China/HK: The New Wine “Vanity” Market for Bordeaux
by Elliott R. Morss
I last looked at the global wine market in 2008, just before the global recession hit. I will provide detail on what has happened since then in an upcoming article. But in summary, wine markets dipped in 2009 but are now making a recovery, led by countries with growing middle classes that have escaped the recession. But here, I want to focus on a single phenomenon – the “vanity” market for Bordeaux in China and Hong Kong.
I have tremendous respect for Bordeaux marketers. They have not allowed Bordeaux to be commingled with other Cabernet Sauvignon or Merlot wines in the eye of the buyers. Table 1 comes from my recent article on marketing wines by regions.
Table 1. – Red Bordeaux and Cabernet Sauvignons
Just look at the price differentials. For wines rated 92, 93, or 94, Bordeaux sells for more than 5 times Cabs that are not from the Bordeaux region. This is even more amazing, given the findings reported in my article on The Taste of Wine:
“Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. …we find that the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less….”
The US Market for Bordeaux
Evidence of a declining US market comes from the following quotes that appeared in the Shanken News Daily:
- David Breitstein, owner of the Duke of Bourbon in Canoga Park, California says: “I spent years selling Bordeaux. Now their wines are priced for a market like China, but not mine. The last vintage my customers could really afford was the 2000. But we can’t sell Bordeaux at $1,000 a bottle today.”
- Owner Jim Arnold of Kahn’s Fine Wines & Spirits in Indianapolis: “Bordeaux commanded half of all premium wine sales in 1990. Today its share is 20% and shrinking…. I’ve sold less than half of my 2009 Bordeaux futures….”
- Johnson Ho, owner of Pantheon Wine Shoppe suburban Chicago, is now advertising 2009 Latour and Margaux at $1,200 a bottle each…. but demand has withered: “I buy a fraction of the Bordeaux I once got….”
- Ron Junge, president and owner of Brown Derby Stores in Springfield, Mo. got one-fourth of all his wine sales in Bordeaux in the 1980s. Today that share has been reduced to less than 5%. He says young shoppers rarely ask about Bordeaux anymore. “For them, buying classified Bordeaux would be like reaching for the stars….”
Why has this happened? Two things:
- Increasing awareness from US buyers of excellent wines from other parts of the world at lower prices;
- The US is not yet out of the recession.
Wine Spectator recently reported that auction sales recovered after the global recession. Global auction sales were $408 million in 2010, up from $233 million in the recession year of 2009. Prices for expensive wines are also up sharply. The Wine Spectator Auction Index increased by 15% over one year, surpassing its 2007 record high.
Source: Wine Spectator Auction Index
Hong Kong has become the worldwide center of wine auctions, which are dominated by Bordeaux sales, out grossing London and New York combined.
Wine Spectator reports that U.S. auction totals rose strongly in 2010, totaling $154 million compared with the previous year’s $107.6 million. But it adds:
“Much of it [growth in US auctions], primarily for first-growth Bordeaux and top Burgundies, is from Asians bidding by fax, phone or streaming Internet to U.S. sales rooms.”
In 2010 the value of Bordeaux imported into the U.S. fell to 99 million Euros (about $147m), down 60%. China has taken up the slack, with exports to China and Hong Kong more than doubling last year to exceed 425 million Euros ($630m).
Table 2 provides data on import trade volumes. China/HK volumes have grown rapidly while other markets have been weak.
Table 2. – Bordeaux: Bottles Imported (in millions)
IMPACT DATABANK also provided data on import values for these same countries. By dividing value by number of bottles, one arrives at bottle import prices. This information is presented in Table 3. Once again, China/HK are in the lead.
Hong Kong serves as the agent for high-end buyers in mainland China. And when the import prices of Hong Kong are broken out, they are even more amazing. On average, Honk Kong paid almost $37 on average for each bottle of Bordeaux it purchased in 2010.
Table 3. – Bordeaux Import Prices (US$)
Source: IMPACT DATABANK
If it is not taste, what is spurring this demand for Bordeaux in China? Again, from my earlier article:
“Lecocq and Visser conclude wine purchases have very little to do with taste: Our results indicate that characteristics that are directly revealed to the consumer upon inspection of the bottle and its label (ranking, vintage and appellation) explain the major part of price differences. Sensory variables do not appear to play an important role.”
Currently the preferred alcoholic beverage in China is low quality but potent brandy. That is followed by beer and rice wines. As Table 4 suggests, the Chinese do not drink heavily relative to other countries, so wine demand could grow for a long time.
Table 4. – Alcohol Consumption, Selected Countries, 2008
Bordeaux will have a long and successful run in China. While China is producing its own good wine (Dynasty and Great Wall Wineries) and more will be forthcoming shortly, Bordeaux and Burgundies have a great following among the wealthy Chinese. And while some of them are quite knowledgeable on wine, many of their friends are not. So to be safe and keep up appearances, they will buy Bordeaux.
I worked with Chinese partners for 15 years. They were always incredible hosts. In all the time I was in Asia, I cannot remember a night when I was not taken to dinner. One time, there were 8 of us working in Phnom Penh. And every night, we would cross the Mekong to go to one of several pretty high-end Chinese restaurants. My partners had a great time drinking brandy, expensive rice wines, and beer. I don’t like any of these, and it bothered my partners that I was not drinking with them.
These are large restaurants and you normally sit outdoors. One night I was walking around at one of these restaurants and I discovered a display case full of Bordeaux. I ordered a bottle. It made my partners happy. And the next night, we returned to the same restaurant and everyone drank Bordeaux. But only for one night.