Alberto Fernandez knows a thing or two about the pioneering spirit that’s become part and parcel of doing business in China. Ten years ago, he pitched up in Shanghai, having been charged by his boss back in Spain with introducing old-name imported wines to a new, vast and daunting market. Back then in China, wine to most locals didn’t connote anything more than the acidic vintages produced by domestic wineries that required generous splashes of Coca-Cola or Sprite to wash them down.
That’s changed, thanks in large part to the efforts of international connoisseurs spotting a big opportunity in China. Around the time when Torres, the Catalan wine-making dynasty, first arrived in China in the late 1990s, the total volume of wine sold in the country was less than 20 million nine-liter cases, with imports comprising around 110,000 nine-liter cases. By 2009, volume had jumped to 93 million nine-liter cases, with imports comprising just over 10 million nine-liter cases, according to London-based market researchers, International Wine & Spirit Record.
It’s been a boon for 36-year-old Fernandez. Having started with a team of just three, the Spanish general manager of the Chinese subsidiary came in at the ground floor of what is now a formidable empire. Today, the number-three wine importer in the country sells not only its own range of wines, such as Sangre de Toro (Bull’s Blood) — the rustic red and whites whose little plastic bulls dangling from the bottles’ necks help it stand out on store shelves around the world — but also more than 55 labels and some 400 varieties of wine from other wine makers from around the world. Torres’s annual sales in China have grown in double-digits since it set up an importing business in 2002 for commercial and wholesale clients in affluent markets like Shanghai. Torres China’s sales, however, have been slowing, growing just 7% in 2009, to 10 million euros, while this year, sales are expected to reach about 14 million euros.
But the 300-year-old winery has more plans for growth as it embarks on a new — and no less bold — leg of its China strategy. As Fernandez notes during an interview at the Torres Wine Bar in El Willy, one of Shanghai’s top Spanish restaurants, the latest strategy is taking him once again into uncharted territory as the business expands beyond wholesale clients to selling directly to consumers via a new retail network, pushing its business far beyond the country’s major metropolises of Shanghai, Beijing and Guangzhou to second and third tier cities. According to Fernandez, it’s “the biggest change we have made in our strategy since Torres set up its China business in 1997.”
China’s Bull Market
Though many Chinese still view wine as a beverage best diluted with soda pop, Torres’s timing to sell directly to consumers is smart. The aim is to tap into newly upwardly mobile middle-class Chinese, who are buying imported wines, not just to drink but also as a long-term investment. But this isn’t a strategy that’s happened overnight. Miguel Torres Riera, the firm’s fourth-generation CEO, has been watching China closely for a number of years, making annual visits to the country since the early 1990s.
Having taken over the running of the company from his father in the early 1980s, he has continued a global expansion from the firm’s base in Penedes, just west of Barcelona. Initially focused on the wine-growing capitals of the world, expansion began back in 1979, with wineries in Chile and then in California, now respectively overseen by his son and sister. Beyond a Swedish distribution subsidiary and small alliances with distributors in some of the some 170 countries where it exports, Fernandez calls the company’s expansion something of an emerging market “BRIC” approach. It set up a distribution company in 1999 in India, with a 30% stake, and while it isn’t in Russia yet, it owns 51% of a distribution company in Brazil.
As for China, Torres began by importing its Sangre de Toro and bottling it — to save on import duties — at a plant west of Beijing in the 1990s and even experimented with growing its own grapes in Hebei province. But as Miguel Torres recalled in a 2009 interview published on Grape Wall of China, a nonprofit wine blog, “A very important difference is that the soil, the land, from which the grapes come do not belong to the winery. It is usually leased by the state to the farmers, and that can make things difficult. We had to make a very precise selection of grapes, and even used hand selection, to ensure quality.”
Fernandez explains that Hebei, along with Shandong, in the east is known for being vast grape-producing regions, but their hot, wet summers affect the quality of the grapes. More accommodating in terms of climate, he says, are parts of central and western China, such as Ningxia and Xinjiang, but also drier areas of Shanxi, Shaanxi, Gansu and Inner Mongolia. “Wineries on the East Coast have facilities in Ningxia or Xinjiang to harvest grapes and send them to their wineries in Shandong or Hebei for final processing,” he says, adding that most of the grapes are Cabernets — Cabernet Sauvignon, Franc and Gernischt — and some Merlot.
Given that most wine bought in China is produced by the big local wineries, foreign wine makers like Torres face formidable competition. And those wine makers reckon what they lack in quality they will make up with in quantity, by adding water, colorings and even grape juice to extend the amount they can sell. “There is a saying that Chinese wine is 70% ingredients and 30% technique,” Fernandez says.
Jim Boyce, Beijing-based wine industry watcher and a contributor to Grape Wall of China, agrees, asserting, “Chinese wine makers are only interested in making money and they generally do not care about the quality of the grapes they are growing or the wine.” In his blog, he points out, the generally poor quality of local wines “is due to everything from the pursuit of high-yield harvests to the use of unripe grapes to the blending of local and bulk imported wine to an emphasis on marketing rather than product quality. And decent local wines tend to offer poor value given the range of quality imported wines available at similar or lower prices.”
All in the Family
There are, however, exceptions, says Fernandez. Torres now has two of China’s best vineyards — Grace Vineyard and Silver Heights — in its distribution portfolio and is now jointly developing new labels with them. That’s a smart move, reckon local wine experts. “They offer two of the best Chinese wines, Grace Vineyard and Silver Heights,” says Boyce. “A lot of hotels and restaurants want those Chinese wines.”
Research for this part of Torres’s strategy began back in 2002, when a friend phoned Fernandez to tell him he had tried a very nice Chinese wine at the well-known Brassiere Flo in Beijing. Fernandez tasted the wine — from Grace Vineyard in Taigu, a city in northern Shanxi province — and liked it. In 2007, Torres and Grace Vineyard — owned by the Hong Kong Chinese Chan family — agreed to make wine together, beginning with the Muscat “Symphony” label’s batch of 10,000 bottles. “The well-known British wine critic Jancis Robinson wrote that it was the most interesting wine she ever tried in China. It made Mr. Torres very happy,” Fernandez says.
There are other reasons to be happy. “We have helped Grace Vineyard gain more recognition in China and overseas, but we also are getting more recognition in China by jointly making good wine here,” he says. “That is helping us to open new doors in China.” Typical of the family brands carried by Torres, Grace Vineyard only produces about 1.2 million bottles per year, while Great Wall Wine Company, the biggest Chinese wine maker, produces about 150 million bottles per year.
In another joint endeavor, Torres has linked up with Silver Heights winery in the Helan Mountains of Ningxia. One of China’s best domestic wines, it’s also a family affair: Silver Heights was founded by former Torres employee Emma Gao, who studied wine making in France and returned home to China to establish a one hectare vineyard with her family. Gao produces 4,000 bottles a year of two Cabernet blends — Summit and Family Reserve.
Staying focused on family businesses is one of the lessons Torres learned early. After a joint venture set up in 1997 with two big companies to import wine in bulk from Spain didn’t go as planned and was dissolved after six years, Torres has since only included family labels in its China portfolio. “They are all family owned, and the family members understand each other and understand value,” says Fernandez.
Fernandez says the average palate is changing slowly in China to favor drier red wines, though the market for sweeter whites remains important. Although keeping an eye on such changing tastes has always been critical for Torres, it is even more so since the creation of Everwines, its new consumer division.
While continuing its focus on wholesalers, restaurants and hotels as well as direct sales to Chinese consumers, “the biggest challenge now is [figuring out] how to expand our wine sales all over China. The growth will be in the second and third-tier cities,” says Fernandez. Under the new plan, the company is targeting Hainan Island, Qingdao, Changsha, Nanning, Kunming — that is, areas spanning much of eastern, central and southern China.
But serving that new market requires some changes in approach. “We needed different, specialized staff, and a more consumer-friendly image. We also needed a different name,” he says. To do that, Torres enlisted the help of external consultants and drew up a list of more than 5,000 suggestions, which resulted in Everwines, or Yongtao in Chinese — yong meaning always and tao meaning grapes.
The name of the new venture had to be easy for locals to relate to, as opposed to, say, a distinctly foreign-sounding name like Torres. “We wanted to create something that Chinese people could relate to,” he notes. “Torres does not mean anything to new, young consumers in places like Nanning, where we are going to open our own independent wine shop.”
But there was another motivation for branding the new division separately from the parent company: Ring-fencing the consumer unit would protect the image of the 300-year-old company. “We cannot franchise the Torres family name because it is very precious. That is why we created the new consumer division with a new name,” Fernandez says.
Convincing the 40 of Torres’ 200-strong workforce assigned to work for Everwines of the need for a new division with a new name was not easy. “It took a long time even for our sales managers to understand why we are now also Everwines rather than just Torres China,” he recalls. Everwines has its own floor at the company’s headquarters in a refurbished loft in downtown Shanghai, where the dedicated team pores over data to understand buying patterns. “Should we put more people in northern China or central China? There are so many cities in China. We have to study this very carefully,” Fernandez says. One hundred cities have been targeted as sites for Everwines wine bars, shops, and counters at supermarkets and department stores.
The locations have big implications beyond sales and marketing. Finding staff familiar with imported wines in cities outside the main centers will be tricky, says Boyce, “or you have to relocate your staff from Shanghai or Beijing to those cities? I wonder if they will be willing to move.”
So far, Everwines has opened two independent wine shops, in Chengdu and Xian. In the first seven months of this year, sales at Everwines increased nearly 6% of Torres China’s overall revenue, to account for 19%, while “on-trade” sales (to hotels and restaurants), at 37%, continue to contribute the largest portion to overall sales.
It plans to open another three — in Nanning as well as Shanghai and Hangzhou — by the end of the year. There are five Everwines counters in outlets of Hola, a Taiwan-invested home goods retailer, in Shanghai, Beijing, Kunshan, Chengdu and Guangzhou, with plans to add another four in coming months. The company expects the government to approve its application to franchise Everwines shops by early next year. “About 80% of our wine shops will be our own, with only about 20% of Everwines as franchises,” Fernandez says.
Like a fine wine, Torres China’s consumer strategy will need time to mature. Of all people, Fernandez knows well that it could take years, not months. “I came to Shanghai for a four-year stay and have ended up staying 10 years. I will be here for another five years,” he says, with a smile.