The Four “White Swans” For Which Argentine Wine Can Grow Again Globally

The pandemic impacted on consumption and trade, but the reconfiguration of the international market is an opportunity for exports to exceed USD 1 billion per year

Four factors that occurred since the end of 2019 and throughout 2020 offer Argentine wines the possibility of growing again in the main markets of the world, as happened between 2002 and 2012, when, thanks to the Malbec rage and a competitive exchange rate, the export of fractionated and bulk wine grew at a rate of 20% per year.

The first occurred in October 2019 , when the government of Donald Trump , in retaliation for the European Union subsidies to Airbus , the European aircraft manufacturer consortium and the main global competitor of the North American Boeing, imposed tariffs of 25% on entry to USA of wines from France, Spain, Germany and England.

The second episode was the forest fires in California , because they will impact the wine production of that region, especially the high-end. Australia , another major producer, also suffered wildfires.

The third will be, as of January 2021, Brexit, the “divorce” between the United Kingdom and the European Union, the wines of the old continent will again pay a tariff to enter the islands.

The fourth is the recent decision by China to prohibit the entry of 7 Australian products, including wine, due to the position of the government of that country to accompany the initiative of the United States and England to investigate the responsibility of Beijing in the origin and diffusion SARS-CoV-2, the coronavirus that caused the pandemic that caused the largest global economic crisis since the “Great Depression” of the 1930s.

They all affect key markets. The United States, the United Kingdom and China are, in that order, the three main importers and account for more than 53% of total world wine purchases. "There are four white swans," says Javier Merino , from the Centro de Estudios Económica de Bodegas de Argentina, the main chamber of the sector (emerged in 2001 from the merger of the Centro de Bodegueros de Mendoza and the Asociación Vitivinícola Argentina), which brings together more than 250 wineries that account for 90% of the sector's exports.

Graphic representation of the relative weight of the 10 main world importers of wine. In the three main ones, opportunities were opened for Argentina

What it takes

In order to take advantage of these opportunities, agreed Ramiro Barrios , coordinator of the Foreign Trade area of Bodegas, and Maximiliano Hernández Toso , president of Wines of Argentina, an association created to install “Argentine wine” abroad, certain conditions are needed.

"Today in Argentina we are making the best wines in history, all the oenologists traveled and make wines of an international level, but we lack support to stimulate demand. Our main competition is Chile and European countries that invest astronomical public funds in promotion, in Argentina only the equivalent of USD 3.5 million is allocated, and almost all of it is provided by the private sector "Barrios says. The sector exports with a dollar of $ 80, a retention of 3% and a refund that recently went from 3.25 to 7 percent.

Today in Argentina we are making the best wines in history (Ramiro Barrios)

“The idea is to have exchange rate and cost and input stability to take advantage of these opportunities. All the wineries are making the effort, market research, tools and technological platforms ”, says Barrios. "We know that the main driver for growth will be exports," he insists, and indicates as a next goal to reach USD 1 billion in export of fractionated wines.

“ To export wine you have to do a lot of promotion, it is not like soybeans. This is a fragmented sector; Out of 200 wineries, only 15 export more than USD 10 million a year , they are small companies that cannot do external promotion; it is a fault that the State must supply; Argentina is the only country in the world that does not invest in promotion ”, explains Hernández Toso.

Both entrepreneurs also highlight that two thirds of the promotion funds come from the private sector, and recognize differences with the mixed corporation of the wine sector, which contributed less than 15% of the USD 3.5 million dedicated to promotion in the markets worldwide.

Recent history

According to Barrios, to understand the current moment it is convenient to review the previous stage. Between 2002 and 2012, he says, there were two major export drivers: modernization of the industry, with investment, modernization, quality improvement processes and attention to the world market, after decades of almost exclusive focus on domestic consumption, and an exchange rate (high dollar) that accompanied the international penetration of Malbec, especially in the US, the main world importer.

Since 2012, with exchange controls and a lag of the dollar compared to inflation, Argentine wine has lost competitiveness and market positions. "In Argentina, the rise in costs can be transferred to price, but that cannot be done in the world market," Barrios explains.

In Argentina the rise in costs can be transferred to prices, but this cannot be done in the world market

Malbec expansion stopped in the US and Argentine wine was no longer competitive in the UK, the second-largest importer in the world, because of its price. China barely appeared on the wine radar. Thus, Argentine wine exports, which had reached USD 921 million in 2012 (a figure that includes fractionated and bulk wine, but not grape must, with which the total exceeded USD 1,000 million) began to decline.

The "Wine Strategic Plan 2020" of the Corporation of the sector, which projected USD 2 billion in external sales for this year was far behind in time and in value. From 2012 to 2015, sales fell slightly, stabilized between 2016 and 2019 and this year they would close 11% down, due to the fall in the world market due to the pandemic.

Evolution of Argentine exports of fractionated and bulk wine, in volume, in average price and in value, in millions of dollars

Through COVID-19, the aspirations are now more modest: to grow again and exceed the USD 1 billion export of fractionated wines (basically, in boxes of 12 bottles) and in bulk, a goal that Barrios believes is perfectly possible. In 2020, according to a recent study by Merino and economists Adrián Rizzo and Leandro Zingoni , from Banco Supervielle's wine division, world exports fell 6.5% in volume and 5.1% in price. Nobody knows how consumption will evolve in 2021, but Argentina has a favorable wind to gain positions.

Nobody knows how consumption will evolve in 2021, but Argentina has a favorable wind to gain positions

The US tariffs on wines from France, Spain, England and Germany, plus the pandemic, changed habits: household consumption increased and well-known brands of Californian wines gained space, while Italian and Argentine wines maintained a presence (in both cases, the sales fell 1%, against an average 10% drop in the market , which allowed them to gain relative positions) and that of “punished” wines collapsed (the French fell 26%). "With Biden it is uncertain how this will continue, the EU has already launched countermeasures against US spirits, such as brandy and whiskey," says Barrios.

In 2018, the US had imported more than USD 4,800 million in wines, a figure that fell slightly in 2019 and this year, due to the pandemic, would be in the order of 4,300 to 4,500 million.

The forest fires, which did not affect Baja California or the Central Valley, would not cut production volume as much, but the fires in the Sonoma and Napa valleys are an opportunity for high-end wines, where Argentina gained space in recent years , as, for reasons of competitiveness, it moved away from the lower segments. “It's a high-end opportunity, not at the global level of the industry,” says Barrios.

Images of the fires in Napa County, California, that affected high-end vineyards, such as those of Moett Hennessey (AP)

Hernández Toso, from Wines of Argentina, believes the impact will be felt. “In 2021 the question of quality is going to be an opportunity; California is going to be able to classify few high-end products and Argentina has between 40 and 50 wineries that export in that segment, neither Australia nor Chile have that ” , he says.

“We will be investing USD 1 million in digital marketing in twelve months, we are doing online events for sommeliers and large buyers and using Artificial Intelligence, virtual reality and augmented reality, because due to the pandemic there are no longer fairs, says the president of Wines, that for the campaign of digital positioning in the West hired Globant.

Brexit

Merino believes that the white swan with the greatest potential for Argentina is the United Kingdom, as a result of Brexit . European wines, which previously did not pay a tariff, will begin to pay 32 euro cents per liter, and Argentine wines , which paid 32 euro cents per liter, by application of the “Most Favored Nation Clause”, will pay half , having a tariff advantage over competitors with whom they previously had a net disadvantage.

In the British market, particularly in London, the channel of online retailers is important, such as Naked Wines, which told the Financial Times that due to the fires in California and Australia it is seeking to expand its network of 260 supplier wineries in 20 countries of the world.

Evolution of wine imports from the United Kingdom, the second-largest buyer in the world, behind the United States and ahead of China.

In recent years, says Merino, Argentine wines gained space in the English market (Argentine sales grew more than 50% between 2015 and 2020, from USD 83 million to USD 124 million) , even as it was shrinking. They did so in good price segments, in part because of the Malbec wave, which arrived late in the British Isles, and also the impulse of physical retail chains such as Tesco and Majestic. The English market, in any of its channels, Merino adds, is also important for its "spillover effect", England has the most influential wine critics in the world, just as the US has the most followed "scorers".

Barrios, the Bodegas Foreign Trade coordinator, who told Infobae that next week they will meet with officials from the British Embassy in Argentina, believes that Brexit is an "attractive opportunity" to increase the penetration of Argentine wines. Of course, he adds, we will have to see how the second wave of coronavirus impacts the market.

Laggards in China

Lastly, in the Chinese market, Argentina has a lagging position. According to the specialized publication Vino Joy, it is the ninth supplier and in 2019 it placed only USD 25 million there. But the opportunity is immense: China has just closed the market to its main supplier, Australia, from where in 2019 it had imported almost USD 800 million in wines. The best positioned are France and Chile (second and third supplier), but in the gap that was opened there is room for more purchases from Italy, Spain, Portugal, South Africa and Argentina.

It is a difficult and distant market, which Argentina neglected. "We did not develop the Chinese market because we were overvalued," explains Hernández Toso, in contrast to Chile, whose wines enter with zero tariffs and made China their main market, and New Zealand, which carries its Sauvignon Blanc as its flagship, to the taste of the new generations, and has the advantage of proximity.

At the beginning of November, China in fact closed the entry of Australian wines, which accounted for 40% of its imports (EFE)

"It is difficult to develop those markets," says the president of Wines of Argentina. To do this, WOFA hired Lab Brand, an international consultancy, to position the digital brand "Wines of Argentina" in We Chat and Weibo, the most important social network in the Asian giant, where there is no presence of Facebook, Instagram, or Twitter. It is a market with less developed commercial channels than in Europe or the US, says Merino, but with enormous potential: the annual per capita consumption of wine in China is just over a liter per inhabitant.

Latin American markets

In addition to the growth potential offered by “white swans”, Brazil continues to be a very important market for Argentine wines, which even grew this year, and the sector also points to Mexico, where the entry of Argentine wines faces a tariff of 8 % , but the existence of a prior bilateral agreement with Mercosur and UMSCA (the treaty that reformulated the old NAFTA between the US, Mexico and Canada) would make it possible to reduce or eliminate this tariff, an obstacle to a greater presence of Argentine wines. “Mexico is an interesting market; by tradition, it had a strong influence from Spanish wine, and 20 years ago Chilean wine entered a lot, whose industry was developed with export in mind ”, says Barrios.

Even so, Argentine wine gained space, representing 14% of Mexican imports. To push that beach head, at the beginning of November Bodegas met with Carlos Tomada, Argentine ambassador to Mexico, and Carlos Sinopoli , the economic adviser of the legation. The goal is to reach the Mexican gondolas without paying the tariff, or reducing it substantially, to overcome the stagnation in the sale of bottled wines of the last two years, in which only the sale of wine in bulk increased. "Although we are not doing badly in Mexico, Argentine wine needs more support to have greater growth. We are the least internationalized leading wine country, since it only exports 25% of its production, unlike Chile, which exports 90% ", said then Patricia Ortíz, president of Bodegas de Argentina. Mexico's wine tariffs are among the highest in the world, behind China, Korea and Japan, all markets where Chilean wines, thanks to their active commercial diplomacy, enter without paying tariffs.

Wine gondola in a supermarket in Shanghai (Reuters)

Internal conditions

Such are the opportunities, conditional on diplomacy and commercial promotion, but are the internal conditions in place to take advantage of them? Infobae asked Walter Pavón , from the Human Resources and Institutional Relations area of Bodegas, a vineyard, so that it enters into production, it needs four years from the initial planting, and five until it results in wine ready for consumption ”. . " Today, volume and quality would not be a problem" to face a growth, but not a boom, of exports, answered Pavón. And neither does logistics, because production goes smoothly through both the Atlantic and the Pacific, through Chilean ports. According to Pavón, “if there were an explosion in exports, something that for now we do not believe will happen, we would have to analyze how to deal with it:

Regarding the harvest, Pavón highlighted that the 2020 Harvest was made just at the beginning of the pandemic improvising solutions (between March and April 70% of the annual grape production is harvested), so in 2021 everything will be more oiled, from the harvest protocols up to those for the transfer of temporary personnel (Mendoza, for example, has already authorized the use of tourism vehicles for the transfer of workers from provinces such as Jujuy and Tucumán).

The 2020 Harvest was made just at the beginning of the pandemic improvising solutions (70% of the annual grape production is harvested between March and April), so in 2021 everything will be more oiled

For 2021, "you have to see how domestic consumption reacts as activities normalize, and we don't know how exports will react," said Pavón. “The world has been hit, but the central countries are acting so that the exit is not so slow. We expect a recovery in both internal and external consumption. And the stocks of the industry are at levels to be able to supply both markets ”, he concluded.

Sergio Serrichio 22 de Noviembre de 2020