Vinfolio.com

Asian wine buyers sometimes ask if European fine wine being sold in the U.S. bears U.S. import labels based on some concern that such wine has been handled more often and is at greater risk of being damaged than wine sourced directly from Europe.

This rationale fails on several counts:

1. Unless the wine is from a newly released vintage, it will likely have been handled by multiple parties already, whether American or European.
2. The seller of the wine (the retailer or auction house) has a reputation to maintain for selling wine of sound provenance.  In Vinfolio's case, in addition to questioning the seller on purchase sources and storage conditions, all wine is inspected according to our inspection guidelines before purchase.
3. Rare wine is simply not abundant enough for buyers to refuse to source wine from the entire U.S. market.  Note that all wine imported into the U.S. must comply with federal wine labeling regulations.  Either the wine's official U.S. importer creates a U.S.-specific label which is applied overseas before importing (see Petrus photo) or the wine is sourced directly in Europe through trade channels and supplemental "strip labels" are added to the European label to satisfy the U.S. requirements (a common practice).

An upcoming test in Hong Kong 

As I have been paying close attention to the Hong Kong market given our decision to launch operations there, I noted that Acker Merrall's upcoming May 31 wine auction, the largest ever in Asia, is sourced from six American collections and two European ones.  Does anyone really think bidders will pass on the American-sourced wine?  I don't.

Vinfolio is taking immediate steps to launch its first international operations in Hong Kong by Fall 2008.  See today's press release.  Here are a few factors which drove the decision:

• The demand for fine wine has been growing steadily in the region and we expect it to continue.
• The recent elimination of wine duties in Hong Kong provided a further catalyst and, over time, will create pressure for other countries to cut duties, too.
  
• Hong Kong offers an attractive business environment and excellent location from which to serve neighboring geographies, especially mainland China.
• The weak U.S. dollar is stimulating more Asian buyers to focus on the U.S. market to buy their fine wine.
  
• Additional wine storage services are needed to support the arrival of wine historically stored outside Hong Kong.  Vinfolio's experience in running a full-service storage facility in San Francisco combined with our VinCellar online cellar management software create competitive differentiation for our services.

Next steps

I will be in Hong Kong again from April 8-11 to begin exploring warehouse and office locations.  In addition, we'll start searching for a Managing Director/General Manager hire.

Bottom line: The fine wine business is global and Vinfolio's operations need to mirror the market to maximize our opportunities.  This is no doubt only the first step in the globalization of our business.

The Hong Kong government just dropped duties on all alcoholic beverages, effective immediately (see story).  The duty on wine had been 40% after having been cut from 80% the prior year.  Financial Secretary, John Tsang, is betting on the behavior of free markets to turn this into an economic win for Hong Kong. 

Hong Kong destined to be Asian trading hub for wine? 

By forgoing approximately US$72 million a year in duties on all alcoholic beverages, Tsang commented that he expects wine-related trading activity may increase by as much as US$500 million.  In particular, the historic status of Hong Kong as a trading hub has been reinforced and this move places Hong Kong in a position to capitalize on its current lead as the center of wine in Asia.  Meanwhile, neighboring Macau, the new center of global gambling, has a 15% wine duty and mainland China's wine duty remains at around 50% (plus bottles are at risk of being "sampled" -- which effectively kills importing small quantities of rare wines).

Other Implications

1. More foreign wine business will open offices and expand activity in Hong Kong.  As previously noted, I'm traveling to Hong Kong on a previously scheduled trip this weekend to explore business opportunities.  Acker Merrall & Condit just announced a few days ago that it is launching wine auctions in Hong Kong in May.  The London International Vintners Exchange (Livex) has indicated its intentions to open an office if duties were dropped.
2. Further upward pressure on fine wine prices - In April of last year, I wrote a post titled "Global factors affecting trend for higher fine wine prices."  In it, I noted that the lowering of duties will drive more demand, which in a relatively fixed supply market for fine wine, supports longer term price rises.  While Hong Kong's economy is relatively small, it could easily become the "funnel" for wine purchases from wine collectors in nearby high duty countries.
3. Hong Kong wine storage facilities will boom - Hong Kong has limited local storage facilities for wine collectors. In fact, many local wine collectors are known to store their wine in London.  Expect much of this wine to return to Hong Kong for storage where it will be more easily accessible by its owners.  Hong Kong should also become the logical wine storage depot for wine collectors in nearby countries for the same reason.

What else do you think will happen?  Please add a comment to this post.

I'll be visiting Hong Kong for the entire week of March 3rd and Shanghai on March 10th to explore how Vinfolio can develop additional customers based in Hong Kong, Macau, and mainland China and better serve those we already have.  Some issues that I am hoping to gain insights about include:

1. How should we market Vinfolio in various regions to build awareness?  Are there logical partners to team up with?
2. What are the practical issues in selling wine to customers located in these markets without a retail storefront (in addition to duties and customs)?
3. Is there an opportunity to act as a wholesaler to other retailers, especially for older vintages of collectible wine?
4. How are other international wine retailers/wholesalers approaching the market?  What are they doing right and wrong?
5. Would it make sense for Vinfolio to consider opening an office in Hong Kong (or elsewhere in the region) to better serve customers?  Or is having a salesperson based in San Francisco making regular trips a viable approach too?

Overall, I am interested in learning as much as I can about how the market operates so that we can make informed decisions about how to best serve the market opportunity.

Setting up a meeting

If you're in the trade or a wine collector and would like to meet me during my trip, please feel free to contact me directly via my office or at steve@vinfolio.com.

It's simple.  Just make an effort -- the latent demand is there.  Decanter.com's recent story, "Bordeaux properties on major China, India tour," contained several factoids that got my attention:

1. The 120 Indian and 150 Chinese buyers and importers materially outnumber the visiting Bordeaux contingent of 80 professionals.
2. Only 20% of the Indian wine market is foreign-sourced.  This is unnatural and caused simply by ridiculously high import duties. 
3. The Chinese market for imported wine is growing 40% a year!

The demand for collectible wine, at least from China, is already surging and over the long term, both China and India will help ensure prices stay high.

P.S.    See my prior post, China's long-term impact on the fine wine market. 

China's growing thirst for wine is likely to drive fine wine prices higher over the next few decades. 

The March 5, 2007 Newsweek (International edition) contains an article titled "Bordeaux meets Beijing" and the February 28, 2007 edition of the Wall Street Journal weighs in with its own story on the Chinese wine market titled "'People I know still put ice and juice in wine'" (WSJ online subscription required).

Here are some items drawn from these articles which grabbed my attention:

1. Chinese per capita wine consumption doubled in the past 5 years but is still only 0.7 liters per person (equivalent to 1 bottle).  In comparison, the U.S. is third in per capita consumption with 14.5 bottles per year (see my post: 92% of wine consumed by "core drinkers") while France and Italy are about the same with 63-64 bottles per capita consumption each.
2. In 2005, China became one of the top 10 wine consuming nations (in absolute terms).
3. Chinese wine imports in 2006 (2.2 million cases) doubled 2005's level (1.15 million cases).  Since 2001, wine imports have grown from $32 million to $133 million.  The WSJ story also states that "wine experts think that one day, the high end of China's wine market for imports could match America's, valued at over $2 billion."
4. The Chinese government is actively encouraging wine consumption for health reasons over grain alcohols.
5. Taxes on many wine imports fell from 120% in 2001 to 48% today.
   
6. Wealthy Chinese buy the most recognized wine names (at very high prices) as a bit of a status symbol more than for the taste.  Sounds like an opportunity for Robert Parker to publish a Chinese language edition of The Wine Advocate and encourage more experimentation!

Alder Yarrow of Vinography has an interesting post today called “Now THAT’s cultivating a market” about an effort to cultivate wine drinking in China among 100,000 middle class families. This is part of a broader trend aimed at satisfying expected growth in Chinese consumer demand to tap into a “luxury lifestyle” that includes wine.

An article from Business Week’s February 6, 2006 issue titled “In China, to get rich is glorious” paints an amazing picture of how wealth creation is driving demand for luxury goods. Ernst & Young estimates that the Chinese luxury market currently generates more than $2 billion in sales annually and is growing at 20% annually. By 2010, China is expected to have 250 million consumers who can afford luxury products, more than 17 times the current number. The impact of Chinese buying will increasingly affect worldwide auction prices for fine wine and other items considered to be luxury goods.

China is already on the radar of some forward-thinking British wine retailers such as Berry Brothers & Rudd who have been marketing Bordeaux futures to the rapidly growing number of affluent Chinese (300,000+ millionaires is a commonly quoted statistic). Vinfolio is about to launch its own initiative in partnership with Winespring and its local partners to sell collectible wine directly in China (it’s almost easier than dealing with interstate shipping regulations). We already sell wine to consumers in Japan, Singapore, and Hong Kong and expect this to be a growing part of our business.