Planning for Wine Investments From China

Despite rumors to the contrary, Chinese investments in the Unites States wine industry have been infrequent and unpredictable. Over the past five years there have been only two significant winery purchases—both in Napa Valley—by Chinese investors:

  • Sloan Estate, an exclusive Napa Valley luxury‑end winery, was sold by owner Stuart Sloan for an estimated $50 million in 2011 to Goldin Financial Holdings, a publicly traded Hong Kong–based conglomerate.
  • Quixote Winery, a Napa Valley estate winery, was sold to privately held Jinta Vineyards & Winery in 2014 in the high-$20 million range. Jinta entered the US wine space in 2013 with the purchase of Hannah Nicole Vineyard & Winery in Brentwood, California.

These two sales represent higher-end, prestigious winery acquisitions. Perhaps more prevalent has been the quiet value purchases of small- to medium-sized wine companies by Chinese investors.

While China’s slowing economy has affected this dynamic within the past six months, one notable exception to the slowdown is COFCO Corporation, China’s largest food company and one of its largest state-owned enterprises. Due to its sheer size, COFCO has been able to withstand its home country’s economic downturn. The largest player in the Chinese wine market, COFCO’s long-term plan is to gain a greater footprint in the US wine market. Its acquisition criteria are to target wineries in the 100,000-plus cases range with distribution relevance in the US and elsewhere.

Background

China consumed 155 million cases of red wine in 2013, a 136 percent increase from 2008, according to a report put out in January of this year by independent research firm International Wine & Spirit Research. These numbers are perhaps a bit skewed because they include Hong Kong, which has long been a wine hub. Nonetheless, the report drives home the fact that China’s growing thirst for wine is significant. 

Red wine is a particular favorite of the Chinese population. Its consumption tripled in China over the past five years, while it decreased in France and Italy. Interestingly, China’s wine consumption isn’t dominated by imported wines. Rather, 83 percent of wine consumed in China—mostly red—is produced domestically, according to the study. In fact, China boasts the second-highest vineyard acreage of any country behind Spain, and is the world’s sixth-largest wine producer by volume. 

These locally produced wines have yet to break out on an international level. The majority of these wines tend to be generic, mass-produced reds at lower retail price points. These lower price points are a natural entry level for consumers being introduced to wine. However, the belief is that these consumers will gradually move up in quality and price as their palates become more sophisticated.

Buyer Wish List

When it comes to investing in a winery, the image of a beautiful chateau is front and center in the minds of both domestic and foreign investors. In addition to the lifestyle motives for investing in a winery, overseas investors typically have a list of business criteria that enhance the attractiveness of a winery target, including:

  • An established distribution network
  • Appellation recognition, preferably Napa Valley
  • Brand recognition, particularly in the red wine category
  • Salability in Asia

These factors, which are reasonable for any foreign buyer, essentially boil down to brand prestige.

The most common stumbling block for Chinese investors is their desire to redirect wine sales to China. Despite a slowing economy, demand for luxury wine continues to grow among wealthy Chinese. With Napa Valley wines commanding a premium, it isn’t surprising that the prospect of buying a Napa Valley winery and then exporting product to China is often a primary motivating factor for Chinese investors. However, the business implications of establishing sales in China at the expense of sales in the US doesn’t make economic sense unless the winery assets are purchased at a discount.   

Complex Deals

Adding to the complexity of getting deals done is the vast difference in the way business is conducted between US wineries and Chinese investors. It’s a phenomenal opportunity that requires patience to work through the cultural differences.

Chinese business relationships are built on trust, which often means having an extended dialogue before committing to definitive action. While Chinese investors may see this as productive relationship building, the US side might feel frustrated by a lack of forward momentum. As a result, many potential transactions never get off the ground because US sellers are reluctant to begin the lengthy courting process that often accompanies overtures from Chinese investors.

Although the Chinese government doesn’t endorse its state-owned enterprises (SOEs) acting in the state’s interest over business interest, the reality is that SOEs are to some degree a political and social tool used to quickly implement new policies into the mainstream economy. This additional layer of complexity can be challenging for US businesses accustomed to decisions based solely on economic rationality. Adding to the complexity is the sheer speed at which policy changes occur in China. Changes can come about very abruptly, because SOEs are the medium through which new regulations and rules are applied.

Additionally, the bureaucratic nature of SOEs often makes it difficult to understand who’s in fact the decision maker. For example, a Chinese investor may send a delegation to the US, yet none of the delegation may be employees of the investor. It can be difficult for sellers to determine whether the person they’re meeting is affiliated with the investment company or instead is a broker or intermediary. Transparency is paramount to doing business in the US, and sellers would feel more secure negotiating with potential buyers during discussions if they better understood the hierarchy.

On the flip side, US wineries have expressed an interest in finding partners in Asia who can assist them in penetrating the Chinese market. Napa has done an admirable job of sending ambassadors to China to better understand their emerging wine market and channels of distribution.

The Benefit of Advisors

An advisor can be your greatest investment. Involving advisors who understand the business interests of both parties and their respective cultures greatly enhances the probability of a smooth and successful transaction.

Employing local advisors on the buyer’s side provides credibility with sellers and demonstrates a willingness to better understand the market. A buy-side advisor can also help investors define their investment criteria in order to focus on the most attractive opportunities, saving time and resources.  Alternatively, a sell-side advisor can help discern a serious and well-capitalized buyer, saving a seller from engaging in lengthy and unproductive negotiations.

The best avenue for finding investment opportunities often can be through a local investment banker, who is typically well connected with knowledge of opportunities both on and off the market. Similarly, fostering relationships with locally based professional service providers, such as accounting and law firms, can open doors and provide valuable referrals. This collective counsel also can provide investors with insight on the economics of various regions and business models.

We're Here to Help

There are still significant opportunities for foreign investments in the US wine industry. Preparation is key to making the transaction process smooth and successful. Foreign buyers looking to acquire wineries in the US should consider having defined parameters for their investment, including the size of the winery, location, brand-type preferences, timetable to complete a deal, and financing commitments.

It adds to a buyer’s credibility if they have industry experience or knowledge—whether through owning other wineries, doing some homework, or working with a local advisor. Similarly, sellers interested in entertaining foreign investments should be aware of the cultural differences when considering a buyer as a candidate to acquire their business. The same parameters for a potential sale should be defined before entering negotiations. If you’d like to learn more about this process, contact your local Moss Adams professional.