Argentine Wine’s New Lease on Life
The Argentine wine industry is finally breathing a sigh of relief, according to the most recent Rabobank Wine Quarterly report. High inflation, a strong peso and taxes on exports have created significant hurdles for the Argentine wine industry over the past several years, but newly-elected president Mauricio Macri took radical actions at the end of December 2015, which dramatically alter Argentina’s competitive positioning.
By cutting restrictions on access to foreign currency, the Argentine peso fell 35% almost immediately, making Argentine wine more affordable in export markets. Likewise, the elimination of the export tax reduced exporters’ costs and improved profitability. The combined impact of these two changes improved the country’s international competitive positioning by 50% almost overnight.
Flexible pricing is paving the way
This improvement will create opportunities for wineries to be much more profitable and more flexible on pricing than they have been in several years. Argentina is the fifth-largest producer of wine in the world, and the change in competitiveness is likely to have implications for numerous other regions. However, while the ability to be more price-competitive is a welcome change, the report also issues a note of caution: “There are now opportunities to be more flexible with pricing, but these need to be managed carefully in order to avoid undermining the long-term premium positioning of the brand and the overall category. Currency moves are volatile, but pricing moves are often more permanent. Excessive pricing moves may allow for windfall profits today, but could create headaches in the long run,” notes Rabobank analyst Stephen Rannekleiv.
Recovery is on the cards
As a result of the recent changes, Argentine wine is likely to see a strong rebound in exports in 2016. Argentina has a history of sharp downturns, followed by rapid recovery, and the wine industry is now poised to begin the period of sharp recovery. This recovery will not be without challenges, however, as key competitors such as Chile and Australia now have more advantageous trade relationships with key export markets, and demand for bulk wine in the US—a key market for Argentina—has declined.
Premiumisation is likely to slow down
Since 2012, US demand for imported bulk wine has fallen sharply due to rising domestic production, coupled with consumer trends favouring more premium wines. The rising demand for more premium wines has created a shift away from bulk wine imports towards more bottled wine, and it has favoured premium suppliers such as France, Italy and New Zealand. This premiumisation trend has been a driving consumer force that has created important changes in demand for wine in recent years, but the report notes that this trend may begin to see signs of slowing. “Until recently, the highest-income earners had been enjoying the most outsized gains in annual incomes, and we view this as part of the underlying driver of growth for super-premium and luxury wines,” notes Rannekleiv. And while wages for upper-income earners continue to grow, the rate of growth is showing a marked slowdown. “We believe this could result in easing growth rates for high-end wines in the US,” the analyst concludes.
Find more details in the full Rabo Research report ‘Wine Quarterly Q1 2016: Outlook for Global and Regional Markets'.
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