05/02/2024

How China’s tariffs on Australian wine changed the market landscape

As China hints at tariffs easing, IWSR looks at how the Chinese wine landscape has changed and what it means for Australian wine

The Australian wine industry was hit hard by the loss of China, its most lucrative export destination, due to the imposition of import tariffs placed in 2020-21. Most recently, for example, a Bain-led consortium announced it will take over Accolade Wines after it struggled to adapt to “challenging macroeconomic and industry headwinds in recent years.”

Whilst many producers are increasingly hopeful that they will soon be able to re-enter the market, they are also targeting a more diverse range of countries – and fine-tuning their international plans to factor in widespread declines in wine consumption.

Increasingly, producers are favouring a combined strategy of prioritising emerging markets – particularly in Asia – and focusing on higher price-points in Australian wine’s established and mature markets, such as the US, the UK and Canada.

Tariffs on Australia’s leading export market

China was once by far Australia’s leading wine export destination, with shipments in the year to January 2020 worth A$1.2bn. However, political tensions between the two nations led to China imposing punitive import tariffs of 107.1-212.1% on Australian wine in November 2020, increasing to 116.2-218.4% in March 2021 (the precise rate varies by company).

The tariffs are due to remain in place until 2026, but in October 2023 Australia and China indicated that they had reached a consensus on a WTO dispute related to the tariffs.

In the meantime, Australia’s wine producers have been significantly impacted by the effective closure of the Chinese market: according to IWSR data, Australian wine volumes in China declined at a CAGR of -78% between 2020 and 2022.

Alternative export markets to offset losses

As a result of the tariffs, producers have turned to other markets in an effort to offset China’s losses, targeting a number of countries across Asia, as well as the category’s more established Western markets.

“Diversification has been challenging and growth has been generally slow, but there are some bright spots,” says Lee McLean, CEO of industry body Australian Grape & Wine.

Data from Wine Australia, for example, shows that in 2022-23, while exports to Southeast Asia declined by 11% in value to A$278m, they increased by 14% in volume to 25m litres. These results are representative of mixed results by destination.

IWSR figures reflect this picture, with Australian wine volume consumption declining by -13% in South Korea in 2022 vs 2021, but increasing in Thailand (+16%), Singapore (+1%), the Philippines (+18%) and Vietnam (+18%).

“South Korea is a market that has been on everyone’s hit list for a while now, but the category has more recently seen an hourglass dynamic with a squeeze at the standard and premium levels and growth elsewhere,” says Sarah Campbell, IWSR’s Head of Research for Asia Pacific. “Meanwhile, local consumers in Thailand are increasingly engaging with the wine category, so that could be another opportunity for Australian producers.”

In the longer term, IWSR forecasts robust volume growth for Australian wine in countries such as South Korea (2022-27 volume CAGR of +4%), the Philippines (+10%) and Vietnam (+8%).

Another major target for Australian wine producers is India; volumes there registered a 2018-22 volume CAGR of +14%, with IWSR forecasts predicting a +6% CAGR gain between 2022 and 2027.

“India is an obvious priority, as Australian wine is already the top imported country of origin there,” says Jason Holway, IWSR’s Senior Market Analyst for India. “There has been a free trade agreement in place since the end of 2022, which has halved taxes, but there are challenges related to complex distribution structures, differing legislation and taxes by state, and the financial investment required to build relationships from scratch.”

The export picture for Australian wine is complicated by widespread declines in wine consumption in many of the industry’s leading export markets. According to IWSR data, Australian wine volume consumption in the US declined at a CAGR of -7% between 2018 and 2022, with volumes in the UK, Canada and Japan falling over the same timescale as well.

“The UK and US will always be important markets for Australia due to their sheer size, the challenge being that wine consumption is declining and wine generally has become massively commoditised, especially in UK supermarkets where a lot of bulk wine is bottled and sold under private label,” says Campbell. “IWSR data shows that the volume losses in the standard-and-below price segments of Australian wine in these markets are outweighing the gains seen in the premium-and-above price tiers.”

McLean points out that, in many markets, Australia’s share of premium wine sales is well below its share of the commercial segment – signalling a “significant upside” for the category, and particularly at what he describes as the “sweet spot” of US$15-30 per bottle.

Re-entering a different wine market in China

Meanwhile, there is growing recognition in the industry that, if and when China drops its punitive tariffs, Australian wine is highly unlikely to return to the peaks of early 2020 in the short to medium term.

The wine market landscape in China has also evolved over the past few years, with overall volumes contracting.

“2022 was one of the most challenging years for China’s alcohol industry,” notes Shirley Zhu, IWSR’s Research Director for Greater China. “Rolling lockdowns and social restrictions limited consumption, and consumer spending waned. There will also be challenges with overstocks, as the Chinese market has rebounded slower than expected post-Covid.”

IWSR data shows a -26% volume decline in total wine sales in China, 2021-2022, capping a 2018-22 CAGR of -16%. 2024 will likely continue to be challenging for wine, but if the economic situation improves as expected, less pronounced declines (circa -2% volume CAGR) are forecast out to 2027.

Australia’s near-total absence from the Chinese market for the past three years has also allowed rival origins to fill the void, with Chile and South Africa two of the main beneficiaries. Additionally, some Australian brand owners switched the source of their liquid to maintain brand presence and sales. When the tariffs are lifted, the question remains whether brand owners will switch back to Australian-produced wine and whether this may have any impact on consumer perception or brand equity.

For now, IWSR’s consumer recalled data shows that while wine originating from Australia has a significantly lower purchase incidence compared to 2019, it remains in the top three recalled purchased countries of origin. This underscores that Chinese sentiment about Australian wine remains positive, and may foster a quick rebound in sales once the supply chain has recovered enough to restore the physical availability of Australian wines in retail and on-premise to pre-tariff levels.

Another change in China’s wine landscape is the growing awareness of locally-produced wine, with increasing recognition of regions including Ningxia, Shandong, and Shanxi and Xinjiang.

The Chinese government created the Ningxia Wine Bureau in 2012 and has supported producers to gain traction on the international stage – Silver Heights, for example is seen as one of China’s most influential boutique wineries. 2023 also saw Treasury Wine Estates launch its first Chinese-produced wine as part of the Penfolds Collection, named CWT 521 (Chinese Winemaking Trial). IWSR consumer research shows that amongst Chinese semi-annual imported wine drinkers, awareness of domestically-produced wine increased statistically significantly in 2023 vs 2019.

Could structural change be the answer?

Many industry stakeholders, however, believe the rebound for Australian wine will require a structural overhaul of the Australian wine industry. The oversupply issue is viewed by some to reach as far back as 2017 when Chinese wine consumption began declining significantly, but production of cheaper wine continued unabated. The addition of large harvests in 2020 and 2021 added to inventory levels.

With Australian wine stocks currently at an all-time high, many wineries are struggling with oversupply, which will become even more pronounced with the upcoming vintage. France’s recent response to overcoming the wine surplus in Bordeaux has been a package including the up-rooting of vines, compensation for growers and a distillation campaign to lessen overstocks.

While re-entering China will not be a silver bullet for Australian wine, producers are hopeful that it will help boost the industry’s outlook.

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