Wine, Recession and Argentina

The global economic crisis has been bad news for Argentina, but good news so far for Argentinian wine. Will the wine part of the story have a happy ending or, like so many Argentinian economic booms, turn eventually to bust?

Bad News and Good

The Economist Intelligence Unit reports that Argentina’s economy has been hard hit by the economic crisis. The economic forecast is gloomy (see below) with the only good news being that inflation, while still high, is falling.

Given rapidly declining business and consumer confidence, the government’s fiscal stimulus measures will have a limited effect, and we expect the economy to contract by 3% in 2009, before only a mild recovery in 2010.

Unofficially measured inflation will ease to 10-15% in 2009, as private demand falls. The official rate will end 2009 at 6.8%, with a similar rate in 2010.

The peso will continue to depreciate in 2009 owing to weaker foreign-exchange inflows, before the pace of depreciation slows in 2010. The current-account position will weaken in 2009-10.

The Argentinian wine economy situation is sunnier.  The May 2009 issue of Wine Business Monthly includes two reports that paint a bright picture of Argentinian wine trends.

The first story is a competitive analysis of Argentina wine in the United States market.  It reports that U.S. imports of Argentinian wine have risen dramatically in recent years, from 2.6 million cases in 2006 to 4.3 million in 2008.  The total value of Argentinian wine in the U.S. rose from $75 million to $146 million in this period.

It is important to put this increase in perspective, however. Total Argentinian imports are roughly equal to the annual output of a single US winemaker, Washington State’s Chateau Ste. Michelle. So the Argentinian presence is rising, but from a modest base.

Molto Malbec

Unsurprisingly, Malbec is Argentina’s calling card in the U.S. market. Malbec’s share of Argentinian wine imports increased from 35% to 48% over 2006-2008 measured by volume and from 44% to 55% measured by dollar value. I was interested to learn that Argentina wine sales are rising at all price points, not just in the value brand segment as you might imagine.  But value is still important.  Argentinian wine prices are rising, but still relatively low.  The article reports that the average FOB price has increased from $29 to $33 per standard 9-liter case.

In the same issue the results of the Nielsen company wine market survey for the period ending 2/7/2009 are reported.  Argentinian table wine imports were up 40% by dollar value for most recent year.  This compares to a 10 percent increase for Chile, one percent for Italy and a one percent decline for Australia.  Overall growth in imported wines was 2.4 percent by dollar value for the most recent year.

The 40 % annual rise is spectacular, but  Argentinian wines account for just 1.4 percent of U.S. domestic wine volume compared with two percent for Chile, nine percent for Australia, almost 10 percent for Italy. This shows that Argentina either has a lot of room to grow in the U.S. market, as optimists will perceive, or a lot of work to do to escape niche player status.

American Exceptionalism

I think the Argentina producers were wise to focus on the U.S. wine market for their export surge.  Although the European Union is more important to Argentina in other major export sectors, the U.S. is the target wine market, and that’s a good thing in this economic environment.  EU wine consumption has long been in decline because of demographic and market shifts, for example, while wine sales have been rising in the U.S.

The recession is likely to depress wine sales growth in both the U.S. and the EU, but the impact will be less in the U.S., I believe, if only because I think the recession will be shorter here. My current thinking is that the U.S. economy will benefit from greater short term fiscal and monetary stimulus, compared with the EU, and more effective medium term structural adjustment.  That said, the recession is and will be very severe.

Early U.S. evidence suggests that wine sales have actually continued to rise during in the first year of the recession, when measured by case volume, although the dollar value of those sales has declined as consumers trade down.

Opportunities and Threats

Reading the latest articles on WineSur, a noteworthy Argentinian industry website,  it pretty clear that Argentina producers appreciate both the opportunities and threats inherent in the current situation.  The opportunities — to establish a market presence built around good value and the rising popularity of Malbec — are significant. But I think it must be hard for Argentinians to see silver linings without looking around for associated dark clouds — their country has suffered repeatedly from the global market booms and busts.

Some of the threats are strictly economic. Argentinian producers are currently benefiting from a falling peso value relative to the US dollar, for example, which helps their wine hit market-friendly price points in the US.  But the falling currency is in part a reflection of high domestic inflation rates, which ultimately lead to higher production costs. A lot will depend upon how the inflation (cost) and exchange rate (export price) factors balance out in the future.

Some of the threats relate more to the fickle nature of the wine market itself.  Malbec and Argentina are nearly synonymous today, but this could change as other wine regions adopt their signature varietal. A recent visit to the Walla Walla AVA, for example, found many producers experimenting (successfully, I think) with Malbec.  Argentina has the first mover advantage in Malbec and must capitalize on this because it will face more competition in the future.  This happened to New Zealand (Sauvignon Blanc) and Australia (Shiraz) and I do not think Argentina will be different.

In exploiting its Malbec lead Argentina will need to strike another difficult balance, between establishing a useful “house style” that will build market identity and letting this deteriorate into a stylistic “monoculture” that soon bores consumers.  It seems to me that Australian Shiraz is currently suffering from the “monoculture” curse, perhaps unfairly, while New Zealand still benefits from a popular “house style,” although I’m not sure how much longer it can ride the gooseberry wave, especially given the vast quantities of Sauvignon Blanc that need to be sold.

Argentina is at a crossroads at a critical moment and moving in the right direction.  Count me cautiously optimistic regarding the future of Argentinian wine.

Update: Just hours after I posted this piece about Argentina the following item appeared on the Decanter.com website.

Argentine wine harvest down 25%

May 1, 2009  / Jimmy Langman

Due to climatic conditions, this year’s wine harvest in Argentina will be down 25% as compared to last year.

According to Argentina’s National Wine Institute, hail in some provinces, and overall higher temperatures in February and March, are factors in the lower production output this year.

The lower production this year has occurred despite Argentina having a 12% increase in land under cultivation for wine grapes.

Guillermo Garcia, president of the National Wine Institute, said: ‘If there had not been an international crisis, we would not have been able to provide wine to countries with developed markets.’

Garcia added that Argentine wine companies need to begin keeping more than three months of stock on hand to make up for such production shortfalls.

Exequiel Barros of the Mendoza-based Caucasia Wine Thinking consultancy told decanter.com that many Argentine wineries are worried about their ability to supply medium-priced wines but added: ‘We need to see how the international outlook develops this year before we can dare to make any projections.’

In Chile, wine growing areas that are not irrigated, such as Cauquenes in the Maule Valley, are predicting a similarly low harvest, with an estimated drop in production from 30 to 40% because of higher temperatures and low rainfall.

Most wineries in Chile, however, are reporting a good harvest. ‘The lack of rain has been good for this year’s harvest. But wineries in the far south, such as in the Bio Bio, may experience changes to quality because of the higher temperatures,’ said Edmundo Bordeu, professor of oenology at Chile’s Catholic University.

The Most Profitable Wine in the World?

Following the Money to New Zealand

2128.jpgWhat’s the most profitable wine in the world? Not the most expensive single wine (like Chateau Pétrus or Screaming Eagle), but the most profitable type of wine? Guardian wine critic Tim Atkin raised this question is a recent article called “Bottle Banks” and it is interesting to think about what the answer might be.

Profits, of course, are all about the difference between price and cost. So which country gets the highest average price for its wine exports? Most people are surprised to learn that it is New Zealand (see footnote below). New Zealand is unusual among wine producing countries in that its exports are almost entirely premium and super premium wines. The domestic Kiwi market for low cost bulk wines is filled by imports from Australia and Chile, leaving NZ producers free to focus on higher value export markets. This nearly single-minded concentration on upmarket wines results in high average export prices.

New Zealand would therefore be a prime suspect for the most profitable wine-making country – if higher production costs don’t offset the price advantage.

Easy as 1-2-3?

I was not completely surprised, therefore, to read Atkin’s conclusion that the most profitable wine is probably Marlborough Sauvignon Blanc from New Zealand, which is by far that country’s leading wine export. Atkin writes that

I was sitting talking to the owner of a top New Zealand Sauvignon in Australia recently when he proudly took out his mobile phone and showed me pictures of his bespoke Maserati. ‘Kiwi Sauvignon is cheap and easy to make and commands a premium,’ he explained. ‘And by the time I have to pay my growers for their grapes, the wine is already on the market.

That certainly sounds easy enough. Atkin continues

He’s got a point. Marlborough Sauvignon generally produces heavy crops (partly a result of fertile soils, but also of vineyard practices). Once it’s in the winery, all the average producer has to do is crush the grapes, add yeast and ferment it at a cool temperature in stainless steel. A matter of days later the wine is ready for bottling.

Nothing could be simpler really, although I didn’t know you could make wine in just a few days. I wonder why everyone doesn’t just get up and go to Marlborough to make Sauvignon Blanc? Since economists are trained to be suspicious of easy money stories like this, I thought it would be interesting to talk to someone in the New Zealand industry about profitability.

Hidden Complexity

So I wrote to Neal Ibbotson, managing director of Saint Clair Family Estate Wines in Blenheim (Marlborough). I met Neal in 2004 when I was doing research for a book on globalization. Neal was a pioneer winegrower in the Marlborough region — Neal and Judy planted their first vineyard there in 1978 –  and someone whose knowledge and opinion I value a lot. The 2003 Saint Clair Wairau Reserve Sauvignon Blanc that I sampled on that visit was the most memorable NZ wine I have ever tasted.

Neal didn’t comment on the Guardian article directly, but what he had to say helped me understand the hidden complexity of the situation.

Marlborough Sauvignon Blanc can in fact be a pretty profitable wine, but that doesn’t mean that everyone is rolling in cash.

Neal writes that

It is very profitable for the best grape growers on the best soils where they can combine relatively high yields and high quality. Say 5% of Marlborough’s growers. These growers deservedly reap the benefit from having out laid the capital and taken some risk and are very fortunate that the grapes they grow are a unique product, in strong demand.

It is less profitable and is in some cases unprofitable, for those growers who are in more marginal areas on less productive soils where yields and often quality are not as good

It can also be quite profitable for the very best wine companies who produce a high quality product and have good access to the markets. Say 10%. There are however both Marlborough Sauvignon Blanc grape growers and wine companies that are unprofitable. {It’s worse in some other parts of NZ.}

There are also a number of cases of new labels that have been produced, by would-be winemakers, that are sitting in the bottling halls, or on retail shelves, gathering dust whilst interest accrues in their bank accounts. In addition there is the huge capital requirement to take a small producer, normally profit marginal, to a medium or large producer where profitability is more likely

This is clearly a more realistic picture of the NZ wine industry. There some firms that are very profitable due to cost advantages or because they are able to leverage unique assets, like reputation or special vineyard characteristics. But there are other firms that, lacking these advantages, scrape by or lose money. Distribution is the big bottleneck in the global wine business, and wineries with access to efficient distribution have a head start towards profit goals. Inevitably in any industry with heterogeneous inputs and outputs, the profit profile is complicated.

Not only are Marlborough profits not uniformly high, according to Neal, they are also not certain. High prices require high quality and the ability to maintain a reputation for exceptional wines (I will talk about what Saint Clair is doing in this regard in a future post). But there are other factors to be considered. Neal writes that …

Most wineries are struggling to some degree with the increasing cost of buying in Sauvignon Blanc grapes, and the high value of the NZ $ which increases the cost of NZ wine in the market place and makes any additional increase in price from the wineries extremely difficult. Because of increasing prices for Marlborough Sauvignon Blanc grapes and the high NZ$ at present most wineries are caught between a rock and a hard place

This reminds me of a discussion I had with Jane Hunter of Hunters Wines in 2004. (Hunters was one of the first NZ Sauvignon Blancs to break into the key British Market and establish the region’s reputation there). What is the biggest threat to your industry, I asked her. The appreciation of the NZ dollar, she replied without hesitation.

Tim Atkin might be right about Marlborough Sauvignon Blanc, but he’s also wrong. I think it must be a very profitable wine for some (I wonder … was he talking to someone from Cloudy Bay?), but making wine and then making money making wine isn’t as easy as he suggests, even in Marlborough.

(Footnote: Here is an interesting fact: Canada actually earns higher per liter revenues from its bottled wine exports than New Zealand, according to my copy of The Global Wine Statistical Compendium, but comparing it to New Zealand is like comparing apples and oranges. Or table wine to ice wine, to be more specific. Canada’s wine exports are tiny compared to New Zealand, but the per-bottle revenues are high because it is mainly expensive ice wine - sweet dessert wines made from grapes left on the vine so that freezing weather can concentrate the juice and flavor.)

Washington and Oregon Wines in London

There is a special tasting of Washington and Oregon wines in London today, held at the Institute of Contemporary Arts at 12 Carlton House Terrace. More than 190 wines from 40 Pacific Northwest wineries are being sampled. Marty Clubb of L’Ecole 41 in Walla Walla is leading an educational seminar about the Washington wines and Howard Rossback of Firesteed is doing the same for the Oregon products. The event is funded in part by a $200,000 federal trade grant. I believe it is the largest organized effort (so far) by Northwest winemakers to break into the European markets. It will be interesting to see if this seedling can grow to bear fruit.

Washington and Oregon are important winemaking regions, of course, but their reputations and sales are concentrated in the United States. Although Oregon Pinot Noirs are always included in the discussion when people anywhere talk or write about new world Pinots, the fact is that not much of it is sold abroad. Oregon wine sales in the UK and France were just over 2000 cases in 2006, for example, out of total production of 1.6 million cases. The word may be out around the world about Oregon wines, but wine distribution and sales haven’t followed — yet.

I don’t have figures for Washington wines, but I suspect that the situation is more or less the same. Washington makes excellent wines (better than Oregon wines, if you judge by the Wine Spectator and Wine Advocate ratings, where several Washington wines receive 95+ points), but so far Washington doesn’t seem to have that one distinctive wine that could establish an international reputation. The state is too varied, I think, in terms of climate and geography for that to happen. Washington is Riesling country, judging by volume of production, but it hasn’t yet established an international reputation with this wine (although it is trying to do so with the Riesling Rendezvous conference). A variety of reds do well here, including both the Bordeaux and Rhone varietals, but no signature style of wine has emerged as the champion. Marty Clubb is telling the people in London that Washington has the ideal climate for wine (that’s the official Washington wine theme), which may be true but doesn’t really define the product for confused international buyers.

Washington does have one advantage over Oregon in the export market: distribution muscle. The Washington wine industry features a few very large players that have the financial clout to potentially open up foreign distribution channels. Money is necessary; it isn’t easy to establish a brand abroad in this crowded market and margins on exports are necessarily lower than for domestic sales, at least at the beginning. I have read that export sales by small scale winemakers are “vanity” projects and there may be some truth to this. That doesn’t mean it’s not worth doing, however.

The Chateau Ste Michelle family of wines have penetrated some European markets. I was surprised to discover a large display of CSM wines in an upscale supermarket next to the train station in Riga, Latvia, for example. I haven’t been able to find out how the wines got there yet — my guess is that CSM’s deal to distribute Antinori wines in the U.S. may be reciprocated by Antinori in Europe but I don’t really know. Other Washington wines including Columbia, Covey Run and Hogue are part of the Constellation Brands portfolio, which may aid in their international distribution, too.

The London tasting isn’t the first effort to get Northwest wines attention in the UK. I remember being in London in about 1990 and walking into Fortnum and Mason only to be shanghaied by an excited clerk who was directing anyone she could to a lonely wine tasting display where they were sampling wines from Hogue Cellars of Yakima. Needless to say, no one had any idea where Yakima was located, but they were amazed that such a unlikely place could produce good wine. Today’s London event is a much larger project than that Fortnum display, but the goal is much the same, to make friends, establish relationships, and get our foot in the door.

I hope the London tasting goes well. Many of the wineries are apparently looking for UK distribution, which makes sense. The UK is the most important wine market in the world. It is a good market to sell wine and to establish a worldwide reputation. A disproportionate number of the world’s leading wine writers and experts are based in London, including Jancis Robinson, Oz Clark, Michael Broadbent and Steven Spurrier. A good word by any of these celebrity wine critics would encourage wine enthusiasts in the UK and around the world to give Northwest wines a try. But the real prize would be a distribution deal with Tesco or Sainsbury’s, which dominate supermarket sales, or one of the big high street wine store chains, since you can’t try wines you can’t buy.

One reason this is a good time to try to break into the UK and European markets is that the exchange rates favor U.S. exports. The dollar fell dramatically in 2007 against both the Pound and the Euro, making U.S. wines relatively less expensive. This will help, but it will still be difficult to get British wine drinkers to think beyond Gallo and one end of the market and Napa Valley at the other.

It’s tough to break into foreign wine markets. Ernie Hunter famously did it the DIY way — he brought his wines to London and entered them in the Sunday Times wine festival, where they won the people’s choice award. Ernie was from New Zealand and his surprise victory paved the road for Marlborough Sauvignon Blanc’s dramatic rise in the world of wine. Washington and Oregon are taking a direct and organized approach, with tastings and seminars. Every case is different. My next post will tell an unlikely story of how Washington wines first came to Sweden.

A Tale of Three Brands

I was asked to give a talk at a university wine event recently and my colleague Amy Ryken selected the wines: three New Zealand Sauvignon Blancs, all from Marlborough: Monkey Bay (2006), Nobilo (2006) and Kim Crawford. The Kim Crawford was the first 2007 vintage I have tasted and it made me realize why people like this wine. I like it for its distinctively pungent tropical fruit flavors, which displayed themselves very well in the young, fresh wine. But winemakers must like it because of its distinctively favorable economics. Some wines spend years in the barrel before they can be sold, but not this one. You harvest the grapes in March or April in New Zealand and the wine’s already on sale in the U.S. in September. That’s Chateau Cash Flow!

The three wines were different and each had its champions, but all three were unmistakably Marlborough products. They had something else in common: all three were sold by Constellation Brands, the world’s largest wine company. This fact made me appreciate how very important branded wine products and distribution clout are in the wine business today. How did theses wines come to belong to Constellation Brands and to arrive at our local stores. Here are three stories.

Nobio wines was founded more than 60 years ago by Nikola Nobilo, a Croatian migrant to New Zealand (most of the famous names in New Zealand wine are of Central or Eastern European origin and came to that island country attatched to migrants fleeing poverty and war). Nobilo prospered and was acquired a few years ago by BRL Hardy, the big Australian drinks conglomerate. When BRL Hardy merged with Constellation Brands, Nobilo came along in the deal. So Nobilo benefits today from its access to Constellation’s powerful distribution system and its expertise in marketing branded goods.

Kim Crawford’s story is a little different. Kim Crawford is a famous New Zealand winemaker who made his reputation at Cooper’s Creek and Saint Clair Estate and opened the first Marlborough “virtual winery.” He purchased grapes from contract growers, leased production space from other wineries, and made great wine. Kim Crawford was so well known for making great wine that he became an iconic brand, sort of like Martha Stewart (and that’s a good thing). “Kim Crawford” on the label as winemaker or winery owner is a sign of quality.

But even brands need distribution, especially for the export market, so Kim Crawford cut a deal with Hogue Cellars of Washington state that brought their wines into the U.S. and Canada. The distribution relationship continued when Hogue was purchased by Vincor, the Canadian wine giant, which was itself eventually bought by Constellation Brands in 2006. Kim Crawford still makes the wines, as near as I can tell, but Constellation owns the “intellectual property,” which must mean the brand rights.

The third wine was Monkey Bay. Monkey Bay is the best selling brand of New Zealand wine in the United States. As near as I can tell there is no “Mr. Monkey Bay” in the same way there is a Mr. Nobilo and a Mr. Kim Crawford. And I am not completely convinced that there really is a Monkey Bay, although one is indicated on the company website.

You see, Monkey Bay is a created brand, like most of the “critter wines” are. The name is created and the wine designed to appeal to a particular market niche or lifestyle segment. “Monkey” suggests that the wine is fun and doesn’t take itself too seriously. “Bay” suggests an island locale, which is appropriate, and perhaps will remind some of Cloudy Bay, the famous (and much more expensive) high end Marlborough wine, which is owned by the French luxury goods conglomerate LVMH. Constellation Brands invented Monkey Bay because they thought they could market the brand and the wine — and they seem to have been immensely successful. The grapes apparently come from Nobilo vineyards.

Why not call it Nobilo wine? Apparently the Money Bay moniker appeals to a different market segment. And by segmenting the market, Constellation Brands can attract buyers with different buying preferences at different price points.

Should we be concerned about so many Constellation Brands wines on the shelf? Well, these wines showed that market consolidation does not necessarily produce homogeneous wines. But that’s only the beginning of an answer. More to follow in future posts.

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