Category Archives: Future of China’s Wine and Spirits Market

The Chinese Wine and Spirits Market: Opportunities and Challenges

DoorHandle

I recently completed my WSET Diploma (!); the final assessment was this paper (already submitted and graded) on the growth and influence of China on the global wine and spirits market. I thought some of you might find the topic interesting…

Introduction

The global marketplace has witnessed rapid changes commensurate with the rise and fall of economies and the relentless, exponential rate of technological advancement. China, now a key player, only entered the commercial sphere a mere forty years ago, yet the country has fundamentally shaped all facets of global trade. The sheer size of its population, its growing thirst for imported wine and spirits, and the rapid expansion of its domestic wine industry, means China has the power to change the drinks market, forever.

Lijiang

City of Lijiang

Key Events Since 1972

The first U.S. president to visit the People’s Republic of China, Richard Nixon broke new ground in February 1972. The country had been closed off to the rest of the world, and the private business sector had practically zero contact with the country. At the time of the President’s tour, normalizing political relations took precedent over economic ones. While the U.S.-China Business Council was founded in 1973 (and now represents nearly 240 companies), no pundits foresaw that China’s phenomenal ascendancy in economic influence would happen in such a short time. [1]

As a noted Asia scholar claimed, “no one in the twentieth century had a greater long-term impact on world history than Deng Xiaoping”[2], Mao Zedong’s successor after his death in 1976. Seeking to mitigate damage done by the Cultural Revolution and loosen policies that stifled China’s growth, Xiaoping instituted a policy of openness or “kai fang” with the west. The ‘80s saw economic reforms allowing foreign investment, establishment of private business, and new rules allowing personal wealth accumulation. In conjunction with President Carter, Xiaoping promoted people-to-people exchanges and allowed an unprecedented number of students to study abroad, anticipating they’d bring home new ideas for change.[3] But while he supported liberal economic policies and a measure of increased personal freedoms, Xiaoping maintained tight political control as evidenced by the tragic Tiananmen Square massacre in 1989.

Zhu Rongji, the fifth premier of the PRC, presided until 2003, and continued encouraging economic growth while also seeking political influence in international affairs. He enacted domestic reforms necessary for China to join the WTO, which it did in 2001. From 1985 to 2010, trade in goods between the U.S. and China increased from $7 billion to $365 billion, rocketing the red state to becoming the second largest economy in the world by 2013.[4]

China’s growth has enticed business from around the globe as its population of nearly 1.4 billion becomes more urban and sophisticated. Millions of Chinese have been lifted out of poverty, their children growing into a middle class with disposable income, and producers of consumer goods are eager to court them.

The Chinese are now the world’s biggest emerging market for aspirational and conspicuous consumption, and the newly middle class of the interior cities are on the heels of the major coastal cities like Beijing and Shanghai in terms of spending growth. Real estate developers are building half the world’s newest shopping malls in China, many in smaller, second tier cities, because middle and lower income households have become big shoppers.[5]

What are they buying? Globally, the Chinese are the leading purchasers of expensive goods, and they hold foreign brands in high esteem, especially those with heritage appeal. While this applies across all aspects of consumerism, it especially holds true for wine and certain spirit categories. In the last few years, the Chinese set new records, becoming the most voracious consumers of Bordeaux and cognac, or at least collectors. Consider that at Berry Bros & Rudd’s bonded wine warehouse in southern England, more than 1 million of 4.5 million expensive bottles stored there, are now owned by Chinese.[6]

Drinking Changyu in Lijiang

Drinking Changyu Wine in Lijiang

The Chinese Drinks Market

Interestingly, China’s mania over wine was first prompted by the state in the 1990s as a healthy alternative to popular grain-based spirits. A cereal shortage coupled with health concerns motivated the campaign. Red wine in particular, promoted as a cardiovascular disease inhibitor, took off: new wineries proliferated, distilleries were adapted for winemaking, and bulk wine was shipped in for local bottling.[7] In 2001, when China joined the WTO, wine import tariffs dropped from pre-WTO levels of 65% down to 48%. While 48% is still extraordinarily high, especially as compared to Hong Kong’s zero tariff policy (repealed in 2008), this combination led to a significant increase in foreign alcohol imports.

As early as 1979, foreign companies were capitalizing on Xiaoping’s reforms to invest in China’s domestic wine market. French cognac giant Remy Martin set up the first joint venture winery, Dynasty; Seagram’s assisted in the establishment of Great Wall winery. Many have since followed, including Pernod Ricard and Chateau Lafite-Rothschild, importing vines, equipment, and oenologists along with them.[8] Between 2000 and 2011, registered Chinese vineyards more than doubled from 200,000 hectares to over 500,000 hectares.[9] Recognizing the importance of the Chinese national grain-based spirit baijiu (the highest-selling spirit in the world thanks to China[10]), LVMH and Diageo each acquired baijiu makers such as Wenjun and Shui Jing Fang to diversify their portfolios.[11]

Incredibly, China has become the 5th largest consumer and producer of wine in the world, importing 30.9 million cases in 2013.[12] Nearly one out of five wine bottles opened in China is imported. The country has overtaken France and Italy to become the largest consumer of red wine, drinking nearly 1.9 billion bottles in 2013. The importance of the color red cannot be overemphasized: due to its strong (if superstitious) cultural affiliation with health, happiness, and luck, red wine accounts for 85% of wine purchases.

French wine still dominates nearly half of all imports, though lesser known countries are benefiting. U.S. exports of wine to China were nearly 23 million bottles in 2013, after being practically nonexistent a decade earlier. Chile’s wine exports to China increased 157 percent by March 2014.[13] Wine consumption continues to rise at a rate of 15% per year, in both the major and second tier cities.[14]

In the premium imported spirits category, the biggest players are Hennessy, Cognac, Martell, and Chivas, at 43% of the market share. A recent lifting of a ban on 100% blue agave tequila caused a spike in sales in Shanghai and Beijing; the industry predicts China to be the second biggest market in five years.[15] In 2012, China consumed 38% of the world’s premium vodka, gin, whiskey, and rum. However, as large as that number appears, 99% of all spirits consumed in China is baijiu.[16]

The Rise and Fall of High-End Alcohol

China’s economic boom led to a bubble in the luxury wine and spirits categories, notably for Bordeaux.[17] Rather than having the typical pyramid model of a normal market, in which expensive products represent a narrow point at the top, China’s was inverted.[18] The rapid rise in wealth, coupled with desire for prestige and the elevated social status that came with owning hard-to-get or expensive bottles, fueled demand and wildly inflated prices of first growths like Lafite, Latour, and Margaux until 2011.[19]

In particular, the market had an unusual over-reliance on lavish bureaucratic gifting — as much as 50% of all premium wines are speculated to have been paid for with government-related money.[20] The current government, led by President Xi Jinping, is now seeking to restore discipline and fight corruption, cracking down harshly on the practice.[21] China’s rich cut gift-giving by 25% to officials responsible for contracts, licenses, and tax breaks.[22]

Major beneficiaries of that once booming market have suffered significant losses in business. Scotch sales plummeted 35%;[23] French brandy dropped 20%.[24] Shipments of Bordeaux to mainland China, their largest export market by volume and value, dropped 26% by July 2014, down from the same period before.[25]

Shanghai's Pudong by day

Shanghai’s Pudong by day

Opportunities in China

Anti-Corruption Campaign

While the anti-corruption campaign hurt sectors of high-end alcohol, the austerity program will have the long-term benefit of forcing the industry to build a stable market. With sales to local governments dry, companies are focusing on finding new clients and ordinary consumers, and on delivering quality wines at better prices.[26]

Creative Marketing

Wooing new clientele, particularly in the off-trade sector as emerging middle classes in second tier cities grow in importance (on-trade in first tier cities had been up to 80% of business), has forced some companies to get creative. [27] Catalan import firm Torres, which has seen its corporate business shrink by 90% in the last two years, transformed its retail outlets, China Everwines, to resemble hip Barcelona wine bars, and has been successfully selling accessory products like Spanish hams.[28]

Changes in Consumption Patterns and Demographics

Meanwhile, the trend to drink wine for pleasure grows as new market segments of younger drinkers and women look to fit wine into their lifestyle (traditionally, wine has been reserved for special occasions such as holidays and banquets, or older, male-dominated business meetings).[29] Younger consumers regularly use the web and social media, two channels the wine and spirits industry should exploit.

Social Media

Although Google, Facebook, and Twitter are banned on the mainland, the equivalent of the latter two, Weibo and Renren, are enormously popular. Market entrants, willing to hire Chinese social media firms versed in these channels can expose their products to millions of users.[30] A recent analysis of upper middle-class drinkers of imported wine revealed that 75% of them research wine online, visiting sites like Winechina.cn, and 62% say they use social media as a source. The online channel is seen as cost-effective, convenient, and trustworthy.[31]

E-Commerce and Lower Priced Wine

CEO of ASC Fine Wines, John Watkins, insists growth lies in lesser-priced wines and expanding e-commerce.[32] Case in point, two of China’s top five wine retailers are online marketplaces Tmall and Yesmywine, and many wines sold are entry-level at 100 RMB and below.[33] While China is one country with many markets, e-commerce gives retailers (and producers who sell through them) an opportunity to reach deeper into the country on one platform.

Maturing Tastes

While French red wine remains the dominant choice for imported wine consumption, opportunities for the rest of the wine world will evolve as the domestic market grows. In the early 70s, Americans drank cocktails. After the explosion of California’s industry, however, the average American’s interest in wine increased, as did their desire to try imports from Europe. Eventually, the imported wines market outpaced domestic wines.[34] Even without a strong domestic wine market, tastes tend to mature. Twenty years ago, Japan developed an appreciation for red wine first, too, but has since evolved into a consumer of all colors.[35] In China, the decline in interest in Bordeaux has already led to regions like Burgundy, Italy, and Spain, enjoying newfound attention.[36]

Sparkling Wine

Curiously, Champagne (and sparkling wine) has not caught on, but given the Chinese interest in fashion, luxury goods, and Western culture, it seems a matter of time before this market takes off. While bubbles account for less than 1% of wine sales, consumption rose in 2012 by nearly 52%.[37] To spur those numbers further, Moët has launched its Chandon Ningxia winery to produce high-end method Champenoise for the local market.[38]

Wine and Spirits Education

As wine education develops, so will the palates of consumers. For instance, the WSET program on the Chinese mainland jumped from the fourth largest market to the second, in mere months.[39] Meanwhile, marketing efforts between distributors and producers can educate consumers through creative initiatives. Despite its suitability for much of Chinese cuisine, white wine remains an underappreciated category. To challenge this, Summergate Fine Wine Importers launched a Riesling Revolution tour with major producers from Alsace, Germany, and Australia. They conducted tastings and media events across four major cities, and reported the effort as successful.[40]

Trade education in a country with a nascent wine culture is at least as important as consumer education: waiters, sommeliers, and retail staff have great impact on customers given they interface directly with them. The Bordeaux Wine Council regularly runs trade seminars in 20 Chinese cities, while promoting its mid-range appellations of Bordeaux, Bordeaux Superieur, and the Cotes and Cru Bourgeois, through the Simply Bordeaux program.[41]

Trade Shows

The proliferation of wine shows should be utilized by regions looking to market their country of origin.[42] For example, ProWine China, an international trade fair for wine and spirits, provides a platform both for international dealers and producers and for local suppliers to present themselves, establish contacts, and become familiar with the Chinese market. ProWine specifically aims to showcase a range of countries: 30 participated in 2013.[43] Additional fairs include the Shanghai Wine Expo, Xiamen Fine Wine Show, Vinisud Shanghai, and the Beijing Wine Expo.[44]

Snake wine from Guilin.

Snake wine from Guilin

Challenges in China

Complex Distribution System

China has been called the wild west of the global wine and spirits market for good reason: the distribution path to the consumer is varied and unlike anything western companies have dealt with previously. This was especially true when the first import firms struggled to establish and develop distribution channels from scratch, having to hire and train employees who had never tasted wine.[45]

Those first, intrepid firms, like ASC Fine Wine, Summergate Wines, and Torres, now control the premium imported wine market. Producers looking for a piece of China may be swayed to sign with them because they laid the industry’s foundation. However, these firms lock clients into exclusivity agreements, and products from regions without stature (and non-red grapes), risk getting lost in growing portfolios. Alternative strategies include engaging an e-commerce site that sells direct to consumer,[46] working with a trusted grocery like Carrefour, and hiring several smaller, regional firms.[47]

Wine and spirits companies looking to crack the code of China should remember it’s composed of a multitude of small markets; they should carefully vet the importer or distributor they select, to make sure their product lines up with their agent’s expertise, strengths, and financial means.[48]

Cultural and Language Differences

Effective communication with the Chinese consumer is a major challenge. Brands need websites in fluent Chinese providing updated information, and names of stockists (important given all the fakes in the supply chain). Since China does not have a western food culture or related vocabulary, producers should consider marketing with a China-specific wine vocabulary, something Cambridge-educated, Beijing-based wine educator Fongyee Walker has been developing.[49] Additionally, premium packaging conveying luxury and pedigree are highly valued by Chinese consumers. [50]

Alcohol Tariffs

High tariffs on imported alcohol drastically increases retail prices, creating challenges for low- to mid-priced products entering the market, as they are significantly more expensive than their domestic equivalent (which continues to improve in quality). While there is industry speculation tariffs will start to ease[51], they have another consequence: alcohol smuggling from Hong Kong (which does not have an import tariff). Crackdowns have curbed this, but the problem persists.

Free Trade Agreements

Products from countries that lack Free Trade Agreements (FTAs) with China are subject to the alcohol tariff, as well as capricious, market-disruptive behavior by the Chinese government. In 2012, Europe and China had a tit-for-tat trade spat. Europe investigated China for dumping solar panels into its market, so the Chinese responded with accusations that Europe had flooded it with cheap wine, and threatened to further increase tariffs. The dispute was eventually resolved but it rattled the European wine and spirits trade.[52]

On the flip side, for countries that have bilateral FTAs like Chile and New Zealand, alcohol tariffs are being phased out to zero, and, consequently, wine exports from these countries have increased significantly.[53]

Regulations

Capricious regulation can extend to import restrictions, like the recent tightening on manganese limits (from 4 mg/l to 2 mg/l) that caught many Australian producers off-guard. Nearly a quarter of wines ready for shipment, after being tested first by Australia’s Vintessential Laboratories, were over the new limit, despite any scientific basis for the decision, according to Vintessential’s Managing Director.[54]

Counterfeiting

China’s counterfeiting has created consumer trust issues: a survey in January found 44% of respondents feared buying fake wine in all price categories.[55] Counterfeiters target inexperienced consumers with little knowledge of how a wine should taste, especially beginning collectors eager to purchase wines for status or for gifts (in which case the wine might never be tasted). To combat counterfeiting, ASC has developed a QR code and hologram to affix on the neck of bottles and can be scanned with a smartphone to give the consumer product information and shipping history. They import the codes and keep them under “lock and key” until affixed in China. ASC expects to apply these to 10 million bottles.[56]

BuddhistYunnan

Conclusion

The allure of penetrating the mainland Chinese drinks market is strong; the population is on track to hit 70-80 million imported wine drinkers by 2020.[57] This growing force will undoubtedly play an integral role in shaping the global drinks economy in the coming decades.

As the market evolves, Chinese tastes will mature. White wine will inevitably draw fans, as will Champagne, especially as the population of lifestyle drinkers, and young and female consumers, increases. However, the strong cultural identification with red and the appeal of whisky and grain spirits won’t abate.

Education, from consumer to industry, will greatly enhance the sophistication of the market, and major cities will continue to set trends as new products gain favor. Despite the loss of the high-end market in the short-term, luxury goods will remain in demand so long as millionaires and billionaires continue to be made in China. Meanwhile, the market for good quality, mid-range and lower priced wines will broaden as second tier cities and off-trade retail gain share. Distribution will remain a barrier to entry, but channels to reach the various markets will, hopefully, become more seamless.

Jumping into the complexities of the Chinese market, even as it seasons over the next decade, is not for the faint of heart; small producers lacking strong regional marketing boards with time and money to invest in China, should consider applying what resources they have, elsewhere. Any potential player must be prepared to build relationships, and establish recognition over a long and potentially unproductive period of time; deep pockets generally make such perseverance easier to bear.

Nightime on the Bund in Shanghai

Nightime on the Bund in Shanghai

Bibliography

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De Beaupuy, Francois, and Caroline Connan. “Bordeaux Wines Feel Pain of Chinese Crackdown on Lavish Living.” Bloomberg.com. Bloomberg, 14 Nov. 2014. Web. 11 Nov. 2014.
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Gibb, Rebecca. “Fear of Fakes High For Chinese Buyers.” Wine-Searcher. 8 July 2013. Web. 11 Nov. 2014.
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Mercer, Chris. “China Agrees to End Anti-dumping Probe into European Wine.” Decanter. 21 Mar. 2014. Web. 11 Nov. 2014.
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“More Chinese Drinkers Turning To Imported Spirits, But Baijiu Still King.” Jing Daily. 4 May 2012. Web. 11 Nov. 2014.
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 Footnotes

[1] Hormats, Robert. “Forty Years After the Nixon Visit: Progress, Challenges, and Opportunities in U.S.-China Economic Relations.” U.S. Department of State. 6 Mar. 2012. Web. 11 Nov. 2014.

[2] Vogel, Ezra. “Deng Xiaoping and the Transformation of China.” Online video clip. Youtube, Youtube, 19 Mar. 2012. Web. 8 Nov. 2014.

[3] Hormats.

[4] Hormats.

[5] Mianyang. “Doing It Their Way.” The Economist. The Economist Newspaper, 25 Jan. 2014. Web. 9 Nov. 2014.

[6] Mianyang.

[7] Robinson, J. (ed.): The Oxford Companion to Wine, 3rd edition, Oxford University Press, 2006, “China”, p167 – 169

[8] Schmitt, Patrick. “Lafite China’s First Wine Declared ‘not Bad’.” The Drinks Business. Web. 11 Nov. 2014.

[9] Winny, Monica. “Domaines Barons De Rothschild Unveils First ‘Experimental’ Chinese Wine.” http://www.billionaire.com/. 14 Aug. 2014. Web. 9 Nov. 2014.

[10] Sterling, Justine. “You’ve Never Tasted Anything Like Baijiu.” The Huffington Post. 17 June 2014. Web. 11 Nov. 2014.

[11] “More Chinese Drinkers Turning To Imported Spirits, But Baijiu Still King.” Jing Daily. 4 May 2012. Web. 11 Nov. 2014.

[12] Guilford, Gwynn. “Latest Evidence the Party Is over in China? Chinese Are Drinking Less Wine.” Quartz. 9 Apr. 2014. Web. 11 Nov. 2014.

[13] “Industry Focus: Importing Wine into China – China Briefing News.” China Briefing. 20 Aug. 2014. Web. 11 Nov. 2014.

[14] Robinson, Jancis, and Hugh Johnson. The World Atlas of Wine. 7th ed. Mitchell Beazley, 2013. 374. Print.

[15] Wilmore, James. “Patron Spirits to Launch in China after High-alcohol Tequila Ban Lifted.” Patron to Launch Tequila in China after Ban Lifted. Just-Drinks.com, 1 Aug. 2013. Web. 10 Nov. 2014.

[16] “More Chinese Drinkers Turning To Imported Spirits, But Baijiu Still King” Mustacich, Suzanne.

[17] “Has Bordeaux’s Bubble Burst?” Wine Spectator. 18 Jan. 2012. Web. 11 Nov. 2014.

[18] Chow, Jason, and Wei Gu. “China’s Wine Market Shifts Toward Entry Level.” The Wall Street Journal. 14 July 2013. Web. 11 Nov. 2014.

[19] Robinson, Jancis. “Wine Advances on China.” JancisRobinson.com. 19 Nov. 2011. Web. 11 Nov. 2014.

[20] Chow and Gu.

[21] De Beaupuy, Francois, and Caroline Connan. “Bordeaux Wines Feel Pain of Chinese Crackdown on Lavish Living.” Bloomberg.com. Bloomberg, 14 Nov. 2014. Web. 11 Nov. 2014.

[22] Areddy, James. “New Frugality Puts Strain on Chinese Firms.” The Wall Street Journal. 22 Jan. 2014. Web. 11 Nov. 2014

[23] Carrell, Severin. “Scotch Whisky Sales Drop as China Frowns on Lavish Spending.” The Guardian. 22 Sept. 2014. Web. 11 Nov. 2014.

[24] Nelson, Jacqueline. “Corruption and Cognac: China’s Crackdown Hits Luxury.” The Globe and Mail. 20 Aug. 2014. Web. 11 Nov. 2014.

[25] De Beaupuy and Connan.

[26] Spegele, Brian. “One Good Side Effect of China’s Anti-Corruption Drive: Better Wine.” China Real Time Report. The Wall Street Journal, 29 Sept. 2014. Web. 11 Nov. 2014.

[27] “The Chinese Grape Wine Market.” Rabobank International. October 2010. p. 6. Report for Grape and Wine Research Development Corporation.

[28] Robinson, Jancis. “China Loses Its Shine.” JancisRobinson.com. 29 July 2014. Web. 11 Nov. 2014.

[29] Halstead, Richard. “China Wine Market Landscape.” Wine Intelligence. June 2014. Report Brochure.

[30] Thach, Liz. “Using Social Media in China to Promote Wine & Spirit Brands.” Wine Industry News. WineBusiness.com, 8 Jan. 2014. Web. 11 Nov. 2014.

[31] Halstead, Richard. “China Wine Market Landscape.” Wine Intelligence. June 2014. Report Brochure.

[32] Chow and Gu.

[33] China: Five Trends for the Wine Market in 2013. Wine Intelligence, 5 Dec. 2012. Web. 11 Nov. 2014.

[34] Chow and Gu.

[35] Moselle, Mischa. “China Becomes World’s Second Biggest Consumer of High-priced Wine.”South China Morning Post. 9 Apr. 2014. Web. 11 Nov. 2014.

[36] Chow and Gu.

[37] Xin, Livia. “Sparkling Wine Gains Recognition in China.” The Drinks Business. 6 Nov. 2013. Web. 11 Nov. 2014.

[38] “There Are Plenty of Reasons Why Champagne’s Falling Flat in China.” Jing Daily. 8 Mar. 2013. Web. 11 Nov. 2014.

[39] Schmitt, Patrick. “Wine Education Booms in China.” The Drinks Business. 19 Nov. 2012. Web. 11 Nov. 2014.

[40] Robinson, Jancis. “Riesling Revolution in China.” JancisRobinson.com. 16 Apr. 2014. Web. 11 Nov. 2014.

[41] “Chinese Consumers Looking for Less Expensive Wines.” ASC Fine Wines. 2 Aug. 2013. Web. 11 Nov. 2014.

[42] While brand is important, marketing of country of origin should be pursued aggressively. Nationality of the wine is the most influential factor affecting purchasing decisions of customers in China, followed by “Taste”, “Brand”, “Quality”, etc. “Marketing U.S. Wine in China.” USDA Foreign Agriculture Service, 19 April 2012. p. 4. Print.

[43] “Unsurpassed Diversity: More Exhibitors – New Countries.” ProWine China. Web. 11 Nov. 2014.

[44] Boyce, Jim. “Wine Fairs.” Grape Wall of China. Web. 11 Nov. 2014.

[45] Noppe, Raymond. “Rise of the Dragon: The Chinese Wine Market.” March 2012. p. 25. Dissertation, Cape Wine Academy.

[46]  Carter, Felicity. “On China: An Interview with Stevie Kim.” Wine Business International. 1 Aug. 2012. Web. 11 Nov. 2014.

[47] “Marketing U.S. Wine in China.” p.5.

[48] “Marketing U.S. Wine in China.” p.6.

[49] Robinson. “China Loses Its Shine.”

[50] “The Chinese Grape Wine Market.” p. 7.

[51] “Marketing U.S. Wine in China.”  p. 3.

[52] Mercer, Chris. “China Agrees to End Anti-dumping Probe into European Wine.” Decanter. 21 Mar. 2014. Web. 11 Nov. 2014.

[53] “Economic analysis of import tariffs in the wine markets of China and the Republic of Korea.” Australian Government Department of Agriculture. July 2012. p. 1. Print.

[54] Mercer, Chris. “Australian Wineries Wary of China’s Allure.” Decanter China. 23 Oct. 2014. Web. 11 Nov. 2014.

[55] Gibb, Rebecca. “Fear of Fakes High For Chinese Buyers.” Wine-Searcher. 8 July 2013. Web. 11 Nov. 2014.

[56] Chow and Gu.

[57] Halstead.

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