Focus on Argentina

Hamish Smith travels to Argentina and finds that economic policy is steering the direction of the country’s wine industry

ARGENTINA'S SOARING INFLATION, exchange rate and protectionist policies are shaping the future of the country’s wine industry, both domestically and internationally. 

Under the leadership of President Cristina Fernández de Kirchner, now two years into her second term, inflation has reached 25%, according to private sector analysts, spiralling living costs and, consequently, the expense of labour.

“The salaries of workers increase with inflation, which was up 25% up this year, as does the cost of gas, electric, oil, taxes, interest,” says Carlos Pulenta, CEO of Bodega Vistalba in Mendoza.

In the space of 15 years Argentina has been transformed from a traditional wine culture to an international industry – now the fifth-largest producer in the world. 

But, where investors were once flocking, heralding the discovery of a grape-growing utopia, they are now looking elsewhere. “Inflation is a problem because it increases uncertainty and reduces investment, but you cannot separate the Argentinian wine business from the economy,” says Pulenta.

When production costs go up, so should the price of the product. Domestically – where an estimated 90% of Argentinian wine is consumed – this is what has happened. In international markets, however, the price is the price – and to many buyers, wine is wine. 

“In Argentina people accept that the price has increased but importers say they will go to Chile or South Africa if we increase the price,” says David Bonomi, winemaker at Doña Paula. “We are not growing our exports – it’s a lot of effort just to maintain them.”

Kirchner has fixed the exchange rate at around 5.5 peso to the dollar – a far lower rate than can be found in the Argentinian ‘blue’ market. 

“If the official rate is 5.5 pesos to the dollar and the blue market is theoretically about 9.0, a good rate would be 7.0 pesos to the dollar,” says Pulenta. 

Pulenta explains how export revenues are processed in Argentina: “I pay the Argentinian central bank in dollars and it keeps them and pays me in pesos. All transactions – imports and exports – are at the official rate.” 

With, in effect, two rates – the lower official rate exporters are paid in, and the actual market rate costs are paid in – some producers have naturally started to look for alternative routes. 

An Argentinian wine retailer, who asked to remain anonymous, has observed the practices of some exporters. “Some exporters tried to take the dollars from exports and unofficially transfer the money in the blue market. The government tried to stop the blue market but it’s complicated, nobody knows how it works. There are tricks to keep the money outside of the country too, in off-shore accounts, to be protected against inflation.” 

Buenos Aires drinks journalists Rodolfo Reich and Martin Auzmendi are agreed on the solution. “Everyone thinks we have to devalue the currency,” says Reich. “Wineries are praying that the government devalues,” Auzmendi chips in: “The problem is political. They think if they bow to the pressure they will look weak.”

Martin Cortese, regional manager of Trapiche, one of Argentina’s largest producers, explains from a big-business perspective how the economic policies impact: “The government isn’t devaluing the currency and the toughest part of the deal is that the cost is higher in pesos for production. We are taking the hit and trying not to pass this on to the distributor or the final consumer.”

So will it be the big companies – those that can afford sustained squeezed margins – that will be the last men standing? “[To put it] in a very mean, capitalist way, that is what we are doing,” says Cortese. “Small companies have dropped out of the market. We are able to stay and increase our share of the market.” 

Magdalena Pesce, marketing and communications manager of Wines of Argentina, says it doesn’t necessarily follow that increased costs and therefore reduced margins will create a consolidated market. 

“The industry is prepared to survive in this environment and find this situation as transitory. Across the industry, wineries are adjusting their costs and spending their resources more efficiently. In the short term, some medium and small wineries are redirecting their efforts to Latin American markets in order to be more cost effective and reduce the transport fees.”

“Consolidation is not a consequence of inflation – it’s the increasing cost of logistics,” says Bodega Vistalba’s Pulenta. “When logistics costs go up you have to have the consolidation to absorb this. Consolidation happens more in stable countries. The idea is to consolidate distribution but not the identity of the wines. The key point in the wine business is to be as authentic as possible but consolidate distribution costs.”

Lack of confidence

For years, the Argentinian people have lacked confidence in the peso. “People do not think in pesos, they think in dollars culturally,” says Carina Valicati, co-ordinator of Wine & Gourmet Tourism for the National Institute of Tourism Promotion (INPROTUR). The government has tried to prise its people away from the dollar, but for things that really matter, such as property, only the American currency is used in transactions.

Dollars are not just in demand by the people. “The government tries to keep dollars here in Argentina because it needs the foreign currency,” says Reich “A new policy that requires payment from international buyers within two to three months has been introduced. Compare this with other producing countries that might only require payment within six months.” 

Pulenta agrees: “The government spends all its dollars on energy – gas, oil from Venezuela – and does not have enough money for other things.” Other things might include materials crucial to wine production, barrels and corks – products that are not made in Argentina.

Without being able to plan inventories of such imports, running a business is a challenge. “It’s not that buying cork and barrels is any more expensive, it’s just that when I need to buy them I have to send a special document to the government – it’s not flexible,” says Dona Paula’s Bonomi. 

Import delays and hyper-inflation are not what foreign investors are looking for. Across the Andes, Chile does have an unfavourably strong currency for export, but it can at least offer stability. “In a stable country you can have a plan,” says Pulenta. “Here you do not know what’s going on next year. In my working life I have faced big devaluations five or six times. In 2002 it was the worst. It was P1:$1, then the next day it was P3:$1. It’s not that the people do not believe in the wine business here, but every country needs external investment. It’s impossible to be isolated.”

Isolation comes in many forms. Scan the supermarket shelves in Argentina and you will find a huge selection of wines and styles – Malbec, Bonarda, Torrontes, Chardonnay, Cabernet Sauvignon, Merlot, Cabernet Franc, Sauvignon Blanc will all be there, along with any number of blends – but they will be exclusively Argentinian. “We don’t import wines – for economic reasons we have a closed market,” says INPROTUR’s Valicati. “We have a protection of the local market but the diversity of our own wines is huge.” 

For Luis Torres, wine tourism academic and tour guide at Mendoza’s Salentein, access to other world wines is crucial to Argentina’s ongoing development. “Our oenologists, agri-engineers and students should be allowed to experience imported wines. This would give them a chance to see what the world demands from their wine.

“We can still be nationalistic as well as import technologies and wine. [The protectionism] is to protect wine from flooding in from other countries. But it’s not as if Argentinians will stop drinking Argentinian wine,” he says. 

The counter case

Despite the apparent discontent, there are counter arguments and supporters of government policy. One of the effects of increased costs is a wine industry that pays its workers a fair wage – not something that could have been said in years gone by. “Five years ago the biggest cost was grapes and wood, today it is labour – this indicates a maturity in the industry, that it cares about its human resource,” says Alejandro Vigil, winemaker of Catena Zapata. 

Secondly, with unfavourable exchange rates and therefore reduced margins, volume wine is unprofitable to export, so Argentina’s reputation will continue to be one of quality. “It helps the image of Argentinian wine – it keeps the quality high and it’s like a filter,” says Bodega Vistalba’s Pulenta. 

According to Wines of Argentina, in 2012, the average price of Argentinian Wines in the US, its largest market was $39.08 per 9-litre case – which translates as about $10 a bottle in retail. In context, the average price for Chilean wines is around $5 less, with some dropping south of $25 a case. 

“The reality is that Argentina always operated in segments above $37 a box, which is profitable anywhere in the world,” says Vigil. “This sets us apart from the segment which is Chile nowadays, especially $22 the box. Our idea is to compete in premium and super-premium segments. 

“Lower-segment competitiveness is currently difficult unless we make deep structural changes, for example plant Malbec in more productive areas allowing us to lower costs of production. We cannot make wines of $20 the box with grapes from Uco Valley.”

Andrew Maidment, Europe & Asia manager at Wines of Argentina, says Argentina’s cheaper wines tend to be consumed domestically, while higher-priced lines are exported. “In an ideal world you don’t export cheaper wines, but it can be part of a brand’s proposition if you have the customers.”

One way of increasing margin at the bulk end is to cut packaging and logistics costs. “Some are looking at shipping bulk wine and having it bottled at the destination,” says Maidment. “Sweden also has a huge amount of wine sold as bag in box.”

Looking forward

If phase one of Argentina’s journey was creating synonymy between Argentina and Malbec, phase two is about communicating Argentina’s regionality and terrior.

“Malbec gave us the opportunity to export – it opened the door to infinite possibilities – but the future is about regionality,” says Doña Paula’s Bonomi. “Malbec doesn’t explain regionality – it is simply a variety. It’ll take a while to explain to consumers but we need to reach the next level. People know what Pomerol is but that took 200 years. 

“With the communication we have today it will be much quicker – we can achieve it in 10 years. My work will be felt by the next generation of winemakers.”

For Vigil, there should be research and development of Argentina’s vine growing areas to develop geographic indications, which might better communicate the message of diversity. 

Talk of Bonarda making a breakthrough persists in some quarters and certainly there are more miles in Torrontes, which is unique to Argentina. But overwhelmingly blends are the talk of Argentina’s wine towns. 

“The future for the New World is blends, for us that is Malbec blends,” says Luciano Rudman, co-ordinator of tourism at Trapiche’s winery in Mendoza. “Blends allow the winemaker to get the credit, not the grape. Some winemakers have their signatures on the wine bottles – it’s a growing trend. Winemakers are becoming the rock stars and blends are the origin and future of Argentinian wine.”

Wines of Argentina’s Pesce agrees the next step is to “communicate the diversity of Malbec terroirs and other varieties/regions” which she calls the “characteristics that define our wine and our country”. 

“Argentina is a country driven by contrast and contradiction: European yet Latin, traditional yet innovative, rustic yet refined. These characteristics define Argentina and are present in all that we do,” she says.

Economic contrast

For many producers, economic policies are in contrast with the future success of Argentinian wine. But, as Pulenta says: “In Argentina we are experts at walking the tightrope.” 

Besides, Argentinian wine has too many selling points and too many devotees to be derailed. If the world starts to hear more about its huge regional and varietal diversity, altitudinal range and craftsmanship we will soon be discussing phase three, not phase two of the industry’s success. 

Hamish Smith’s trip to Argentina was sponsored by Air Europa and the Argentina Institute of National Tourism Promotion (Inprotur),