Treasury Wine Estates (ASX: TWE) announced recently it will shift some of its luxury wines into other Asian markets after a drop in Chinese demand. Recent austerity measures in China have decreased the sale of luxury wines, which are mostly used in gift-giving, causing Treasury to allocate wine to other key Asian markets such as Hong Kong and Japan in order to 'provide brand and profits optimisation'.
Hong Kong in particular has been a standout performer, although the company reported growth in every region (with the exception of in the U.S.) in 2013. Asia in general is a strong focus for Treasury with approximately 20% of the company's earnings now coming from this region.
Treasury also counselled shareholders to remember that 'Asia is so much more than just a China story' and this is something winemakers globally already know. Treasury faces a tougher struggle in nations like Japan where winemakers from all over the world have a more established presence, though there is definitely strong potential for the company to grow its market share. China, by contrast, is one of the largest (comparatively) untapped wine markets in the world and could be a gold mine for the successful wine maker.
The ever-expanding Chinese middle and upper-middle class now accounts for about 59% of the urban population of China (the urban population being approximately 700 million) — an enormous potential market if Treasury is able to establish the perception of value for many of its brands. The fact that wine sales dropped due to austerity measures, reducing the amount of gift giving, says to me that wine doesn't yet play an important role in Chinese recreation.
This, in my opinion, is the biggest hurdle Treasury faces to Asian success. In virtually every nation worldwide, the use of alcohol is regulated by the dominant culture – and wine is quite new to Chinese culture. Or to put in another way – can you imagine senior executives drinking rum and coke in a board meeting? How about the Aussie working class getting together for a drink after work and the drink of choice not being beer? These are stereotypes, sure, but they have a strong basis in fact.
It's equally difficult to imagine the average Chinese co-workers enjoying a dry Wolf Blass over dinner, and in a nation considerably more traditional than Australia, the barriers to change may be even greater.
Foolish takeaway
Treasury Wines is definitely going in the right direction with its expansion into Asia at large, rather than focussing specifically on China. Over a billion potential consumers live in the region and I would not be at all surprised to find that most of Treasury's earnings will come from Asia in 10 years' time.
However between now and then Treasury needs to do some serious brand building and focus not just on the perception of value, but on making wine 'cool' (for want of a better word). People need to want to drink it and as China grows and more people in lower income brackets can afford it, Treasury's potential market multiplies.
