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How fair are government taxes on wine around the world?

Screen Shot 2014-11-12 at 00.19.37Government tax rates on wine differ significantly between countries and it is difficult and complex to accurately compare them. Different considerations and challenges such as economic, cultural, political and legal determine how taxes are applied. Whether they are fair or unfair depends on your point of view. The wine industry constantly fights to avoid increases in excise duty in order to protect their sales and profits. Producers that rely on local demand call for higher import tariffs in order to protect their domestic wine industry. Alternatively, those relying on exports call for free trade or tax rebates in order to sustain and grow their business. Consumers are principally against any type of tax. Whereas governments rely heavily on tax revenue, yet never seem to be satisfied.

There are huge differences in government taxes. For instance excise duty rates vary from €6 per bottle of wine in Norway to zero in Hong Kong. On the first glance, this significant rate difference seems unfair. Why should consumers pay so much for their favourite tipple in one country while others enjoy much lower pricing? However, comparison of taxes is complicated as the value of rates is based on different cultural, political and economic philosophies of countries. Following a period of alcohol prohibition, Norway’s high taxes are linked with strict restrictions by the government alcohol monopoly Vinmonopolet. Whereas Hong Kong, thanks to its global connectivity has had zero tax since February 2008 with a view to economic dynamism and liberalism.

However, even within the European Union where the majority of members share the same currency and similar economic goals, the excise duties vary so remarkably it can hardly be considered fair. The United Kingdom is one of the highest tax paying countries at £2.05 per bottle in comparison to traditional wine producing country such as France which only charges €0.03 per bottle. So if you buy £5 bottle of wine in the UK (being the average price), 57% is tax and about 28% is retail margin and the liquid is barely 25%, making it poor value for money for consumers. No wonder then that thousands of Brits travel across the channel every year to take advantage of the bargains in Calais.

Governments can receive a significant amount of funding through wine taxes. Some of this revenue is used to offset the cost of crimes and health damage that are related to alcohol abuse. The wine industry in the UK paid over £15 billion in duty and VAT to the government in 2010 yet the Institute of Alcohol Studies claims that alcohol related harm was estimated to cost society (England) £21 billion in the same year. This includes £3.5 billion of NHS cost, £11 billion of alcohol-related crime and £7 billion of lost productivity due to alcohol. This estimate suggests that alcohol consumption brings more financial losses then benefits to the government. However an accurate estimate of the economic cost of alcohol consumption is difficult to calculate due to the number of variables involved.

From the wine industry’s point of view, there is a danger that taxes reach a level where reduced consumption materially impacts sales and profits. In order to avoid this, the UK duty increase was postponed in 2014 (as a result of the Call Time on Duty initiative). It was estimated that action will save the industry £175 – 230 million and protect over 6,000 jobs. On the other hand, the French government (starting from a much lower base) is keen to drastically increase the tax from €0.03 to somewhere between €0.30-0.60 per bottle, estimated to bring an extra €2 billion to the state government.

Taxes vary depending on whether wine is imported or locally produced. For example in Shanghai, tax for imported wines adds 48% to the cost of a bottle compared to domestic wine which only adds 30% to its cost. This protects the local industry. However, in India, the import tax is so high (a whopping 150% of the value of the wine), that a bottle of Jacob’s Creek costs US$40. Imported wines are therefore incredibly expensive and difficult to access for an average consumers. In order to make imported wine more available and pricing more affordable, discussions about reducing the duty to 40% are underway.

In Australia the tax is the same for wines regardless whether they are imported or locally produced. Thanks to the WET rebates, New Zealand wine exports to Australia have increased by 139% since 2005 when it was introduced. This is currently causing a lot of issues for local producers despite its fairness in free trade terms. In order to protect the Australian wine industry and control overseas competition, the Winemakers’ Federation of Australia is calling for Wine Equalisation Tax reform to address this issue. It is believed that the reform could earn the Australian government AU$25 million a year.

The notorious complexity of US taxes have been known to discourage wineries from trading directly to consumers. The original idea to lift restraints of the three-tier system in 37 states (including California) was to help the availability of wines produced by small and less known wineries and to promote selling wine directly to consumers. Whereas federal excise duty tax is fixed according to alcohol level, and for still wine up to 14% abv is charged at $0.21 per bottle of wine, state tax is much more complicated. Each state has its own rules and regulations, each requires different record keeping and payments. This challenging tax regime limits the number of states that wineries are prepared to work with and limits consumers’ choice of wine from other states.

Keeping tax systems simple and consistent may seem to be a good idea from administrative point of view. But when it comes to the link between taxes and the alcohol level of wine, there are some who call for more versatile tax bands. It is no coincidence that the majority of red wines do not reach an alcohol level over 15.5%. For example, in the UK still wines with alcohol between 5.5% and 15.5% are taxed the same. The result is that nearly all wines end up being taxed by the same amount which may be considered unfair. In order to encourage responsible drinking, promote lower alcohol wines and introduce fairer trading, many producers together with the Wine and Spirit Trade Association are therefore proposing a different alcohol tax band between 9% and 12% abv.

Government taxes on wine are so sensitive and impactful that their fairness and subsequent challenges or benefits are being reviewed constantly. Arguably, many governments struggle to balance fairness when applying their taxes. What some producers may view as fair trade others view as a threat to their profits and a limit to their growth. What some view as a restriction of free choice others view as beneficial control of alcohol consumption. However, what is certain is that hardly anyone believes that taxes on wines are fair to them and there will always be groups who lobby for change.

 
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Posted by on November 12, 2014 in Uncategorized

 

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Everyone wants it but only a few make it

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Everyone wants to sell their wines in China.  As Damien Wilson, director of the MSC in Wine Business, puts it “The (Chinese) market appears like a commercial oasis in a global wine desert”. Ask any producer about their export wish list and the Chinese market is likely to be somewhere close to if not at the top. Ask them again why and how they plan to target China and the answer is less clear. Many have been seduced by the promise of easy money. However, as the transition from a producer economy to a consumer economy is taking place, the Chinese wine industry is no longer what it used to be and is changing very rapidly.

The Chinese economy is thriving and with it the wine industry is also growing. According to official government statistics, the Chinese economy is the fastest growing in the world (only second to the US) and Chinese middle class household incomes have risen tenfold in the last 30 years. Even though the rate of volume increase has slowed slightly in the last two years, wine exports to China are still rising significantly in comparison to other markets. A 10% rise in volume has been reported from 2011 to 2013 (to round 31 million 9L cases) and imported wine now accounts for 15 – 17% of the market. Furthermore, its value is already worth 1/8 of the biggest global importer, the US, which has been estimated at €4 billion (OIV 2013).

Understanding current and future wine consumption is less clear. According to somewhat questionable figures from the IWSR, current wine consumption has plateaued since 2011 from 156m to 155m 9L cases in 2013. Furthermore, the same source is very optimistic about the future, predicting a 40% rise by 2016 but does not offer much explanation for this forecast. If this were all true, the Chinese would be consuming nearly as much wine as US consumers were in 2013 (297m 9L cases according to Wine Market Council’s annual report on US Wine Consumer Trends).

On the one hand, Chinese government encourages wine drinking as it is healthier than the local baiju spirit. At the same time, however, the government’s on-going anticorruption campaign is cracking down on official wine gift giving and wine spending, following the recent leadership change. Many top luxury brands such as Chateau Lafite and Penfolds Grange are reporting lower demand. Despite the large Chinese appetite for luxury goods (China accounts for 7% of global luxury goods consumption), wealthy Chinese spent 15% less in 2013 than the previous year and 25% less on gifts according to The Hurun Report, the Annual Luxury Consumers 2014 Survey. Fewer people are expected to give expensive gifts and many luxury brands are preparing for a disappointing year of the Horse.  “Overnight, the perfect deal-lubricant became a career-blemishing gaffe” Andrew Jefford reflects. One conclusion is clear – if demand does not match the imported supply – stock will start pilling up in warehouses (if it is not already doing so) making it an even bigger challenge for newcomers to enter this market.

Originally, the majority of consumers got introduced to wine through business dinners and karaoke. However, the growing power and the scope of Chinese blogger groups and social networks are now having an important impact on how stories are spread and shared. The Internet generation is not only mimicking Western drinking habits but also engaging with wine more enthusiastically than consumers in more mature markets. Since Google started to provide uncensored search results from its Hong Kong base, now used by people in mainland China, the use of internet has quadrupled according to Human Rights in China. Despite the government intensifying its control and censorship over social media content since new president took charge in March, audience growth is unstoppable. According to IB Intelligence, two out of the five largest social networks in the world are solely Chinese (Qzone with 712m users and Sina Weibo with 500m users). Despite Facebook being blocked in China, it has 95 m users nearly matching the 100m Facebook users in the US.

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As more people are moving to urban areas as part of government policy, changing demographics are bringing a new type of Chinese consumer interested in all price points and hungry for knowledge and education. Big cities such as Shanghai, Beijing and Guangzhou all have populations greater than 10million. Moreover, the growing number of second and third tier cities is further driving the consumer economy and the growing distribution of luxury goods. McKinsey & Co 2009 estimated that by 2025 “there will be 221 Chinese cities with a population greater than one million compared to only 35 cities in Europe”. Also wine is no longer only consumed by expats, tourists and urban business professionals with high disposable incomes.

Despite the Chinese consuming a mere one litre per person, the nation is ranked as the fifth largest wine-consuming country in the world as there are 1.354 billion people living in China. Traditionally wine in China was not drunk but given. Sometimes a single bottle could pass several hands before the cork was actually popped. Image was very important. In fact, this is still true but now many people are buying wine for themselves and paying with their own money. It is also becoming more of a regular activity as opposed to just a one off treat. Sales used to be driven mainly by men but as more women are claiming their place in the workforce and gaining more confidence and independence, they are also becoming more interested in wine. Yesmywine.com, China’s biggest wine online retailer, reports that males only represent 55% of their customers.

Wine consumption particularly red wine is no longer only associated with health benefits. While this is still the biggest selling point in China according to Jared Liu, co-founder of Yesmywine.com, wine is more increasingly being seen in a social context as it helps you to relax, relieve stress, creates a friendly atmosphere and tastes good (findings of China Wine Barometer and Wine Intelligence research headed up by Dr Justin Cohen).

The biggest selling wine is still red Bordeaux (rather tannic, earthy, bone dry red with subtle fruit flavours) although tasting experiments by AWRI (2008) indicated that what Chinese drinkers enjoy are fruit-driven, soft, slightly off-dry reds, unsurprisingly, like many consumers elsewhere. Sparkling wines are now starting to be in demand with imports increasing from 300,000 9L cases in 2010 to 700,000 9L cases in 2012.  However, they share similar limitations with white wines. Lacking the cachet that red wine has, issues with temperature (a preference for hot water and room-temperature beer) and taste (the bubbles, flavour and high acidity can be viewed as unusual and sometimes unpleasant) and tradition (no health benefit link as with red wine).

French wines still dominate the market with nearly 50% share of volume, Bordeaux being number one with 6 million cases imported since 2000. Chinese consumers buy French wines because they believe they should do so but they are also becoming more price conscious, less brand loyal and generally harder to please. With growing availability of wine information online, drinkers are expected to become more confident about the wines they choose.  The new trend is already turning towards exploration of new wines and countries such as Burgundy, Italy, Australia (13% share), Spain (10%), Chile (8%), Italy (7%) and the US (5%) according to the International Wine and Spirit Research The Wall Street Journal.

The most common mistake that people make is treating the whole of China with the same brush. As Damien Wilson says ‘China is misunderstood by European wine producers”. The wine trade structure is very complicated and increasingly fragmented. According to Rabobank, it is estimated that there are anything from 4,000 to 25,000 importers while only 50 odd bring a sizeable volume. Tastes, traditions and regulations vary widely between regions and cities. According to Canadian International Markets Bureau research into Chinese Consumer Trends (2010), spirits are very popular in Southwestern China as the largest domestic producers are situated here. Northwestern Chinese consumers are more concerned about their health and well-being with Beijing’s biggest trend being fruit wines and low-alcohol beers.

Both Guangzhou and Shanghai attracts the most sophisticated drinkers but if you want to import your wines here you should be ready for a lengthy procedure going through Chinese customs, sometimes requiring things that are either impossible or very difficult. For example, each wine requires a health certificate. It takes up to six week to receive it and many samples are needed. Sending samples however is officially forbidden in Shanghai and therefore producers have to send them to Hong Kong (with simpler wine regulations and taxes) and then have someone carry them into mainland China or try sending them as a gift.

Indeed, China has its dark side too. Smuggling, bribery, trademark hijacking and widespread wine counterfeiting clouds the reputation of the market. Hong Kong is still perceived as the most trusted place with a good reputation for buying wines by collectors. But many still believe that any wine below $25 might be fake and nobody really knows how much counterfeit wine stock is circulating globally. The global fine wine market is now estimated to be worth £2.5 billion. In order to solve this issue, the government is increasing pressure on the wine industry and consumers to work together as there is fear of people dying from fake wine. Since the death sentence has been handed out to forgers of the most expensive bottles, fake bottles are in decline (reported by Decanter 2014). However, counterfeiting is not only for premium luxury products as pretty much anything and everything can be counterfeited in China.

Another issue is that if you want to build your brand in China you had better register your trademark now as you may find that someone has already registered it. Claiming your origins can be timely and costly due to local bureaucracy.  To tackle this issue, China is re-enforcing a crackdown against trademark hijacking through the new Chinese Trademark Law that should enter into effect from May 1, 2014.

Regardless what you may have heard or think, the Chinese wine market is taken much more seriously now than 20 years ago with a growing number of Trade Fairs (Vinexpo in Hong Kong where close to 20,000 visitors are expected and ProWine in Shanghai). And the Chinese can also start to be proud of their own wines.  Both the volume and quality of their domestic production is rising (quality less so), creating tough competition for imported wines. Probably the most famous awarded wine was He Lan Qing Xue’s Jia Bei Lan 2009 Cabernet blend winning the Red Bordeaux Varietal Over £10 International Trophy at Decanter World Wine Awards (DWWA) chosen out of 12,000 wine entered. When the results of DWWA 2013 were released, 20 out of 49 Chinese entries received an award including Domaine Helan Mountain, Great Wall or Chateau SunGod.

China produced 14.8m hectoliters of wine in 2012. In comparison, France and Italy each turned out 40 million hl. The high demand for local wines in order to battle against alcoholism (as wine offers a lower-alcohol alternative to the domestic white spirit baiju) and the push for economic growth of poor regions explain the rapid increase of newly planted vineyards. France’s National Centre for Scientific Research projects that China will be the world’s biggest wine producer within five years.

The Chinese may lack the skills and expertise of well-established vine growing regions but they are keen to learn and they are investing a lot in winemaking and viticulture. The top wineries to watch are Great Wall, Changyu, Weilong and Dynasty. Ningxia is one of the rising vine production regions with 26,000 ha of vines.  Due to relatively moderate winters, a long growing season and available irrigation from the Yellow River, this dessert-like region can grow grape crops with success. Despite many challenges, genuine international interest and investment in local wineries and regions is growing. Similarly, wine giants such as Pernod Ricard and Moet Hennessy are starting to invest in Ningxia.

China’s biggest challenges with domestic production range from lack of water and labour, disease (leaf-roll) and extreme climate pressure (severe summer monsoons and freezing winter temperatures) to quality pressure from imported wines. For example, due to the increasing difficulty finding seasonal labour in winegrowing regions, producers are forced to resort to a combination of manual labour and mechanisation according to Li Demei, consultant of Wang Zhong winery based in a remote part of Northern China. He calculates that protecting vines from severe winters by covering them with soil and then uncovering them in spring every year represents up to 30% of their total expenses and requires 200 to 300 workers. Specifically designed machines are available as an alternative but despite their efficiency the cost is high (equivalent of £26 per row) and smaller producers cannot afford them.

China is an exciting yet daunting market opportunity and if you plan to invest in the wine market here it is worth investigating thoroughly as easy sales and high margins are things of the past. What ever you do and what ever product you have to sell, understanding Chinese social media is one of the most effective ways to engage with your target audience here. Global oasis or not, Chinese consumption and production is changing the equilibrium of the world’s wine industry.

 
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Posted by on February 20, 2014 in Uncategorized

 

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