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The US financial crisis would benefit Argentinian wines

By: Gabriela Malizia

The crisis would pose an opportunity for Argentinian wines to grow in the Northern market. Some analysts see an optimistic scenario, but there is concern regarding a setback in overall consumption.

The fall of the Wall Street financial system, which is making world markets totter, is also affecting the wine industry at the global and local levels. In this scenario, some analysts claim that Malbec would begin to replace some of the European varieties, while others argue that a market recession could provoke a drop in overall wine consumption.

The United States represents 24% of total Argentinian wine exports, which makes it the first destination of bulk and bottle wine in terms of sales, followed by the United Kingdom, Canada and Brazil.

In 2007, some 509,923 hectoliters of Malbec were exported, implying sales for almost 160 million FOB dollars. The United States is still the major market for those exports, accounting for almost 50 million FOB dollars. In the first semester of 2008, exports to the US comprised 2,113,473 12-bottle cases for a total of U$S 70,752,289, which implied an increase by 44.52% compared to the first semester of 2007.

An optimistic panorama

Alberto Arizu junior, who manages exports in his family's winery (Luigi Bosca) holds out an optimistic view. "It is clear that the United States will take strong measures to prevent extreme situations. We believe that consumption can be somewhat harmed, although it may be a good opportunity for Argentina, for I do not believe that Americans will stop drinking wine. They will surely change their preferences and people will start paying more attention to the price-quality ratio of New World wines. Happily, Argentinian wines are experiencing their best moment."

A month before elections, and in a heated scenario involving the two main candidates (Mc Cain, who will not campaign due to the financial crisis, and Obama) the United States is facing the worst economic crisis in its history. In the meantime, here in the South wineries are getting ready for their best season, cautiously and rather scared. "We are three months away from the end of the year and promotions are finishing. We are all concentrated in season sales. We entered this scenario too concerned about the obligation of delivering the pending orders; distributors and importers are facing up to end-of-year sales. We will see what happens in a month, with the new president," Arizu said.

The brand, which grew by 40% in the past two years, is now forecasting a 20% growth in the United States for next year. "We will not fall. We have a very aggressive sales forecast. We keep receiving orders and making payments normally. I am talking about caution. It will not be an euphoric end of year, but it will neither be a failure. Despite the array of conflicts we have experienced, this has been an extremely successful year," Arizu added.

Mergers and price increases

When talking about mergers and acquisitions, nothing has changed in the wine industry. The trend towards concentration in the US market continues. This favors large companies that have increasingly less actors in channels. For medium-size and smaller producers, these monsters and distributors who manage portfolios of thousands of brands, are not that beneficial.

With regard to price increases in the North American market, Alberto Arizu claims that "the problem lies with wineries and price segments. The lower segments are more exposed to customers swaying and resistance to price changes. This is not the case with our products. We are in the upper segment so it does not affect us much."

He also indicates that in the segment above 10 dollars "there is quite a strong sensitivity. Argentina has grown much in the segment from 10 to 20 dollars, so we should play in that segment, where I believe we are a bit more protected. Nevertheless, the Unites States market will not absorb exaggerated increases, in this situation or any other."

The British market will also enter a recession. The government has already foreseen a slow-down and a rise in the employment rate, which will also affect consumption. "But there, even more so, consumption niches must be considered," Arizu argues. "Supermarkets will be the most affected, because there will be not new consumers in England, which consumes 30 liters per capita. Luigi Bosca is not a common denominator in England. The country allocates some of the highest prices in the world to our wines. This year, we grew by nearly 40% there, too."

Crisis and drama

Cecilia Razquin, foreign trade manager at Catena Zapata, is cautious when talking about the future. The winery's US importer offers a version of the current environment. "Our US importer says that there is great fear. After the Twin Towers, this financial crisis is experienced with much drama. In terms of the wine business, the impact of the crisis is not directly felt yet. The development of the next two or three weeks will be key in terms of another financial company falling. If there is a waterfall effect in bankruptcies, the scenario would be truly serious. Moreover, elections are coming up, so there is much uncertainty."

When asked about whether this could be a good opportunity for Argentina compared to French wines, she evaluated the situation and doubted. "That commentary circulated at the beginning of the year, when the US recession was foreseen. But the truth is that if an economy enters a recession, overall consumption falls. Furthermore, it is very hard to know to what extent this product replacement occurs. It is risky to think in those terms; that is what we want, but there is a gap between expectations and actual events."

Catena, the largest exporter to the United States, has continued growing this year, particularly in its upper lines. "Our lines Catena Alta and Nicolás Catena Zapata have experienced considerable growth this year (40% in volume). We have great expectations regarding the United States. Luckily for end-of-year sales, orders have already been received. We will embark everything in September and October, because we have a month to the destination. We do not fear for stock remaining," Razquin added.

"We are concerned"

Juan José Canay, president of Bodegas de Argentina and foreign trade manager at Bodegas Trapiche admitted that they are "concerned about this crisis. The year is not closed yet. We keep having inflation in the domestic market and we are worried about how this crisis will affect our performance abroad. If there is crisis, there will surely be less consumption. Now, what we want to know is whether there will be less consumption of French wine and more of Argentinian wine. The most feasible answer is that consumption will drop overall. This crisis is hitherto unheard-of in the world so we do not know what will happen."

He added that the Argentinian wine industry is still losing profitability in the domestic market and that the world financial crisis will surely have an impact on the currency basket. The real and the euro have shown a tendency to fall, while the dollar remains stable.

With regard to end-of-year forecasts, he commented that "customers are not holding sales back. They have one more month to place orders. Evidently, the problem is not selling everything one expected to sell by the end of the year, which results in large stocks left over; this implies that January and February sales will fall.

Canay granted that the events unfolding in the United States will also affect the rest of the markets. "This is a world crisis, and close markets will also experience drops in consumption, because as long as the United States stops buying, all markets will suffer. However, we can not anticipate the extent of the impact."

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