Where Is China's Wine Market Going?

When Don St. Pierre Jr. announced in October that he had stepped aside as CEO of ASC Fine Wines, the company he cofounded with his father in 1996, it surprised many in the business. An American ex-pat, St. Pierre has been a trailblazer in building the fine wine trade in China. As one prominent Bordeaux négociant noted, “where ASC goes, we go.”

But in a lengthy interview with Wine Spectator, St. Pierre said the time had come for him to focus on long-term ideas and leave managing what has become a big business to an expert. ASC appointed John Watkins, an American executive who cut his teeth on Northwest Airlines’ expansion into China in the 1980s, as his successor.

A couple years ago, ASC began a big shift, moving beyond China’s saturated first-tier cities into second-tier cities, opening 26 offices and a distribution network to 150 cities. Staffing shot up from 400 to 1,200. “The challenges China presents moving forward are really unbelievable. We're just beginning to see Chinese consumers develop their own tastes and interest in wine and see wine as part of their life as opposed to drinking wine because of a business occasion,” St. Pierre told Wine Spectator. "We’re always trying to stay ahead. Hiring John is about staying ahead."

When St. Pierre and his father opened their doors in 1996, they represented just three brands—Beringer, Petaluma and Bollinger. To import their first container of wine, they formed a joint venture, but had a falling out that left them dry. “They actually hijacked our first container, so we didn’t even have wine for our first launch party,” said St. Pierre.

Today ASC has an annual turnover of $200 million, Suntory owns an 80 percent stake, and the company is poised for more expansion. The challenges ahead are both common to family-led companies and unique to China. “One challenge I’ve seen across four different industries in China is to attract, train and retain really good people as whole new industries are created,” said Watkins, who has also worked for GE and Cummins.

Watkins' coming on board as CEO will free up the 44-year-old St. Pierre to do what he does best from the executive chairman of the board’s seat: new ventures in the unpredictable, fast-paced Chinese market. As St. Pierre sees it, “It's critical for the organization and the shareholders that, as a cofounder and entrepreneur, I focus on what I'm good at and have a passion for. When I looked at who do we need to get to run this business for the next 10 years, it had to be someone who really understood China really well. It couldn't be someone who understood the wine business, but didn’t understand China."

While Watkins improves training and efficiency, expands the core business of business-to-business sales and negotiates strategic alliances in China’s fickle regulatory environment, St. Pierre will focus on direct sales and premium domestic wine production, both of which offer potential. “We’re very interested in acquiring or investing in a domestic winery. As a major distributor of wine, it’s not right that we don’t have a decent quality domestic wine as part of our portfolio,” said St. Pierre.

There is a relationship between premium domestic wine and imported wine. Over the past three years, as domestic producers upgraded packaging and raised prices, consumers got used to the idea of spending 50 bucks for a bottle of wine. The result was that demand exploded for often little-known imported wines, which suddenly seemed affordable and a better value in terms of quality.

Now St. Pierre aims to compete with domestic producers by making his own Chinese wine, assuring distribution through his network. He sees particular potential in direct sales. “I'll be involved in developing our direct sales business model—Internet, shops, retail store partnerships, and then we're building these flagship platforms called ‘wine residences’ in different cities where we have regional offices,” said St. Pierre. ASC recently unveiled a 54,000-square-foot luxury wine residence in Shanghai that includes a wine shop, private club, event space, wine training and wine lockers and storage for corporate and private clients.

But the road is paved with as many obstacles as possibilities. “In April, [Premier] Wen Jiabao came out with a statement that the Chinese government was wasting too much money on expensive alcohol,” said St. Pierre. "That was a remarkable statement—that the Premier would specifically point out expensive alcohol as being a problem—but it shows you the extent to which government or government-related companies are spending on expensive alcohol."

The effect was immediate. This is a transition year for the Chinese government, rife with political instability and headline-grabbing infighting. Government officials suddenly weren’t so comfortable uncorking Bordeaux’s top brands, and businesses with government relationships were already cutting back on entertainment as the economy slowed. Figures from Chinese customs show a boom from January to August 2011, when wine imports grew 100 percent in value and 60 percent in volume. For the same period in 2012, wine imports only grew 13 percent in value and 17 percent in volume. The average price per liter has dropped as the Chinese traded down.

Meanwhile smuggling and the murky gray areas in Chinese law continue to test wine traders. Smugglers operating over the Macao and Hong Kong borders into the Mainland avoid the 48 percent duty, making it tough for legitimate importers to compete. And corruption is a major issue. “You have to be very smart. It’s hard for small companies to deal with those issues when they have not yet established themselves so that they can say, 'No, we’re not going to do that,'” said St. Pierre.

How does a company stay ahead of such challenges? The trick is to think China first, wine second. “Honestly, if we had come to China being wine people first, and not understanding China, we would never have survived,” said St. Pierre.