Friday, August 16, 2013, 07:45
Focus HK: Pours and effect
By Wong Joon San

Focus HK: Pours and effect
Andrew Davis, Associate director-general InvestHK.

In the first of a two-part series, China Daily reviews the Hong Kong government’s 2008 decision to cut its wine duty to zero, one of the administration’s most successful policies, which transformed the city into the world’s foremost wine-trading center. Wong Joon San reports.

Hong Kong is today the world’s number one wine trading center and one of the biggest wine auction hubs globally. (We will address this in part two of our series, with Head of Wine for Christie’s China, Simon Tam), thanks to the abolition of import duties on wine five years ago. Today, no obvious competitor to Hong Kong appears on the horizon. The industry has benefited greatly and taken full advantage of the city’s free port status which allows wine to enter and leave, duty free.

That isn’t all. The zero duty policy is credited with creating about 5,000 jobs in wine trading and related fields, according to some, though there are no official numbers to support the claim.

Hong Kong also has a number of other advantages such as proximity to the Chinese mainland which has seen phenomenal growth in wine popularity. It’s an area with more than three million high-net-worth individuals, bon viveurs and connoisseurs, eager to associate themselves with the éclat attached to fine wines.

Since the duty exemption declaration, the smallest players in the wine industry have become familiar with Hong Kong. The city has experienced robust and sustained growth of wine imports, increasing by 41 percent in 2009, 73 percent in 2010 and 40 percent in 2011, after reaching a record high of $1.3 billion.

Wine consumption in Hong Kong is forecast to increase 57 percent between 2010 and 2014, according to Vinexpo’s study. In particular, wine sales via the on-trade channel — the distribution through traditional channels like supermarkets, groceries are expected to perform better than the off-trade channel (such as bars and restaurants).

“Hong Kong has the highest per capita wine consumption in Asia, at 5 liters per year, while Japan drinks 2.4 liters per capita and the Chinese mainland consumes 1.3 liters per capita annually,” says Andrew Davis, associate director-general InvestHK, pointing out the city’s huge potential in the burgeoning wine business in years to come.

Davis notes that the mainland has a huge population of 1.3 billion people, and even if only 300 million people in the country increased their wine consumption by half a liter each, it would add up to a huge market.

He then stops to reconsider Hong Kong’s wine evolution. “Right policy, right time, right place,” Davis says of the abolished wine duty. The policy also helped the city’s food and beverage industries grow, allowing people to develop new tastes and take advantage of the duty-free environment to set up bars and restaurants.

But that’s just the tip of the iceberg, according to Davis. It’s an industry whose cup runneth over with future possibilities. “What I see happening (in the near future) is development of wine education and wine logistics. There could even be opportunities in financial services. You (may even) have heard talk about wine funds, though they may not be particularly big.

“We will also see increasing knowledge about wine. It will be good to see young Hong Kong people becoming sommeliers and masters of wine. It is not about what type of wine people are drinking at home, but rather opportunities (in wine logistics and wine storage) for people coming to Hong Kong (from neighboring economies such as the mainland, Vietnam and the Philippines) to be educated,” Davis says.

For top quality wines requiring a longer storage period, Hong Kong also has state-of-the-art wine storage cellars with temperature control systems, such as the Crown Wine cellars at Shouson Hill, among others. Wine traders may choose to store their wine in reliable storage facilities to ensure the investment quality of the wine stock is preserved.

Storage certification

With the expansion of the wine storage industry in the city, a Wine Storage Management Systems (WSMS) Certification Scheme based on globally recognized ISO9001 requirements was inaugurated. The certifications are a comprehensive suite of skills, designed specifically to assist businesses in the wine supply chain to take systematic and effective action to protect wine from deteriorating.

The program encourages and rewards organizations which establish and implement management systems to identify, measure and reduce risks that might lead to undesirable affects on wine quality.

It applies also to fine and commercial wine storage facilities (e.g., including wine cellars and warehouses), wine storage facilities in wine retailers (e.g., including wine retail shops, hotels, clubhouses and supermarkets) and wine transportation service providers (e.g., including carriers and freight forwarders).

Wine imports

“Hong Kong imported about 50 million liters of wine last year. That’s the equivalent of 22 Olympic-size swimming pools,” Davis says, laughing at the image of just how much wine was imported to the city in 2012.

Davis also explains that although wine imports increased, only 20 percent of the total was re-exported. The rest remained in Hong Kong.

“It doesn’t mean they are all consumed. Expensive wine imported in December could be stored and sold to Macao’s high rollers (or some others) sometime later, for example in February,” Davis says, adding that taxes on wine are paid only when they leave the city for their final destination.

Thus, a great deal of valuable wine is stored in Hong Kong on a long-term basis, Davis says.

“Who knows what opportunities could emerge as a result of having this wine market here (in Hong Kong)?”, Davis says.

“Anything can happen. As production of wine increases on the mainland, it is also possible for Hong Kong to become the transit point for mainland wine to go global, and that may happen in the future,” he says.

Learning curve

Although Hong Kong’s location provides the hub for grape producers globally, wine trading has only started on the learning curve since the zero duty ruling in the city five years ago and it has a long way to go compared with other matured markets in the West.

Historically, since the 18th century, as France’s Burgundy and Champagne became more popular, the importance of information and credit in the commerce of wine increased. So, international brokerage of Parisian and French wines soon extended to London as more wine brokerages became financial intermediaries, drawing financial support for wine trades from the London and Paris financial hubs.

This was because distant markets required high quality wines which, in turn, required increased investments in an activity that was already capital intensive. Yet those investments were not without risk. Brokers, because of their knowledge of demand and because of their keen knowledge of local conditions, were ideally placed to bear those risks.

“So, most of the wine imported into Hong Kong is via wine brokers in London or from Chateau de France,” says Ir Paul Tsui, managing director of the Janel Group, one of the leading companies in the territory offering “one-stop shopping” services for those interested in this business. Tsui, also chairman of the Hong Kong Association of Freight Forwarding & Logistics Ltd, explains that these two cities are where wine brokers are mainly located.

Aside from the Janel Group, names like ASC Fine Wines (Hong Kong) Trading Corp Ltd, Altaya Wines Ltd, Jebsen and Company Ltd, Jointek Fine Wines (Hong Kong) Ltd, Maxxium Hong Kong Ltd, Summergate Ltd, Telford International Company Ltd, and Treasury Wine Estates are, among others, playing important roles in opening up new markets for wine in Asia.

Tsui, who has been interested in the wine industry for 16 years, says his company became involved in the business only four years ago, after Hong Kong announced that with effect from Feb 27, 2008, its excise duty on liquor with less than 30 percent alcoholic content was reduced from 40 percent to 0 percent.

However, liquor with more than 30 percent alcoholic content is subject to 100 percent duty. If the liquor is to be re-exported and not to be consumed in Hong Kong, no excise duty is to be paid.

Liquors with an alcoholic content of more than 30 percent by volume measured at a temperature of 20 degrees Celsius are subject to license and permit control. Only licensed importers are eligible to import liquors. They are required to apply for a permit before each shipment arrives.

One-stop shopping

“Over the last couple of years, the wines and spirits industry has recorded double digit growth in Hong Kong, and the industry is just starting to grow with increasing demand in Hong Kong and the mainland,” says Tsui, during an interview in his office at Skyline Tower in Kowloon Bay above Victoria Harbor.

In respect of the wine business, the Janel Group is ahead of its rivals. Tsui says he had been in collaboration with wine cellar contractors when he built his own wine cellar 15 years ago. “I use a professional cooler and have radio frequency identification (RFID) tags on the bottles of wine which can monitor the correct temperature for their proper storage,” he says.

With his industry contacts, his company has organized a “one-stop shopping service” for anyone or any business interested in getting professional assistance to build wine cellars in Hong Kong or cross-border on the mainland. Tsui’s company also has been regularly participating in international wine fairs for almost five years. It has been appointed by the Hong Kong Trade Development Council to be the official forwarder to handle duty exemption program for hard liquor of more than 30 percent alcohol for five years continuously.

“A great many opportunities to expand in this industry exist as not many people have the necessary knowledge on how to store good quality wine correctly,” Tsui says, pointing out that quality wine, which could cost between HK$5,000 ($644.7) to HK$10,000 per bottle, needs proper storage or otherwise it could easily go bad.

The Janel Group provides the professional skill and knowledge to establish the appropriate type of wine cellar using the right type of equipment, including technical monitoring RFID technology which functions like an electronic grapevine; it supplies alert messages if the temperature in the cellar goes out of the range of 11-12 degrees centigrade. The wine cellar’s owner will immediately receive an SMS message when the temperature deviates from the acceptable range.

Tsui says a copy of the message could also be sent to his company if they were tasked to do the monitoring and upon receipt of an alert message, an evalutation could be carried out immediately and the wine cellar owner advised on the necessary action to take.

There’s a development — like Hong Kong’s wine success — worth raising a glass to.

Contact the writer at joonsan@chinadailyhk.com

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