Domestic wines hit the spot

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When Dynasty Fine Wines Group began producing what it claimed to be the first bottles of western-style wine in China 25 years ago, customers thought the drinks were rotten.

"Chinese grape wines had always been sweet but our wine tasted a bit sour," admits Gao Xiaode, general manager at Dynasty, a joint venture between state-owned Tianjin Development Holdings and France's Remy Cointreau. "In China, people think food and drinks that have a sour taste have gone bad."

Thanks to several marketing campaigns and encouragement from the Chinese government, many consumers have since embraced wine as a fashionable beverage and healthier alternative to traditional rice spirits.

The change in Chinese palates has not only helped Dynasty to become the country's second largest wine producer, but it has also paved the way for a HK$550m (US$70m) listing on the Hong Kong stock exchange this month.

Benefiting from China's runaway economy and the increasingly chic lifestyles of its urban population, the wine retail market nearly doubled from Rmb1.9bn in 1997 to Rmb3.4bn ($411m) in 2003, according to Access Asia, a Shanghai-based research house.

The World Wine Industry Association expects wine sales in China to increase by 35 per cent in the period of 2003-08, compared with the global average of 5.4 per cent.

While white wines account for more than 60 per cent of the Chinese market, red wines have seen stronger sales growth in recent months. Analysts point to the widespread belief that red wines are healthier than white wines. It also helps that red is seen as a lucky colour in China.

"Expensive bottles of red wine have become the latest 'trophy drink' of the Chinese nouveaux riches, who like to drink such wines when eating out," writes Access Asia in a recent report.

Despite the occasional Bordeaux blanc or Jacob's Creek, domestic winemakers such as Changyu Group, the country's biggest wine producer, accounted for 90 per cent of domestic sales in 2003, helped by lower prices and extensive distribution networks.

Foreign brands are required to pay import duties, which dropped from a peak of 44.6 per cent in 2001 to 14 per cent last year. As a result, the average price of a bottle of imported wine is about US$10, compared with US$2-$4 for Chinese wine.

But some analysts believe Chinese wineries will lose their competitive advantage, pointing to a further reduction in import taxes and a growing popularity of foreign brands among wealthy consumers.

"Our customers prefer foreign brands because Chinese wineries have a much shorter history and their production is considered less sophisticated," says Mark Ruan, assistant food and beverages director at the Portman Ritz-Carlton hotel in Shanghai.

Yet Dynasty remains sanguine. The company's turnover for the first nine months of last year rose 25.4 per cent to Rmb620.9m, while net profits jumped 40.4 per cent to Rmb96.5m, according to the company's listing prospectus.

"Ten years ago, customers might have thought that a bottle with a foreign brand was better," says Mr Gao of Dynasty. "But now they realise that for the same amount of money they can buy much better Chinese wine."

While alcoholic drinks are an integral part of Chinese celebrations and family reunions, wine accounts for just over 1 per cent of the alcoholic drinks market. Annual per capita consumption is less than a quarter of a litre, compared with 3 litres in Japan and 59 litres in France. Indeed, the retail wine market as a proportion of total alcoholic drinks sales has been gradually shrinking since 1997, according to Access Asia.

"We are confident that wine consumption will continue to grow because [disposable household] incomes are rising," insists Mr Gao. "More people will be able to buy luxury goods such as wine."

To prove its point, Dynasty is planning to use the proceeds of its initial public offering to lift its production capacity from about 30,000 tonnes last year to 70,000 by 2008.

The company is also stepping up its marketing efforts, in the hope of winning over sceptical consumers.

Paul French, one of the authors of the Access Asia report, believes Chinese wine companies have yet to push their products beyond the "status symbol level" and into the mass market.

"In China, some people drink wine because they like it, while others drink it because it's fashionable. But how many of them will become repeat buyers?" asks Mr French. "It's like coffee. It's fashionable now but in a couple of years people may move on."

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