Despite high inflation and interest rates, recession, and a severe decline in wine consumption, several Argentine wine companies have decided to increase their investments. It’s worth understanding wine from their perspectives and asking what they expect to see in the near future, and how they position themselves in export markets.
With a gross domestic product (GDP) of more than $637.6bn, Argentina is one of largest economies in South America. In a territory of 2.8m km2 with abundant natural resources, the country offers a great diversity of climates and landscapes ranging from mountains and valleys to deserts and plains. This geographical and climatic range allows the production of different wines with unique features. Following the low harvests in 2016 and 2017, Argentina in 2018 consolidated its position as the fifth world wine producer, producing 14.5m hl.
But after economic growth of 2.9% in 2017, the country began to face financial turmoil, with economic activity slowing from the second quarter of 2018. The Argentine peso fell 100% against the US dollar and inflation accelerated; a variety of factors explain this decline, which fell another 15% in the first quarter of 2019. Inflation remains uncontrolled and is not expected to be lower than 4%. Unemployment was at 9% in late 2018 with almost 4m people out of work, and in the last quarter of 2018, GDP fell by 3.5%, according to official data. The macroeconomic picture is bleak.
Effect on wine consumption
In 2018, domestic wine consumption fell 6%, to 8,385m litres, according to the National Institute of Viticulture (INV). Argentines now drink just 18.8 litres per head a year, the lowest amount in recorded history – and an amount that is not expected to grow. The outlook for 2019 and beyond looks complicated for wineries that sell to the domestic market.
Abrupt macroeconomic changes have a special impact on viticulture, a sector which has little room to move because it depends on making large investments in crops that may not pay off for some years. This is not, of course, new for business people who have committed to investing in the wine sector. And the business people contacted for this article indicated that they believe the export markets offer big opportunities. The proof of this could be seen at ProWein 2019, where 150 Argentinean wineries exhibited. Their presence there was supported by the indisputable success of Malbec, almost a synonym for Argentina in the world of wine. That’s why 42,000ha is now planted in Argentina.
One company eyeing the export markets is Bodegas Salentein, the country’s fifth-largest wine exporter, which is also number three in retail in Argentina. “We started from scratch developing at Uco Valley in 1996 with the purchase of land, planting vineyards and building the first state-of-the-art winery in Mendoza [Salentein],” explains managing director Juan Molina Berro. “Since the first vintage in 1999 we have been growing steadily and focusing more and more on the premium, luxury and sparkling segments. To keep growing focusing on quality we have invested steadily over 23 years in tank capacity, new vineyards and technology, to achieve the highest quality and efficiency, in all our brands through our history, both in good and not so good years. The growth has been sustained in local and export markets because we have always maintained a balance that averages 50% in each market and that allowed us to surf the different macroeconomic crises in Argentina over these 23 years.”
As for new investments, Molina said: “In the next few years we will continue investing at a rate of $4m per year. These investments will be concentrated in new vineyards. Fifty hectares per year will be planted in Uco Valley, Mendoza and Pedernal and Tulum valleys in San Juan province. We will also incorporate technology to increase capacity and quality that will include a new bottle filling line and steel tanks to increase the storage capacity in both still and sparkling wines, as well as alternative vessels for fermentation of high-end wines.”
Bodegas Chandon is also planning new investments. Despite the fall in local sales, this member of the LVMH group is planning to double its wine production in Mendoza. “Our company was the first subsidiary of a French Maison de Champagne to bet on Argentina, settling in Mendoza in 1959,” said French agronomist and oenologist Hervé Birnie Scott, the estate director of Chandon Argentina. “Since then, after 60 years in the country, Chandon has been investing constantly, always betting on the long term.” Birnie Scott says the company recently announced a $13m investment plan which will include the construction of a 2,500m2 grape pressing centre valued at $7m. “This will be the most important pressing centre in terms of technology in all Latin America, and the largest for sparkling wines throughout the continent. It will be operational for the 2020 harvest. Another investment will be a new bottle filling line for still wines with a capacity of 14,000 bottles per hour.”
The vineyards will also be upgraded, Birnie Scott said. “It is mostly related to the renovation of vineyards in the best areas of Mendoza, and the migration towards a sustainable and organic viticulture. The most planted varieties will be Malbec, Chardonnay and Cabernet Franc.”
The big player bets big
Grupo Peñaflor, Argentina’s biggest wine company, is also betting on the long term. The company has important wineries such as Trapiche, Finca Las Moras, El Esteco, Navarro Correas and Mascota Vineyards in its portfolio; it owns 3,200ha of vineyards and works with more than 600 grape growers, employing more than 2,300 people. Argentina’s main wine exporter sells $180m worth of wine abroad each year, and is the world’s largest producer of Malbec. Francisco do Pico, director of institutional relations, explains that: “There has been a recovery in the external market since last October, something that has not been happening for many years.” He foresees 2019 as challenging for the domestic market but very positive for exports. “We are capturing many opportunities for growth abroad, since we have – with great effort – maintained our presence in all the key markets.”
He noted that Argentina has the lowest ratio of exports to production of all wine countries. “We only export between 20% and 30% depending on the year. Italy, France, Spain, Chile, Australia, South Africa and New Zealand export much more than Argentina in relative terms.” He adds that although Argentina lost “15% of exports due to the exchange rate lag in recent years, with great effort we were able to maintain our presence in international markets”. “Today we are capturing opportunities in many countries. The best example is the United States, where the Argentina category fell in 2018 but we grew double-digit in volume.” Overall, 2018 was a good year for exports, with the company selling 68m bottles worth a total value of $174m – a new record. Do Pico thinks producers must invest more in the promotion of Argentinean wine and encourage the government to sign free trade agreements.
So confident is Grupo Peñaflor in the potential of export markets that it plans to invest $200m over the period 2018 to 2022. “Peñaflor has always bet on investment and sustained growth in a balance between internal and external markets. This balance has been key,” says do Pico. Wineries that are too dependent on either exports, or the domestic market, are always at the mercy of market forces, he says. “On the other hand, investment in production and processing, as well as in our brands and new products, have been fundamental to continue growing. The consumer is increasingly demanding and complex. We are in a highly competitive industry and other beverages also compete with us.”
In such an environment, maintaining the status quo is not a good strategy.
Daniel Lopez Roca
This article first appeared in Issue 2, 2019 of Meininiger's Wine Business International