Date
19 November 2017
Donald Trump toasts a glass of red wine during a state dinner in Beijing hosted by Chinese President Xi Jinping. Photo: Reuters
Donald Trump toasts a glass of red wine during a state dinner in Beijing hosted by Chinese President Xi Jinping. Photo: Reuters

Great Wall wine has yet to make a profit

US President Donald Trump wrapped up his visit to China with deals worth about US$250 billion. The banquet menu at the formal dinner hosted by President Xi Jinping for Trump raised eyebrows. The menu included garoupa fillets in hot chilli oil. The dry wines in both red and white were made by domestic producer Great Wall Wine.

The winemaker has been suffering huge losses for years. China Foods decided to sell Great Wall Wine to China’s state-owned conglomerate COFCO. The winery business has a long cycle to make a profit, which does not suit short-term investors.

Most people would think of France and Italy when they talk about grape wine. In fact, China has more than 2,000 years of history in grape wine, which was brought back to China by Zhang Qian, a Chinese diplomat who served as an imperial envoy to the outside world during the Han dynasty.

Grape wine became popular during the Tang dynasty. Many Chinese poets have written poems to describe the taste of wines.

Minquan Wine, the former winemaker of today’s Great Wall Wine, was founded in 1958 to produce a decade wine for hosting foreign visitors in order to save foreign exchange. Minquan Wine was invited to the Leipzig wine tasting in 1963. The company changed its name to Great Wall to represent Chinese wine.

In 1988, Great Wall Wine started to introduce grape growing and brewing techniques from Europe. Great Wall Wine has become the supplier for state banquets in recent years even as Chinese customers developed a taste for red wine. The company has annual sales revenue of over 2 billion yuan.

By contrast, Kweichow Moutai (600519.CN) posted sales revenue of 38.9 billion yuan last year. In the meantime, China imported 14.6 billion yuan of wine last year, up 17 percent from the year before. Most Chinese prefer imported wines.

In this case, domestic winemakers like Great Wall Wine can only focus on the lower-end market. For example, Great Wall’s wine was sold at between 21.50 yuan to 66.30 yuan per bottle on Tmall during the Single’s Day shopping festival.

As a result, China Food, the parent company of Great Wall Wine, posted a loss of HK$270 million and HK$210 million, respectively in the past two years. The company reported a huge loss of HK$440 million in the first half of the year.

China Food decided to sell the wine business to COFCO for HK$1.4 billion last month, together with HK$3.7 billion of liabilities. The deal allows China Food to get rid of a loss-making business and heavy debt burden. The share price of China Food surged 13 percent the following day and spiked more than 20 percent since the deal was revealed.

A bottle of wine would take a few decades to reach the best taste and fetch the best price. A winery has to produce great wines in order to build a valuable brand, which enables the winery to require a price premium.

Great Wall Wine introduced new technology from Europe in the late 1980s, and its first batch of wine using these techniques was produced in 1992.

This batch has won a silver medal in a competition organized by the International Wine Connoisseurs of Brussels. Currently, 1992 Great Wall is sold at 500 yuan per bottle, more than 10 times the price of a new wine.

Great Wall is still a young company compared with centuries-old wineries in Europe. Winemakers can’t leapfrog rivals unlike smartphones and mobile payment systems. Investors may lack the patience to wait for a winery to make a profit.

This article appeared in the Hong Kong Economic Journal on Nov 13

Translation by Julie Zhu

[Chinese version 中文版]

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BN/RA

Hong Kong Economic Journal columnist

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