Monday, June 11, 2007

First they ignore you
then they laugh at you
then they fight you
then you win.
- Gandhi

Sunday, June 10, 2007

India or China? The new wine frontier?

In the classic 1967 movie The Graduate, there was a memorable exchange between the young hero Benjamin, who is just finishing school and wondering about his future, and a friend of his parents.

Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.

Around the turn of the century, I had a similar conversation with a successful Indian banker in Hong Kong. If I wanted to focus my efforts profitably, he solemnly said, I should never forget the simple four-letter word: CRIB. In response to my vacant reaction, he explained that the acronym stood for China, Russia, India and Brazil, the quartet of dynamic countries with large populations and fast-growing economies. At the time, all but the most narrow-minded Western wine professionals were aware of the potential of Japan, and many had travelled to Singapore and Hong Kong, where they had enjoyed vinous encounters with English-speaking expatriates. The CRIB markets, however, were largely unexplored.

Today, in wine terms, the picture has changed radically for at least three of those countries. Brazil may still be largely off-piste for almost everyone except Portuguese winemakers, who exploit the common language, and enterprising pioneers, who share my belief that inexpensive wine from Brazil’s northerly, two-harvests-per-year vineyards will soon take the Anglo-Saxon world by storm. Russia, India and China, on the other hand, are on almost every serious wine salesman’s itinerary.

Setting Russia – which will eventually be treated as an eastern extension of Europe – aside, the biggest puzzle for Western wine companies often seems to lie in deciding whether to focus their
efforts and limited resources on China or India. Which of these two countries' rapidly growing middle classes will offer the biggest pot of gold. Curiously, many apparently sophisticated outsiders, apparently dazzled by images of rapidly growing middle classes, treat India and China as if they were alike. In fact, however, they are as dissimilar as, say, Japan and the UK.

One essential difference lies in current wine consumption. The 1.3 billion Chinese currently get through a glass of wine per person per year: a tiny amount when compared to the 20 or more litres of most European markets, but enormous when set against the teaspoon per person that is being drunk by 1.1 billion Indians. Culture plays a large part here: alcohol – of any kind – is traditionally viewed unfavourably by most of the subcontinent’s religions. As the admittedly anti-alcohol campaigner Shanthi Ranganathan pointed out to the World Health Organization in 1994, ‘In the Hindu scriptures drinking is referred to as one of the five heinous crimes, which include murder and adultery….” Ms Ranganathan went on to say that the ancient Tamil poet and ethical authority Thiruvalluvar called alcohol a social evil, and that a drunkard was like a dead body. According to the laws of Manu, which governed the day-to-day activities in ancient India, people who consumed alcohol were committing a sin for which they would have to atone by having the image of a flask branded on their forehead.

If the 830 million Hindus are largely discouraged from drinking, there are also 160 million Muslims who are positively banned from doing so. A further 19 million Indians might be expected to pay some attention to the injunction in the Sikh Code of Conduct, which states that ‘A Sikh must not take hemp, opium, liquor, tobacco, or any intoxicant’. The 4.2 million Jains are also supposed to avoid alcohol (along with meat and fish), and a precept of Buddhism – to which some 8 million Indians adhere – is ‘I undertake to abstain from intoxicating drugs or drink’.

Of course, religious rules are not always observed, as Catholic Italy’s falling birth rate proves, but they do help to set a social tone. Would-be exporters to India might do well to ponder the fact that Mahatma Gandhi, still a figure of huge reverence, was a stalwart campaigner for abstinence, and Gujarat, his home state, has maintained a state-wide ban on alcohol almost since the end of the Raj. Between 1977 and 1979, India underwent two years of nationwide Prohibition, and Tamil Nadu was ‘dry’ for 23 years. Even now, there is scarcely a state election at which calls for Prohibition are not heard, especially from women’s organisations. Weddings, which in India traditionally last for days and can include up to a thousand or more guests, involve little or no alcohol – unless the guests are Christian or Parsi.

Within India, it is often said that the challenge lies in converting the male population from beer to wine, but average consumption is a meagre litre of beer per head of population (in China it is 23 litres). And, given a similar growth of 7–9% in both countries, the gap seems likely to widen rather than to shrink. Curiously, there is one form of alcohol in which India can claim to be a world class consumer. The subcontinent recently became the number one drinker of whisky (mostly Indian whisky. it must be said) with an annual market of over 450m litres.

The anti-alcohol mood that is easily encountered in India has to be contrasted with the stance taken by the Chinese government since 1987, when it decided to encourage the production and drinking of wine. If poor people were going to consume alcohol, the old men in Beijing cleverly realised, it was far better for them to drink liquid produced from grapes than from grain that could be used to feed humans or their animals. In particular, the government sought to switch consumption from baiju, the traditionally popular strong spirit made from sorghum. So, while Indian duty rates outside hotels can be as high as 500% on imported wines, in China duty has dropped since 2001 from over 200% to under 50%.

India’s swingeing duty rates on wine have helped to slow the development of a strong wine retail sector of the kind that is already to be seen in China. But wine retailing in China is also benefiting from the rapid growth in supermarkets such as Wal-Mart and Carrefour, which have yet to make their mark on India.

Official bureaucracy is an issue in both countries, but it is more annoyingly endemic in India, where petty officials have extraordinary powers when it comes to alcohol. F&B managers in international hotels regularly have to welcome teams of uniformed ‘inspectors’, who choose busy Saturdays to carry out painfully slow stock-takes of every bottle on every rack. This behaviour is not unconnected with the corruption that is mentioned in almost every conversation in India.

There are several other key differences between India and China that ought to concern the wine industry. India may boast two wineries – Sula and Grover – that are producing world-class wines, but most of its other producers are underperforming woefully, as the recent release by Pernod Ricard of a set of decidedly lacklustre wines under the Seagram brand illustrates. Far too much emphasis has so far been placed on one region – Nasik, near Mumbai – despite the fact that the Grover Reserve, India’s best red, was produced from a vineyard close to Bangalore.

So far, much of India’s winemaking focus has been on uninspiring Chenin Blanc and under-ripe Bordeaux-style reds. China is increasingly looking to develop a locally grown variety called Cabernet Gernischt, which is similar to the Cabernet Franc and shows great promise.

China’s wine industry, compared with India’s, is huge – and growing bigger by the year. The area of its vineyards expanded from 181,000 hectares (ha) in 1988 to 453,000ha in 2005, and in 2003, China produced 4.1% of the world’s wine – less than Australia and Argentina (4.6% and 4.4% respectively) but more than Germany (3.1%) or South Africa (2.8%). According to a study by the London-based International Wine and Spirit Record, by 2009 the Chinese will be drinking 766 million bottles of wine, more than 50% than in 2004.

Alongside this growth in local wine will almost inevitably come an expansion in the market for imports (this has been the model in other sectors), and it is expected that China’s big wine and spirit producers will enter the fray as importer-distributors. Great Wall is already reported to be seeking to build a portfolio of non-Chinese wines. A similar model exists in India, where the UB group, owner of United Breweries, which enjoys a near monopoly in its sector, is now also a major wine distributor. UB has recently bought Bouvet-Ladubay, the Loire sparkling wine producer, and similar purchases can be expected from Chinese wine companies over the next year or so, though it is likely that the money may be spent in Australia rather than France.

As someone who is watching both markets closely in the belief that, in the medium-to-long term, they will both hold more of the keys to the future of the global wine industry than a traditionally important country like the UK, I’d still advise strongly against over-optimism by anyone who imagines that there is easy money to be made in either. And, on balance, I’d bet on China offering the greater opportunities in the short term.