Simon Zhou has made a career out of promoting and selling New Zealand wines into the land of his birth, China, and he sees steady growth ahead.
How did you get involved with New Zealand wines?
I lived in New Zealand for 15 years and I have been involved in the New Zealand wine industry from 1996. The import tax for alcoholic beverages was lowered from 2004, a drop from I think 89% to 49%, so we saw an opportunity in bringing products from New Zealand. We import wines from all over New Zealand, and we do a few other products too, including bottled water and bottled beer. We work with 13 different wineries; we’re the importer, our job is to bring the product to China and distribute.
What trends do you see in the China consumer market?
The golden times for restaurants (in China’s main cities) was the late 1990s and early 2000s. In terms of making money, it was much better than now, because at that time eating out was seen as fashionable and there weren’t as many restaurants. Rents and labour costs were a lot lower and you were able to charge much higher prices, so companies made a lot of money. Today the market dynamic has changed. Consumers now are eating out as a necessity, not as a luxury. They eat out because they have to, and they don’t want to eat at home. People are eating out a lot more and there are a lot more options. The cost of doing business has gone up, rents are so high. And people are just not willing to pay those prices any more. In the late 1990s, people paid over 1,000 RMB for a Chinese meal. If you charge that now, people won’t pay unless you have something special.
How about for wines?
This has impacted on wines as well. People are no longer willing to pay the high prices, and you see a lot more wines in the reasonable price bracket. We sell to the restaurant at around 50-80 RMB and they will on-sell at the 200 RMB mark. That’s the volume end of the market. If you go beyond that, volume drops off, consumers are not willing to pay. For high end wines, people are happy to pay corkage and bring their own. So margins for us are down, but volumes have definitely gone up. Of course, there are a lot more players in the market too. But the margins for restaurants on wines haven’t come down. They are still selling at the same margins, but they are selling down. They used to sell at an average price of 400 RMB, and now 200 RMB, but they are buying at a lower rate too. Otherwise it’s difficult for them to survive.
How else is the market here changing?
There are also a lot of changes in the dynamics of what people want. You are no longer able to make something seem fancy and pass it of. The levels of sophistication have risen significantly and people want a really good price nowadays. There is a lot of innovation in consumer markets as well, a lot of new products coming out.
How does this impact on New Zealand wines?
In terms of wines, New Zealand is in a somewhat difficult position. New Zealand produces wines in the premium area, because of the volume and also the cost of producing the wines is not cheap. New Zealand has the highest average import price per litre in China; double the average price of French wines. That is not just for China, it is worldwide. That means that in much of the HORECA market, New Zealand wines are not there, they are not able to compete with the value end of the product range. So New Zealand is only in the premium area. But New Zealand is unfortunately not in the super-premium category. Almost all New Zealand wines retail at between 130 to about 350 RMB. So that makes New Zealand unique in that it is only in the middle segment. But the middle of the market is doing very well, and New Zealand accounts for 1% of total wine imports into China.
Can that be increased?
Absolutely. New Zealand has a unique factor; it is a neutral country, it doesn’t have strong links with the US or with Europe. and so when you market New Zealand products, people don’t bash it. You get French bashing, and US bashing, but you don’t get New Zealand bashing. And the aromatic properties, the purity of New Zealand wines, is not seen anywhere else in the world because of the unique climatic conditions. I guess an important part of it is to convince Chinese consumers that white wines taste just as good as red wines. In China, sales are 90% red.
Any chance of that changing?
Definitely. It used to be 95%. So white wines have already doubled their share, but of course from a small base. If it got to 80:20, then New Zealand’s opportunity will have grown significantly because you’re tripling the market. So when that changes, New Zealand will be in a much better position. the key area I think is to convince consumers to drink white wine. Trends and fashion are very important. For instance we’ve seen the growth of IPA craft beer over the past six months, simply because (Chinese leader) Xi Jinping went to the UK and had a drink of IPA in a pub. So influential people endorsing this type of product will result in growth because then people are willing to try unfamiliar products.
What growth do you expect in coming years?
We have a 10% growth rate at the moment, we’re happy with that, although it used to be higher. We are now busy educating people on aromatic wines, which is what New Zealand is good at. It will take another generation, maybe 5-10 years, and then we’ll be in a much better position.
Do you see a China economic slowdown?
I’m not an economist, but yes, people are buying less expensive wines. 50% of our business is selling direct to consumers, and a lot of our high-end consumers are buying less expensive wines. They’re still buying the same amount of wine, but just trading down. So instead of buying a 2,000 RMB bottle, they are buying 800 RMB. But we see total consumption is still growing. So yes, the economy is probably slowing down, in terms of manufacturing and so forth, but consumers are actually growing, at least in terms of our business. We’re up 10% in revenue and 30% something in volume.
How do you view China’s middle class?
I don’t know how to define Middle Class, it’s difficult to say. but I see people want more things in their lives. They want nice things. not necessarily branded things any more. But Shanghai is unique. For our colleagues in Shanghai, they own their own apartment already, and that means they are all ‘USD millionaires’ in asset terms. But are they behaving like what we perceive a Western middle class to be? Maybe not, because their spending is still not so high. In those terms, most of our customers are middle class. They want to experience Western lifestyles, they want to taste wines. It’s that feel good factor.
How is the regulatory environment?
For many years we had very few problems with import regulations. Mostly it’s us making mistakes, not doing things right. The biggest challenge now is the over regulation in terms of new businesses; grey areas in terms of building codes and things like that. For instance, we are building a new warehouse, and it could be one way or it could be another way. The grey regulations are difficult for anyone to follow. And it’s getting greyer, with more codes coming out. We went through a similar exercise five years with our old warehouse, and had none of these problems, now we do. It’s very frustrating. No one will tell you what the new regulations are, it’s up to you to find out. It’s not about under-the-table payments either. We see it as a shifting of responsibility. Government departments don’t want to take responsibility.
Should New Zealand companies use a distributor or do it themselves?
Do you see China as one of your most important markets? If you do, then yes I think it better to set up here yourself.
