested in assuring products sold in China were authentic and unadulterated. ‘We have a strategy for constructing a complete chain from production to consumption to guard against forgeries and to reassure our clients. Being involved from the vineyard upwards in Bordeaux helps to strengthen this commitment.’
Among their stated plans, besides the distribution of Viaud itself in China, was the distribution of other classified wines through a merchant company owned by the previous owner of Viaud, Philippe Raoux, and the creation of a branded wine for the Chinese market. Owning a chateau in Bordeaux allows the property holder to get round complicated rules about grape purchases, and gives them theoretical access to large amounts of wine. Until now, very few chateaux owners have taken advantage of this, leaving it to the Bordeaux négociants. But the Chinese owners are happy to do it themselves.
Jean-Luc Coupet, director at Wine Bankers & Cie, was instrumental in putting together the Viaud puchase, and sees it having a far-reaching significance. ‘By making this purchase, the Chinese government has legitimised the idea of investing in Bordeaux vineyards. In a country where government-approval is all-important, I think this will have an immense impact, and we will see the value and prestige of investments rising over the next few years. There is not much resistance to selling classified estates to the Chinese from the Bordeaux side, particularly when there are shareholders involved – and why should there be, when the French are prolific investors in vineyards world over. But more fundamental changes to the market? I am less certain about that. Return on investment is slow with vineyards and the current system needs big pockets and a long-term view.’
The biggest concern may well be that, while things are good, no-one wants to look too closely. As Coupet says, ‘Right now there is a balance between chateaux and négociants, but if prices drop, it can becomes a war, as has happened in the past. When all goes well, négociants easily sell upwards of 100 to 200 names. When things go badly, that shrinks to 30 or 40. That model becomes less sustainable today, when chateaux demand to know their customers and don’t leave it all to merchants as they did in the past. Then the Chinese arrive, without the same historical hang-ups, and take distribution in their own hands. It’s possible that all this may speed up the process of a split.’
Another much-disputed effect of recent price rises in Bordeaux has been the growth of wine investment funds and online wine trading platforms such as Liv-ex and the newly launched BWineEx, that treat the trading of wines in the same way as any stock exchange. The concern is that the wine funds, more than any other factor, are skewing the market by buying up reserves of wine and holding on to them, creating the potential of a glut. Similar companies are now springing up in China itself, suggesting the formation of ‘a bubble within a bubble’ as commented one Bordeaux observer. The Industrial and Commercial Bank of China and China CITIC Bank began to provide financial products investing in wine in cooperation with Chateau Junding (co-owned by COFCO) in 2008, and in October 2010 the first foreign-backed fund opened within China itself from the French bank Société Génerale. It’s not hard to see why this is happening – the average age of wealthy people on the mainland (meaning those with more than $1 million investable assets) is 36, compared with 48 in Hong Kong and 43 in Taiwan, a report from HSBC Holdings Plc showed. And these young millionaires are interested in wine. Tellingly, a new Chinese government watchdog body was created in early 2011 to oversee the wine industry, in recognition of how dizzying fast it is growing. These funds are almost entirely stocked with Bordeaux classed growths and the concern is that while they have helped maintain their pricing, but if the market falters, could prove toxic to the overall system.
The Wine Property Market
So far, Chinese property purchases are not translating into increased prices for sellers. The vineyard property market in Bordeaux remained relatively stable in 2010 according to the SAFER Aquitaine Atlantique. There were 345 transactions resulting in 1490 hectares changing hands in 2010 as against 328 transactions and 1590 hectares in 2009. The overall value of these transactions declined by 11% over the same period, from €110 million in 2009 to €97 million in 2010, perhaps because as Alex Hall, vineyard consultant, points out, ‘So far Chinese purchases have been made in appellations where supply outstrips demand. Ironically, many of the properties they are interested in buying are on the market because the owners have the product but lack the distribution.’