Doug Yong writing for the South China Morning Post has warned that the Chinese wine bubble is about to burst. He is not referring to the Bordeaux bubble where wealthy Chinese rushed to acquire top flight wines and vintages at high prices but one closer to home:
“A new profit warning from Dynasty reflects a bursting bubble in China’s overheated wine industry, with a major consolidation likely to start in the second half of this year.”
Dynasty Fine Wines are a leading domestic wine producer and are one of its oldest, celebrating their 30-year anniversary in 2010.
Yong writes that he has previously predicted this looming bubble was coming:
“As the rapid development of China’s wine industry follows a pattern often seen in other hot new sectors. That pattern often sees hundreds of new companies pile into these emerging sectors, leading to overheated competition and forcing everyone into the red. The inevitable result is consolidation, with the older, larger companies usually coming in to mop up the mess.
While most of China’s wine sellers are too young to be publicly traded, Dynasty is one of the few that is older and is listed in Hong Kong, providing an important window onto the broader sector’s health.
So it’s quite revealing that Dynasty has just issued an announcement saying it will report a net loss for 2012. That loss would come after the company reported a loss of about US$600,000 in the first half of last year, reversing a profit in the first half of 2011.”
Back in 2012 I wrote that China was concerned that imported wine from Europe is damaging their domestic market. The China Alcoholic Drinks Industry Association made a formal request to the Ministry of Commerce to look at the situation.
Wang Zuming, Secretary General of the group, has said that the rivalry between imported wine and domestic brands has never been so intense. I wondered at the time if we would see taxes put on up imported wine if European wine imports continue to interfere with China’s 12th Five-Year-Plan?
Yong goes on to say that:
“Dynasty’s status as one of China’s oldest and best known domestic wine makers is particularly noteworthy, as the fact that it is losing money means that nearly everyone else in the sector is probably also posting even bigger losses.
Dynasty noted in the warning that its sales volume actually decreased last year compared with 2011, and that the company has suffered from both China’s weak economy and the waning appeal of domestic wines compared with imported rivals.”
Yong concludes that a major consolidation is likely to start in the second half of this year:
“With the competition heating up so much, look for 2013 to be a year of ballooning losses not only for Dynasty, but for just about everyone in the sector. We’ll probably start to see the first signs of consolidation in the second half of the year, with a full-scale clean up likely in 2014.”