Chapter 3
Big Trouble in
Not-So-Little China

Mark O’Callaghan
26th April, 2021

  • Many wine businesses no longer have a short-term nuisance to ride out. They now have serious, long-term problems.
  • The long-run impact and the least-worst responses will vary between businesses.
  • From assertive (new entrants, new products, new bottlings, new markets) to defensive (shrinking or selling vineyards) measures, many good, rational options remain.
  • The high cost of doing nothing.

Houston, we have a problem

When China’s Ministry of Commerce (MOFCOM) announced in March that it would extend its interim import duties for most Australian wines for the next five years, many producers went from having a short-term challenge to a serious long-term problem. Moreover, last week’s cancellation of Victoria’s Belt and Road agreement is unlikely to improve market access.

When relations improve and (hopefully) trade settings return to normal, the market recovery work will be exhausting. Just as it was in the USA when listings were lost to very high exchange rates (over parity in 2011), getting those positions back wasn’t easy.

The political tensions have been widely covered and need no repetition here but as managers, we must deal with the world as it is, not as we wish it to be. To that end, the question becomes: what are the least-worst options?

Sudden impact

While the initial imposition of duties was unsurprising, the magnitude of the rates probably was. Now that they have been extended the impacts on different businesses are clearer. The obvious cases are the producers for whom China was the total focus. Unfortunately, many have no contingency, no channel diversification, no understanding of other markets and often wine styles, branding, pricing and packaging that do not resonate elsewhere.

Their difficulties are shared by their supply chain. Cork suppliers saw their orders collapsing many months ago, barrel suppliers saw the same – especially in the warmer regions – and I would certainly rather have 10 Ha of uncontracted Tasmanian Chardonnay than the same of Barossa Cabernet.

With respect to vineyard impact, there will primarily be two different overlapping categories: those that supply the wines of the classic warm, ripe, fuller-bodied red styles (overwhelmingly S.A., Sunraysia, Riverina, etc.) and those that will be influenced by inbound investment (regions around Melbourne and Adelaide, for example) which are often as much about lifestyle as they are about wine business.

Another significant category will be what is sometimes called “visa wine” or the channels that supply Chinese citizens seeking a path to Australian residency. The extent to which these have supported the recent high average export prices is unknown but some estimates put the value of this category at over half the total. The outlook is bleak for these businesses but almost none of this wine ever aligned with Australia as a fine wine brand.

Glasses half full

Despite the understandable pessimism, there is still much that can – and should – be done to minimise the harm and maximise the long-term value of investments in hard assets and brands. “Diversification”, the ubiquitous buzzword, is easier said than done, whether that is internationally or domestic. Markets like India are mind-bendingly complicated and normal travel won’t resume any time soon. For some, this is an opportunity to re-work vineyards for the future and others might need to re-think their winemaking styles, even with simple things like ripeness and oak use.

To avoid the tariffs while complying with the current regulations, some are exploring their options for in-market bottling. An attractive option with potential but not without problems or risks. These include underdeveloped QA systems, an inability to label the wine as being Produce of Australia, regulations changing and a history of wine counterfeiting in some regions. Some firms are also exploring their supply options from other countries so their brands can continue trading.

These approaches – and many others – have their difficulties, risks and costs but it is important to remain positive. There are always options.

Pay now, pay later

Strictly speaking, doing nothing is an option. It is just a bad one. Procrastination and delay will usually just lead to decay of vineyards, wineries, bottled stocks, team morale and brand strength. Even for investors whose best option is, sadly, to divest, being proactive will still yield a better price tomorrow than a distressed sale of a tired asset in three years’ time.

What’s next?

Charting the right course will be tricky and many of the best choices will be tough, but panic and haste do not help. We have supported many clients through difficult times over the years and there is always a way forward. One of the keys is understanding not just the environment around you but your own strengths and weaknesses.

Mark O’Callaghan is Managing Director of Wine Network Consulting. Based in the Yarra Valley, but working on projects around Australia, the UK and China, Mark is a regular contributor to various wine industry bodies and wine show judge. The views expressed here are his own.