Montes Alpha Cabernet Sauvignon 2006
By Kwaak Je-yup
How does a dependable New World value wine turn into a country’s best-selling oenological brand ― which then retails for more than five times the original price? The answer is the Korean system.
Montes Alpha, a popular mid-range line from the Chilean producer Vina Montes, is by far the select choice for locals; its versatile taste and simple name has helped avoid gustatory or linguistic gaffes at business dinners. More than 650,000 bottles are sold annually in Korea and roughly 4 million have been sold thus far.
But this bang-for-the-buck choice, such as the Cabernet Sauvignon which sells for less than $10 in Chile and double that amount in Europe, typically retails for 40,000 won in Korea. Even in Sweden, known for strict alcohol laws and steep tax rates, one could buy a 2008 vintage bottle for 159 krona, ($23 or 26,000 won).
The price for the popular Chilean red ― after the free trade agreement in 2009 eliminated import tariffs ?drew consumer complaints but neither government authorities nor industry insiders offer a straight answer, busy pointing fingers at each other instead.
“Importers are putting unnecessarily high price tags on wine to begin with,” said an independent wine merchant who requested anonymity so not to risk his business relationships. “The government also imposes too much tax.”
Pricing blame game
Nobody seems guilt-free in this convoluted system. The merchant argued that the high price tag is the best way to improve a wine’s reputation in the competitive local market. Moreover, the 30-percent alcohol tax levied on wine certainly raises the final price consumers pay at supermarkets or specialist wine stores.
But that is not the whole truth. According to the World Health Organization’s 2004 statistics, this Korean rate is comparable to Sweden’s (33.80 percent) or Finland’s (36.00 percent), yet they still sell Montes Alpha’s as well as other wines for less. Countries with significantly lower rates for wine are usually producer nations, with the salient exception of Japan, which manufactures none.
The tax rate is questionable, nonetheless. Unlike most developed countries that apply more tax for higher alcohol content, the national revenue service earns 72 percent from beer. When asked about the possibility of an excise tax system, which charges by the quantity of alcohol and is practiced widely, the Ministry of Strategy and Finance (MOSF) official was reluctant.
“Given the domestic preference for soju, which is basically hard liquor, (an excise tax) would be wildly unpopular,” he said, asking not to be identified by name.
The ministry instead points right back at the merchants and the profits they make in the complex web of distribution. The government installed a four-tier system in 1992, when alcohol importation was liberalized, This means no wine can bypass going through the importer, the distributor, the wholesaler or the retailer, with additional costs incurring at every change of hands. Each actor allegedly takes a 15 to 30 percent cut, and consumers have to cover the 10-percent VAT on top of everything else. Costs to transport from South America, estimated to add 15 percent to the import price, seem negligible.
Another merchant even cited Chile as the origin of this price hike.
“Chile has one of the highest growth rates in the world today,” said Kwon Min-jun of Mirae Wine, an importer. “The inflation and rising labor costs contribute to the general increase in price.”
The Chilean Embassy, in Seoul, declined to comment, citing the sensitivity of the issue. The commercial attache could not be reached directly since he is currently in his native country.
It is a common refrain, finally, in the industry that skyrocketing Chinese demands are the key culprits of the global wine price inflation.
New reform: too little, too late, besides the point
While the ministry recently proposed complete liberalization ― retailers can get an import license and importers are able to sell directly to consumers ― the wine merchant who requested anonymity said the measure comes too late.
“Many retailers, especially in Seoul, are already just taking the wine from importers,” he said, adding that shops in the provinces have no choice but to rely on distributors with nationwide networks.
Legal changes, he said, will not make a big impact since the industry has already adapted to the hitherto rigid structure; some importers have also established direct sales outlets under different names and registration numbers. The system is already obsolete.
Industry sources say wine consumption needs to rise much further to speak of real changes in pricing. The market is simply too small for anyone to be wildly profitable, as commonly accused by the public. In other words, if the volume went up, margins ― and prices ― would subsequently go down.
Wine consumption in Korea is among the world’s lowest, due to its unfriendly high-class image and price. According to published trade data, Korea’s wine consumption per capita was only around 0.5 liter in 2009. Its level peaked in 2007, at 0.72 but slowly came back down with the global economic downturn. This is even below nations like Peru, Senegal, Kyrgyzstan or even the island nation of Tonga.
The wine industry, therefore, is highly segmented. According to Kwon, there are 600-plus importers, 70 percent of them small and independent.
“There are very few of us who can make ends meet,” he said.
The true solution, then, is to liberalize even further ― to the Internet, for instance. Merchants say that this is the only way to truly bypass the distribution structure, even for remote corners of the country. Consumers can do their own research online and choose their wines; retailers can compete on the ability to provide a wider selection instead of trying to rip off the handful of customers who make physical visits these days. The ministry official declined to comment on the possibility of alcohol e-retailers. He said there were no other measures under consideration or discussion.
“Distribution margins obviously play their part, but transportation, other costs like labor, rising fuel prices, health inspection fees... we have our hands full,” said Kwon. “Giant distributors like Diageo could win from this reform, but I am not sure if this new format can change the status quo.”