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Small production prices

Small wineries negotiate with US importers

August 11, 2010 by Gabriela Malizia | in Business, News

Wineries interviewed by WineSur negotiate rises with their importers of 5 to 10% in some cases, especially at the entry level. There is caution in the USD 10-20 range, while increases in the USD 20+ range have been given red light.

It is hard to generalize, or even define what a “small” winery is. This time we chose to speak with well-known brands whose volumes are not massive and whose wines are well positioned within the USD 10 to 20 retail price segment in the US.

At least 5 out of the 7 interviewed wineries admitted they are negotiating rises of around 5 to 10%, and that the most difficult category is that between USD 10 and 18 retail price.

A case in point is the winery Sur de los Andes. The firm’s owner and manager, Guillermo Banfi, announced: “In the course of this second semester we’ll raise prices from 5 to 10%, in particular in our line of classic wines. We won’t touch the prices of the great reserve line or of our icon wine. Margins have shrunk so much that there’s no way we can keep absorbing the high increase in costs.”

When asked how much of a margin of increase could be born by an Argentinian wine without losing market share, Banfi provided an example that illustrates the situation in the US, a reference market. “In the US, our wines in the USD 10-18 retail price segment sell very well – these are wines with an FOB price of USD 3-5. With an FOB price of USD 3, the consumer price is around USD 11. A rise of 5-10% would imply an increase of USD 1-2 in retail prices, which would have a negative impact on sales, since pricing is a very sensitive issue in this segment.”

Another illustrative example of the present situation is that of Altos Las Hormigas, a small production winery elaborating mid-priced and high end wines. Antonio Morescalchi, vicepresident and founding partner in charge of the commercial department of the firm, explained: “When we launch the 2010 vintage we’ll have to raise the price of wines within the range up to USD 20 retail by at least 10%. In more expensive wines, we’ll have to bear with a decline in profitability because the market is still weak in the price category above USD 20.”

“The problem is that there will be a radical change of scenario for Argentinian wines in the USD 10-20 retail price range. Up to now, these wines have sold well because they are, on average, superior in quality to similarly priced European wines. But from now on, the gap in quality will be narrower, and we’ll be competing with wines of similar quality and price, from regions with a longer standing presence in the market. Argentinian wine will continue to sell on account of its taste profile and uniqueness, a much more demanding challenge in my opinion, yet not one that cannot be surmounted,” added Morescalchi.

In turn, Santiago Santamaría, general manager at Bodega Melipal, announced that, in their case, prices will rise by around 5-8%. “Eighty percent of our wines are, before and after the rise, within the USD 12-18 retail price segment, so we estimate our positioning won’t suffer.”

Bodega Sottano highlights the importance of an additional factor in this price rise context: the role played by raters. Sebastián Olalla pointed out that price rises are very much bound to the level of recognition enjoyed by each wine and winery in the market. “For example, today, our entry level line is commercialized at USD 12.99-15 in every market. If one of the products in that line obtains good ratings from Wine Spectator or Robert Parker, we could surely take it to USD 16.99 and still sell it without difficulty. We could then leave it within that price point, at which we would be able to compete in terms of product quality.”

What is the level of risk?

In an inflationary context, for a small winery, failing to raise prices could entail more risk than taking the chance of losing points of market share in a given market. Although everybody agrees that persuading importers is not that simple, especially in markets like the US – where they find it difficult to understand that a country may have an annual inflation of over 25% –, raising prices becomes inevitable. It is true that the degree of difficulty to modify prices may depend on a number of factors: whether the brand is new in a certain market or niche; whether it has to compete with products or brands supported by more aggressive policies within that market, niche and price point, or face the type of competition presented nowadays by euro countries (France, Spain, Italy); or even on more particular reasons, like a recent change of importer.

The latter is the case of Ruca Malen. As Ricardo Valero, the winery’s export manager, said, since the winery changed their importer early this year, “we cannot raise prices at all.” What the company did towards the end of last year to mitigate the impact of local price rises was to estimate the inflation rate for 2010, and so in October they valued wines considering replacement supply costs. Then they set profit margins, trying to adjust the case price by around one to two American dollars. “Even so, in markets where our prices were lower, we raised prices by 5% because the context is unfavorable for price rises.”

Mauricio Lorca, owner of the winery that bears his name and Foster’s manager, explained that in the case of small wineries, the margins to negotiate rises are very narrow and the risks are too high, since a USD 1 rise in the FOB price translates into a USD 4 rise on the shelf, which results in a different positioning of that product in the market.

For others, there is no margin for negotiation. “We’re not planning to change the prices we’ve offered our importers because they will have trouble understanding how prices can rise in a global market where the growing supply from Australia and Chile as well as the traditional wine producing and exporting countries from the Old World, accompanied by the strong devaluation of the euro, tends to push wine prices down,” declared Aldo Biondolillo, founder and general director at Viñedos & Bodega Tempus Alba.

Translation: Inglés del Vino

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Big Squeeze on Small Wineries in Argentina | Barreling - The Wine Blog »22 Agosto 2010 @ 1:35 am |

[...] The devil is in the details, however, and a more detailed analysis of Argentinean exports suggests that some parts of the industry are facing significant challenges. As usual, my source for news and analysis about wine in Argentina is WineSur, which reports that small wineries are really feeling the squeeze in the critical U.S. export market. (See the report by Gabriela Mazilia. ) [...]

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