In a pop-up shop on the outskirts of Shanghai, the problems facing Penfolds across China are written in black marker pen and glued to the window.

"Buy 1 get 1 free" says the sign promoting the offerings inside.

For a wine brand brand which aims to sit alongside the likes of Louis Vuitton at the luxury end of the market, it's hardly the ideal image.

But the sign, written on an A4 sheet of paper, tells us much about the bumpy ride for Penfolds and its parent, Treasury Wine Estates, in China over the last three years.

In and effort to smooth its expansion into China, Australia's biggest wine company has embarked on a new, higher-risk strategy of taking direct control of marketing and distribution for its flagship brand Penfolds and a handful of other high-end labels across China.

It's trying to maintain the premium image Penfolds has built up over decades in China, with chief executive Mike Clarke determined to get more out of his brands by taking on distribution for restaurants and bars.

The pop-up shop is an unfortunate outcome of that strategy.

Stockpile

Having fired its exclusive distributor in China late last year, that distributor is now dumping stock on the market. Penfold's Rawsons Retreat and the full range of Wolf Blass, another Treasury brand, are at fire-sale prices.

"We have a stockpile we need to get rid of quickly," said the shop assistant at one of the former distributor's stores in Shanghai's suburban Minghang district.

China is the third-largest export market for Australian wine producers, with $224 million of exports in 2014.

The falling Australian dollar, which is now trading at about $US0.77, compared with $US1.10 in late 2011, has been a plus for the industry and helped reverse the downturn in total exports. Total wine shipped from Australia in 2014 rose for the first time in seven years, to $1.82 billion.

While the currency helps, Treasury has another problem brewing in China that's even worse than unfortunate visual merchandising.

That problem began on November 14, 2012 – the day Xi Jinping became China's top leader.

On taking power Xi signalled an end to excessive government banquets, gift giving and the general extravagance which had taken hold within the Community Party.

His dictates were ignored as just another empty promise and those who had benefited most from this excess, such as Treasury, assumed sales would continue growing at rates above 30 per cent.

Going luxury

That didn't happen and the problems were made worse by Treasury and others continuing to ship ever greater volumes of wine to China, even as the slow-down took hold.

By the middle of 2013 the over-supply reached critical levels and the discounting began.

It has not stopped since and wine imports to China this year from all countries are expected to be flat.

Treasury's answer has been to bring in former Coca-Cola executive Robert Foye to head up its Asian business.

 The 22-year veteran of Coke has driven the move away from distributor ASC as the company looks to get closer to its customers and better position its brands in the luxury space.

It's a higher-risk strategy in a notoriously difficult market that will largely swing on Treasury's ability to get its sales force out into the market quickly and control parallel importing, which was a constant headache for ASC.

This "grey" trade through Hong Kong destroyed efforts to maintain uniform prices across the country.

That should be easier to control with distribution being taken in-house, but it will also depend on how quickly the pop-up shop and others around the country get through excess stock.