The BRICs: Suprising Wines of India

This is the fourth in a series of articles on wine in the BRICs Brazil, Russia, India and China.  (Note: According to today’s Financial Times, Jim O’Neil, who coined the term BRICs has decided to expand the list to include Mexico, South Korea, Indonesia and Turkey. Hmmm. I will be expanding the Wine BRIC list myself in an upcoming post!)

India’s wine markets are full of surprises for anyone who hasn’t been following them closely in recent years. The only previous Wine Economist post on wine in India dealt with that country’s misguided tariff policies that I argued stifle the wine industry in an attempt to protect it (a view I still hold).

Because most people don’t associate wine with India, you might think that wine is quite new in India — and it is as you will see below, but it is also very old. Like the other BRIC nations, wine in India is going through a dramatic transition today, but one that is quite distinct because of India’s unique history, politics and culture.

The Roots of Indian Wine

Persian conquerors brought grape vines to India nearly 2500 years ago; wine consumption is first mentioned in a text on statecraft written about 300 b.c.  Wine was a beverage for elites, not the masses (who apparently wanted stronger stuff), and lived a shadowy existence that continues today due to concerns about alcohol consumption. The influence of British colonizers contributed to the growth of Indian wine production in the 19th century, before the scourge of phylloxera hit India’s vineyards in the 1890s with predictable results.

Table grapes are a major crop in India and wine grapes are grown in several regions, generally at altitudes of 200m – 800m, although vineyards at 1000m exist in Kashmir. Growing conditions are surprisingly good using viticultural practices that take humidity and rainfall patterns into account (harvest must be complete before the monsoon). Two crops per year are common.

Since independence in 1947, wine has been caught in a crossfire in India. On one hand, it is a heavily controlled substance.  Article 47 of the constitution makes it a function of the state to discourage alcohol consumption (Gandhi and some other early leaders were teetotalers), so wine imports are highly taxed and advertising is forbidden. Individual state governments within India tax and regulate wine sales much as in the United States, creating a distributional crazy quilt. At the same time, however, some state governments promote viticulture and wine making as an economic development tool. It’s a push and shove situation for wine.

The surprising state of wine in India today reflects this condition. On one hand wine (especially imported wine) is highly taxed and the national market fragmented by uncoordinated state regulator regimes. At the same time, pro-development government policies seem to have led to an over-expansion of supply by encouraging new vineyard plantings.  Wine consumption is growing rapidly as India’s expanding middle class embraces the fruit of the vine, but for the moment at least there’s a shakeout taking place among producers who find themselves out ahead of demand.

A Tale of Three Winemakers

The contemporary history of Indian wine can be told through the three most important wineries, Chateau Indage, Grover Vineyards and Sula Vineyards.

Chateau Indage is generally credited with starting the quality wine industry in India in the 1980s.  Bombay investor Sham Chougule sought to produce sparkling wines, mainly for export (40% foreign sales today). Piper-Heidsieck, the French Champagne house, provided technical expertise for site selection, grape variety choice and wine making. The result was India’s most famous wine, Omar Khayyam, a sparkling wine praised by Jancis Robinson among others. Chateau Indage was until recently India’s largest wine producer, offering two sparking wines, a pair of reds (Cabernet Sauvignon blended with indigenous varietals) and two white wines. Chateau Indage today is expanding globally, having acquired wineries in Australia and a distributor in the UK.

Grover Vineyards came next, a collaboration between Kanwal Gover  and French wine maker George Vasselle. Their ambitious goal was to bring Bordeaux to Bangalore — to make French-style wines in India using only French varieties. This they have achieved to a very considerable extent. With the help of flying winemaker Michel Rolland, Grover’s signature red wine La Réserve has gained an international reputation.

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Sula Vineyards recently overtook Chateau Indage to become India’s #1 wine producer. Sula is the project of Rajeev Samat, who left home to study at Stanford and work in Silicon Valley before returning to manage the family enterprises. His Tuscan-inspired winery and associated vineyards in Nashik, a few hours drive from Mumbai, is part of an elaborate economic development plan that includes vineyards, wine production and wine tourism.

Having introduced a value range to complement its premium wines in 2008, Sula is expanding rapidly on all front (see the video above for more information), adding 1000 acres of new vines to supplement their current 1200 acres.  A new winery is in the works to handle the increased tonnage. Sula now has more than 300 employees and a 70% market share, making it the Big Dog in Indian wine.

Sula is a big part of the movement to make Indian wine part of the mainstream middle class lifestyle using all the techniques of modern marketing. It is worth taking a detour to visit the Sula website to see how they tell their story and position their products. Like its colorful label (and Rajeev Samat, its enthusiastic owner), Sula combines Indian roots and international influences.

SWOT Analysis

The Indian wine market has obvious potential that has attracted investors to the domestic industry and international firms seeking markets for their products. The U.S.  Wine Institute commissioned a 2008 report on the Indian wine industry (the link takes you to a pdf of the report) that makes good reading. Only a very small percentage of India’s total population has the right combination of religious views, legal age, location in states where alcohol can legally be sold, disposable income and exposure to wine to be considered potential customers, according to the report. However this tiny percentage amounts to 24 million people, a considerable and growing market!

The study’s SWOT analysis provides an effective summary of the situation.

Strengths

  • Indian wine consumption has grown 25-30% annually over a 5year period.
  • Good climate for grape growing
  • Urban population is increasing.
  • Youth are craving an alternative to hard liquors and developing a more refined taste.
  • Wine is becoming more acceptable to women and youth.

Weaknesses

  • Wine remains an elite taste.
  • Wine is difficult to store in India due to lack of cellars and refrigeration.
  • Less than 50 percent of the population is legally old enough to drink (25 yrs. old).
  • 400 million persons are 18 years old or younger.
  • Poor awareness of wine and infrastructure.

Opportunities

  • 100 million persons will be legally allowed to drink alcohol (25 yrs. old) in the next 5 years.
  • Supermarkets are emerging to support wine distribution infrastructure.
  • Domestic market with increasing disposable income.
  • Growing tourism industry.

Threats

  • The Indian constitution discourages alcohol consumption.
  • Wine viewed as a “sin” by some.
  • Indians still prefer whisky.
  • Advertising for alcoholic beverages is banned.
  • Domestic wine production is coddled by state governments.

While there are many challenges to the development of the Indian wine industry, I suspect that the biggest obstacle will be reforming government policies that fragment the market and create counter-productive domestic incentives and barriers to foreign competition. After that, serious infrastructure limitations must still be addressed.

It is pretty clear that good wine can be made in India and that a large and growing potential consumer market exists. A lot of work remains to realize India’s grape potential (sorry about the pun!).

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!

Indian Tariffs and Vino Exceptionalism

A recent book review and an article in today’s Financial Times provoke a short essay on wine exceptionalism.

Bad Samaratans

Choice magazine, a publication of the Americal Library Association, recently asked me to review a book called Bad Samaratans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang of the University of Cambridge.  I was happy to do this and gave the book a generally favorable review because the message is a useful one that I have written about in the past.

The advocates of hyper-globalization often tout totally free markets as the only way forward, but the “secret history of capitalism,” as Professor Chang calls it, is that there are plenty of examples of countries that only advanced when they adopted protective measures that gave domestic firms room to grow.  This lesson goes back as far as Alexander Hamilton in the United States, Friedrich List in Europe (and so is not really a secret) and lives today in the economic miracles of Japan and Korea. This  doesn’t mean that protectionism is always good, only that is is not always bad.  Life is complicated.  Deal with it.

I think this view is true in general, but is it also true about wine?  Or is there such a thing as wine exceptionalism?  An article in today’s Financial Times makes we wonder.

Indian Wine Tariffs

The article reports on a dispute between the European Union and India that is apparently headed to the World Trade Organization.  The issue is Indian wine tariffs.  India has tariffs on imported wine and high taxes on domestic products, which is perhaps not unexpected, given India’s low per capita income.  You might expect a country like India to impose high excise taxes on luxury goods as a way of funding needed government programs.  I imagine that wine is a luxury for most Indian households, so a high tariff would be a way of taxing the affluent to benefit the poor.  Wine consumption is very low in India (5 million liters per year, which is practically zero per capita, given India’s huge population) and the high tax is one reason for this.

But the India market is growing, expected to double in the next two years, so there is something at stake here.  More to the point, however, the Indian taxes are not for revenue only — some are intended to protect the nascent Indian wine industry.  That’s the rub.

WTO rules allow countries to have tariffs, but require that they satisfy a “national treatment” rule.  This means that, once foreign products have entered the country and paid the duty, they must be taxed and regulated just like domestic goods.  This is where India has run afoul of the WTO.

According to the Financial Times article, three Indian states, Goa, Maharashtra and Tamil Nadu, which represent important potential import wine markets, impose additional discriminatory domestic taxes on foreign wines, while exempting domestic wines to try to encourage the growth of the industry.    The FT reports that

India imposes customs duties of up to 150 per cent on bottled wines and spirits at the border. These are supposed to be equivalent to the excise duties paid by domestic producers.

But the EU says Maharashtra is imposing a special fee on imported wines and exempting local producers of wines and spirits from excise duty. Goa and Tamil Nadu are charging extra import fees while Tamil Nadu continues to operate restrictions on the sale of imports.

This is contrary to WTO rules, if the accusations are true, and hence bad trade policy. But is it good economic development policy?  That is, is it a good idea way to build the Indian wine sector? Or is wine different?

Vino Exceptionalism

I have to admit that my answer is, no!  I have studied a lot of countries that have chosen to try to protect their domestic wine industry from foreign competition and I am not aware of a single case — not one — where it was effective.  Captive markets (in wine if not more generally — sorry Prof. Chang) seem to breed what Albert O. Hirschman used to call “lazy monopolists.”  The wines they produce are easy money — made to appeal to a least common denominator market and quality products are neglected in a sort of tragedy of the vineyard commons.

Quality wine emerged only when competition was introduced.  This was true for Argentina, Canada, New Zealand, Washington State and now, I believe, in Languedoc in the South of France, although it is still too soon to tell how EU market reforms will work there.  If vino exceptionalism holds for India, then I suspect that their protective policies will not benefit them much.  Indian wine drinkers may thank the EU in the short run for its vigorous prosecution of WTO rules.  Indian wine producers may also thank them in the long run for forcing them to focus on quality in order to compete with imports.

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