China's crowded wine market offers no lifeline to struggling global industry

Kathy Hall reports.

SHANGHAI (Reuters) - Australia's wine industry was cheered by news that China will lift anti-dumping duties and reopen its market to imported wine, but a tougher economic climate in 2024 is unlikely to bring the kind of sparkling growth winemakers are looking for.

China has driven the growth of the global wine industry for two decades as hundreds of millions of Chinese middle class people have begun to enjoy 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 has been prolonged by the long-term disincentives it brought.

"In terms of consumer interest in wine, the market has shrunk dramatically and there is no sign of this reversing after COVID," said Kym Anderson, executive director of the Wine Economics Research Centre at the University of Adelaide. There's no sign of that being reversed after COVID," said Kym Anderson.

He added that "apparent consumption" of Chinese wine in 2023, which includes both imports and domestic production, would be just a quarter of its 2017 peak, with annual imports shrinking by two-thirds over that period.

At the same time, more and more domestic and global companies are entering the market, launching alcoholic beverages in addition to wines, said Judy Chan, chief executive officer of Grace Vineyards, one of the country's leading winemakers.

"Now that we're seeing more cocktails, more craft beers, consumers have more choices," she said.

Wine ...... has an aura of international sophistication," she said. Part of the problem is that it has lost that aura.

Founded 25 years ago in the northern Shanxi province, Grace is a wine producer that has now begun to diversify its portfolio with the production of gin.

China's alcohol market is the largest in the world, with an estimated $336 billion, but it is dominated by the hotly contested national liquor market. After COVID-19, consumer malaise has hampered efforts by foreign wines to capture a bigger share of the market.

Although consumer confidence rose by 1.5% in January, it hovered near record lows as China's slowing economy, sluggish real estate market and high youth unemployment curbed discretionary spending.

Yu Yan, who uses the social media app WeChat to sell her wines directly to her customers, mostly middle-class, said they have become more price-sensitive since the pandemic and that her wines are most popular at prices below 200 yuan ($28).

"China is so difficult, and the environment is so bad," said Ms. Yu, whose mass transit center is in the commercial center of Shanghai.

"I needed to find people who hadn't tasted wine yet and were curious about it. That's how I developed my business. You have to be competitive.

Winners and losers

However, the market is still strong and Chan says people are willing to buy good quality Highland wines.

"She was referring to Penfold's, the best-known brand of Australia's premier wine producer, Treasury Wine Estates.

"People are willing to pay for such a prestigious wine brand.

Despite the fact that TWE's export business to China has been wiped out by the punitive tariffs of up to 2,18%, TWE has continued to invest in the Chinese market and has launched Chinese wines.

While quality products like Penfolds are likely to be encouraged, the re-entry of Australian wines into the Chinese market will be very difficult for many other producers who are already facing a serious oversupply problem.

They will reduce the market share of countries such as France, Chile and Italy, which have benefited from the lack of matting in Australia, and become leaders in China's US$1.6 billion import market, with shares of 48.24%, 19.31% and 10.1% respectively in 2023.

Australia signed a free trade agreement with China in 2015, which provides freedom of movement for its wines and gives Australia a 14% tariff advantage over many countries.

As much as this is the case, it will take time for Australia's export capacity to China to rise, and with the overall market shrinking, it is unlikely that imports will quickly reach the A$1.2 billion (about US$790 million) that they were at before the outbreak in 2019.

But that doesn't rule out hope for growth in China's wine market, and while she worries that the peak of China's wine market may be over, she still has faith in the stability of China's wine market.

Anderson said there is still room for growth in China's wine consumption, as adults in China consume less than half a litre a year, and wine accounts for less than 1.5% of all alcohol consumed in China.

As much as possible, China has "sleepily" upended normal expectations for growth in wine consumption in developing markets.

"Considering the growth in incomes, and what we are seeing from many other countries and cultures, there is no reason why we should not expect wine consumption to continue to grow at the same rate in China," he said.

(US$ 1 = RMB 7.2358)

(US$ 1 = A$ 1.5191)

(Reporting by Kathy Hall; Editing by resonance Larance Fernandez)