Financial market signals for the Chinese wine market

According to trade sources in China, the recent financial market woes have not resulted in notable curb in wine consumption. The front line message is that the typical Chinese wine drinkers are fairly well-off and their discretionary spending is not heavily dictated by their success in the stock market.

However, there are subtler forces at play. First, the mid-autumn festival and national “golden week” holidays are supporting the wine trade as people rush to buy gifts amidst aggressive promotional offers. Imported wines below and around the 100 yuan (roughly £10/ €14/ US$16) mark are most popular for family parties and personal consumption. Mid-range wines are also doing well, as more expensive gifts are becoming socially unacceptable due to government crackdown on wide-spread corruption. However, traders at the low-to-mid-range markets are looking beyond the holiday season with more uncertainty. The 100 yuan market will become more competitive, serving the most price-sensitive client base most likely to self-impose austerity, with the added challenge of a weakened Renminbi spelling higher prices for imports.

The weakness in Renminbi could be a game changer for trader strategy and consumer behaviour going forward, especially if your view is for continued yuan weakening. The surprise August Renminbi depreciation translates to at least 7% of price increase for wine imports. Chinese wine market is barely recovering from its nadir of 2013 it will not stomach price rise at present. For now, price hikes are likely to be absorbed by the trade, notably in the low and high end of the market. The most adversely impacted are the low end exporters with settlements in US dollars, aside from the US, that also include wines from Chile, South Africa and Argentina. These exporters will face downward pricing pressure to compete within and around the 100 yuan budget bracket. However their margins indicate that around a 10% increase in import price would eat up profits, and will necessarily result in either a price increase or a reshuffle of products.

Life is not much better at the high-end, because merchants are unlikely to pass on price increase whilst stocks remain high. This creates a complex picture at the high end of the market.  Faced with a stock market crash, weaker currency, gloomy and uncertain economic outlook, financial analysts are generally of the view that expensive wines will face soft demand in the same vein as luxury products. However, some trade insiders believe otherwise. Short term exchange rate related price increase is likely to be absorbed by the importers, thus retailers and their discerning and wealthier clientele will seize the opportunity to buy high value bottles before price hikes are passed on to them. This would create opportunities for merchants to work through their stock, and stay incentivised to offer good deals for high end consumers whilst stocks last. This could create a healthy dynamic for the wine trade to rebalance (over) supply, (sluggish) demand and (supressed) margins going forward. Turing adverse market conditions into opportunities for both consumers and traders.

Last but not least, at the high net-worth end of the market the focus is unquestionably the Chinese investors’ unwavering interest in purchasing wineries, notably in and around Bordeaux. The difficult wine market at home is seemingly irrelevant to their desire for chateaux. Among the high net-worth community, the tumbling stock market in China and its uncertain outlook only increased the appeal of overseas assets. A weaker yuan at present does not significantly impact purchasing power, especially against a tired Euro. “Better to look sooner rather than later” seems to be the favoured view among prospective buyers. As they say in the market, uncertain conditions induce flight to safety.  It used to mean buying gold and US treasuries and such likes, but in a new world order, for some the land from which vines grow and wine flow is the flight to safety of their dreams.

© Janet Z. Wang 2015

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