Fine wine - a window into the culture of China's wealthy elites

March 17, 2015

 

Relative newcomers to this market, wealthy Chinese from the Peoples' Republic started to buy up top wines in the latter part of last decade, specifically Bordeaux first growths.  The fact that these wines were being bought to drink straight away, rather as an investment for the future, depleted a limited stock and forced prices sky-high in 2008.  Then came the global financial crisis, and prices fell again, but the Chinese have stayed on the scene. 

 

More  recently, Xi JinPing's government has waged war on graft within the Party and government as a whole, and foreign luxury brands have taken a hit as the amount of "gift" giving between officials has fallen away.  It's possible that expensive cases of wine might have featured among those gifts, certainly, but they won't have accounted for all sales – far from it.  Last September, for example, more than 120 world records were set for lots of wine sold at auction in Hong Kong, with a lead being taken by mainland Chinese bidders.[1]

 

Within just 10 years (a long time in the tech world, but a short one for wine) the Chinese market for fine wine has changed radically.  And this fascinates me because I'm interested in Chinese culture and business, and the ways that these interact with the West.

 

In May 2014, Hurun (observers of China's wealthy elites) published a special report looking at "alternative investments" entitled China Spiritual Investments White Paper [2].  This report was written jointly with the Industrial Bank Co. of China, and contains the results of surveys carried out during the previous year, relating to China's investments in artworks, classic cars, gemstones…and wine.  It's only available in Chinese right now.  The report offers little real analysis beyond the figures, nor does it compare the investment habits it uncovers with those of wealthy elites in other parts of the world, but it makes interesting reading none the less.   So what did they discover?  Why and how do mainland Chinese elites buy fine wines?  I'll list out the main findings of the report, then summarise and offer my own comments at the end.

 

Hurun found that in 2013 the average time that the respondees had been buying fine wine was 4.4 years, with most beginning in 2008.  The richer respondees (those with more than RMB 50million in assets) had been in the market slightly longer  - an average of 5.3 years. 

 

What reasons did these people give when asked "why do you buy fine wines?"

 

    74% - for a personal hobby

    50% - in order to socialise

    49% - to drink

    32% - because of the influence of the friends near to them

    30% - for self-improvement - learning and developing "style"

    18% - because they hold their value

    10% - because it's a hot-spot in investment markets

    7%   - because there are high profits to be made

 

Note the importance of social factors in this list, also supported by other research.  According to Dezan Shira & Associates China Briefing, for example,

 

"Wine makes for a particularly attractive investment for the wealthy in China, as it combines personal passion, investment and consumption into one, and is an important social currency between friends and business acquaintances. Almost half of high net worth individuals invest in some form of alcohol, three-quarters of whom identify personal interest as their main reason for doing so. "[3]

 

Now here are the top 8 reasons private PRC investors give for choosing NOT to go for fine wines:

 

    53% - I don't understand about wine

    29% - it's hard to do/realise

    26% - no personal interest in fine wines

    22% - the market is unusual and "non-standard"

    18% - risk too high

    17% - the scale of this market is too small

    16% - returns are too low

    8%   - the costs are too high

 

How do wealthy Chinese go about buying in fine wine?

 

    71% - make their own purchases direct, within China

    53% - make their own purchases direct, but when travelling outside China

    47% - use a specialist wines and spirits agent/broker

    25% - buy at auction houses

    8%   - buy En Primeur (in effect, wine futures)

    7%   - buy through a financial institution such as a bank or fund

 

Note that this list does not take into account the considerable investments that wealthy Chinese are making in vineyards throughout the world, not least in Europe.

 

Most respondees claimed they got their wine information from friends.  When we consider the caution with which mainland Chinese people bestow their trust, and the regular unmasking of wines and spirits counterfeiting operations in China (I remember seeing them on the news and in newspapers when I lived in Chengdu, and hearing friends talk about them too), this situation shouldn't surprise us.  Friends and family are the people you trust in China.  Here's how Hurun's figures looked when people were asked "where do you get your information from?":

 

    57% - recommendations from friends

    53% - social events

    52% - clubs and associations

    38% - websites

    36% - introductions from experts

    34% - specialist books

    24% - advice from brokers

    20% - magazines

    19% - television

 

So it is friends who are trusted (including those met at social events, in clubs and associations) rather than "independent experts" (brokers, books, magazines). 

 

The final set of statistics that caught my eye related to the factors which the respondees considered most important when they bought fine wine:

 

    81% - the year / vintage

    77% - the brand

    66% - location of vineyard

    43% - the rarity of that wine

    39% - price

    39% - personal preference

    28% - the opinion of an expert

    14% - the design of the packaging / label

    11% - market movements

 

Summary and observations

Fine wine investments appeal to a small and relatively new group of wealthy PRC Chinese elites, some of whom have been active in the market (either continuing to buy, or at least choosing not to drink all their investments) for more than 5 years.  It's reasonable to assume that their level of knowledge about wine has grown significantly during those years, particularly because almost ¾  view this at least as much as a personal hobby as an financial investment. By far the majority of purchases take place within China direct from a shop, rather than (as they see it) through an agent, or at auction.  Friendship is crucial to the process, both in terms of being a major reason to buy (socialising) and in deciding what/how to buy.  The influence of independent, professional "experts" seems to be limited – in China, fine wine is something to be talked about, explored and shared with people we already know and trust.  It seems that i) those who buy fine wines feel confident that, together with their friends, they can find enough information about what to buy, how to buy it and how much to pay, without resorting to seeking out specialist advice, and ii) those who choose not to buy often do so because they and their friends are not confident that they have sufficient knowledge, and they do not feel that seeking out an "expert" is the right solution to this problem.

 

These factors suggest to me that specialist fine-wine companies wanting to develop in China need to take a very long-term view.  On one hand, they need to be investing in relationships with wealthy elites so that they become "trusted friends" who will, in time, introduce others in their circle.  On the other hand, the fact that most wine purchases take place directly in China suggests that a local shop-front is necessary – especially one which can demonstrate trustworthiness and integrity, with respect to the supply chain.  As more wealthy Chinese are connecting directly with wine producers and vineyards around the world, it could be of value to have producers point towards certain trusted in-China vendors, or those vendors demonstrate their direct links with producers.  Neither relationships or shop-front on their own will be enough – both will be necessary.

               

 

 

[1] See (e.g.) http://www.cnbc.com/id/102029218#.

[2] 中国高净值人群心灵投资白皮书 (free download available from http://www.hurun.net/en/Research.aspx

[3] See more at: http://www.china-briefing.com/news/2014/07/29/alternative-investments-chinas-rich-looking-to-art-wine-and-jewelry.html#sthash.yJA4xgM4.dpuf

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