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Hong Kong's Expensive Wine Industry

Four years after the government slashed off the tax on wine, Adele Wong dives in for a price—and reality—check.

By Adele Wong | Jul 26, 2012

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  • Hong Kong's Expensive Wine Industry

On February 27, 2008, the Hong Kong government decided to test its free-market principles to the extreme with a rather magnanimous act: Shortly after lowering the 80 percent duty on wine and beer all the way to 40 percent in 2007, the government went on to completely scrap all taxes on incoming alcohol products not exceeding the 30 percent alcohol benchmark.

It has now been four years since the celebrated zero wine duty was put in place, and our city has comfortably settled into its new role as both an international wine port and a popular point-of-sale. The number of registered wine traders and businesses has exploded from the hundreds into the thousands, supermarket wine shelves continue to expand and boutique wine shops and online merchants are popping up all over town. The number of wine classes and events on offer seems to grow exponentially by the day, and restaurants of all stripes have begun to offer impressive wine lists along with their meals. In short, Hong Kong’s interest in and fascination with wine is at an all-time high.

But apart from the explosion of choice available to us, what has the axing of the wine duty really done for our gradually maturing wine industry? And are we, the consumers, any better for it?
 


The Price Is Right...?

The question of whether the removal of the wine duty has actually resulted in a drop in prices for the end consumer has been explored time and time again since the policy was first implemented. Back then, the observation that retail prices hadn’t budged by any noticeable standard was often explained away. The Hong Kong dollar was weak against foreign currencies, or there were sunk costs already invested by the merchants that they had to recoup. Four years on, however, the tune is starting to sound a little too familiar.

For your average consumer, the abolition might as well not have happened. Many people we interviewed in a casual poll have barely noticed a shift in prices at all. “Wait, there was a tax? So you mean it [the tax] has already been removed, or you mean it will be removed soon?” asks Marco, a fashion stylist.  “No, I don’t think I’ve noticed a change at all,” says contemporary dancer Venessa. Calvin, a travel consultant, agrees. “Nope, no difference,” he says.

In fact, a whole new crop of businesses have sprung up in recent years just to counter what many saw as unfair industry-wide practices that were artificially keeping prices high in spite of the zero wine duty. James Bradshaw, owner of straight-to-consumer online wine store Winerack Hong Kong, is one such entrepreneur. “In the beginning, we were sourcing a lot of products that were sold elsewhere in Hong Kong. Brands such as Villa Maria were being sold at Oliver’s for $189, and we [sold] them for [as low as] $59. It’s a nice wine, but $189 is ridiculous. Prices in Hong Kong are often determined by the wholesalers who most of the time make more profit margin than the retailers,” he explains. (Editor’s note: Villa Maria sauv blanc currently sells for $149 at Oliver’s, and $95 on Winerack.) “My company really exposed the people who looked at the abolishment [of the wine duty] as just another way to take your money.”

“If you think you need to spend a lot of money to get a good bottle, there are companies that will gladly take your money. Those companies have only increased prices,” Bradshaw continues. “Just look at the prices in Hong Kong versus the United Kingdom. The UK has about an HK$25 tax on a bottle. Look at websites such as Majestic Wines UK [and use them] as a benchmark [against prices in Hong Kong].”

Indeed, a quick search on Majestic Wines reveals a slight discrepancy in prices, especially in mid-range New World brands, when compared to those listed on Watson’s Wine’s online store. Whereas a bottle of Australian Vasse Felix cabernet merlot 2009/2010 sells for 13.74 pounds (HK$167) on Majestic, the same goes for $198 at Watson’s. The differences might appear subtle—but the United Kingdom has one of the highest wine duties in all of Europe, whereas Hong Kong has none.

Bradshaw has identified certain brands in particular that haven’t really budged in price since the duty cut. “I didn’t see Penfolds or Yellow Tail decrease [in price]. Greed again from their agents,” he concludes. A bottle of 2011 cabernet sauvignon from Yellow Tail—a brand that made its name as a fun, value-for-money type of wine when there were few in the market—currently retails for around $90 per bottle at Wellcome, which places it well above other low- to mid-range products on the same shelf. A scour-through on price comparison site wine-searcher.com, in contrast, shows that the same bottle retails for as low as five Euros (HK$48) in Germany.

The discrepancies don’t stop there. “Pinot noirs from Watson’s are 30 percent more than they cost in [their country of origin],” says David Lee, co-founder of Spike’s Cellar, an online wine platform that organizes regular tastings and sells lesser-known wines from around the globe. “I could buy [those wines] there and ship them here myself, and it’s cheaper,” Lee adds. “Bordeaux at Watson’s is very overpriced.” But Lee ventures an explanation: “Watson’s are always located in the best spots, so they charge a higher price to justify that.”

It’s not always that retailers are seeking a higher margin, though; logistics often drive up the price of wine. “A lot of wines are priced high because shipping is expensive,” Lee says. “Unless there are huge volumes, people cannot really fill a container, and that gets really expensive. Bordeaux in Hong Kong [in general] is fairly priced, with large volumes coming over. But a lot of smaller operations in Hong Kong can’t do the same. We’re usually talking about $30 to $50 to get a bottle of wine over here.”

Sometimes, it seems as though wines are priced completely arbitrarily. “New-to-market wines are priced so differently in their places of origin to what they are priced in Hong Kong,” says winemaker Eddie McDougall, who also owns a Lan Kwai Fong-based wine bar called The Flying Winemaker. “Some are priced cheaper in Hong Kong, while some are four to five times the price. I think it’s just people taking advantage of others.”

“Champagnes are always marked up very high,” McDougall continues. “Retail Dom Perignon [averages about] $990. At [a fancy hotel], you might be paying $5,000 per bottle, and at [a club] you might be paying $2,000. It’s so different everywhere that it’s very confusing for the consumer.”

And then there are the restaurants. “Restaurants are paying rent. Particularly in Hong Kong, alcohol is the big breadwinner for any F&B outlet… And hotel [restaurants] are particularly cheeky in the sense that they won’t list wines that you can find on the retail shelf. That’s how they get away with it.”

So how does McDougall manage to keep his own costs down? “We’re partly retail, partly drinks venue, partly takeaway,” he explains. “[Since the tax cut], there’s been no licensing separation between being a wholesaler, importer, retailer and restaurant. Essentially, the person importing the wine can be all of these, whereas in other countries there’s a very clear line between each [step].”



It’s Gotten Better

There are those, of course, who take a very different view. “[The zero wine duty] has trickled down more to the retail rather than the on-trade side,” says author and Master of Wine Jeannie Cho Lee. “For various reasons, it hasn’t trickled as much as we would all like on the restaurant side. But definitely, it has on the retail side, like supermarkets and wine shops.”

“The wine duty came down by 40 percent [in 2008],” Cho continues. “So I would say on average, right now, wine prices are probably 25 to 35 percent lower on retail shelves. A lot of [the pricing] has to do with the Euro, and the exchange rate matters as much as the duty in a lot of the situations.”

“There’s always a misunderstanding of the tax reduction,” says Patrick Fong, trade marketing manager at French conglomerate Pernod Ricard, which produces and imports a handful of New World wines to Hong Kong on top of its spirits-focused portfolio. “It really only benefits the really top-range wines, since the tax is calculated based on the [original] seller price.”

“If a wine sells for $100 in supermarkets, the cost from the vineyard [or the original seller] was probably around $50 dollars, not including logistics, warehouse, advertising and promotion,” says Fong. When the tax cut is factored in, Fong says this translates to only about 10 percent of the cost—or in the above example, $5—in savings for the product carrier. For wines that retail for under $500, there is not much room for a price reduction that reaches the average buyer, he argues.

“We did drop our prices,” says Jonathan Mather, sales manager at distributor Edrington Group (formerly known as Maxxium). “But there are a couple of factors that have clouded [the situation]. One is that the consumer sometimes trades up [in wine selection] without even realizing it, or the merchant trades up its value level without realizing it.”

“The background story is also very important. There’s economic growth, rising costs [in general] in Hong Kong and there’s overhead,” Mather explains.


Read our interview with Jeannie Cho Lee here.



Value Vino

At the end of the day, most of us simply want to enjoy a bottle of decent tipple without wondering whether we’ve been duped by the powers that be. But with all the new wine stores, obscure-sounding brands and different price points out there, this is sometimes easier said than done.

A good starting point is to figure out a price range that you’re comfortable with, and also what appreciation level you’re at. “Almost everything over $100 in my opinion is going to be overpriced,” says Winerack Hong Kong’s Bradshaw. “I see beginner wine drinkers diving in at the deep end with rich, complex $200 bottles, and they are just simply too strong and rich for a wine newbie.”

Even if you’re not a complete newb, “you definitely don’t need to spend over $200 to buy a good bottle of wine,” says David Lee of Spike’s Cellar. “A lot of good ones will cost you less than $100. ParknShop has a lot of them. You just have to [use trial and error] before you find the good ones.” One downside to value-shopping at the supermarket is that the shops don’t necessarily know how to keep the wines in good condition. “The bottles just get stored on the shelf, and they turn off the lights and the air con [once the shop is closed],” says Lee.

In these situations, “I would always pick a new vintage. [Cheaper] wines are not good for aging. An older vintage means they’ve been sitting in the supermarket for longer,” says Wesley Ho, Lee’s business partner and co-founder of Spike’s Cellar.

If you’re willing to splurge a little more, then “$250 to $300 is a good price range for something very, very high quality,” says The Flying Winemaker’s McDougall. “Wines are basically priced on economies of scale. Less is more. The more wines they make, the cheaper it’s going to be.” In other words, boutique vineyards will generally charge more than mass-produced brands—but that still requires some homework to figure out which ones are mass-produced, and which ones belong to the smaller producers. “If you’re smart about it, you might even go to Macau,” McDougall offers. “Their wines are very cheap—particularly the Portuguese wines.”

 

The World’s (Wine) City

For all the confusion in the market, we should count ourselves blessed with the sheer range of options available as a direct result of the scrapped wine duty. “For a consumer, you’re in a fantastic place because you can drink your way around the world all in one city. And that’s great. You can’t beat it, not even in London,” says McDougall of The Flying WInemaker.

“One of the biggest effects of the wine duty dropping is not necessarily the price, but the variety,” Spike’s Cellar’s Lee adds. “For a large variety of middle class Hong Kong residents, wine is now readily available and accessible. You can see wines being promoted by nearly every restaurant,” says Master of Wine Jeannie Cho Lee.  

At first, this explosion of choice proved frustrating for some already established brands. “With more wine coming into Hong Kong, this has actually diluted the market and wine drinkers’ regular consumption of certain brands,” says Fong of Pernod Ricard. “When the duty was first reduced, there was a big impact on the big brands since people liked to try new things.” But over time, these same Hongkongers also developed their palates well enough to go back to the brands they trust most. Adds Fong: “The trend now is people are back to finding the right brands. They are willing to spend more on quality wine instead of buying cases of an unknown brand.”

Still, there’s lots of territory left to be explored. For better or worse, Hong Kong drinkers haven’t quite let go of their fascination with familiar Old World regions such as Bordeaux and Burgundy—you only have to pop in to any wine shop to figure that out. 

But that preoccupation comes at the expense of exploring good wines from other parts of the world. “American wines are underappreciated. They’re getting big, but there’re not getting big with the right name,” says Lee of Spike’s Cellar. “With US wine, you get the [low-end fruity ones like] Robert Mondavi, Beringer—or you get the Opus Ones, Harlan Estates. All these things in between just never get brought out here. There are lots of extraordinary cabernet sauvignons that are so much more pleasurable than Bordeaux, but you just never find out about them.”  

“Underappreciated? Definitely Spain,” McDougall says. He stays away from the Bordeaux at The Flying Winemaker and instead attempts to introduce his customers to more obscure wine varieties from Spain and other regions, including Lebanon, Turkey and even China.

“Everyone seems to be coming here from all parts of the world,” McDougall concludes. “I just hope people are a bit more far-sighted about it. There are a lot of guys who are short-sighted and in for a quick buck, whereas for me, this is my life. I’m not trading wine one day and underwear the next, and baby milk powder the following day. There’s a lot of people doing that.”



Is This Bottle For Real?

“Acker [Merrall’s] Results Exceed Combined Sales of Other Major Wine Auctions in Hong Kong This Weekend,” screams a PR headline extolling the success of an end-of-spring wine auction that broke 55 world records and raked in $70 million total. These types of auctions—the sky-high ones that continue to cement our city’s role as the world’s leading wine hub—have all been part and parcel of the post-duty movement. 

Meanwhile, another wine-related story in the July issue of Vanity Fair takes a markedly more critical angle. “In recent years, Hong Kong has eclipsed London and New York as the richest wine auction market, and it has apparently also become a popular dumping ground for counterfeits,” the article reads. In fact, the star of this particular story is an American resident named Rudy Kurniawan, who was recently arrested by the FBI for counterfeiting high-end red wines—such as decades-old Burgundies and Bordeaux—in the comfort of his own home. “Collectors on both coasts are known to be holding millions of dollars’ worth of wines procured from Kurniawan,” the article continues. “It is feared that many of these bottles will be sold in Asia, where money is abundant and there is often less scrutiny.” It turns out Acker Merrall was one of the auction houses that had sold wines belonging to Kurniawan prior to his arrest, although Acker’s president, John Kapon, claims the auction house was a victim in the whole scandal.

“The recent arrest of Kurniawan begs many questions: How widespread are fake wines in Hong Kong and Asia since we are now the number one auction city in the world?” Master of Wine Jeannie Cho Lee asks the readers of her wine blog. “How can we prevent this vicious cycle of fraudulent wines surfacing in our market? It will only take one high-profile case in Hong Kong to scare the already jittery buyers of fine wine, and will certainly leave doubts about the reliability and reputation of Hong Kong as a fine wine center.”

“It’s definitely a concern,” says The Flying Winemaker’s McDougall. Apart from the Kurniawan scandal, he believes that a lot of fake wines also come out of China. “The counterfeiters are finding an empty bottle here, refilling it, corking it and then sending it somewhere else. And obviously people are not going to open the wine to check if it’s real, because they’re going to keep it for investment.”

“This happens in every market where you see a nouveau-riche boom. It’s happened many times before,” explains Mather of distributor Edrington Group. “We’re adjacent to one of the largest boom markets in the last 50 years—China. We’ve taken off import controls, we’ve got tremendous demand and the general perception from the public is that the goods here are of reasonable quality. This is a perfect recipe for somebody to try [and pass off counterfeit goods].”

So how can we protect ourselves from the scammers and fakers? From the producers’ side, Pernod Ricard has started the practice of changing its wine labels from year to year. “This makes it harder for counterfeiters to copy our wines. It’s a new trend [for a lot of the winemakers],” Fong explains.

For the individual collector or investor, a little vigilance will go a long way. “One step we can take is to demand provenance and traceability of the wines we buy, whether it is from a wine merchant or at auction,” writes Cho. “If the wine has a high price tag or is old and rare, especially in magnum, we should be even more vigilant. We should also be aware of the court cases and controversies surrounding fake wines in other markets so that we don’t become its next victims.”

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