China wine and spirits market: Pitfalls and opportunities – S5E8

This podcast episode explores the China wine and spirits market with expert Ian Ford, co-founder of leading Chinese distributor Summergate Fine Wines & Spirits, which was acquired by Australian retailer Woolworths in 2014.

Ian has since founded a new company called Nimbility, which provides expertise to wine, spirits and beer producers seeking to export their products to Asia.

In this episode of Drinks Adventures, he advises some of the most common mistakes made by producers in China:

  • Working with the wrong distribution partner. “Any serious producer that’s looking at dedicating resources to China really needs to do their due diligence. It’s extraordinary to me the number of people that will jump into bed with a partner in China that has sold them on a story of ‘great connections with the military’, and somehow they think that’s going to translate into sustainable business for their brand”.
  • Tailoring their brand or visual identity for Chinese consumers. “Adding Chinese characters onto the front label or engineering a label with dragons and phoenixes on it… That sort of thing runs completely contrary to what the Chinese consumers are looking for, which is something that is authentically imported from the country of origin”.
  • Treating the China wine and spirits market as a monolith. “The Chinese consumer is extremely diverse in their tastes, preferences and brand affinities, and the same applies regionally… the cuisine, climate and all of those factors are quite different”. 

Also in this episode, we explore the contrasting evolutions of the wine and spirits categories in China, and what Ian sees as the huge untapped potential for craft beer.

And, Ian shares with us his experience trading in China during the SARS pandemic, which had very similar impacts on the Chinese economy to those of COVID-19.

  • Click here to open this episode in your podcast player

But first, you’ll hear from Ian how he originally came to relocate from New York City to begin a career in the China wine and spirits market in 1995.

Jancis Robinson on the changing world of wine: S4E4
Unico Zelo Wines’ Laura Carter on sustainable wine and spirits: S4E7
Matthew Jukes on The Great Australian Red: S4E3

China drinks expert Ian Ford of Nimbility Asia.jpg

China wine and spirits market trends, with Nimbility co-founder Ian Ford: Full transcript

JAMES ATKINSON: Born and raised in New York City, Ian Ford has been working in the beverage industry in China since 1995. 

IAN FORD: I went to college at Duke University in North Carolina. And that was back in the late 80s and early 90s, and I chose to study Mandarin Chinese at that time. And that sort of set me on a lifelong journey. I took a year off during my undergrad career and spent a year living in Shanghai and Beijing. And I graduated from Duke with a real desire to go back to China and work for a while. And I didn’t have a grand scheme. I certainly felt like I wanted to get to China, work there, experience the country, use the Chinese language that I had studied and I was offered a job ultimately with a company called Seagram which was one of the large international wine and spirits companies at the time. They were the owners of Chivas Regal, Martel, Captain Morgan, Crown Royal. A series of pretty big spirits brands. The company doesn’t exist now, it was acquired and broken up. But in any case that was the job and the job offer that was my vehicle to go to China. 

JAMES ATKINSON: And what did the China wine and spirits market look like when you first arrived?

IAN FORD: Well the two categories actually were quite different. So the wine category was very much for tourists and foreign visiting businessmen in their interactions and entertaining and dining, and their interactions with their Chinese counterparts. There was virtually zero Indigenous market for still wine in China at that time. Very, very small and the market was entirely in five-star international hotels and western restaurants, or international restaurants. Spirits on the other hand had already built a pretty strong traction in the local market, it was about gifting, it was about business entertaining. And it was also something that had become quite popular in, in nightclubs around the country. And it was an interesting time in China, I mean it was the first emergence of any sort of market economy, private ownership, private enterprise really was just at its very embryonic stage at that point. And cognac in particular and a bit later on Scotch whisky became sort of the lubricant of a lot of the business dealings that were going on. It became quite chic and de rigueur to offer glasses of cognac over business dinners and to seal business deals. So the cognac category in particular at the time was very different. It was a big Chinese New Year gifting item. There were massive promotional campaigns that were already being implemented at that time around the Chinese New Year gifting opportunity. And so gift packaging and gift boxes, and gift campaigns were a huge source of cognac sales in the market at that time. So the two categories, wine and spirits were actually very different. And still are frankly to this day. 

Ian Ford pictured early on in his career in the China wine and spirits market
Ian Ford pictured early on in his career in the China wine and spirits market

JAMES ATKINSON: Beginning in sales and marketing roles at Seagram, Ian was subsequently appointed to work alongside Boston Consulting Group on a strategic review of Seagram’s China operations. 

IAN FORD: And it was fascinating. It was everything from regulatory licensing, logistics, wholesale distributor management systems and strategies. So it was really a crash course in a whole bunch of different areas of the China drinks business. And actually coming out of the back end of that I had identified wine as a category that I thought was an interesting opportunity in the mainland China market.  The folks at Seagram did not entirely agree with me and I think the reason was pretty obvious. At that time Martel Cognac was doing very, very well in mainland China. Chivas Regal was the up and coming brand and both of those brands were still doing very, very well in China. And wine I think was seen as a bit more peripheral and less lucrative for a big spirits company. So in any case, I decided to pull out of my role at Seagram at that time and I started Summergate in 1999 together with Brendan O’Toole who was one of the lead managers from Boston Consulting Group. So the two of us having done that strategy project and with the blessing of the higher ups at Seagram, we went and started Summergate. Which was a company in the early stages dedicated to importing, marketing and distributing bottled wines into mainland China. And then of course for 15 years we built Summergate into one of the leading importers and distributors of wine. And then mineral water, and then spirits into mainland China. And at a certain point we expanded to greater China, including Hong Kong and Macau.

How Summergate Fine Wine and Spirits was founded

JAMES ATKINSON: Ian and his new business partner Brendan O’Toole, formerly of Boston Consulting, took a trip to Vinexpo, a wine exhibition held in Bordeaux France in 1999. 

IAN FORD: We had really no business to show anyone at that point, other than our ideas and plans. 

JAMES ATKINSON: And you must have still been really quite young at that stage?

IAN FORD: Yeah I was 27 I think when we started the company. So yeah, pretty young. I had some years at Seagram under my belt, but beyond that, that was it. And obviously I could speak Chinese at that point. After five years in the market my Chinese had gotten a lot better. But I think also there weren’t a lot of other options. You know, a lot of wineries were not really even being confronted with the option of shipping to mainland China back in those days. There were not a lot of companies importing and distributing in the mainland China market. And I think it was all kind of one day China’s going to be big, so it would be a good idea to get in early, get in now and start building your brand. 

JAMES ATKINSON: And what else made you and Brendan so confident in the potential of the China wine and spirits market?

IAN FORD: There were a few factors that we thought were compelling. One obviously was the sense that China was on a very clear path of economic growth and well generation, and private enterprise and disposable income, and the growth of the middle class. So from an economic standpoint, there was a strong sense that there was going to be the customer base, the consumer base, the Chinese people were going to have the disposable income, the interest and the prosperity to be able to participate or to play in the sort of, the wine world. There was also a very strong belief on my part that given China’s very robust and dynamic dining culture, which is one of the most dynamic I’ve seen anywhere on earth. The Chinese love to go out and eat and drink together, around big round tables, in a very, very social setting. When you drink, you always drink with someone. It’s something that is very different from a western culture where you might just sip your wine, sniff your wine or take a sip and enjoy it. In China it’s always you find another person and you smile at them, and you raise your glass and cheers to them. So much is celebrated and enjoyed and done over a big meal with friends or colleagues, or family. And we felt and I felt that wine had an absolutely essential role to play in that occasion moving forward. Given the importance of wine in a dining setting, as opposed to cognac or in my view baiju, the Chinese spirit. That wine had a much more pivotal role to play in that occasion and a better fit in that dining occasion. The other thing I felt was the Chinese have an inherent, it’s a dangerous business generalising about the entire Chinese population. But there is a sense of connoisseurship that exists and you can see it very much in the tea category. So when it comes to tea there is a genuine and very deep connoisseurship associated with tea and where the origins of the tea, and where the leaves come from and how they’re picked and dried. And then the ritual of how it’s prepared and presented. And given that level of connoisseurship and precision, and the sort of sense of ritual around the consumption of tea. I also felt that wine had a natural fit into that sort of an arena if you will. I guess it’s that classic question of you know, if the foreign shoe salesman shows up in a new market or there are two salesman and one of them says there is nobody here wearing shoes. I’m going home. And the other guy says well there’s nobody hear wearing shoes, I’ve got a massive market. I guess I was the sort of latter. I felt that there was a huge upside for wine with the Chinese consumer. 

China wine and spirits market: Key statistics

JAMES ATKINSON: How big was the Chinese wine market at that stage?

IAN FORD: It was approximately 250,000 nine litre cases of bottled wine imported into China when we started Summergate in 1999. And it’s now running at somewhere between 55-60 million. I think it peaked at 62 million nine litre cases. And for many years we were witnessing the market double year on year, or grow 70% or 50%. There were a couple of bumps in the road along the way. But I mean the growth trajectory was massive. And look, I think most of what I had expected to happen actually transpired. I mean you know, the middle class has adopted wine as an essential part of their lifestyle. But still there’s a huge upside. Per capita consumption of wine in China is still very, very low compared to other comparable markets. So there’s still a long way to go despite the fact that it’s already one of the top imported wine markets in the world today. 

JAMES ATKINSON: Other than the work that importers like Summergate were doing, what were the other catalysts that lead to that increase in wine consumption? Because that’s obviously pretty incredible growth for the China wine and spirits market.

IAN FORD: Yeah well one of the interesting phenomenon that took place was what’s referred to as the French paradox. Or the idea that the French consume very fatty foods but they have very low rate of heart disease. And that’s ascribed in some circles to the very regular or common consumption of particularly red wine in France. And the sense that red wine is good for your circulation, it’s good for your heart. If obviously, it’s consumed very much in moderation. That was a phenomenon that was widely reported in the Chinese media and obviously the government has quite a firm grip on the media, and the sort of propaganda and what is promoted. And there were motivations on the part of the Chinese government to try to elevate consumption of red wine. The baiju category in China is enormous and certainly back in those days, in ’98, ’99, 2000 consumption of baiju was really significant. And it’s a very, very high alcohol drink. So the Chinese government had a couple of I think motivations at that point of promoting the idea of drinking red wine. One was a health component and you know, drinking a couple of glasses of red wine at lunch versus you know, a couple of shots of 56 per cent alcohol baiju. Or three or four shots. I think they felt was much better for the society at large. But there was another interesting phenomenon and that is baiju is made from grain. And because of the size and scale of the baiju category, it was consuming a huge amount of China’s domestic grain capacity. A noticeable proportion and China was a net importer of grain. Whereas wine grapes could be grown in quite inhospitable places in the country where perhaps grain and other staples wouldn’t be grown. And I think there was a sense that they could convert some of that alcohol consumption to wine, that could be produced from grapes grown in certain parts of China that would replace the grain consumption of baiju. So there were a couple of motivating factors and I think there also became gradually, a bit of a social badging. Of drinking red wine as a symbol or a sign that I’m international, I’m much more urbane and sophisticated than my other fellow citizens. And so drinking red wine also became a symbol or a signal to those watching in a very conspicuous way that I’m sophisticated and I’m successful and I’m international. 

China wine and spirits market expert, Ian Ford pictured at Vinexpo
China wine and spirits market expert, Ian Ford at Vinexpo

Concha y Toro success in China

JAMES ATKINSON: I heard a pretty incredible anecdote about an event that you staged on the Great Wall of China in Summergate’s early years to launch the Concha y Toro brand. 

IAN FORD: That was a real watershed moment I think for us, for Concha y Toro and for the industry. We launched Concha y Toro in Asia, so we had, we were not distributing Concha y Toro anywhere outside of China at that time. But we centred the launch of their brand across Asia in Beijing with a gala event on the Great Wall of China. So in addition to all of the domestic guests that we had brought out to this even, Concha y Toro had also brought in their importers from South Korea, Japan, Thailand, Hong Kong, Singapore, Vietnam. Concha y Toro held a day of seminars and conferences, and sessions with all of their importers. And then the next day in the evening, we had this gala launch even for Concha y Toro Asia on the Great Wall. And it was a fabulous event, it was an incredible occasion. We had the Chairman of Concha y Toro was there with us, we had the ambassadors from Chile and Mexico, and Argentina and a few others. And this was of course back at a time, in 2000 I believe it was. 2000 or 2001 when you could do this sort of event. This is not something that would be, I don’t even think possible to do today because of the regulatory environment and the restrictions put on any sort of this type of activity on a site as important as the Great Wall of China. But back then I went there as a young man and knocked on the door of the management office of the Great Wall and asked them if it would be okay if we did a dinner event on the great wall. And we sort of went from there. It ended up being quite an extraordinary thing. But it really set the stage for Concha y Toro for many, many years to come. For Casillero Del Diablo’s incredible growth and brand positioning in China, and across Asia. And it was an extraordinary commitment from Concha y Toro, given the scale of what Summergate was shipping into China at the time. I recall the look on the face of the CEO of Concha y Toro as we had lunch in Santiago at the very, very beginning of our partnership and business with them. And the stunned look on his face when he heard how small our first order as for China. I think he still jokes about that story now when he talks about the China market. But it was very, very small beginnings. But obviously the market now is as I’ve said, one of the top imported markets in the world. Concha y Toro is shopping well in excess of a million cases of wine annually now into China, on the basis of very, very sound brand awareness, brand positioning, consumer loyalty and very good distribution. And that took a long time to build in China. And it’s a very, very strong foundation that producers like that have, that started back in those very early days.

JAMES ATKINSON: So it was very soon after that in late 2002 that SARS first emerged. Which must have been about the worst possible timing for Summergate?

IAN FORD: Yes, it was. Yes it was. It’s one of those things that you just never plan for, obviously. As we’re all experiencing these days. The only saving grace for us at the time as that because we hadn’t really actually grown so big in terms of our team and our overheads, and our infrastructure that we were able to be flexible and nimble enough to sort of wiggle our way through that. And adjust our business model and you know, tighten up on our overheads and costs. And we managed to survive through the roughly six months of the complete shut down of the market that took place. Producers that we worked with, that understood the difficulty we were going through but believed in us and believed in our partnership, and were able to work with us on extended payment terms and work with us on promotional mechanisms and promotional support, and an A&P budget. That was something that I never forgot. And as an importer in China, going through such a difficult time and having the strong support of some partners like Villa Maria and Concha y Toro and a few others, was completely essential to us surviving that period. And it was something that earned the loyalty of Summergate to those producers from that point on. 

JAMES ATKINSON: And what did the lockdown actually look like in China during SARS?

IAN FORD: Well I mean it, restaurants and bars and hotels you know, very quickly went from full business to no business. And it became very apparent to us quite quickly that hotels running at five per cent occupancy and restaurants shut down, that we needed to rethink the business model quickly. That happened fairly rapidly. And there was a lot of panic I’d have to say. There was no playbook for what to do about it. We didn’t have a reference to a previous episode of this in recent history. We were flying blind in terms of how long is this going to last? How bad is it going to get? I could not travel domestically in China without being quarantined. So I was in Beijing and my business partner was in Shanghai, and we didn’t see each other for six months. 

JAMES ATKINSON: And were there times during the SARS epidemic where you thought that Summergate actually wouldn’t make it?

IAN FORD: I think I probably woke up every morning wondering about that question during that period. I don’t think a day went by where I didn’t wonder whether or not we were going to make it. You know, we didn’t have financial backers, we were self-funded. And you know, it was a purely entrepreneurial organisation and set up between the two founding partners. So you know, we had to make ends meet. One of the things that we did do was to shift gears from, we were primarily a supplier to the on-trade, which was the main market in the early 00’s. The main market in China was the restaurant trade, the hotel trade. There weren’t really wine bars back then. There was a bit of retail to be done, there were the likes of Carrefour already had a significant imported wine business. And you know, we would try to do business with them and a few other retailers. What we did though at the time of SARS, pretty quickly we recognised that people were going to continue to drink wine. But they’re more likely to be doing it at home and not going out to restaurants. And probably, possibly not going out to supermarkets either. So we needed to figure out how we could get the wine to them, which prompted us to develop a direct to consumer or home delivery business for wine. Which is what we did. And it was a very important gear shift for us to be able to continue to make sales and to continue to you know, supply wine to people who still wanted to buy wine. And that was an important gear shift and I think it’s what part of really got us through. It enabled us to generate enough revenue and income to be able to keep the light on and to get through the sort of real dark days of SARS and get out the other end. 

China wine and spirits market: Lasting effects from SARS

JAMES ATKINSON: And did you continue with that home delivery offering after the epidemic was over?

IAN FORD: Yeah we sure did. I mean that was the origin, the very beginnings of our retail business that carried on throughout the existence of Summergate and at one stage became a company called Pudao, a sister company of Summergate. Underneath the umbrella of the parent company. And Pudao to this day is one of the best wine retailers in the country in my view. Specialist wine retailer, with retail stores in Beijing and Shanghai. And the origins of that really were that direct to consumer business that we launched during SARS. Interestingly in China, you know, you don’t have anywhere near the sort of regulatory environment applied to trade that you have in Australia or North America with the three-tier system. Or in Australia, where the regulations surrounding wine and beverage alcohol retail are quite strict. In China as a licensed entity, we were able to import, we could sell to distributors. We could sell to retailers and restaurants, and hotels. We could sell directly to the consumer. So there was no tier system whatsoever and we retail liquor licensing in China is extremely liberal. Everybody who has a license to sell retail food and beverage can sell alcohol. And that means that we could engage in any stage of the supply chain that we chose to. And so that also is what enabled us to be able to start and run and build Pudou as a wine and spirits specialist retailer. 

JAMES ATKINSON: And did SARS have any lasting impacts on consumption behaviours in China?

IAN FORD: Honestly my feeling there is no. And the reason I say that, and I think it’s different now and I think this time around will be different. But the reason I say that about SARS is the entire industry was so young and embryonic at that point that so many things happened after that, that changed the landscape of the imported wine category in China. That by the time we got to 2007/2008, you know, SARS was a distant memory. And you know, the Chinese indigenous demand for wine and interest in wine, and wine consumption had completely changed the landscape of the imported wine category in the category. Where wine you know, it moved out of the fancy French and Italian restaurants and the five-start hotels. And it moved into the broader general arena of the China market. Chinese restaurants and local retail, and all of that. So I think it’s hard to trace a trend back to something that emerged out of SARS. Whereas I think this time around, home consumption of wine may have had a real shot in the arm if I can say it that way, during this period where the Chinese were very, very compliant with the Chinese government requirement to lockdown and not go out to restaurants and not go to bars. And you know, the whole stay at home, shelter at home kind of thing. And several entities that I am in contact with on a regular basis, that have direct to consumer businesses where they do home delivery have been reporting record sales in March, April and May. I think that that’s likely to not go away as restaurants and bars, and as they reopen and as on trade business comes back to life. And it certainly will come back to life. I think what we’re going to see though is a residual home consumption and direct to consumer and retail business that’s going to emerge out of the back end of the COVID-19 period. 

JAMES ATKINSON: When the SARS epidemic came to an end, did it take some time for consumers to be confident to go out to bars and restaurants again, or was it a pretty rapid rebound?

IAN FORD: Well I think, if you recall SARS just sort of petered out. It just stopped transmitting. And I think the epidemic was declared over in September and I suspect it was probably the behaviour of some of these viral infections that tend to peter out during the summer and then potentially come back again in the winter. And so I think with SARS by September, which if I recall correctly was when everything was lifted. I think there was a real confident sense that it was behind us, it was done. There wasn’t so much of a gradual return to normalcy. It happened very quickly. I think what we’re seeing now is definitely more gradual, but still I think the rebound is underway in China right now as we speak. 

JAMES ATKINSON: I should point out that this interview with Ian was recorded on June 11, 2020. Before the most recent outbreak of COVID-19 in Beijing. 

IAN FORD: Our biggest challenge coming out of the back end of SARS was for months we had been working very hard to keep our inventories as tight as possible. Working capital and cash flow was a major concern and consideration. We didn’t have any idea how long SARS was really going to last. There was nobody that could say well you just have to get through six months and then you’ll be fine. I mean nobody knew the answer to that question at the time. As with everybody else, we had to manage our working capital and our inventory very, very carefully. And then you know, the World Health Organisation declared the SARS epidemic was over. The global travel ban to China was lifted, travel insurance for business people travelling to China was reinstated. The domestic quarantine regime was lifted in China and so business came roaring back. But we had three to four months lead time to order product and get it into China. So the biggest problem we had at that point was actually satisfying demand once the rebound occurred. I think we’re probably going to see something similar this time around, although the dynamic is quite different in the sense that with SARS it was primarily a China problem. Whereas now, it’s because it’s such a global issue China has closed their border to foreign visitors. As have a lot of countries around the world and around Asia. So the rebound may not be as robust. Particularly anything related to international business and entertaining and all of that sort of thing. 

JAMES ATKINSON: What would you have done differently if you were confronted with that same situation again in the China wine and spirits market, as obviously many importers are today?

IAN FORD: I guess, I mean obviously hindsight is 20/20. I would have tried to have a better preparation for the rebound. If I could go back and do it again, and if I was an importer today in China, looking at my current situation. Whatever means that I had at my disposal to try to prepare appropriate inventory for a market rebound, I would do my best to try and do that. And I would look for help probably from my producer partners, to enable me to be able to do that. To have as much as reasonably possible inventory on the ground to be prepared for that rebound. 

JAMES ATKINSON: Ian Ford and Brendan O’Toole sold Summergate to Australian supermarket retailed Woolworths in 2015 for US $25 million. 

IAN FORD: We got up to a point where you know, we had 13 offices across greater China. We had about I think 350-400 employees across sales and marketing, and finance and logistics. I think we had something in the realm of 10-15,000 direct clients that we were selling to. And then a whole network of first tier distributors that we were selling to, who were then selling on into the local regional markets. I mean again, the whole point of us being able to be nimble and flexible enough to sort of wiggle our way through SARS and get through to the back end of it. We would have not have that degree of flexibility 10 years’ later, for sure. And there were companies that didn’t make it out of SARS. There were companies that were already bigger than us at that time, that I think SARS was the beginning of the end for them, for that reason. 

China wine and spirits market: Common mistakes by exporters

JAMES ATKINSON: Coming up next in this extended interview with Ian Ford, we discuss some of the biggest mistakes that drinks companies make when they try to crack the China wine and spirits market. And what’s currently happening in craft spirits and craft beer. 

JAMES ATKINSON: Moving onto your current business, Nimbility. I could see from your website that you’re already working with a range of wine and spirits producers on building exports to China and other Asian markets. Are there any specific brand attributes that you’re looking for in potential clients?

IAN FORD: So yes. Nimbility is a partnership. We help producers to build their markets in Asia. And that’s a combination of the nuts and bolts of importers and distribution, and route to market. And also brand building, communications and messaging, and activation. And the third being market intelligence. So gathering and analysing all the information that is sort of swirling around in Asian markets and pulling that together, and providing that back to the producers that we work with. In terms of attributes for the market, I think there’s no one profile or style or positioning of a brand that I think is necessarily suited. Very often what we look for and what we seek out with the clients that we’re working with is authenticity, credible storytelling, something that is unique and authentic and real. It could be a story about your grandfather who founded the winery, or it could be a particular really interesting production technique that you employ. But I think authenticity is something that for the Chinese consumer in particular is very often what they’re looking for. They want to know that this is the Real McCoy if you will. It’s something that really is credible, authentic, the genuine article. It’s why we very often, we advise producers against the idea of tailoring their product or particularly their visual identity or brand to the China market. So for example, adding Chinese characters onto the front label or engineering a sort of made for China label with dragons and phoenix’s on it. Red and gold labels. That sort of thing runs completely contrary really to what the Chinese consumers are looking for. Which is something that is authentically imported from the country of origin. So they want something that they believe is genuinely Australian and has credibility, and is authentic. They don’t want something that’s engineered for them.

Francesca Martin, who co-founded China wine and spirits market consultancy Nimbility along with Ian Ford
Francesca Martin, who co-founded China wine and spirits market consultancy Nimbility along with Ian Ford

JAMES ATKINSON: What about that old practice of using Australian native animals to market products? So kangaroos or whatever it might be. There’s a beer brand in Australia called Broo, which is spelt B-R-O-O and they have a kangaroo on the label. And they seem to think having that kangaroo on the label is going to make the product irresistible for Chinese consumers. 

IAN FORD: Yeah, well I hope that Broo has more going for them than just the kangaroo on the label. 

JAMES ATKINSON: Have you heard of Broo, out of interest?

IAN FORD: No I haven’t, I honestly have not. No look I think gimmicks of any kind. You can potentially get near term success. You can get some opportunistic transactional success. But that all comes out in the wash and ultimately if the goal is to build a long-term serious sustainable market in China, I don’t believe you can do it on the basis of those very sort of shallow, gimmicky led brands. I think that ultimately if the goal is to create genuine sustainable consumer loyalty, consumer interest, consumer demand, that has to be done on the basis of something that can hold their interest over a long period of time. The interest in a bottle that has a kangaroo on it expires very quickly. And you know, the consumer moves on. I don’t think those are really sustainable brands that can build a market over a long period of time and get to the point where; I mean look. Producers are going to be profitable in China when they don’t have to pay for the demand for every single bottle that they’re selling. If you go into China with a push strategy and you’re pushing your product all the time, and you’re not creating pull through, through the consumer. That the consumer is actually pulling your brand through naturally, organically because they’re fallen in love with your brand. You’re never going to make any money. It doesn’t even matter if you start to get bigger in scale. It’s very difficult to convert that into a business where you can actually make some money. Because you’re constantly having to push the product through the supply chain, and that costs money. So the end game for me for any serious brand, any serious producer in China has to be the creation of consumer demand over a longer period of time. Once you achieve that critical mass and the consumer is organically pulling your product through the supply chain, that’s when things start to become really interesting. And when you look at brands like Penfolds, Casillero Del Diablo, to an extent Yellow Tail. And in the spirits category if you look at Chivas Regal and Hennessy Cognac. That’s what they’ve achieved and their China markets now are very sustainable and are very profitable for them.

JAMES ATKINSON: So you obviously think that the Yellowtail brand has more depth to it than just the critter on the label?

IAN FORD: I think they do. I think what happened in China is because they’re so successful in the US and they can talk about how big the brand is. That becomes credibility to many buyers in the China market. There’s a lot of notoriety around Yellowtail. It isn’t just the label anymore, right. It’s a massive brand, it’s a hugely successful brand and that actually carries quite a bit of credibility with it. It went into the US as a completely unknown creation through Bill Deutsch and as a replacement for Lindeman’s in that whole distribution network. It came into China with the backing of 10-12 million cases being sold in North America and a very, very strong and credible brand. They were also pretty savvy at creating an online business. They did really well through the big e-commerce platforms of Tmall and One of the rare instances of a brand really being able to leverage the online platforms to be able to project and amplify their brand. 

JAMES ATKINSON: What are the biggest mistakes that brands make when they’re trying to break into China?

IAN FORD: Oh, there’s so many. I hate to say that. But I think getting with the wrong partner is probably mistake number one. And any serious producer that’s looking at dedicating resources to China you know, really needs to do the due diligence, get good advice, get second opinions. Really understand who the players are. You know, what is the, what are the channels that I need to be in to be able to reach the consumers that I want to reach? Who are the importers that are going to be able to seriously and credibly take me to chose channels? And which of them am I able to work with? Okay you can sort of narrow the list down. It seems like sort of market entry 101. But it’s extraordinary to me the number of people that will jump into bed with a partner in China that has sold them on a story of you know, they have great connections with the military. And somehow that’s going to translate into great sustainable business for this particular brand. You know, things like that. And I see a lot of brands you know, getting into a partnership with the wrong people. And I think that’s a key mistake. I think looking at the China market as a monolith. Thinking about you know, what’s right for the Chinese consumer is another big error in approach to China that I see. You know, I often describe the consumer in this way. You can imagine a 55 year old gentleman living in west China, in Chengdu, in a local pharmaceutical business, doesn’t really speak English and the sort of wine preferences that individual might have versus a young lady, who is 28 years old, who went to University in Sydney, who came back to China and works for McKinsey & Company in Shanghai. You know, their behaviours as consumers, their preferences, what gets them excited etc, are going to be so vastly different. So the idea of approaching China as a monolith or the Chinese consumer. I mean the Chinese consumer is extremely diverse in their taste and preferences, and brand affinities and so on. And the same would apply regionally. So south China – Guangzhou, Shenzhen – very different from, extremely different from north China – Beijing and Tianjin and Dalian – which are almost more like Korea than they are like south China. But also Shanghai and west China – Chengdu and Chongqing. Regionally China’s also quite diverse and the cuisine is quite different. And you know, the climate and all of those factors. 

JAMES ATKINSON: Imported spirits haven’t followed the same growth trajectory as wine in the China wine and spirits market. Which is surprising in that Chinese people were already spirits drinkers. Why do you think that is?

IAN FORD: Well I think traditionally it was cognac and whisky that were leading the charge in the spirits category and from a volume standpoint, they still are today. But I think cognac and whisky ended up getting very much stuck into a narrow niche in terms of consumption occasion. And they certainly pretty much failed to take any market share off of the massive baiju category. But what we are seeing now, which is exciting, is a lot of energy in the cocktail and mixology space in China. We’re seeing an explosion of cocktail bars and mixology. We’re seeing the emergence of sort of rock star bartenders, celebrity bartenders that own their own bars. And that’s certainly very dynamic in a city like Shanghai. But it’s also in Pingyao and Changzhou and Shenzhen, Guangzhou etc. I see there the origins of something really interesting. There’s so much excitement and energy about cocktails and boutique spirits, craft spirits. You know, the gin category is, while still small in volume terms. You know, there’s a lot of interest and that younger generation, the 28-year-old, the young lady who went to university overseas and works for McKinsey. She’s drinking cocktails. I mean that’s potentially one of the biggest threats to the imported wine category is actually the cocktail culture that’s developing very, very quickly. 

China craft beer market insights

JAMES ATKINSON: What about craft beer? There’s a few American craft beer brands that I know have had a crack at the China market. And the Australian brand Little Creatures has made a pretty big push. Do you think any of these brands are getting traction?

IAN FORD: Well they’re certainly visible. Success I think you know; you’ve got to ask the financial controller at the end of the day if they’re successful or not. But certainly, they’re visible. Goose Island has been very, very visible. Obviously, they have the backing of ABI, Anheuser-Busch InBev. They’ve been pretty assertive in getting Goose Island out into the market. You know, one of the challenges facing craft beer as a category, is the Chinese regulations related to microbrewing as we used to call it, or craft brewing, as small scale. To get a QA certificate and a QA license to produce and bottle craft beer at a small scale is almost impossible. The requirements to be licensed to get what’s called a QS stamp, which basically certifies the product to be fit for human consumption and is required on packaged food and beverage products. To get that the scale of the brewery has to be massive relative to what a normal craft brewer would set out to do. So for somebody other than ABI, or someone like them, it makes it very, very difficult to actually brew and bottle at a scale of a craft beer brand in China. So what you end up with is either brands that want to market themselves as craft beer, but are really piggybacking on the massive brewing facilities of somebody like an ABI. Or you have imported product, you have bottled beer coming in from Australia or North America, or Europe. And the problem there if course is freshness and shelf life, and lead times and the supply chain in China. Where it’s not very efficient, it’s not very timely to market. And so if you have beer that’s best consumed within a six month time frame, it’s very difficult to get it produced in Australia, bottled, put into a container, shipped to China, cleared through customs, put into the supply chain, out into the retail environment and bought by a consumer within six months. You also have to worry that the beer has been handled properly throughout all that. 

JAMES ATKINSON: Yeah and realistically, hop driven beers are really at their best you know, within three months of packaging.

IAN FORD: Correct, that’s right. That’s right. And I know serious craft brewers who have come out to Asia and had their own beer in a bar or in a venue in Hong Kong or Shanghai and been horrified at the state that the beer was in. And you know, so that’s a big problem. So the Chinese consumer for craft beer is not being served. My sense is you have the biggest beer market in the world in China. You absolutely have a significant proportion of those consumers who would like to drink craft beer. And they’re not being served. So I’ve looked at this several times and to me there’s a massive market opportunity there that needs to get figured out. 

JAMES ATKINSON: And actually before the interview you were telling me that you’ve personally considered the possibility of opening a craft brewery in China, what that would look like. 

IAN FORD: I’ve certainly taken a long hard look at it, yes.

JAMES ATKINSON: Is there any push to change that prohibitive legislation?

IAN FORD: I’m not aware of any imminent change in the regulation and the beer industry, they don’t really have a lobby in China. It doesn’t really work that way. But the power and influence of the beer industry, both domestic and foreign, there would be a lot of opposition from those corners of the industry. What you do see, and credit to the guys who have done it. What you do see is incredible craft beer brands that are done as kegged beer. So they, you have Great Leap… Boxing Cat – which ultimately was acquired by ABI and several others – who built their brand as a brewpub. And so they brewed on site and then they would gradually expand, maybe a few brewpubs and then they would start selling their beer in kegs to other restaurants and bars and craft beer bars. But all of those guys have struggled to break through to packaged beer. To bottled or canned beer. And ultimately that’s what really needs to happen if you’re going to be accessible to the craft beer consumer in China, they have to be able to buy you in a retail store or online and have it delivered and that sort of thing. And to do that you have to be in bottles or cans. You can serve a beer in a restaurant, that’s governed by restaurant licensing and it’s very liberal. As soon as you produce it domestically and package it in cans or bottles, you need that QS code on the individual package itself. And to get that, that’s where all those heavy regulations come into play. 

China wine and spirits market: Coronavirus recovery

JAMES ATKINSON: It’s obviously a very rapidly evolving situation right now in the China wine and spirits market. But I asked Ian how things were looking on the ground when we recorded this interview. At that time he was stuck in California, with China having closed its borders due to the pandemic. 

IAN FORD: I’m on the phone and on Zoom and all that with China basically every day now. Including Hong Kong and also Singapore. And on the mainland things are really looking up. We’re seeing a lot of return to normalcy. Restaurants, hotels, bars open. Domestic travel has been loosened up so my own colleagues, but also other businesspeople are able to travel around China now and go between cities. People are going back to work; the kids have gone back to school. That’s obviously not now, it’s the summer break. And what we’re seeing from many, many of our partners across the industry are claims of anywhere from 60-80% of what they would consider normal business. So their business, their sales have returned to anywhere between sort of 60, 70, 80% of what they would normally expect at this time of year. So that, that’s all very encouraging in terms of the market in my view. You know, importers are replenishing their inventory, they’re shipping wine. The direct to consumer guys are going like a house on fire, I’ve never seen them doing so well. And what we’re also seeing is a return to the on-trade business. The fact that China’s border is still closed to foreign visitors is still putting a bit of a dampener on economic recovery and the recovery of the China wine and spirits market. So that’s an element that is still I think an impediment to the market coming back to full strength. 

JAMES ATKINSON: But overall that sounds like pretty good news for Australian companies like Treasury Wine Estates, that rely very heavily on the China wine market. 

IAN FORD: Absolutely, absolutely. I mean, we’re already seeing like I said, importers start to replenish their inventories and you know, ship wine from around the world. And it seems to all be pointing in a very good direction in terms of any indication of a return or a resurgence – you know, knock on wood obviously – of the virus. So I think there’s very good reasons to be cautiously optimistic that the China market could be a very positive source of you know, ongoing or new business for producers in Australia and around the world. 

JAMES ATKINSON: And what about you, is there any news on your bid to return home to Shanghai?

IAN FORD: I’m hopeful at this point. I was actually granted special approval from the government of Shanghai to apply for re-entry into China as an emergency, special case as a business owner and operator based in Shanghai. So it’s one first step in what is a long bureaucratic process. But you know, I’m hopeful that I’m going to be able to get back to Shanghai on that basis, sooner rather than later. 

JAMES ATKINSON: And I guess you’d have to quarantine upon arrival in China?

IAN FORD: I believe so yeah, unless they start to implement a testing regime – which is possible. Where I would be tested on arrival and held until the test results came back. But I think right now, the regime that’s in place right now is the quarantine regime. So I would be in 14-day quarantine, most likely in a government run facility. 

JAMES ATKINSON: That doesn’t sound like much fun.

IAN FORD: It sounds glorious. What a pleasure that’s going to be!

JAMES ATKINSON: Well Ian, thanks so much for your time. Its been such an informative chat about the China market. And best of luck with Nimbility and getting home to Shanghai. 

IAN FORD: Well thank you very much, I appreciate the time James. 

We hope you enjoyed this interview with Ian Ford about the China wine and spirits market. For more insights, listen to the Bottled In China podcast.

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