World Cup 2014: Prime Time for Brazilian Wine?

Faces, the official World Cup Brazilian wine. Click on the image to view a FIFA video about the wine.

The World Cup — FIFA’s celebration of global soccer — kicks off  on Thursday in  São Paulo with host Brazil vs Croatia and will end on July 13 in Rio with the final match at the famous Maracanã stadium, which was originally constructed for the first Post-WWII World Cup in 1950.

That game is likely to be the most-watched single event in world history — talk about prime time!

Soccer is a fast game full of twists and turns and it is notoriously difficult to predict how a big tournament like this will end, but based on history, which I admit does not always repeat itself, I will hazard three observations.

And the Winner Will Be …

First, the winner is likely to be from the western hemisphere, not Europe, Asia , Oceania or Africa.  Only twice has a team from outside the host country’s half of the globe won the big prize: Brazil in Sweden in 1958 and Brazil in South Korea-Japan in 2002. Good news for Brazil, Argentina, Uruguay, Columbia, Mexico, the USA and the other teams from that part of the world.

Second, the winner is likely to be Brazil based on the fact that they have won more World Cups (5) than Italy (4) or Germany (3). Among Western Hemisphere powers Argentina and Uruguay have won two each. That Brazil is also the host country improves its odds, according to my soccer-mad friends, although it is important to remember they lost the final at home to Uruguay in 1950 — a result that made young Pelé’s father cry and inspired the later successful efforts.

Finally, the 2014 World Cup champion is likely to be a significant wine country. Every previous winner of the Cup from Uruguay in 1932 to Spain 2010 plays in the world wine league, even 1966 winner England, which makes up for its modest but growing current wine product by being a key export market for the world’s wine.  Is that too much of a stretch? I hope not — otherwise the Netherlands, another big export market,  might as well give up now!

Is Brazil an important wine country? If so, then it would seem to be the strongest possible favorite to win the cup, as a report from the analysts at Goldman Sachs suggests. Wine is alive and well in Brazil. No wonder they are using the occasion of the World Cup to promote their industry (click on the image above to see a FIFA video) much as South Africa did (see video below) when they hosted the 2010 tournament.

Brazil’s total wine output does not rival France, Italy and Spain, the globe’s top producers (and World Cup winners, too) but they are not at the bottom of the league table, either. Data for 2009 put Brazil’s wine production at 340 ML, less than Argentina (1214 ML) or Greece (425) but ahead of Austria (235 ML), New Zealand (205 ML), Uruguay (62 ML) and Croatia (75 ML).  Huge Brazil is not covered with vines, but it is clear that enough of it is to make it a significant wine producer.

My friends in Portugal and Argentina see Brazil as a significant export market, too, based on various combinations of language, history, culture and proximity that facilitate sales of their wine. And they are not alone is seeing Brazil’s potential. OIV data for 2013 put Brazil’s total wine consumption at 348 ML, above Chile but less than South Africa.

1532 and All That

While you might think of Brazil as a land of beaches and jungles, it is a very geographically diverse country with several major vineyard areas. The principal winegrowing region is the state of Rio Grande do Sul on the warm edge of the world wine-growing zone (roughly 30 – 50 degrees of latitude north and south). Serra Gaucha has more than 90,000 acres planted to vine.

Wine in Brazil goes way back. The Portuguese planted grapes around São Paulo in 1532 and Jesuit priests established vineyards in Rio Grande do Sul in 1626. But it took a wave of immigrants from Italy in the late 19th century to firmly plant the vine in Brazil.  The migrants came from Italy’s northeast – Trentino and the Veneto – and were drawn to the climate and hilly terrain of the Rio Grande do Sul. They brought winegrowing knowledge and a taste for the wines of their homeland, especially sparkling wines (think Spumante and Prosecco). Their influence persists today.

Champagne-maker Möet & Chandon saw Brazil’s potential, especially for sparklers,  as far back as 1973, when it was making its big globalization push into the U.S., Australia and Argentina. They invested in sparkling wine production in Brazil figuring that if anyone was going to sell domestic “Champagne” to fizz happy Brazilians it should be the Champenoise themselves. Möet & Chandon were soon joined by other wine/drinks multinationals including Seagrams, Bacardi, Heublein, Domecq and Martini & Rossi, so the international presence in Brazil is quite strong.

New World Order

Wine production 100 years ago was focused on quantity instead of quality, as it was in most of the world, and that meant American hybrid grapes rather than European-style vitis vinifera varietals because of climate concerns. Market problems led to the establishment of large cooperatives in the 1920s and 1930s, as growers, many with tiny vineyards, struggled for market power. As in Northern Italy, these cooperatives are still important today as the wine industry moves up the quality ladder.

One of these cooperatives grew so large that it became more or less the Riunite of Brazil. Cooperative Vitinicola Aurora was receiving grapes from more than 1500 family growers at its peak in the mid-1990s and producing (and exporting) very large quantities of wine.

team

Many Faces, One Heart

I haven’t tasted Faces, the official Brazilian wine of the 2014 World Cup, which is made by Lidio Carraro Boutique Winery, but I like its style. The wine brand picks up the twin themes of unity and diversity that are important to a sports team and so very important in Brazil’s history. Many Faces, One Heart — it is a fine message, don’t  you think?

The white wine is a blend of Chardonnay, Muscat and Riesling Italico, which should be a pleasant summer sipper. The red wine spares no effort to make the soccer connection — it is a blend of eleven different red grape varieties, one for each of the players on a soccer team.

Eleven players. Eleven grape varieties. In the same manner as the Brazilian national football team, the FACES wine label will represent Brazil as the OFFICIAL LICENSED WINE OF 2014 FIFA WORLD CUP™,  reflecting the national terroir with a team of grapes from different grape-growing regions, representing colors, aromas and flavors of our territory. Merlot, Cabernet Sauvignon, Teroldego, Touriga Nacional, Tannat, Ancellotta, Nebbiolo, Tempranillo, Pinot Noir, Malbec and Alicante Bouschet are the selected grape varieties for the FACES red wine range. These varieties hail from every corner of the Serra Gaucha, including the Vale dos Vinhedos – the most traditional area for grape growing and wine-making in Brazil and also other locations in the Southern part of Rio Grande do Sul state.

If you scroll down on the Faces website you can find an interactive element that allows you to fill each position on the team from goalkeeper to striker with your choice of the appropriate grape variety. Apparently I am not a very good wine/soccer manager. I put Tannat in goal, but the winery says that Malbec is better there. But I did better with my choices at forward, according to the website.

Keep your eyes open for these wines and others from Brazil, which may be available more widely available during the World Cup. A quick internet search suggests that Faces wines have arrived in parts of Canada and the UK and probably here in the US, too. I’ll bet the Brazilians are hoping that you will toast their team’s victory with a glass of Brazilian wine! Cheers! (Or should I say Goooooooooooooool!?)

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Some parts of this column appeared in my previous survey of wine in the BRIC nations. Here is the Goldman Sachs odds sheet for the World Cup as reported in the Wall Street Journal. GS calculates that Brazil has a 48.5 chance of winning its 6th World Cup.

 

Argentinean Wine: A SWOT Analysis

The first thing we did when Sue and I arrived in Mendoza was to walk to the offices of Área del Vino, the group that publishes Vinos y Viñas magazine, the WineSur website and provides economic and strategic analysis to the wine industry here. We met with Javier Merino, Área del Vino director, and Gonzalo Merino, director of WineSur. They got our visit off to a flying start.

Our discussion was wide ranging. Gonzalo is working on new media projects to expand the market for Argentinean wine and reach a new generation of consumers. Javier was just back from Hong Kong and China and keen to discuss the potential new markets there. Both were happy to talk about controversial questions, such will the Malbec boom be sustained and whether Torrontés really is The Next Big Thing.

Their analysis has been very useful to me as I have met with wine-makers, winery owners and managers. Based on all these discussions I have prepared this SWOT analysis, which represents my current thinking about Argentinean wine today. This is a work in progress (and necessarily very brief), so I welcome comments that correct my thinking or re-direct my analysis.

Strengths

Argentina has many strengths. The most important may be that it has a “hot” brand, its signature Malbec. When wine enthusiasts think of Argentina they think of Malbec and vice versa — a strong identity that many wine regions envy.

But, as I will explain in future posts, Argentina is not just Malbec (or even just Malbec and Torrontés as some writers propose).  Quality extends across a broad spectrum of wine varieties, styles and price points, which is a very good thing.

Weaknesses

That said, the industry is very dependent upon exports of Malbec to three main markets, the United States, Brazil and Canada.  There would be trouble if Malbec exports to these markets were to falter due to either a decline in demand to a shift to some other “hot” variety.

The domestic market for wine is very substantial, but it is still dominated by low-price basic wines — another weakness. The Argentinean industry would be much stronger if a larger domestic market for quality wines could be developed.

Water is also an issue here as it is in many wine regions. Not an issue today, Javier told me, but for the future. And of course the future is fast approaching.

Threats

There are a number of very serious economic threats that cloud the short term outlook. Domestic inflation is high in Argentina. The government estimate is about 10%, but I failed to find anyone who thinks that it is less than 25%.  Production costs are rising rapidly– labor, grapes and other inputs are increasingly expensive. Land prices for new vineyard projects seem to be growing exponentially.

Revenues are not increasing at the same rate, with the result that margins are being squeezed.  In fact, the pressure is on to cut prices in the competitive U.S. market. It is not clear how long the current combination of rising costs and falling revenues (or soft revenue growth) can be sustained.

I visited several wineries that were clearly focused on increasing efficiency in an attempt to claw back margin without sacrificing quality.  But I also heard rumors of wineries that were taking the perhaps desperate move to source lower cost grapes from other regions to stay in business. The concern was that quality would suffer and The Brand undermined.

Opportunities

There are many opportunities and they fall into two categories: new wines and new markets. By new wines I mean a movement to expand Brand Argentina beyond value Malbec, both into the higher reaches of the wine wall and into other varietals. I’ll be writing more about this in future posts.

I’ve already written about the new markets. As I listened to Javier discuss the great potential in countries like Brazil, with large and growing populations and fast economic growth I knew just what he was talking about: The BRICs (and the New BRICs). Javier believes that the BRIC-like markets  are the key to the next stage of Argentina’s export growth. Because geography still matters in both wine and economics, Brazil is a particularly attractive target, but both Hong Kong and China are high on the list.

Argentina’s China card is that its wines could fill an open market niche. Not cheap bulk wines like those from Chile and Australia. And not overpriced prestige labels like those from France. Quality Malbec from Argentina would be more affordable (and in most cases better) than the French and of course much better than the bulk wines. Distinctive, too, on several dimensions.

But China’s a tough market to break into, as I have said before.  China will require patience and good luck as well as good wine.

The new market with the greatest potential for Argentinean wines may be Argentina itself.  Nearly everyone I talked with said that the best thing that could happen would be for the domestic market for quality wine to expand, making the industry less dependent on exports and less vulnerable to inflation and exchange rate changes.

Bottom Line Analysis

So what’s the bottom line? Well, of course, I believe that the long run opportunities are important, but it seems to me that the short term threats are on everyone’s mind right now, in particular, the inflation-exchange rate squeeze. If inflation continues at high rates and the U.S. dollar – peso exchange rate stays stuck at about 4 pesos per dollar, some producers here will be squeezed out of the U.S. market. Perhaps they can sell to Brazil or on the domestic market, but the prospects are not good if everyone tries to shift focus at once.

What is keeping the exchange rate stuck at an over-valued level? Politics and fear, I suppose. There’s a presidential election in the fall and everything here has taken on a political significance, so it is no wonder that holding the line on the exchange rate (and denying that an inflation problem exists) would be political, too.

And then there is the fear.  Argentina has experienced inflation-devaluation vicious cycles in the past. Inflation leads to a falling currency, which adds to inflation pressures, which forces the currency down even more. Etc, etc.  There’s a worry here that lowering the exchange rate would set the cycle off once again and nobody wants that.

Fear and politics are powerful forces. Argentinean wine, for all its strengths and opportunities, is caught in the squeeze.

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Thanks to Javier Merino, Área del Vino director, and Gonzalo Merino, director of WineSur for meeting with us in Mendoza and to everyone who has talked with us about wine economics in Argentina during our stay here.  Watch for future posts that examine particular elements of the Argentina wine story in more detail.

The BRICs: Misunderstanding Brazilian Wine

This is the second in a series of articles on wine in the BRICs Brazil, Russia, India and China.

Intuition isn’t a very good guide to understanding the wine market in Brazil, so it is easy to misunderstand what’s going on there. Nearly everything you think you know about wine in Brazil is probably wrong. For example, a lot of people probably imagine that

  • Brazil doesn’t produce wine, or not much of it anyway. How could they? The country is covered with Amazonian rain forests (except for the beaches in Rio, of course).
  • Brazil probably doesn’t consume much wine, either. Everyone drinks those caipirinha things, don’t they?
  • If they do make wine, it is probably very bad. But I wouldn’t know – I’ve never had any.

Time to Think Again

What’s wrong with these statements? Where should I begin? Brazil produces a lot of wine – it is the fifth largest Southern Hemisphere producer (after Argentina, Australia, Chile and South Africa). Brazil’s 3.5 million hl production (2007 data from OIV) is more than twice the corresponding figure for new world wine power New Zealand (1.5 million hl).

While you might think of Brazil as a land of beaches and jungles, it is a very geographically diverse country with several major vineyard areas. The principal winegrowing region is the state of Rio Grande do Sul on the warm edge of the world wine-growing zone (roughly 30 – 50 degrees of latitude north and south). Serra Gaucha has more than 90,000 acres planted to vine.

Wine is grown in several parts of Brazil, as the map indicates,  including the São Francisco Valley, a hot desert area in the northeast just nine degrees south of the equator. Winegrowers there use plentiful irrigation and specialized viticultural techniques to more or less program grapevines to produce crops twice a year on a rolling schedule that keeps winery equipment in nearly constant use.

The Roots of Brazilian Wine

Wine in Brazil goes way back. The Portuguese planted grapes around São Paulo in 1532 and Jesuit priests established vineyards in Rio Grande do Sul in 1626. But it took a wave of immigrants from Italy in the late 19th century to firmly plant the vine in Brazil.  The migrants came from Italy’s northeast – Trentino and the Veneto – and were drawn to the climate and hilly terrain of the Rio Grande do Sul. They brought winegrowing knowledge and a taste for the wines of their homeland, especially sparkling wines (think Spumante and Prosecco). Their influence persists today.

Although average wine consumption for Brazil is low — less than 2 liters per capita — Brazil’s middle class is on the rise and the wine market is growing beyond its traditional immigrant base. Many people are betting on Brazil and hoping that it will become a more prominent player in the world of wine.

Grape Expectations

It is an old joke that “Brazil is the country of the future … and always will be.” Champagne-maker Möet & Chandon saw Brazil’s potential, especially for sparklers,  as far back as 1973, when it was making its big globalization push into the U.S., Australia and Argentina. They invested in sparkling wine production in Brazil figuring that if anyone was going to sell domestic “Champagne” to fizz happy Brazilians it should be the Champenoise themselves. Möet & Chandon were soon joined by other wine/drinks multinationals including Seagrams, Bacardi, Heublein, Domecq and Martini & Rossi, so the international presence in Brazil is quite strong.

Wine production 100 years ago was focused on quantity instead of quality, as it was in most of the world, and that meant American hybrid grapes rather than European-style vitis vinifera varietals because of climate concerns. Market problems led to the establishment of large cooperatives in the 1920s and 1930s, as growers, many with tiny vineyards, struggled for market power. As in Northern Italy, these cooperatives are still important today as the wine industry moves up the quality ladder.

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Unlikely Name for a Brazilian Wine

One of these cooperatives grew so large that it became more or less the Riunite of Brazil. Cooperative Vitinicola Aurora was receiving grapes from more than 1500 family growers at its peak in the mid-1990s and producing (and exporting) very large quantities of wine.

Even though you think you have never tasted a Brazilian wine, you may well have sampled the Aurora coop’s products.  The name on the label wasn’t Aurora – it was Marcus James!

Here in the U.S. Marcus James is now a Constellation wine brand imported from Argentina, but it began life in the 1980s as the Aurora coop’s brand. The very un-Brazilian name was derived from the first names of an Aurora executive and the son of his  American business partner.  The wines were simple and affordable (the Yellow Tail of their day?) and captured a substantial market. You probably tasted Marcus James if you were drinking wine in the 1990s, perhaps at a party or reception even if you didn’t actually buy any of it yourself.

By 1996 Marcus James was selling more than half a million cases in the United States – more than the entire Argentinean wine sector at the time – and exporting to 30 other countries as well. The Aurora production facility was the largest winery in the Southern Hemisphere and one of the largest in the world.

The brand was so successful that Constellation Brands apparently had concerns about the ability to meet growing demand and when the contract came up in 1998 they switched wine sources to Argentina. Marcus James continues to be a successful brand here in the U.S. (it is the #3 Argentinean brand), selling Argentinean Chardonnay, Merlot, Cabernet, Riesling and Malbec (plus some California White Zin). Aurora still sells Brazilian-made Marcus James wine at home.

Brazil in Motion

The Brazilian market is in transition today. Vitis Vinifera grape varietals have replaced the hybrids in most places. As Brazil’s wine market has opened up to imports, quality standards have  risen and although the basic wine market is still large, the quality sector is expanding. Wines are being produced that can compete on international markets.

Richard Hemming published reviews of Brazilian wines on the subscriber-only part of the Jancis Robinson website in 2009. He rated four Brazilian wines in the four star 17+/20 category, with a 1998 Cave Geisse Brut 1998 sparkler topping the list. The tasting note for a Lidio Carraro Nebbiolo 2006 describes it as “Very pale and brick-hued. Cherry, tobacco, floral, violets. The tannin is high and proud, the fruit sophisticated and there is a perfume that persists across the whole palate.” Sounds good enough to drink, doesn’t it?

The Miolo Group of wineries is often mentioned as one of Brazil’s quality producers and two of their wines received strong reviews in Hemming’s article. It is worth exploring their website if you are interested in where Brazilian wine is going.  They are clearly ambitious, producing wines in many quality ranges, including a reportedly Parkeresque icon-level wine (unsurprising since Miolo is one of Michel Rolland’s clients). World export markets are clearly in their plans.

This is the new new world of Brazilian wine, but the old world still lingers. I think this is a common characteristic of the BRICs today – one foot in the present, the other in the past, moving quickly toward the future.

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Brazil’s past is surprising, its present is promising and its future … well, I am optimistic that the promise will be fulfilled. Now on to Russia to see what we can learn there.

The BRICs: The New New World of Wine?

This is the first of a series of articles on wine markets in the BRICs. BRICs? Is that a wine term? No, although it sounds just like brix, a measure of a grape’s sugar level. Jim O’Neil of Goldman Sachs coined the term BRIC in 2001 to refer to  Brazil, Russia, India and China.

Initially many people suspected that BRIC was just a gimmick — a way to package four very dissimilar countries into an appealing acronym that would draw investor interest. If it was a strategic maneuver it was a brilliant one because of the way it captured the world’s imagination.

More than a Gimmick

“BRICs” is an attractive name for many reasons, perhaps especially because it looks and sounds like NICs — the Newly Industrialized Countries of Hong Kong, Singapore,  Taiwan and South Korea that have been so successful in the global economy.  There was some question initially about why these four particular countries were chosen (why Brazil and not Mexico, for example, and what about Turkey?) and what if anything they had in common, but the idea quickly caught on.

Today the BRICs are firmly established, as the Economist noted earlier this year in an article titled, “The BRICs: The trillion dollar club.”  The BRICs have turned into something real.  Why? According to the Economist

The BRICs matter because of their economic weight. They are the four largest economies outside the OECD (Organisation for Economic Co-operation and Development, the rich man’s club). They are the only developing economies with annual GDPs of over $1 trillion (Indonesia’s is only half that). With the exception of Russia, they sustained better growth than most during the great recession and, but for them, world output would have fallen by even more than it did. China also became, by a fraction, the world’s largest exporter.

In a recent Economist article (that included this provocative graph), Goldman’s O’Neil was asked to look ahead 25 years, from 2011 to 2036, and to speculate about the future.

One of the questions he raised was whether the BRICs would have greater total (but obviously not per capita)  income than the G-7 countries and what that might mean if they did. A good question to discuss … over a glass of BRIC wine.

The Future of BRIC Wine?

BRIC wine? Well, yes. All the BRIC countries produce wine and all are important wine markets for the future. As these economies grow, their expanding middle classes will be increasingly attractive target markets for the world’s wine makers and their wines will begin to appear on you local shop’s shelf.

China was the 6th largest wine producer in the world in 2007 according to International Organization of Vine and Wine (OIV) statistics, with an estimated 12 million hectoliters of wine produced (for readers who still think in “English” units, a hectoliter equals 100 liters or a little more than 11 standard nine-liter cases of wine).

By comparison, #1 Italy and #2 France produced nearly 46 million hl each in 2007 followed by Spain (34 million hl), the U.S. (20 million hl) and Argentina (15 million hl). BRIC Russia was 11th in the global wine league table, with 7.3 million hl of output followed by Brazil in 15th place with 3.5 million hl.

India does not appear in the OIV wine statistics, indicating that its wine industry is quite small at present. But India definitely is on the wine map — the omnipresent Michel Rolland even has a client there (Grover Vineyards). India is already a major producer of table grapes, with 2007 production only a little less than Chile and the U.S. combined (that’s a lot of grapes), so it is not unreasonable to suppose that higher levels of wine grape production may follow. India would be on the wine BRIC list for its potential as wine import market, of course, even if it didn’t make any wine at all.

Solving the BRIC Puzzle

Some people in the wine industry dream that the BRICs will be the solution to the problem of global over-supply. OIV estimates that 266 million hl of wine was produced in 2007 but only 249 million hl consumed,  a gap of 17 million hl or about 200 million cases. Yikes! Do the BRICs have the potential to soak up all that extra wine and bail out the global industry?

Dream on, say the experts consulted for a 2009 article in Meininger’s Wine Business International. “Are the BRIC countries going to solve the problems of oversupply in the world today? I don’t think so,” said Arend Heikbroek, associate director for beverages at Rabobank (and one of the sharpest wine analysts I know). “It’s a long-term shot,” he continued, ” it’s complicated, each market is completely different. You need to understand the risk, the dynamics, the traders, the distribution system and the legal system in each of these markets.”

Fair enough. Each BRIC is its own particular puzzle, I guess, and it is too soon to know how they will fit into the bigger puzzle of global wine.

The BRICs will be important to the future of global wine even if they aren’t a silver bullet solution to current problems. They are the new new world of wine and we need to figure out what we know about them– and we don’t know.

In this series I’ll examine each BRIC wine market in turn starting with Brazil by bringing  together and synthesizing various published reports and then try to pull things together into a summary. I hope readers with particular expertise will leave comments to help broaden and deepen the analysis. So away we go!

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