Making a Case for the Argentine Wine IndustryPublished: January 22, 2004 in Knowledge@Wharton
In addition, a number of business services associated with this market have sprouted and today, business volume exceeds $4.8 billion dollars annually. The wine sector now includes everything from newly trained professionals in oenology and agriculture to new specialists in packaging, logistics, distribution, marketing and point-of-sales techniques. Alternative educational programs have sprung up such as the Masters in Grape and Wine Growing at the National University of Cuyo in Mendoza, home to more than 60% of all Argentine land cultivated for wine production (approximately 250,000 hectares.)
The reasons behind this growth go back to the good economic conditions of the 1990s, which provided stability to businesspeople, and to the entrepreneurial spirit of Argentines who have developed professional wine cellars and joined forces to promote exports. For all that, however, the industry still faces a number of challenges.
While analysts expect Argentina’s wines to enjoy a run of further economic growth, they agree that an increase in production volume will be necessary. That will only be possible if businesses can acquire new bank loans, frozen after the devaluation of the national currency at the beginning of 2002. “The lack of financing complicates prospects,” says Alberto Arizu, director of Luigi Bosca, a well known winemaking firm that today exports 40% of its production. “You have to find a solution to this problem because technology renews itself day by day.”
On the other hand, Argentine wine would not be so distinguished if it were not for the country’s huge expanse of fertile land, the kindness of the climate, and the range of different wine-growing altitudes provided by the Andes mountain chain. “The climatic conditions and the use of new techniques have allowed Argentina to become recognized for its capacity to cultivate various varieties, especially the Malbec grape, which is produced by and large in the traditional province of Mendoza,” says Diego Marcos Salguero, who does institutional promotions for the Argentine winemaker Familia Zuccardi. Adds Wharton management professor Gerald McDermott: “Argentine wine obviously has some advantages when it comes to natural resources and the climate in all regions where grapes are grown, such as Mendoza – the most important – and Salta, San Juan, and la Rioja.”
Golden Years of the 1990s
What made growth in the wine market take off during the 1990s was the system that assured convertibility of the Argentine peso, which helped provide stability and security in foreign exchange. “During the 1990s, more than $1.3 billion was injected into the agricultural and winemaking sector. New wine producers were launched. Technology was introduced, and the varieties of grapes were improved and broadened,” notes Sergio Olivieri, an economist at the headquarters of IERAL, the Institute of Economic Studies on Argentine and Latin American Reality of the Mediterranean Foundation, located in Mendoza.
“The deregulation that took place during the nineties was a motor of growth,” Olivieri adds. “It eliminated regulations that had an impact on development in the sector, such as the production quotas. As a result, the wine producers got busy expanding their businesses.”
IERAL has played an important role in this process. From the middle of the 1980s, it helped publicize the damaging impact of regulations through numerous reports put together in its Mendoza central office. “Nowadays, we can say that Argentina’s grape and wine-growing sector is at the same level as Europe’s, thanks to the incorporation of technology carried out during the last decade. That’s why exports have grown,” says Arizu.
Change in Consumption Habits
Over the past eight years, the world’s wine consumers have changed their preferences. Earlier on, buying was divided equally between “table wines” and “fine or high-quality wines.” These days, better-quality wines have largely displaced ordinary wines, due mainly to effective advertising campaigns, improved awareness on the part of consumers, and new, improved varieties of wine.
Data reported by IERAL show that in Argentina, between 1998 and 2003, the portion of all wine-growing land devoted to “table wines” dropped from 54% to just 39%. Meanwhile, “fine wines” today represent 59% of total production. Moreover, domestic [Argentine] consumption grew by 106%, thanks to a change in wine fashion. Wine stopped being an expensive product, one associated with high society, and instead became a drink consumed by young people as well as a growing number of women.
All this took place even as worldwide demand was changing. “The improvements and new investments in Argentine wine were ideal for being able to position ourselves in overseas markets,” notes Olivieri. Adds Arizu: “Although we winemakers have thrown ourselves into exports, no one is abandoning our domestic market now that Argentina is among the 10 countries that have the highest wine consumption. This makes it different from other wine-producing nations whose domestic markets consume more beer and other drinks.”
When it was time to export, Argentine winemakers – mostly companies that are family-owned – went ahead on their own to find customers. However, in spite of the fact that they are competitors in the domestic market, they are now getting together under the same umbrella to achieve a greater competitive advantage in foreign markets.
They organize themselves by forming “clusters” or “export consortia” – groups of wineries that pool their funds – in order to finance their business travel and participate in fairs and promotions in other countries. “They joined forces in spite of their internal competition and got into new markets as a result,” says Olivieri. “These clusters or export consortia not only brought them together in their export efforts; they also brought them together to pool production volumes. Otherwise, the wineries would not have been able to deal with [new] markets because they couldn’t manage [individually] to achieve production levels that responded to the growth in demand.”
Another good example of this new cooperation, says McDermott, is Pro Mendoza, which began as a source of information about oenological news brought from outside the country to local winemakers. “Argentina is developing interesting new grapes in order to supply export markets. But this is a young industry and it needs to mature,” McDermott adds.
According to IERAL, only 10% of Argentina’s production goes abroad, which brings Argentina a mere 1% global market share. INV, the national winemaking institute, says that Argentina’s main markets are in Europe, including Italy (more than 25%), France (25%), and Spain (15%). Meanwhile, the country also ships wines to both South Africa and Australia. The United States is another market that is very attractive, getting more than 5% of Argentine exports. In fact, Luigi Bosca is thinking about “increasing its presence in the United States because that is where consumption has grown most,” Arizu says.
Luigi Bosca is a member of Wines of Argentina, an export consortium that brings together more than 70 winemakers. According to Mario Giordano, coordinator of Wines of Argentina, “the way we promote ourselves isn’t just through fairs or international events but, for example, through enormous research projects in several countries around the world in order to find out how people view us: What are our strengths and what are our weaknesses? We want to work in a way that is even more professional so we can sell more in the future.”
In order to achieve that goal, however, Argentina must compete with a group of countries that enjoys similar climates and soils. Among them, Australia, New Zealand, South Africa and Chile stand out. Those countries have years of experience and advantages over Argentina when it comes to commercialization. Moreover, those countries’ winemakers have access to incentives offered by their governments.
In fact, one of the big challenges for Argentina is to get greater involvement from its government, which would allow strengthening of the country’s wine brand. “This is happening on the basis of various programs that promote Argentina, whether it’s through the country’s wines, the tango or such marvels of tourism as the Glaciers and the Cataracts of Iguazú,” says Giordano. Along the same lines, Arizu notes that “like the rest of Argentina’s winemakers, we know we can’t sell more unless we have a country brand that helps us. Today, many of us are working to build that country brand from the private sector in groups like Wines of Argentina.”
“The key is to be efficient at the time you go into other markets,” says McDermott, “and that depends on public policy. INTA, the national institute for agricultural and fishery technology, is the appropriate agency [to do that] but it needs a bigger budget … The main thing at the national level is to achieve a country brand in order to promote wines more effectively abroad.”
With regard to Chile, Giordano emphasizes that “our neighbor is not our competitor, for now. But we will be competitors in the future. I believe that we can compete and, at the same time, occupy different spaces in the marketplace. We can even complement each other. Chile is a country that is well-known in the winemaking world. We are still in the process [of achieving that].”
Salguero agrees. “Chile is a major competitor because nowadays it enjoys a greater presence in international markets than we do. They began to export their products a lot earlier than we did.”
For McDermott, even if Chile has a greater international presence, with its 10% global market share, “Argentina has very good prospects for growth if it can improve its way of producing. It could be that the pairing of good production – and high volume – can be unbelievable for Argentina. Moreover, Chilean wines are thought of as good but cheap – and that costs Chile market share in the U. S. in the fine wines segment.” Argentina can take advantage of that situation, he adds, “especially if the country can add more value to its fine wines.”