Penfolds five: Pressing issues for Aussie wine favorite in China

When chief winemaker Peter Gago of Penfolds visited Beijing last month to lead a re-corking clinic, it felt like a warm and fuzzy break in a rough and tumble stretch for this popular Australian brand in China. Alongside the ongoing drama of the sale of parent company Treasury Wine Estates — KKR looks like the suitor of the moment — there has been plenty of talk in the media and trade here about Penfolds position in particular, hardly surprising given that its leading label, Grange, is among the top — many would say the top — “new world” brand in the country. Here are five pressing issues Penfolds faces (all highlights mine):

1. Australian Financial Review reported last month on a nightmare trademark crisis for Penfolds. “Treasury Wine Estates failed to register the Chinese name for Penfolds and is now locked in a protracted legal battle with a notorious trademark squatter in an effort to regain ownership of the iconic name,” stated AFR. “This potentially leaves Treasury open to a hefty fine for trademark infringement and could also allow the rival to sell wine using the Chinese name for Penfolds.”

2. AFR wrote today that all InterContinental hotels in China took Penfolds off the menu due to fear of liability re the trademark case. “The removal is a blow to the takeover target’s China strategy and raises fears other large hotel chains, supermarkets and online stores may follow in ­suspending sales of Australia’s best known wine,” reported AFR. “An industry source estimated the InterContinental contract could be worth around 5000 cases annually to Penfolds or around 5 per cent of its total shipments to China.”

3. Meanwhile, Treasury is still adjusting to the nearly two-year crackdown on official spending that has deeply cut sales of high-priced labels, including icons Grange and Bin 389 a.k.a. ‘Baby Grange‘. “[Treasury] said first-half earnings fell as China’s crackdown on official gift giving curbed demand for premium vintages,” reported Bloomberg in January. “The Chinese Communist Party’s quest to restore discipline among its ranks has led to a campaign to stamp out gift giving and extravagant official spending, hitting premium liquor producers, Swiss watchmakers and expensive restaurants.” The austerity program hasn’t eased and, not surprisingly, we see no shortage of deals on Penfolds wines.

4. Declining official spending has meant the need for new sales outlets. While ASC Fine Wines has long been the exclusive rep for Penfolds, industry sources say over a half-dozen distributors will also be selling the brand, primarily to create revenue in off-trade areas where ASC is absent, such as hypermarket chain Carrefour. “We are the exclusive authorized distributor for all Penfolds wines across all sales channels including on-trade, off-trade, direct sales, wholesalers and e-commerce,” responded an ASC spokesman when I asked about this situation in June. “Other distributors of Penfolds wines are unauthorized and engaging in parallel and grey market practices with all the risks associated with those practices.” Having numerous distributors will no doubt increase exposure  for Penfolds — both to new consumers and to potential loss of brand control.

5. I doubt I was alone in doing a double-take last year when Wall Street Journal reported then-company head David Dearie saying Treasury planned to open its own wine bars in China in three to five years. It’s not that it came during the early months of the spending crackdown — “Mr. Dearie said the move toward entertaining hasn’t been influenced by China’s recent austerity campaign, in which catering and wine companies have been hurt by a ban on government banquets.” — but that it came out of left field, at least to me. That the Journal indicated it was “too early to disclose details” seemed telling — it felt like a warning signal. By the way, I know this point last is not a pressing issue but I thought I’d include it anyway.

Penfolds faces other challenges, from the inevitable counterfeits that are part and parcel of being a famous brand, to–like all Australian wineries–growing competition from countries like Chile. But it’s the most recent developments involving the Penfolds trademark, and the InterContinental Hotel’s decision to remove the wines from its menus, that are going to have industry watchers wondering what’s coming next.

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