It’s an astute move by Penfolds to circumvent the Chinese tariffs on Australian wine by producing locally, but the strategy is not without its risks, says China drinks expert Ian Ford.
Nimbility founder Ian Ford told the Drinks Adventures podcast that several Australian wine companies – Treasury Wine Estates, Accolade and Casella – are now producing wine offshore for the China market.
Penfolds meanwhile continues to expand its winemaking operations beyond its homebase to the USA, France and now China.
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“It’s a really interesting test of the idea that a wine brand like Penfolds, that started off as a clearly Australian brand, can become a hybrid, and effectively a global brand,” he said.
“China could now be the biggest testing ground for that idea. These tariffs may have forced the issue.”
He said Treasury Wine has previously tried to produce Lindemans wine in South Africa, “not to very much success”.
“But maybe this time will be different,” he said.
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Marketing challenge confronts Penfolds
Ford said the quality of Chinese wine continues to improve, so it makes sense that Penfolds would follow its USA and French wine ventures.
“That looks like it’s right out of the playbook. I think it’s a really smart thing to do,” he said.
“But from a marketing standpoint, it’s a challenge. How do you brand it? How do you make it something that is Penfolds, but it’s also authentically Chinese?”
Ford said there is certainly a risk that the global winemaking ventures could dilute the Penfolds brand.
“It could pollute that pure Barossa Valley Australia Penfolds Grange halo effect,” he said.
“They’ve got to get the messaging, the communication and the branding right, but they’re pretty good at that.”
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Chinese wine tariffs: Who are the winners?
Ford follows up his 2020 appearance on the Drinks Adventures podcast with another insightful interview on the dynamic Chinese drinks market.
He reveals which countries have been most successful at plugging the gap in China left by the exclusion of Australian brands.
We also cover moves by spirits giants Diageo and Pernod Ricard to establish single malt distilleries in China, and the opportunities Ian can see for Australian distillers.
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Nimbility founder Ian Ford: Full Transcript
IAN FORD: It’s not the first time we’ve seen it. We saw similar approach taken with French wine. I’m gonna get the year wrong, but it was it was I wanna say 2010, but I don’t know if that’s correct. Anyways, there was a period when there was a dispute over solar panels and solar panel dumping into Europe. There were a similar sort of cocktail of sort of somewhat trade-oriented disputes, somewhat political-oriented confrontations, and that resulted in an action against against French wine. And it was a very similar thing. It was accusation of dumping and then imposition of tariffs tentatively. And then finally, a judgment came down and tariffs were imposed, but it wasn’t for five years. This is that’s the one big difference. Is this five-year period for the Australian wine tariffs is quite new and quite substantial and really punitive. I mean, it’s really damaging to the industry.
JAMES ATKINSON: With your knowledge of the political system over there, you know, we’ve had a change of government obviously in Australia since then. Is there any chance do you think of it being overturned or reviewed before that five years is out?
IAN FORD: I think there’s certainly a chance, but it’s entirely up to government relations, and that’s sort of out of my wheelhouse, if you will. You know what I mean? That’s way above my pay grade. But I certainly would say it’s possible. I I would absolutely see it as within the realm of the possible that there is a wrap approach moment between the governments and and some of these things get resolved and some smoothed out. I think that could very it would be very easy for the Chinese government to say, okay, things have improved. We’re gonna resolve the tariffs earlier than planned. I could see that happening. But again, I don’t know what likelihood there is of that.
JAMES ATKINSON: Now what’s happened in the market over there off the back of that, have we seen other exporters scrambling to, you know, fill the gap left by Australian wine?
IAN FORD: Yeah, absolutely. I mean, I think everybody kicked into gear for obvious reasons. You know, Australia was the leading origin country of line into China at that point had been for a couple of years. It was really on the ascendancy. And so it left a huge gap in the market. Whether you talk about the trade, and all levels of the trade and they’re all scrambling to fill their portfolio of Australian wines. Or even down to the consumer who’s kind of looking around for, ‘okay, well, I’ve, you know, used to drink Penfolds’. What am I gonna do now? So as we sort of expected, there was a mix of beneficiaries. Certainly, South Africa was a beneficiary year one. I think a lot of importers took a good new look at South Africa as a country of origin, and there was a big surge in imports from South Africa. And the two other bigger beneficiaries were, again, fairly obvious, Chile. Now the strong number two category in China, and France had a big resurgence. And that was largely because of the fact that there was a huge proportion of the Penfolds sales in China that was business entertaining. It was face giving, very conspicuous consumption at business banquets and so on. And France was actually the natural replacement for that with primarily Bordeaux, and there’s a tremendous amount of interest in Burgundy now, even though there’s very little available. So, yeah, I think those stick out to me as the three beneficiaries. I think Chile was quick to act in terms of actual nuts and bolts outreach to importers trying to connect the dots and really literally step in and try to fill fill that gap. South Africa likewise. And I think France maybe just was the the sort of natural beneficiary at that luxury sort of conspicuous consumption level with Bordeaux and Burgundy.
JAMES ATKINSON: It’s hard for a country to sort of step in wholesale and replace the volume of a brand, like a strong brand, like Penfolds, because especially I think in a less mature wine market, the power of a brand is very important, isn’t it, in giving consumers confidence that they know what they’re gonna get when they buy something?
IAN FORD: I totally agree. It’s not not easy to do. You know, I think a producer like Concha y Toro out of Chile has has done well because they have good roots in the market already. You know, my old company, Summergate. We were importing and marketing Casillero del Diablo from 2000, 2001. But also newcomer not newcomers, but relatively new brands to the China market, Casa Silva, which is one of my clients now, has also performed extremely well now since that all happened, despite all of the other big factors that have been going on, which is obviously the pandemic and everything that’s happened. So it’s like I said, a lot has changed in the two years since we talked last time, you know, between the total changing of the landscape of the wine category with Australia basically being excluded, and then all of the pandemic disruptions. I mean, it’s a whole new world here, really.
JAMES ATKINSON: How did everything play out, I guess? Because we were talking about what the pandemic’s impacts might be.
IAN FORD: Yeah. Well, up until March, we were pretty optimistic that maybe China was gonna skate through.
JAMES ATKINSON: March of this year, we’re talking I’m sorry.
IAN FORD: Yeah. March of 2022. So we’re now actually just starting to come out of the back end of probably the most severe impact of COVID and lockdowns and so on in the China market. So we’re actually getting it more severe now than anything that happened up until now. All of Shanghai, retail, trade, whether that be grocery store, e commerce, restaurants, wine bars, hotels was completely shut down. I’m hopeful that we’re going to see a snapback that will get that effect where the restaurants open, hotels open, travel opens up, and you get a big surge back of demand and and activity, and and we saw that in 2003 with SARS. So I’m hopeful that’s gonna happen. My strong feeling is that there is a consumer base, particularly young younger consumers than that sort of next up and coming generation. They love going to wine bars. They love exploring whether it’s natural wines or wines from Georgia or wines from Greece or you know, assyrtiko from Santorini. You know, there’s a whole generation of wine lovers that are coming up the ranks that I think introduces a huge amount of energy into the category. It’s going to be interesting to see, you know, is it going to continue to be Bordeaux in France or, what countries of origin, what regions, what styles dominate the landscape here. I mean, we’ve recently started selling wine in cans into China. I was very uncertain about how that was gonna go. It’s hard enough to talk to many, many buyers here about screw cap, let alone, you know, wine in a can. But the wine in cans is selling. And, you know, we’ve got a beautiful Provence Rosé in a can that’s been selling like gangbusters. There’s so much of the China wine market story to hasn’t been written yet. It’s still very young. It still has so much development to happen and so many new consumers coming into the category. Per capita consumption here is quite low. It’s less than two relative to twelve or fifteen or eighteen litres per capita. So it’s way behind any sort of mature wine drinking market. And that just says to me, I mean, it’s a massive beverage alcohol market. That’s not the issue. Right? I mean, there’s no religious conjunction here. Disposable income is abundant, the trade infrastructure, the culture of dining out and eating and drinking together with friends and family or business people, it’s all there. And, you know, if China goes…
JAMES ATKINSON: Sounds like the sort of thoughts that you were having when you when you launched Summergate all those years ago. Are you thinking you’re thinking of going again with another distributor?
IAN FORD: What does James Bond say? Never say never. Yeah. Look, I I guess you’ve probably seen this from me before. I’m very optimistic about the long-term future of the imported wine market here. I mean, it’s there’s been a couple of body blows to the industry, but fundamentally when people ask me, are we entering the sunset phase of the imported wine category in China. And I just I think that that’s completely absurd. There’s so much headroom. There’s so much room to grow. There’s so much energy amongst the younger generation. This is the very, very first chapter of a very long story here, and there’s a long way to go.
JAMES ATKINSON: The other big bit of news that came out of the as a result of the Chinese tariffs was obviously that Penfolds is gonna make Penfolds wine in China. Was that a surprising move for you?
IAN FORD: No. That looks like it’s right out of the playbook. I think it’s a really smart thing to do. You know, you have a substantial wine industry here already. You know, you obviously have historically the legacy big brands like Great Wall and Dynasty and Jiang Yu, very, very big, making very commercial wines. But in the last ten years, there’s been lot of development of really interesting smaller boutique producers making very good quality. Quality has been going up and up and up. And I I think it’s a brilliant move to come in and and try to establish an actual presence making wine in China. From a marketing standpoint, it’s a challenge. Right? I mean, how do you brand it? How do you make it something that is penfolds, but it’s also authentic Chinese. And so there’s a challenge to that in terms of how do you package it? How do you make it something both Penfolds and Chinese? Right? But I you know, they’ve done some interesting things already with a, you know, they went to market I think it was 2019 with a wine / baiju hybrid, if you recall. Right? So, you know, they’ve been looking at China. They’re thinking about how do we innovate, and they’re seemingly very confident in doing that with the Penfolds brand. So I think kudos to them. I think it’s a brilliant move.
JAMES ATKINSON: You don’t think it erodes any of their brand value in the sense that it’s basically with provenance being so important now, it’s pretty much saying to the world you can make Penfolds wine anywhere, obviously, America, France, even China, which doesn’t have the same track record yet that those countries do.
IAN FORD: Absolutely. I think there’s risk of that. I I think there definitely is a risk of that. That’s the risk that they’re taking. Right? So, you know, again, my view is if they they’ve gotta get it right, they’ve gotta get messaging, the communication, the branding and they’re pretty good at that stuff. Right? So I have my sense is that they’re they are gonna get it right? But yeah, of course, there’s risk that they dilute the brand, that they sort of pollute that that pure Barossa Valley, Australia, you know, Grange halo effect, that that gets sort of polluted or diluted down. There is some risk of that. Also interesting to note that there are some Australian brands being produced and bottled in South Africa and shipped to China in the interim now. Until the tariffs come back down.
JAMES ATKINSON: Which ones?
IAN FORD: So Treasury Wine Estates has got some lines coming out of South Africa. Oh, okay. Yeah. I believe they’re looking at doing Rawson’s Retreat if they haven’t already. And I think both Accolade and Treasury are looking at doing the same out of Chile.
JAMES ATKINSON: I believe Yellowtail is as well.
IAN FORD: Yellowtail has. You’re absolutely right. A Yellowtail already has. Yeah. So with Telford Wine & Spirits, their importer here in China. They’ve got a Chilean Yellowtail that’s already come into market. And to hear directly from Telfort, they seem to think it’s being well received. So, I mean, it’s a really, really interesting test of the idea that a that a brand can become global, that a wine brand that started off as clearly an Australian brand or a French brand or a Chilean brand can actually go and become a hybrid. And become effectively a global brand. Penfolds being made in California, France, and now looking at producing in China. It’s interesting that China may be the biggest testing ground for that idea, right, that you can have Yellowtail from Chile or you can have Penfolds from California or even Penfolds from China. You know, these tariffs on Australian wine may force the issue here and force that that testing of the idea of, can a wine brand become a global player, a global brand? We’ve seen it played with in the past, not to very much success, but maybe this time around will be different.
JAMES ATKINSON: What are the examples you’re thinking of there?
IAN FORD: Lindemans made wine in South Africa. By and large, I don’t think that it worked. I think maybe they have one or two markets in Scandinavia that that accepted it and have rolled with it. That’s the one that I had in mind, also Treasury.
JAMES ATKINSON: Any other interesting developments over there that we haven’t covered?
IAN FORD: There’s a lot of talk recently about local pride in Chinese brands, Chinese-made products, and it’s a very real thing that’s happening here. There’s a whole pending wave of Chinese whiskies that are gonna come on to the market. I know you you’d mentioned you were interested in talking about that. So there that’s a whole another area. Right? I mean, you’ve got obviously, Scotch whisky is extremely authentic. It comes from a certain origin, etcetera, etcetera. But there seems to be quite a lot of confidence in the prospect of producing, you know, authentic Chinese whisky and certainly the big guys are investing a lot of money in that in that prospect.
JAMES ATKINSON: And do you know anything about what they’re coming to market with? Is it essentially a Scotch style of single malt whisky that they’re mimicking in China? Are there any local ingredients being used or anything like that?
IAN FORD: I believe there are local ingredients being used. Yeah. I think there’s a lot of experimentation going on with corn and rye, and also with things like sorghum and barley, which are indigenous or, you know, much they’re sort of particularly sorghum. I mean, that’s something that I think there’s a lot of experimentation going on. I don’t wanna speak for what exactly what they’re doing because I they’re obviously keeping that somewhat close to the chest. As far as I’m aware, none of the serious enterprises making whisky here have come to market with anything yet, not that I’m aware I was asking around even just before this call to a few of my friends here that are real whisky aficionados and are completely plugged into Pernod Ricard and Diageo as private clients, and they would be first on the list to get bottles of whatever they’re coming out with and they haven’t seen anything yet. So I don’t think they’ve come to market with anything. My sense is from what I’ve seen is that they’re trying to not necessarily emulate a Scotch style, but they want it to be a single malt. So they’re looking for that single distillery, single place, whisky of origin as opposed to a blend.
JAMES ATKINSON: Has this sort of market dynamics that you’ve talked about in the last two years been beneficial to Chinese wine industry and people consuming Chinese made wines?
IAN FORD: Yeah, it’s interesting. I I think there clearly, there’s been some disruption to imported wine, so that that theoretically could benefit Chinese producers. I think this this phenomenon of Chines pride that I mentioned earlier. But we’ve got to give them credit. I tasted just yesterday at the Pudao wine store. I tasted a totally new bottling of viognier from Ningxia. I was offered it blind. I was not in China. It was a world class wine. And so more and more of that has happened more and more people. you know, Ian Dai, with a a brand called Xiaopu, Ian is somebody who’s been in the business and the industry for a long time. Here in China, he’s got his own line that’s coming out that’s really interesting. There’s a lot of interest in marsellan as a grape variety here. All of that energy, we’ve got to give them credit too. It’s not you know, because imported wine is disrupted that they’re just stepping into the gap. They’re doing all kinds of great stuff and, you know, like I said, quality is going up. The number of different players coming in with really interesting stories and backgrounds and really good winemaking. So I think there’s a bright future for Chinese wine at the premium level.
JAMES ATKINSON: There’s some incredible investment happening in Ningxia. I’ve read about tripling its production footprint to a level where it would be on par with Bordeaux. I don’t know if I read that correctly, but that sounded like a crazy level of investment?
IAN FORD: Yeah. So part of what’s going on there is, you know, when the Chinese government latches on to something they go big. You know what I mean? So Xi Jinping has visited Ningxia himself to sort of inspect the wine industry, if you will. Which is an endorsement from on high here in in this part of the world. And so Ningxia has been the recipient of a tremendous amount of attention and possibly over-investment. I mean, we may see at some point that capacity has just completely outstripped demand and that there isn’t really a big export market yet for these wines to take up the slack. And so they’re gonna have an overcapacity problem. It’s very possible. But it doesn’t surprise me that there’s a huge push to plant grapes and really drive that whole region as one of China’s biggest regions. But right now, it’s China’s premier winemaker region.
JAMES ATKINSON: Has there been any change to the the situation over there, the difficult situation over there in craft beer that we talked about last time around?
IAN FORD: It’s loosened up a bit. In terms of the regulations here to make craft beer in China. I haven’t seen much in the way of new projects and brands and and in in the last couple of years, I think the pandemic has just had a chilling effect. On, you know, new startups, new projects for the most part, and particularly the last four or five months. But my understanding is that it has in fact gotten easier to produce craft scale beer in China, whereas in the past, the minimum requirements in terms of volumes and scale were massive and you just so you just couldn’t do craft beer. And that way, there have obviously been folks that have figured out how to navigate around that and how to work with an existing brewery and sort of brew with them off to the side and that sort of thing, but it’s hard to navigate all of that and do anything big and of scale. Once things settle down here, from the standpoint of COVID lockdowns and the COVID disruption. My sense is there’s still a big upside there as well with craft beer. It’s the biggest beer market in the world, right? So I mean, it’s almost an inevitability at some point.
JAMES ATKINSON: Now you work with a really interesting array of different brands encompassing a lot of different categories. You mentioned the canned wine thing before, but are there any of your other clients that you want to mention that are getting real traction over there, possibly that might surprise people in terms of the sorts of drinks that they’re succeeding with.
IAN FORD: Yeah. Well, I mean, I guess maybe this one wouldn’t be so surprising, but yeah, Casa Silva from Chile is going great. You know, we’ve placed them with ASC Fine Wines, you know, the oldest, most established, leading wine importer in China. And, you know, the Chile category has got a lot of energy in it. Casa Silva is a great producer. So that that’s looking very optimistic. It’s been a struggle with our Australian friends and partners, obviously. So you know, we focus on Indonesia and South Korea and Japan and other parts of Asia.
JAMES ATKINSON: You’ve got Australian spirits producers though as well, I think at least one I’m aware of anyway.
IAN FORD: Yep. Adelaide Hills Distillery, the 78 Degrees Whiskey brand and gin, great company, making inroads around Asia Pacific with them. But again, China’s definitely on the radar, but the recent disruptions to the Australia-China relationship have been a bit of a challenge. But there’s a huge amount of energy in the whisky category. So whether that’s Japanese whiskey, Irish whiskey, obviously the Scottish single malt; Johnnie Walker, Chivas Regal. Once things settle down both with the pandemic and between China and Australia, Australian whisky here surely has got a place in the market. That’s obvious to me.
JAMES ATKINSON: Fantastic Ian, well thanks so much for coming back on the show.
IAN FORD: Oh, it’s a pleasure. Thanks for having me.
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