August 18th, 2010

Bordeaux over baijiu.

Andy Xie, in The Lafite Puzzle:
China's impact on the luxury French wine market has been enormous. The French fine wine index (Liv-100 index) is up by roughly 37% from a year ago, 24% year-to-date, and its upward momentum remains strong.

There is little doubt that Chinese buyers, not Wall Street traders, are the force behind this positive trajectory for French fine wine. Bordeaux wine producers are all talking about China and Chinese buyers seem to dominate the en premieur for the 2009 vintage available from next year. In fact Chinese mainland buyers are increasingly pricing out buyers from Japan, Taiwan and Hong Kong in the quest for 'first growth' wines.

So the question is, why so much demand from China?

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A market is efficient when informed consumers make rational choices. An efficient market motivates producers to improve quality and control costs and this cycle leads to great brands that last.

The French wine market was like that, but I am afraid that Chinese demand is decreasing the market efficiency and may bring down great brands over time. When winemakers see prices resulting from propaganda, not quality, they will focus on marketing and decrease their investment in improving quality. It would be a tragedy if Chinese demand, by bringing easy money, brings down a French legacy that has lasted for five centuries.
On the high-speed train from Shenzhen back to Guangzhou, I sat in first class across from a couple of guys who had evidently just come back from Hong Kong. They were talking animatedly about the bottles of Bordeaux they had bought there, which they were taking out of their bags and showing one another.

Now I wonder if whether any of the bottles they were carrying were fake.