This week Russell Flannery of Forbes had an insightful article on “How To Start A Wine Business In China”. The article is as follows:
Napa Valley’s Duckhorn sees good prospects in the Middle Kingdom.
It was 2006, and David Duckhorn was looking to the future. His prominent Napa Valley family, along with co-investors, was in the process of selling their northern California vineyards for a reported $250 million. Never tired of the industry, Duckhorn bought the much smaller Via Pacifica of New Zealand, an exporter of wines to the United States. Still open to new business ideas, he one day was chatting with Chinese-American friend Steven Zhao at a restaurant in Sebastopol, California about the prospects for wine sales in China. By the end of 2008, the two along with one other partner set up a wine import company in Shanghai.
Eighteen months later, Via is gaining a toehold in the country’s wine market. Last week alone, Via attracted more than 100 people who paid $50 each to two wine-tasting dinners, and its eight employees are expanding sales in other cities. Duckhorn expects within a few years sales in China will “for sure” surpass Via’s current U.S. total of $5 million. “We see the growth rates here being substantially larger.”
Success could likely be lucrative. ASC Fine Wines, one of China’s largest wine importers, sold a majority stake to Japan’s Suntory Group for a reported $55 million last December, believed to be an industry record in China. Shares in big wine producer Constellation Brands and other international spirits companies such as Foster’s Group and Brown-Forman have rallied in the past year on hopes for the global recovery.
Expansion by Via would be welcomed news for California, whose wine sales fell last year were reported to have fallen for the first time in 16 years. And it would be good for U.S. trade officials that hope exports to fast-growing China will boost the economic recovery. Seated in front of U.S. and California flags and surrounded by wine racks full of mostly Napa Valley exports, Duckhorn explained his China experience and strategy to Forbes in a Shanghai office modeled on the tasting room at his vineyard back home.
What’s working well so far? For starters, Duckhorn picked a niche in China that’s fragmented and growing at double-digit clip, leaving plenty of room for newcomers. Chinese are interested in wine, Duckhorn said, as part of a curiosity about international culture as their incomes soar, especially in rich cities like Shanghai. “It’s more of wanting to participate in the feeling, the culture” rather than a one-off display of wealth, he said. “It’s not like making money and buying a Ferrari.” Via’s pitch in China is that purchasing a bottle of wine “shouldn’t be exclusive just for exclusivity’s sake.”
Wine also appeals because of the country’s great culinary tradition. “The food culture here is so much superior to the States. Wine historically is part of that table. You try to express that (to the customer): ‘Sometimes you want to get a quick meal. Sometimes you’re entertaining the boss’s boss, and you’ve got to bring out something nice.’ You want to incorporate it into that atmosphere.” Wine also holds promise locally because it’s healthy, he said.
In a country where many foreigners complain about red tape, Duckhorn described as “great” the six months Via needed to get business licenses. Via remitted “less than” $500,000 of start-up capital all in one shot to avoid the paperwork of bringing in capital incrementally. The process went well in part because of the previous Shanghai business experience of its third partner, Mark Wang, a real estate investor involved in the development of the building where Via is located.
Now that Via’s Shanghai company is set up, Duckhorn said “95%” of the effort is advancing because of good communication between himself and company leaders on the ground, like Gaylen Richardson a former restaurant wine buyer in California whose industry contacts there are as good as Duckhorn’s own. That’s important, Duckhorn said, in sourcing wines and also because Via wants to control its Chinese operation “from dirt to table: We don’t use middlemen. We don’t consolidate containers with other people. Our own warehouse is three stories below in this building. We don’t have to worry about air conditioning and theft. It is ours.”
Building up business in China isn’t necessarily unlike Napa Valley, he says: “Getting into these places involve long-term relations. Our winery relationships are long-term, too. So the business structure is set up to be long term.
Besides help with paperwork, Duckhorn and Richardson have received help from their Chinese partners in choosing wines to sell. “Red by far dominates the book,” said Duckhorn. Men especially like the stronger flavor. Once customers pick a color,, the business is “more price-point driven than varietal,” he said. Entry prices start at 100 yuan ($14.70), mid-range prices are 200-450 yuan, and higher prices can be as much as 2,000 yuan a bottle.
“We once had a customer who asked about our most expensive wines, and we said, ‘1,000 to 2000 yuan.’ And they said, ‘That’s not expensive enough.’ So we said, ‘We can make it more expensive if you like,'” chuckled Richardson. Once the pricing is set, customers look for help with varieties.
Ironically, once you have a business license, Duckhorn said, it’s easier to sell wine in China than the U.S., where tied-house laws limit sales across state lines and with certain customers. “Here, if you get the right license, you can pretty much sell to whoever you want and sell anywhere. And that’s a huge, huge difference in the mindset of someone coming from the U.S. alcohol trade to the Chinese alcohol trade.” Although China’s is hence more efficient, taxes are much higher than in the U.S.–about 50% per bottle, forcing Via to store inventory in tax-free Macau until it’s ready to ship into China.
One promising segment for wine in China is the gift market, Richardson said. “Bars and clubs are huge, though price sensitive and relationship-driven,” he added. Emerging upscale restaurant chains also have good potential.
Yet the sheer size of China’s wealth and population beyond Beijing and Shanghai seemed to leave Duckhorn as optimistic as much as any marketing details. “It’s kind of like the States, where you have Washington and New York, and a large market beyond. We haven’t even scratched the surface. But it’s the same story.”