China’s thirst for wine

Between a sharp economic downturn and corruption scandals, Chileans haven’t had a lot to celebrate lately. So when Chilean authorities announced that China had become the country’s biggest buyer of fine wines, it was welcome news indeed.

The national department of agriculture recently reported that Chile sold $163 million in bottled fine wine to China last year, overtaking its sales to the United Kingdom and the United States. Now, that may not sound like a whopping sum; it’s only a fraction of the estimated $258 billion in global wine sales. But it means a lot to Chile, one of the so-called New World winemaking countries, which is aggressively trying to carve out its place in world markets. It’s also a lesson for other Latin American nations still stuck on a Chinese-driven commodities treadmill.

China’s breakneck industrial growth over the last decade drove production across the Americas, as nations rich in raw materials pumped iron ore, beef, soybeans and oil into the dragon’s maw. But the commodities boom has passed, sending prices of copper, Chile’s main source of export dollars, to a six-year low. Now, most Latin American producers are sitting on inventory and dreaming of moving up the value chain.

That’s where ambitious New World winemakers, such as Australia, South Africa and Chile, saw an opportunity. A few years back, the business media was flush with stories of newly rich Asians avid for luxury brands, and willing to pay top yuan to wash down their gourmet meals with the best of Bordeaux or Tuscany. Even now, the Chinese millionaire’s dream du jour is to buy a chateau in France.

And yet as China’s wealth trickled down, so did the taste for finer things. By 2012, China was drinking more red wine than France. That’s been a boon for low-end national brands; the best-known domestic label, Great Wall, may not win many blind tastings, but goes for $5 or so a bottle.

Increasingly, however, it’s the middle class that’s driving China’s consumer market: discerning college students and young professionals who are shopping for better but still affordable brands, something between a Petrus and plonk.

Enter Chile, a land of traditional and tech-savvy vintners, heralded for their highly regarded if lesser-known wines, and modest prices. Production is soaring, thanks to falling grape prices and a weaker peso, which makes the South American country’s wine more competitive abroad. That combination has helped Chile grab market share from more august wine producers in global markets: In 2015, Chile sold more wine to Japan than France.

But the real prize is mainland China, which, despite the slow patch, is touted as the future of global wine sales. Barely 10 years ago, Chilean wines were hard to find in Beijing or Shanghai. Last year, Chile became China’s fourth-largest supplier, selling 65 million bottles, a 43 percent jump in volume over 2014.

To build the brand, Wines of Chile, a fancy trade lobby, opened an office in Shanghai in 2014, and last year started a wine academy in Hong Kong that will initiate aspiring oenophiles into the secrets of wine’s new world.

Arguably none of this would have been possible without Chile’s other competitive advantage: free trade. Known as the most market-friendly country in Latin America, Chile has kept its borders open and avoided the sand traps of its quarrelsome neighbors in Mercosur, a South American trade union that has been dogged for years by protectionism and ideological bickering.

Chile was the first nation in Latin America to sign a free trade agreement with China. That was in 2005, and in the decade since, bilateral trade has quadrupled, reaching $34.1 billion. A small but expanding part of that trade is Chilean wine, which thanks to the trade deal now enters China duty-free - which is something to toast.

*The author is a Bloomberg View contributor in Rio de Janeiro.

by Mac Margolis