On a gentle slope, parallel trestles of vines lead up to a lofty European-style house, one of several self-styled châteaus in coastal Shandong, the biggest wine-producing region in China. Thick bunches of Riesling and Cabernet Gernischt grapes ripen under a hazy summer sky. Built in 2002, Chateau Changyu-Castel is run by China’s bestselling winemaker, Changyu Pioneer Wine of Yantai. Here a storied past meets ambitious plans to stay atop China’s burgeoning wine market.
Changyu enjoys the kinds of rising gross margins that global winemakers can only dream of—79 percent in 2011 on sales of 90,000 tons of red and white wine, its main product line, plus brandy, sparkling wine and Chinese “health liquor.” Changyu’s net rose 33 percent to $303 million on revenues of $918 million, up 21 percent and tripling in five years. It appears for a seventh yearÑfifth con- secutivelyÑon Forbes Asia’s Best Under A Billion list.
As with domestic rivals like Great Wall and Dynasty Fine Wines, the bulk of Changyu’s revenues derive from sales of cheap red wine. For all the talk of fine wines conquering China, the mass market remains a sea of plonk. In 2010, 72 percent of wines retailed for less than $5 a bottle, according to Access Asia, a consultancy in Shanghai. In most cities grape wine comes a distant second after rice wine, or baijiu, as the toast of choice at banquets. Only 1.3 percent by volume was priced over $10 in 2010.
Changyu has its eyes on this premium category, which has been stoked by wealthy buyers of fancy imported wines. Joint ventures like Chateau Changyu-Castel, in which France’s Castel Group holds a minority share, and estate wineries in other provinces offer a way for Changyu to improve quality and reposition the brand, possibly for even higher margins. The company has quietly acquired vineyards in Italy, Canada and New Zealand without the attention paid to Chinese purchases of trophy châteaus in Bordeaux.
“We try to raise our reputation at the high end, while at the same time we’re marketing wine as a product for ordinary people,” says Zhou Hongjiang, the company’s general manager. “We’re trying to develop in both directions.”
Changyu, like many Chinese wineries, can produce only so much table wine from the country’s limited vineyard capacity and needs juice from abroad, as well as the already bottled imports, to build out its desired dual market.
Zhou’s team plans to open hundreds of wine stores across China, where it will sell its branded wines and those of foreign partners who grant exclusive import and distribution rights to Changyu. Within six years Changyu plans to open 3,000 stores, including franchises. It says that it will prevent counterfeit wines from being sold, always a concern here.
Last year sales of imported wines, including Changyu-in- vested wines, accounted for less than 1 percent of company revenues. But Sun Jian, vice-general manager, who is in charge of negotiating import rights, says that sales of imported wines have already doubled so far this year, even before any partnerships are inked (he declined to name any candidates). “In the future it’s likely that the share of imported wine will continue to grow. The trend is clear. Changyu, as a distributor, sees an opportunity to provide what our customers want,” he says.
These are steps into highly fragmented territory. Last year Chinese customs counted 3,863 importers, up 200 percent in five years, according to Rabobank, a Dutch bank specialising in the sector. Many bypass retail channels and rely instead on direct sales to wine-quaffing banqueters who want to impress guests. Importer markups on bottled wine can be as much as three-fold, say trade experts.
Changyu officials say that the company’s distribution network and market knowledge make it a more suitable sales agent for major foreign wineries that want to build their brand in China. “We’ve talked to [potential] partners. They see Changyu as a heavyweight player in this market,” Sun says. COFCO, the state-owned food giant that controls China Great Wall Wine, also markets imported wines.
Changyu has other grand plans. To celebrate the company’s 120th anniversary it has earmarked nearly $1 billion over four years to create an international “winetropolis” in Yantai, where a few million residents sprawl between ocean and farmlands. Included will be a research institute, another château, a wine trading centre and a tourist town complete with hotels, a mu- seum and, naturally, bars. Officials say the project will be financed from retained profits and is on top of $300 million in capital expenditure in 2012.
It’s a far cry from Changyu’s roots as China’s first modern winery. Its founder was Zhang Bishi, or Cheong Fatt-Tze, a Cantonese businessman who made his fortune in Southeast Asia. From his base in Penang, where his mansion is now a boutique hotel, Zhang built a trading empire in Indonesia, Malaysia and China, and was dubbed “China’s Rockefeller” by the New York Times in 1915, a year before his death. By then he had thrown his support behind Sun Yat-sen, taking up an appointed position in the republican assembly after the fall of the Qing dynasty.
In 1892 Zhang founded Chang Yu Pioneer Wine near the thriving treaty port in Yantai, or Chefoo. The wines were sold mostly to foreigners in China or shipped overseas. The company’s museum, built on the original winery site, displays a medal awarded at a 1915 international expo held in California.