Argentina faces competition crisis

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3rd May, 2013 by Gabriel Savage

Soaring grape prices and an overvalued peso have raised concerns about the ability of Argentina to compete at the lower end of the bottled wine market.

According to a new report by Rabobank, some wineries are reporting an increase in production costs of more than 100% during the last four years, with raised labour costs primarily responsible for a 115% increase in average wine grape prices. With the average export price of bottled wine going up by only 60%, the report highlighted the likelihood of a “rapid deterioration in profitability.”
Commenting on the current situation, Rabobank analyst Valeria Mutis remarked: “The competitiveness of Argentine wine exports is being undermined.”

Pointing to the squeeze on margins, she outlined the problems posed by the country’s wider economic problems. “Whilst official figures set the inflation rate at approximately 11% per year, private estimates put the yearly inflation rate at 25%,” reported Mutis.

“Although the Argentine peso has weakened, this devaluation has been less than the inflation rate, and this has hurt the sector’s competitiveness abroad.”

With a growing gap between official and black market exchange rates, commentators expect a “steep devaluation” of the peso, although they feel this is unlikely to occur before the end of 2013 “at the earliest.”

Against this uncertain backdrop, Rabobank suggested that basing a strategy on currency devaluation alone would be “particularly risky,” especially for smaller companies.
Instead, it recommended that Argentine producers consider bottling in their export markets as a means of protecting margins.

However, Mutis acknowledged the challenge of finding the right bottling partner, warning of “potential conflicts of interest, volume requirements and or relinquishing brand ownership.”
Nevertheless, she concluded that such an approach “appears to offer a way to establish a presence in important export markets and to continue to grow the mid-tier brands without significant investment, and without risking significant capital.”

Responding to the report’s findings, Alberto Arizu, head of Bodega Luigi Bosca, told the drinks business: “We agree that a devaluation would not be the way if there is no concrete plan to reduce inflation in production costs and cost in general.”

Acknowledging that “due to deteriorating margins, Argentine wineries lost export stimuli on entry labels,” Arizu maintained that the country remains competitive at high price segments, “although with a significant deterioration in profit margins.”

To balance these margin concerns, he remarked: “Argentina remains strong in terms of demand in some markets (USA, Latin America and China), so that a change in some of these variables could position the country well again.”

For the moment, Arizu confirmed that efforts are being made to maximise Argentina’s ability to compete with other wine producing countries, with companies scrutinising “not only production costs and labour, but also in logistics costs that impact a lot on this industry.”
“We must learn to wait and keep working,” he concluded.