China is no longer the wine sponge the industry had previously pegged it as

China is no longer the wine sponge the industry had previously pegged it as

Problems in China have spooked the wine industry in recent months. Chris Losh takes a look at what has gone wrong in the country, and where else wine producers could look to sell their wares.

Have you heard of the ‘Peak Wine Theory’? It’s the idea that wine consumption has reached its maximum level, and that, volume-wise, it’s all downhill from here. It’s been discussed for much of the last ten years. Indeed, it’s probably been a topic of conversation since the Romans stuck vines across Europe, with gnarled locals leaning on their sticks and saying that this fancy new vineyard was all very well, but where were the invaders expecting to sell it?

Considerations of the PWT have, however, gained a little extra piquancy with the kind of economic news coming out of China.

Even before Black Monday, which saw 10% wiped off the Shanghai Stock Exchange at the end of August, China’s economy was faltering: growth is below 7%, with some experts believing it could dip to 3% this year.

Western countries would, admittedly, dream of such figures. But, given the Dragon economy’s double-digit returns for most of the last decade, the slide towards no-growth, or negative growth, is concerning - particularly for a wine industry that has bet much of the farm on China’s continued success, and is decidedly short of good-news stories elsewhere.

On one level, China still looks promising. A report published in July by market research analysts Wine Intelligence shows there to be positive underlying trends, the most obvious of which is the ‘normalisation’ of wine. "A lot of the initial growth in China a few years ago was driven by dumb money chasing “prestige” wines at inflated prices, which was not sustainable," says Wine Intelligence’s chief operating officer, Richard Halstead. "[The austerity programme] rebalanced the market to something that’s more sensible for the long-term health of the category."

Certainly, free-trade agreements with the likes of Chile, New Zealand and Australia have helped to lower prices of imports, and there are signs of a growing young, urban middle-class drinking imported wine on a semi-regular basis.

But, it’s not all good news. While more Chinese are drinking a couple of bottles every month, fewer are drinking on a weekly basis. And the average price of take-home wine for at-home consumption has dropped from $37 in 2013 to just $26 last year.

Moreover, wine consumption seems to be running a year or two ahead of the wider economy, in that it is slowing down more quickly. Wine imports - up 5% in 2013 - grew just 3% last year. And, the fear that imports could follow domestically-produced wine and actually start to decline is very real.

It’s particularly significant, because China has been the engine that has driven the wine world for much of the last decade. And, while no global markets are in freefall, the industry certainly doesn't have a bountiful well it can keep returning to. Indeed, of the top ten wine markets, according to Wine Intelligence, only two – the US (+1%) and Russia (+0.1%) – sold more wine last year than in 2013.

Moreover, we’re not just seeing the continued long-term decline of big traditional European markets like France, Spain and Italy; Markets that drove growth through the '90s and '00s seem to be topping-out, too. Australia will have fewer regular wine drinkers this year (11.2m) than last (11.5m); Germany, the UK and Nordic countries are all flat or falling.

After two decades of growth, a slowdown in these markets was inevitable – and has been exacerbated by the economic crash of 2008. But, it’s also undeniably true that the Chinese explosion of the last decade has sucked marketing money and investment away from more mature markets. That's understandable, of course. But, it’s no surprise, either, that so many of these mature markets talk of feeling rather neglected.

Driving energy back into them will not be easy and, with the Dragon starting to stutter, it is a major concern to producers that there’s no sign of any other big-volume markets growing fast enough to take up the slack.

Over the next few years, wine companies will have some big decisions to make regarding where they allocate funds and focus. Apart from the US, which is sure to become ever-more competitive, it’s hard to see any markets that look especially appealing. While people talk optimistically of India’s potential, no-one seems to have the stomach for that particular set of challenges right now.

Perhaps the industry needs to turn its gaze towards the Dark Continent. South Africa showed 8% growth last year, and Nigeria is a country that knows how to earn, drink and spend money.

The problem is that, if this is a solution, it’s one for ten years down the line. And, by then, China ought to be over its present economic wobble.

For the next five years, this looks like an industry with a lot of wine to sell and a declining number of places in which to sell it. The OIV estimates wine consumption at about 220m hl for most of the last 20 years. There might be the odd peak and the odd trough, but I’d say we seem to have reached a steady maximum.

Peak Wine, it seems, is no longer a theory, but the new reality.