China wine market unlikely to help struggling industry

For two decades, China has driven growth in the global wine industry as many among the hundreds of millions entering its middle class acquired a taste for wines from Australia, Chile, Italy and France.

But industry executives in China say the market, and domestic consumption, are still struggling to recover from a downturn that began before the COVID-19 pandemic and was drawn out by the lengthy curbs it brought.

"The market has shrunk hugely in terms of consumer interest in wine and that's not showing any signs of reversing post-COVID," said Kym Anderson, executive director of the Wine Economics Research Centre at the University of Adelaide.

China's "apparent consumption" of wine in 2023, which includes imports and domestic production, was barely a quarter of its peak in 2017, with annual import volumes shrinking two-thirds over that period, he added.

At the same time, more domestic and global players have crowded into the market, with many alcoholic drinks besides wine also on offer, said Judy Chan, chief executive of leading domestic winemaker Grace Vineyards.

"Now we see more cocktails, craft beers, there's so many more choices for consumers," she said.

"Wine ... had this halo of international sophistication. Part of the problem is that it's lost that halo."

Grace, set up more than 25 years ago in the northern province of Shanxi to make wine, has also started making gin to diversify its offering.

China's alcohol market is the world's biggest, estimated at $US336 billion ($A511 billion), though a fiery domestic spirit, baijiu, dominates it. And efforts to claw a bigger share for foreign beverages have been stymied by consumer malaise after COVID-19.

Although the consumer confidence index rose 1.5 per cent in January on the month, it is hovering near historic lows as China's economic slowdown, sluggish property market and high youth unemployment damp discretionary spending.

Yan Yu, who uses social media app WeChat to sell wine directly to clients, most of them middle class, said they had become more price-sensitive since the pandemic, with the most popular price point for her wines below 200 yuan ($A43).

"China is so difficult, the environment is so hard," said Yu, who is based in the commercial hub of Shanghai.

"I need to find people who haven't tried wine yet and are curious. That's how I grow business. You just have to compete."

Yet the market at the top end remains stronger, Chan said, with people ready to buy high-end wines of good quality.

"I think Penfold's will do really well," she said, referring to the most famous brand of Australia's top wine producer, Treasury Wine Estates, as it returns to China.

"People are willing to pay for a recognisable wine brand like that."

TWE has been betting as much, continuing to invest in the market and turning out a Chinese-made wine despite punitive tariffs of up to 218 per cent that obliterated its export business to China.

While exceptional offerings such as Penfold's are likely to receive a fillip, the re-entry of Australian wines to China will be tough for many other producers already battling serious issues of oversupply.

They will shrink market share for nations such as France, Chile and Italy that benefited from their absence to become the leaders of China's $US1.6 billion ($A2.4 billion) import market, with shares of 48.24 per cent, 19.31 per cent and 10.1 per cent respectively in 2023.

And Australia's 2015 free trade deal with China frees up its wine shipments, giving it a 14 per cent tariff advantage over many nations.

Still, ramping up Australia's export capacity to China will need time, and imports in a shrinking overall market are unlikely to quickly reach 2019's pre-pandemic figure of $A1.2 billion.

That is not to rule out hopes for China's wine market to grow, with Chan betting on a stabilisation, even though she fears the peak has probably passed.

Anderson said there was room for growth as annual adult consumption stands at less than half a litre and wine accounts for less than 1.5 per cent of all alcohol consumption in China today.

Still, it was "confounding" that China had overturned normal expectations for the growth of wine-drinking in a developing market.

"Given the growth in incomes, and what we have seen from many other countries and cultures, there's no reason why we shouldn't have expected the same type of growth in consumption of wine to continue in China," he said.

Australian Associated Press