In Search of Chinese Terroirs

I am in Australia this week where I am giving a talk called “Australia on the Global Stage” at Savour Australia 2013, the international wine gathering that Australian wine is using to relaunch Brand Australia on the global scene. I will have a report on what I learn in Australia in due course, but for now I’m busy just being there.

My friends and colleagues Cynthia Howson and Pierre Ly and their associate Jeff Begun have recently spent several weeks in China examining trends and issues in the Chinese wine industry. They have been kind enough to write three short essays that I will publish here while I’m away from the office. I think you will find their analyses very timely and interesting! Here is their first report.

In Search of Chinese Terroirs

by Cynthia HowsonPierre Ly and Jeff Begun

We were lucky to spend a month last summer traveling through several Chinese wine regions, meeting producers, farmers, and experts, and tasting some truly delicious wines. In past Wine Economist posts, Mike noted that China’s fragmented agriculture was the biggest challenge for Chinese wine producers. How can winemakers ensure a reliable supply of flavorful and fully ripe grapes, when they have to work with hundreds of implausibly small family-run vineyards?  Mike pointed out that the best producers are those who somehow solved this problem. Another serious and more permanent challenge comes from the climate. So how did they improve and what’s next?

The grape supply chain

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Stunning view at Grace Vineyard in Shanxi province.

Getting control over land is not easy in China and many producers still have to work in large part with hundreds of small family-run vineyards. Yet, some high quality producers have found ways to work with this difficult supply chain by developing relationships with growers. For example, Grace Vineyard, in addition to renting land to grow grapes with their own labor, works with hundreds of very small farmers, and provides them with training and credit for inputs. Grace is willing to pay the price for good quality grapes and provides incentives to farmers accordingly. Of course, at Grace like elsewhere, this takes a lot of work with supervisors going through the vineyards and checking on the work, relationships are not always easy and some compromises may have to be made in difficult vintages to sustain good relationships. But the excellent wines we tasted at places like Grace Vineyard in Shanxi, or Leirenshou in Ningxia, could not have been produced without flavorful, fully ripe fruit and a sizeable portion of it had to come from small family farms.

Of course, it is easier for wineries to secure high quality fruit when it is grown in-house, by renting land to farm with their own employees. Some wineries rent large plots of land directly from the government. Others have to rent from individual farmers, either by dealing with each individual grower directly, or by entering contracts with a village authority which then redistributes rents to individual farmer. In each case, relationships and the local institutional context determine which types of arrangements are feasible and on what terms. Future policies and reforms regarding land markets will certainly play a key role to spread existing improvements in Chinese wine on a larger scale.

Many Chinese terroirs?

So if wineries have found and continue to find ways to improve the grape supply chain, what about the climate? Isn’t China simply too difficult a place to grow high quality wine grapes? People seem to disagree on this issue but what we saw makes us hopeful and optimistic that pockets of high quality will continue to develop.

One source of hope is that China, as one would expect given its size, has many terroirs with incredible diversity. One winemaker told us that opportunities and challenges come together, and this applies to each region in a different way. This post by award-winning winemaker and consultant Professor Li Demei, does a great job explaining the pros and cons of the climate in seven wine regions. For example, toward the Northwest, in Ningxia and Xinjiang, although harsh winters require that vines be buried in winter, reliably hot and dry summers protect the grapes from disease. A reputation for limited or no pesticide use could be a strong selling point, given that food safety incidents in China (including some related to pesticide residue) have received a lot of media attention.

In Shandong province on the East coast, producers enjoy a mild winter and vines do not have to be buried. However, the location also comes with the challenge of humidity and rain during the summer, and especially at harvest. The risk is that people will use pesticides a bit too generously, but careful disease prevention programs can be developed. Emma Gao, from award winning winery Silver Heights, based in Ningxia province, told us she saw a lot of potential for Shandong winemakers, and she compared them to the Burgundians, in the sense that there are many people there willing to put in the hard work needed to overcome challenging conditions. Hardworking Shandong terroiristes overcoming adversity, how interesting would that be! It will be interesting to see future advances there, and it is worth noting that the DBR (Lafite) – Citic project is currently under construction there in a small village next to the resort town of Penglai.

Unlocking China’s terroirist soul

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Terroir labeling: the mountains of Alti-wine, and the sandy dunes of Skyline.

That’s what Mike hoped when he wrote about China in Wine Wars. There are many challenges ahead for producers of course, from contracts on land and grapes, to infrastructure and climate. But our last tasting before leaving China gave us further hope. Jim Sun, founder and chief editor of the leading industry media winechina.com, welcomed us at his China-focused cellar in Yantai to share insights, as well as five delicious wines. With passion, Jim told us the story of each of the wines he picked from regions we had not visited, to illustrate a variety of interesting microclimates. The terroir message of each wine was evident, from the Gobi desert vineyard of the Skyline Chardonnay, the vertiginous high altitude of vineyards of the “Altiwine” red produced in Yunnan province, to the proximity to a lake that keeps some Cabernet Sauvignon vines cooler than usual in Xinjiang.

Experts seem to disagree on whether China can become a serious producer of fine wine. But there are already some delicious wines, and they each come with their unique and interesting story. That may be enough to get wine enthusiasts interested in China and encourage further progress.

In our next post, we will discuss the role of government in Chinese wine.

Decanter’s Power List 2013: Globalization and China’s Continuing Rise

He’s still #1

The July issue of Decanter (the self-proclaimed “world’s best wine magazine”) is out and with it comes the Decanter Power List 2013 – a list of the 50 most powerful people in wine this year as determined by the magazine’s editors.

The Power List, which appears every other year, is great fun, both in the way that it spurs debate (my soccer-fan friends spend hours and hours debating similar lists for their sport) and because of the glimpse it offers into the way the world wine map is changing … or not.

Small World After All

What does the 2013 list reveal? Well, the #1 most powerful man (only 15% of those on the list are women) is once again Pierre Pringuet, CEO of drinks multinational Pernod Ricard. There are bigger wine companies – Gallo (Gina Gallo is #17 on the list) and Constellation Brands (#5 Robert Sands) but it is Pernod Ricard’s global reach and decidedly global strategy that sets it apart and makes Pringuet #1. Or so I believe, because one of the messages of this Power List and the last one is that globalization is now the way of wine.

The new #2

Asia is the key to the global kingdom, or so the list seems to say. Ten of the 50 listed luminaries have a strong Asian connection, including the new #2 (up from #8 last year) Wu Fei, head of the wine and spirits division of COFCO, China’s state-owned Cereals, Oils and Foodstuffs Corporation.

COFCO makes wine (Great Wall brand), invests in wine properties (Chateau Viaud in Bordeaux with more foreign acquisitions to come) and is a key potential partner for anyone in the world who wants to sell bulk wine into the Chinese market. It will soon start bottling Australian and Chilean wines to sell under the Great Wall label, with more international expansion planned.

COFCO’s (and China’s) influence is so strong that its association with Bordeaux flying winemaker Michel Rolland seems to account for his surge in the ratings from #18 last year to #7 in 2013. The China connection also might explain Aubert de Villaine’s meteoric rise from #30 to #8.

De Villaine is co-owner of Domaine de la Romanée Conti and that alone might justify a place on the list. But 2013 has been widely seen as the year that many Chinese investors and collectors lost interest in Bordeaux and turned their attention to Burgundy. So no surprise that DRC, perhaps the most sought-after Burgundy wine, would surge in the ranking.

New Names and Faces

There is always a good deal of churn in the Power List and this year is no different. I counted 14 new names, starting with #48 Judy Leissner (CEO of Grace Vineyards, China) and ending with #11 (John D Watkins, ASC Fine Wine, China) and #12 (Yang Wenhua, C&D Wines, China).

Not every new face has a Hong Kong or China link, but many do including # 44 Li Demei (Chinese consulting winemaker), #42 Paolo Pong (Hong Kong retailer and restaurateur), #27 David Pedrol (Chinese online wine retailer) and #23 David Dearie (CEO of Treasury Wine Estates, which is noteworthy for opening a vast 6000 square meter wine gallery in Shanghai).

Other new names on the Power List are Magdalena Gerber (#33 – she is CEO of Sweden’s wine monopoly, Systembolaget) and Bob Peter (#32, head of the provincial monopoly Liquor Control Board of Ontario). Systembolaget and the LCBO are two of the world’s largest wine purchasers and retailers (along with Costco, the U.S. leader, represented by Annette Alvarez Peters at #4 and Tesco’s Dan Jago at #14). Globalization can create a huge wine pipeline and this gives power to those who can fill it (like Pernod Ricard) and those who can empty it profitable (Costco, Tesco, Systembolaget and the LCBO).

More questions than answers

The U.S. is the world’s largest wine market today and it seems a bit under-represented on the Power List with only eight names, but they are heavily concentrated in the top tier: #9 critic Robert Parker, #6 Constellation’s Robert Sands, #5 distributor Southern Wine & Spirits’ Mel Dick and Costco’s Annette Alvarez Peters at #4.

It’s interesting to ponder the Power List because it raises more questions than it answers.  Who do you think really is the most powerful wine person in the world?

Why aren’t there more women on the list, especially from Europe where Jancis Robinson and Magdalena Gerber are the only female representatives? This is a question for the industry (and not just Decanter’s editors) to ponder. Will this year’s new faces still be around in two years when the next list is released? Where will the next group of new names come from?

And, of course, when will Decanter finally include a wine economist in the power list? I guess we’ll just have to wait and see.

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Click on the links to read my analysis of previous Power List selections for  2011 and 2009.

Christiane Amanpour and Chinese Wine: The Wine Economist Interview

I was pleased to be interviewed the award-winning  journalist Christiane Amanpour earlier this week for her  “Around the World with Christiane Amanpour” report on ABC.com.  The original topic was set to be last week’s French wine auction, where odd lots and “too-expensive-to-serve” bottles from the Elysee Palace cellars were sold off to pay for more modestly priced wines to serve at state events  (with a bit left over to pay down the French national debt).

The auction was a success (buyers snapped up wines that became famous by the publicity surrounding the auction), but Ms. Amanpour, perhaps sensing that this had already become old news, shifted the conversation to another wine topic.  Click on the image below to view the interview.

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Thanks to Mary-Rose, David and of course Christiane Amanpour for their work on this interview.

Chinese Wine [Uncorked]

Li ZhengpingChinese Wine 3/e (translated by Shanghai Ego — really!). Cambridge University Press, 2011.

Many of my conversations with wine makers and wine sellers this year have looped back around to the question of China. China seems to be the Great Hope for people who see it as a vital future market and also a Great Mystery for those who haven’t yet figured out how to uncork it.

Great Wine Wall of China

Uncertainty is the Grape Wall of China to those who wish to penetrate its market borders. The known knowns are few and the unknown unknowns many, or so I am told. Talk about assymetric information inefficiencies! So everyone’s interested in learning more about wine in China.

Hence my interest in this slim (146 page) book from Cambridge University Press. It is part of the “Introduction to Chinese Culture” series of brief guides that includes ten published volumes (Chinese Clothing, Chinese Furniture, Chinese Music and more) with additional volumes (Chinese Gardens, Chinese Jade, Chinese Food, Chinese Tea and so on) set for publication in 2012.

The back cover description of this book reads.

This illustrated introduction to Chinese wine explores the history of wine production in China, the legends and customs that surround it and its place in China today. Traditionally, Chinese wine and spirits were made from grain, and had three important uses: to perform rituals, to dispel one’s worries and to heal. Today, wine is still believed to have a therapeutic benefit, but the Chinese beverage industry has expanded on a large scale and now includes famous brands of beer and, increasingly, vineyards producing red and white wine for global consumption. Chinese Wine is indispensable reading for both wine-lovers and all those with an interest in the transition from traditional to modern Chinese culture.

The book delivers on this promise with clear direct prose and beautiful illustrations. But it would be a mistake to read more into this description than there is.

Lost in Translation

The term “wine” can easily get lost in the translation. Wine here in the U.S. is grape wine for the most part, but wine in China is a much broader concept including fermented fruits and grains. Chinese Wine  examines grain wine, beer, distilled spirits and Chinese-made grape wine. Changyu, Great Wall and Yanjing brand wines receive special attention.

Grain wine, especially rice wine, is much more important than grape wine in this narrative. Why? The author explains that “Grape wine is easier to produce than rice wine. However, as grapes are seasonal and cannot retain their freshness for long compared to grain, grape wine-making technology was not adopted extensively in China.”

Whereas grape wine is made when the grapes are harvested, rice wine (like beer) can be made year round from stored rice — a practical advantage. But grape wine was favored in times when it was necessary to conserve grain stocks.

The cultures and traditions associated with Chinese wine are superficially very different from ours.  Wine is if anything much more important in China (if I have read this book correctly) than it is here, but the social rituals of wine drinking seem to be the point, not the beverage itself. Maybe this is not so different after all? Chinese Wine is making reconsider what I thought I knew about grape wine’s social function in the world of vitis vinifera.

An Afterthought?

Chinese Wine treats us to discussions of the origins of Chinese wine, the varieties of Chinese alcohol, rituals and traditions, legends (a very interesting group of tales) and finally, towards the end, a bit about imported wine and its growing popularity. Seriously, imported wine takes up just a couple of pages if you don’t count the photos, and the most important brand name mentioned is Gallo’s Carlo Rossi red (which is credited with boldly entering the Chinese market in 1992).

Is that it? Is imported wine in China just an afterthought? Probably not, although it is good to put things in perspective. I suspect that the author was chosen because of expertise in Chinese cultural history and so the book reflects this (and goes lightly on China’s recent fascinating with Bordeaux). Certainly everything I read suggest that market for grape wines in China is growing and maturing rapidly.

But it doesn’t hurt to remember that wine exports to China to do enter a sort of market tabla rasa. Just because there are few European-style wine traditions in China doesn’t mean there are no wine traditions at all. And the importance of grain wine should not be ignored.

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I called this entry [Uncorked] because none of the traditional wine vessels illustrated in the book looks remotely like anything that you could stop up with a cork, highlighting the differences between Chinese and European-style wines. The urns and pots are often beautiful. A feast for the eyes!

The Forbes Interview: Wineries that “Get It”

Forbes Asia published “The Future of Wine,” a  three page excerpt from Chapter 15 (“The China Syndrome”) of Wine Wars last month. A follow up interview appeared this week on Karl Shmavonian‘s Forbes.com blog “Horse Feathers” under the heading “An Economist Shares His Thoughts on Wine.” (You can read the excerpt and the interview by clicking on the links provided.)

It was fun to answer Karl’s questions. Karl’s focus is Asia, so I wasn’t surprised that he had questions about Chinese wines, the Chinese-Bordeaux wine market and even the prospects for South African wine in India and … Sub-Saharan Africa!

One question really made me think. Who “gets it” in the wine world?  Here’s the question and my brief answer copied from “Horse Feathers.”

Name a few wineries that “get it” from a business standpoint.

I think Chateau Ste Michelle gets it here in Washington State. Ste Michelle Wine Estates has a “string of pearls” operating philosophy that allows each of their winery brands (including Columbia Crest, for example, and Stag’s Leap Wine Cellars) a good deal of independence while benefiting from the economies of distribution, etc. Even the large production facilities like the white wine facility in Woodinville contain mini-wineries that allow the winemakers to do small scale projects while also producing hundreds of thousands of cases of the mainline products.  Chateau Ste Michelle balances the big and the small without losing their terroirist souls. Boisset and Frog’s Leap (both in California) are examples of two totally different companies that both get it. In particular, they both get the environmental problem, although they approach it in very different ways.

Reading this, you probably wonder what I mean by “getting it” and why I picked these three wineries as examples? Here’s the story.

What does it mean “to “get it?”

“Getting it” in this context means understanding the tensions that are at the core of the wine market (and that I analyze in Wine Wars).  Globalization and wine market expansion generally have brought a world of wines to our doorstep. This embarrassment of riches is both blessing and curse. It’s a blessing because of the opportunity to sample wines from all around the world. It is a curse because of the difficulty of choosing. Too much choice can be intimidating, especially in the case of wine, which has so many other intimidating factors associated with it.

Anyone who can simplify the choice and gain the consumer’s trust stands to benefit in this complex market environment. Brands have therefore become increasingly important, both private brands like Mondavi and Mouton Cadet and more general types of brands like Brand Marlborough Sauvignon Blanc and Brand Argentina Malbec. Consumers understand the wines associated with these brands and so are more confident in making purchases. (Just having a strong brand is not enough, however, as the roller-coaster story of Brand Australia Shiraz demonstrates).

The risk with brands, however, is that they can sometimes go too far in their effort to simplify (the Shiraz problem). It is important that branded wines not sacrifice the qualities that make wine special. Wine that is just another packaged good has lost its “terroirist” soul — the winemakers just don’t “get it.”

The Terroirist Revenge

So Wine Wars argues that the future of wine will be determined by the battle between the market forces that will push wine into the world and the “revenge of the terroirists” that will push back. Because I am an optimist (I have “grape expectations”), I think the future is bright. But this requires that wineries “get it.” So, Karl asked me, who does?

Well, a lot of wineries get it, to be honest, but in the short time available I only mentioned three of them. Boisset gets it, for example. It’s a good example of a “global” wine business, with strong brands in both the Old World (France) and New World (California). But there is a strong terroirist element to Boisset that keeps it honest, both in terms of the desire for wine to express a sense of place and also a concern for the environment. Boisset has been especially active in packaging innovations, for example, that aim to reduce the carbon footprint of wine. That’s one way to “get it.”

Frog’s Leap gets it in a different way. It is an example of a producer that has developed a strong brand without dumbing down its wines or selling its soul. Frog’s Leap is such a strong brand in Japan, for example, that it was the featured winery in the Japanese re-make of Sideways. But Frog’s Leap proves that branding doesn’t have to sacrifice quality or reduce wines to a least-common-denominator status. Frog’s Leap stands for something, both in terms of wine and with respect to the environment (dry farming, sustainable methods). They show that it is possible to “get it” this way, too.

Global-Local Nexus

Chateau Ste Michelle is my third example. They are the largest wine producer in Washington State and the largest producer of Riesling wine in the world. The parent company, Ste Michelle Wine Estates, usually ranks about #7 among U.S. wine producers. The Chateau as it is known here in Washington knows about globalization (its wines can be found all around the world) and brands, too, but it hasn’t sacrificed its soul in the process. In fact, I think you could argue that it has tried to use the forces of globalization and brands very constructively — through international partnerships with Germany’s Dr. Loosen and Italy’s Antinori family, for example.

The Chateau collaborates with the Antinori on two projects: Col Solare (an ambitious winery in the Red Mountain AVA) and as partners in the Stag’s Leap Wine Cellars in Napa Valley. Working together, they leverage powerful brands and bring together international expertise, but the goal is to produce distinctly local wines.

The partnership with Germany’s Dr. Loosen has created Eroica, one of America’s most distinctive Riesling wines, and a series of Riesling Rendezvous conferences, which bring together terroirists from across the nation and around the world to share their expertise and plot strategies to promote Riesling without sacrificing quality. The Chateau really “gets it,” but in its own unique way.

The future of wine? A big question. Not everyone will “get it” but I’m betting that enough will to justify my grape expectations.

Argentinean Wine: Striking a Balance

Old and New at Mendel Wines

Balance is the key to great wine (and profitable wine business, too). I was reminded of this truth many times during our visit to Mendoza, where wine makers are trying to chart a course between and among several extremes:

  • Competitive export sales versus the challenging domestic market;
  • Reliable value wine sales versus potentially more profitable premium products;
  • Popular and successful Malbec versus TNGT — The (speculative and uncertain) Next Big Thing.

The key to long term success involves finding the right balance in this complex economic environment.

Thinking Global: Anabelle Sielecki

I want to use this post to consider three types of balance that I think are particularly interesting in Mendoza – the balance between crisis and opportunity,  local and international winemaking influences and the simple tension between the old and the new.  We learned about all three dimensions during our brief visit to Mendel Wines in Lujan de Cuyo.

Crisis and Opportunity

Mendel is both very old and quite new.  The vineyards are old, planted in 1928. Somehow these Malbec vines survived the ups and downs of the Argentinean economy. The winery is almost as old and has a certain decaying charm. It stands in stark contrast to Salentein, O. Fournier, the Catena Zapata pyramid and the many other starkly modernist structures that have sprung up in this part of the world.

The winery project is quite new. Mendel is a partnership between Anabelle Sielecki and Roberto de la Mota and is the result of a balance between crisis and opportunity. When economic crisis struck Argentina ten years ago, opportunities were created for those with vision and entrepreneurial spirit. Anabelle and Roberto seized the moment and purchased these old vines and well-worn structures for their new super premium winery project.

That their impulse was timely and wise may not have been obvious at the time (crises are like that), but it is perfectly clear now. Wine Advocate named Mendel one of nine “Best of the Best” Argentinean wineries in a recent issue.[1]

Old and New

The winemaking that goes on in Mendel is also a combination of old and new. The technology is modern, of course, with stainless steel and French oak very visible. The setting, however, constantly reminds you of the past and the vineyard’s and winery’s history. Walking through the winery, for example, I was struck by the big concrete (or were they adobe?) fermenting tanks – a blast from the past for sure.

No, we don’t use them to ferment the wines anymore, Cecilia Albino told us, but we put them to good use. Peek inside. Sure enough, the tanks were filled with oak barrels full of wine aging quietly in the cool environment.

[Interestingly, I saw concrete tanks again during our visit to Achaval Ferrer.  Roberto Cipresso, the winemaker there, built the tanks because he uses them at his winery in Montalcino.]

Mendel also illustrates the balance between local and global that characterizes wine in Argentina, where much of the capital and many of the winemakers come from abroad.  Roberto de la Mota, partner and chief winemaker at Mendel, personifies this balance. Roberto is the son of  Raúl de la Mota, who is sometimes said to be Argentina’s “winemaker of the century” so important was his work in developing quality wine in this country.

Roberto naturally grew up in the wine business both here and in France, where he sought advanced training on the advice of Emile Peynaud. He was the winemaker at Terrazas, Chandon’s still wine project in Mendoza, and then at Cheval des Andes, a winery with connections to Château Cheval Blanc. I think it is fair to say that Roberto’s resume represents a balance between local and global, between deep understanding of Mendoza terroir and knowledge that perhaps only international influences can provide.

Acting Local: Roberto de la Mota

Local and Global

I asked Roberto if it was important that Mendel is an Argentinean project and not owned by a foreign multinational. Yes of course, he said, but he hesitated a bit and I think I see why. Many of the influences and markets are international, but people, vines and inspiration are  purely local. Not one or another, but intertwined, balanced.

And this thirst for a complex balance defines the future. Talking with Anabelle over coffee in Buenos Aires, she was ambitious to break into new markets – Hong Kong, China, and so forth. Anabelle is an architect — another field where global and local intersect.  She is married to Héctor Timmerman, Argentina’s Foreign Minister and former Ambassador to the United States, so her international interest comes naturally.

Meeting with Roberto at the winery in Mendoza, he was interested in learning even more about his vines and terroir so as to better develop their potential. And to bring more of the classic Bordeaux grape varieties (like Petit Verdot) into the mix.

Mendel has charted its balanced course quickly, purposefully and well.  It is a perfect illustration of both the tensions that define wine in Argentina and the potential for success if a clear but balanced path is boldly taken.


[1] The other “Best of the Best” wineries in Wine Advocate issue 192 are Achaval Ferrer, Alta Vista, Catena Zapata, Viña Cobos, Colomé Reserva, Luca, Tikal and Yacochuya.

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.