With a GDP of over $490bn (according to World Bank statistics), Argentina is one of the largest economies in Latin America. President Cristina Fernández de Kirchner’s government has focused its attention on promoting economic development through social inclusion and investing heavily in health (8% of GDP) and education (6% of GDP). Between 2003 and 2009, the middle class has doubled in size from 9.3m to 18.6m and now represents 45% of the population.
The downside
The Economic Commission for Latin America and the Caribbean (ECLAC) has indicated that the rate of growth of Argentina’s GDP increased during 2013, following the 3% slowdown registered in 2012 by the World Bank. According to the ECLAC, however, these good results have to be set against a major weakness in the economy: a larger current account deficit and limited access to foreign credit have resulted in a heavy reduction in foreign currency reserves. These dropped from $43.29bn at the end of 2012 to around $31bn at the end of October 2013. A slowdown in economic growth (to 2.6%) is also predicted for 2014.
In order to rebuild those reserves and to close the gap between the official and unofficial exchange rates, the Central Bank allowed the peso to devalue in January 2014 by around 20%. Devaluation has been good news for the wine industry, especially for grape juice and concentrate, and bulk wine, particularly because there were still significant stocks of these low-added-value products from previous harvests, thanks to a fall in sales.
Wine industry affected
After 20 years of continuous growth, exports had actually dropped by 4.79% in 2013 – to $1,105bn from $1,161bn in 2012. Since the fall in the value of the peso, however, bulk shipments have risen 8.1% in volume, representing exports of 24m L. Volumes of grape juice also increased by 25.3%, but at lower prices.
Sales of bottled wine have been less encouraging this year. According to data provided by the Caucasia Wine Thinking consultancy, bottled wine exports fell 1.6% in value and 2.7% in volume during the first quarter of 2014, compared with the same period in 2013. The most alarming decrease is in the United States market which, since January, appears to have cut its purchases of Argentine wines both in value and volume. North America matters to the Argentine industry: in 2013, over half - 51% - of all exported wines went to the US, with an additional 9% being shipped to Canada.
Another key market is also less economically fruitful than it was. Since 2011, the GDP of Brazil - the third-biggest export market for Argentine wine - has barely grown and there has been a reduction in the demand for foreign goods. After two consecutive years of decline in 2011 and 2012, both in value and volume, exports of bottled wine to Brazil continued to fall last year, dropping 9.78% in volume and 16.87% in value.
On the positive side, a previous decline in Argentine domestic consumption seems to have plateaued and sales volumes of all styles reached 1.033bn litres in 2013, a rise of 2.85% from a 2012 figure of 1bn litres. However, there are few expectations that there will be much further growth in the short term. Since the devaluation, inflation is now widely expected to top 30% this year. In an effort to avoid this, interest rates have been raised and an official price regulation project introduced. For most consumers, rising prices are a growing problem.
Argentine wineries will be forced to be very careful in the way they plan their production, internal sales and exports. Larger wineries are considering the marketing costs of building their domestic and overseas sales, while smaller ones, fearing the high costs involved in gaining and maintaining a presence in the domestic market, are increasingly tempted to sell directly to consumers via e-commerce sites.
Volume versus value
Many in the industry maintain high hopes for Brazil, where per capita consumption is still only 1.9 L per year. There are projections of this growing 8 or 9 times, while the relationship between Argentine wine and the Brazilian consumer is strong. In the more immediate term, there is a growing focus on strategies that promote the sales of more premium Argentine wine at home and abroad. The solution to Argentina’s problems may lie in accepting that while the volumes of wine exported may fall, this could be more than offset by a rise in the value per litre.
