The duty elimination on wine and beer is expected to cost the government about US$72 million in the short term, but according to the government’s own calculations, it will produce gains of nearly US$514 million in the long run. Much of the gain is expected to come from fine wine transactions, including auctions, conventions, logistics and wine storage business over the next several years. 

 

There was considerable media coverage, leading up to the budget announcement, about the benefits that a fine wine hub could bring about. The Hong Kong Wine and Spirits Industry Coalition (HKWSIC) cited no less than eight sectors that would benefit from the elimination of duties. These include: retail, transportation, logistics, conferences, restaurants, exhibitions, hotels, wine trade and consumers.

 

The coalition’s research has shown that Hong Kong and China-based collectors make up about 40% of London’s fine wine brokerage business, estimated at over US$1.2 billion. Most of the revenue is not coming into Hong Kong and as a result, it is losing out on potential revenue of US$400 million. If Hong Kong positions itself as a duty-free hub, it will get revenue from wine auctions – the worldwide auction market was estimated to be worth US$300 million in 2007 ­– as well as revenue generated by the UK wine merchants.

 

HKWSIC argues that the regional trend has been to lower wine duties, as in the case of China and Japan. Japan has a volume tax that enourages purchase of fine wines. It was also pointed out that China’s duty was lower than that of Hong Kong prior to this recent move. However, in reality, if consumption tax and VAT are included, the total tax on wine in China adds up to about 48%. This figure excludes the transportation and logistics costs, and the margins calculated by importers, wholesalers and retailers. 

 

 

On the face of it, Macau seems well positioned to capture the growing fine wine market with only 15% duty and a booming casino, hotel, and food and beverage business. However, Macau lacks a world-class logistics facility and transportation hub.

 

Hong Kong, on the other hand, has world-class logistics companies, a busy and efficient port, international air traffic, a highly efficient transportation system and frequent freights from all over the world. With zero duty and no VAT (value-added tax) or other hidden taxes, Hong Kong appears to have enormous potential to become a fine wine hub. 

 

While international auction houses such as Acker Merrall are proposing imminent auction dates and British fine wine merchants are expanding their grip on the Hong Kong market, local importers are ambivalent about the future. Greg De’eb, general manager of Crown Wine Cellars says, “We still need to do all the paper work as before, and hand in the documents to the customs.” For the short term, there is uncertainty about how long this zero duty will last, given the government’s previous track record.

 

The wine duty is creating pressure on wine importers and retailers to lower their prices, but many are sitting on a supply of duty-paid stock. If they lower prices, they will have to absorb the cost as well as get a lower revenue, if volumes do not rise sufficiently to compensate for the lower margins. Franz Donhauser, general manager of the Island Shangri-la hotel, says that, “In the long run, this is good for Hong Kong, but we will probably lose revenue from wine sales in the short term.” What importers and restaurants will be hoping for, is greater volume and trading by consumers to make up for lower margins. In the wine market, importers and retailers are slashing prices to move their stock as quickly as possible. The back office staff are busy re-adjusting their prices and re-calculating their profit margins for 2008. Nearly all the fine wine merchants have cut their prices by an average of 15% to 20%, including Farr Vintner’s and Berry Brothers & Rudd. Retail shops are even offering  20% to 30% discounts.  

 

For consumers, this is great news. They will have greater variety, lower prices, and more options of how and where to buy wine. Why not just order a few cases of that delicious wine you tried at the cellar door of Margaret River or Napa while on holiday? The beauty of the free market is transparent pricing and greater options. Exactly how this new change plays out in the wine industry is something the consumer can watch with amusement, while enjoying a nice glass of wine.