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Argentine wineries go out to recover place in the world: how they plan to do it

In 2012, the Argentine wine industry reached its peak of exports. They were US$ 921 million in total, but they reached US$ 1000 million if sales of grape must abroad were added . There began a process of decline driven by various factors, mainly the exchange rate, some bad harvests and macro instability. And, although the idea was to use the magic number of 1 billion as a base, the reality was that it was never possible to consolidate that figure. In fact, in 2020 -through a pandemic- the lowest point in many years was reached, with just US$ 791 million. But this year, the trend seems to have reversed. In the first seven months, foreign sales totaled US$511 million, with an increase in the free on board (FOB) price per liter of 27.24 percent compared to 2020.

And while the outlook is encouraging, the overall picture is still challenging. In addition to the general problems brought about by the pandemic, such as the drastic drop in consumption in the hotels, restaurants and cafes (Horeca) channel, and the increase in the cost of maritime transport, are added local complications that make exports difficult. Exchange rate gap, macroeconomic imbalance, withholdings and delays in VAT refunds are the main complaints heard among producers who seek to consolidate the presence of Argentine wine in the world.

Last year there was very significant growth in bulk exports, which function as a commodity and have a lower price per liter than bottled ones, they explain. With a competitive price due to the devaluation of the peso and thanks to the shortage problems experienced by Australia and South Africa, Argentina was able to supply that market.

Now that the bulk has dropped, reality is beginning to be seen. It is that fractional wine is the one that moves the needle in terms of total amounts and added value. And for that reason, it is the one that all wineries want to conquer.

"We are looking forward to what happens until the end of the year. We had a bad first half of the year, but in the second semester it seems that it could improve ", says Patricia Ortiz, owner of Bodega Tapiz and president of Bodegas de Argentina.

Rough seas

However, the industry is facing complications they never imagined. Due to the pandemic, the number of containers available was limited and, consequently, logistics prices became more expensive. To put it in numbers, a container to Europe used to cost US$2,000 and now you can pay up to US$11,000, they explain.

Currently, maritime traffic goes from Asia to the United States and few ships reach South America. Added to this is the fact that Argentina -which is already far from the main consumption centers- is importing less and, therefore, there are even fewer containers available.

Ortiz gives an example to highlight the complexity that exporting today entails for local wineries. Wines destined for the West Coast of the United States are being shipped by ship to Miami and from there by truck to Los Angeles or San Francisco. Thus, transportation costs skyrocket to levels never seen before. And that's not counting the delays. The time to reach the gondola is 90 days, three times what it takes in a normal situation.

Despite these complications, Argentina gained share in a key market such as the North American. This growth was largely driven by the fires in California and, above all, the tariffs that the Trump administration imposed on European wines in retaliation for the European Union subsidies to aviation giant Airbus.

"We were left out of that dispute and we were able to occupy part of the market at a time when domestic consumption was falling. Now the situation has normalized a bit, but the presence and visibility we gain are always a good news", adds José Zuccardi, CEO of Bodegas Zuccardi and president of the Argentine Wine Corporation (Coviar), the public-private body created to articulate public policies for the sector.

Dante Robino, acquired by Cervecería y Maltería Quilmes at the beginning of 2020, is one of those that was able to take advantage of this growth in participation. "We see that there are many opportunities, not only in the United States, but in other markets, such as Uruguay, Paraguay and Brazil. We are taking advantage of the distribution channels that the company has around the world With this, we more than doubled export volumes," says Nicolás Bruno, general manager of Dante Robino.

Argentine wineries go out to recover place in the world: how they plan to do it

Bruno adds that beyond the logistical problems, the wine sector is facing an unexpected problem: the shortage of bottles. The shortage had already begun to be felt at the beginning of the year, but the explosion of two of the three furnaces of the manufacturer Verallia in the middle of last month aggravated the situation. Cattorini, the other local supplier, has put another oven into operation, but it still can't keep up.

"It wouldn't be surprising if the wines for the New Year's Eve parties arrive in different containers than we're used to. There are no bottles and no one knows how to get past the hurdle", predicts Christian Baranovsky, Category Leader Wine & Sparklings at Pernod Ricard Argentina, the company that owns the Etchart winery in Salta and the French brand Mumm, which produces sparkling wines in San Juan.

New markets

Like Dante Robino, the local subsidiary of the global spirits giant is trying to leverage its global distribution chain to open up new markets. However, the lack of knowledge about the Argentine brand as a wine producer sometimes works against it. "It happened to us in the United States. We were not successful within the group and now we are looking to work directly with an importer to bring Etchart and the Cafayate brand to that market," he adds.

The brand is trying to enter China through the local subsidiary. They sent samples of their wines and shared the assets they have in Argentina to start promoting themselves in that market.

The timing is ideal, they explain. Following the Australian government's request for an investigation against China into the origin of the Covid-19 pandemic, the authorities in Beijing launched a trade war. Until then, with US$2 billion in exports a year, Australia was their main supplier of wine.

Someone has to fill that void and although Argentina is probably not the main beneficiary -France and Chile already had a much larger presence and are increasing participation-, there are those who want to increase the barely 500,000 boxes of nine liters that the country sends to the Asian giant.

Due to the size of the market and the incorporation of new consumers into the world of wine, China is the most coveted jewel in the sector worldwide. Everyone wants to have a presence there, because the growth potential is immense.

However, for Argentina it is very difficult to get there. Without official support, Wines of Argentina (WofA, the international promotion agency for local wineries) has a budget of just US$3.5 million a year. With that money, he has to advertise the Argentine brand in all markets.

In the sector they complain and say that it is too little and, despite the fact that they make it perform to the maximum, it is not enough. And opening up a market, becoming known and reaching consumers takes time. In China almost no one knows that Argentina is a wine producer and it competes against countries like France and Chile, which have been installed for years, repeating in the wineries.

"Opportunities are captured by the one who is best prepared. And with China they did not do their homework: a free trade agreement has not been signed and that was the central duty. And although France does not have and pays the same They have been doing their homework for a long time. There are many French people living in China, many who speak Mandarin, a lot of French investment. There are very important French players such as supermarkets that promote their wine and a lot of money is invested in advertising ", says Maximiliano Hernández Toso, president of WofA and owner of the Riglos and Huarpe wineries.

Low barrier

The lack of free trade agreements (FTA) is another of the big problems that hit the sector squarely. While Chile has signed agreements with practically every country in the world, Argentine producers can barely export their wines without paying tariffs to a handful of countries in the region that, except for Brazil, are not large consumers.

In the United States and the United Kingdom the tariff is 10 percent, in Mexico, 16 percent, and China, 14 percent. The average is below those figures, at 5 percent. Last year, that meant that there were $36 million spent, just , to allow the wine to enter the marketo. That money, the producers complain, could be used for international promotion instead of going to the treasury of other countries.

The signing of the FTA between the EU and Mercosur, in 2019, had been celebrated by the winemakers. But a short time later, the agreement was left a dead letter and they already know that it is very difficult to revive it. Now they are waiting for the Foreign Ministry to speed up a treaty with the United Kingdom, which after Brexit is looking for new trading partners. Agreements in Asia should also be explored, not only with China, but with India, Korea, Japan and other markets that are very attractive.

"If we don't work on that path, it's difficult to be competitive", they lament and point out that 14 percent tariffs, as is the case with China, inflate prices by 18 percent in the gondola.

In some cases, the lack of agreements takes Argentine wines directly out of the market. That is what happened to the Federation of Argentine Wine Cooperatives (Fecovita) with the export of bulk to South Africa. The 25 percent tariff put them out of competition and they were replaced by Spain: it pays 0 percent.

"We don't have FTAs ​​with almost any country. We are in the extreme south of the world with a market that is concentrated in the north. At the distance from the centers of consumption that makes freight more expensive, we have to add the tariffs. And, on top of that, today we are exporting taxes. It is difficult to compete like this", says Alberto Arizu, CEO of Luigi Bosca, a winery that this year celebrates 120 years of existence.

Today, wine growers pay 4.5 percent export duties and although the state has established a system for refunding value added tax (VAT), the delays make it financially unfeasible. The return is never made in less than three months and the wineries have little waist to absorb that cost.

Tax backpack

"Although withholdings that are currently at 4.5 percent have their incentive in refunds that are currently 7 percent, we believe that not they are the best mechanism to promote exports. Today refunds are recovered in the short term but this has not always been the case. And the way to achieve a quick refund is to apply it to the payment of other taxes", says Diego Pulenta, Export Manager of Pulenta Estate.

And although the Minister of Economy, Martín Guzmán, told the winemakers that the elimination of export duties for the sector was being studied, nothing concrete was ever achieved. "We need measures to promote exports and continue growing. But what we see is that whoever sells abroad and brings dollars into the economy is punished," they reason.

"That the wine industry pays withholdings is outrageous. We are competing against other countries that not only do not have this tax, but also return all the taxes paid by the producers. A tax is being imposed on a product with high added value and that reduces competitiveness. Withholdings are always a bad tax, but much more so on a product like wine," says Eduardo Sancho, president of Fecovita.

Bottled wine, he adds, brings the country brand to the table of consumers around the world. Each bottle that is opened has a label that says "Argentina" and the province - and even the region - where it was produced.

The tangle of taxes and tariffs leaves Argentine wine without large margins for entry level. Thus, the sector has to concentrate on the upper-middle and upper range, the tip of the pyramid, they explain. This year, the average FOB export price was lower than previous years and, in theory, would allow it to gain a foothold in the US$10 a bottle segment, which represents 75 percent of global consumption.

In the first months of the year, the price per liter exported was US$ 2.55, well below US$ 3.63 in 2018, the year that showed the highest values. However, the inconsistency of the macroeconomy and the volatility of the exchange rate are a factor that prevents consolidation in this segment.

"Playing in the premium segment allows us to absorb the drop in profitability caused by fluctuations in the exchange rate. It would be ideal to have something more stable, but you have to play with the cards that you deal. And given that the final consumer always is going to pay the same, we have to anticipate the fluctuations of the dollar in the best possible way", says Hervé Birnie-Scott, Director of Oenology, Vineyards and Cellars at Moët Hennessy Argentina.

More than Malbec

The luxury brand has Chandon and the Terrazas de los Andes winery in the country. With the brand of sparkling wines they began the path of launching the Chandon Apéritif outside the country under the Garden Spritz label -a sparkling wine macerated with bitter oranges and strawberries-, which was widely accepted in Europe and the United States.

"You have to create the desirability of the product. In the 2000s, the world discovered Malbec. Today sales go through the terroir. They left generic Malbec to talk about geographies. of soil, climate, landscape. It gives identity to the product. It is a malbec plus, with something else. It interests the connoisseur and from there the distributors are excited" , Explain.

According to Ghiorzi, Peñaflor's Director of Exports, Argentina is competitive from the reserve wine segment, which is around US$35 FOB for a nine-liter box.

"We are not competitive in entry-level wines. And the internal economic context has an impact. Foreign trade rewards perseverance: it is difficult to build the category and once you have, it is difficult to destroy it< /b>", it adds.

Last year, in the wake of the pandemic, global wine consumption fell 5.3 percent to 2.248 million cases. However, in exports -which represent a third of the world business- the decline was only 1.9 percent.

"What we saw was that the Horeca channel fell because the quarantines around the world prevented it from going out to eat or drink something outside, but purchases in supermarkets and wine bars increased. More drinks were taken and with higher prices in homes and, in addition, new consumers were added", adds Ghiorzi.

The big question after a gradual return to normality is what will happen with this change in the market. And although retail sales are already predicted to fall, there are already those who predict that the floor will be higher than that of the pre-pandemic period.

"There are countries like Brazil, Mexico and Korea where this trend was very marked. I think that there will be a residue of these new wine enthusiasts who arrived with Covid< /b> And that's good news," closes Ghiorzi.

THIS ARTICLE WAS PUBLISHED IN THE PRINTED EDITION OF APERTURA MAGAZINE

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