Jun 22, 2010
Diageo, the world’s largest drinks company, shrugged off the downturn in global wine sales and upped its long-term bet on Mendoza, with its ideal climate and hit varietal Malbec, Juan Pedro Tomás reports from the Argentine province. Bad weather and global doldrums took a toll on Argentina’s wine industry over the past year, but Diageo – owner of some of the world’s most famous drinks brands – still savored a $14 million investment to expand its production in the heart of Argentina’s wine country.
Diageo’s new state-of-the-art winery, Finca Agrelo, was inaugurated in the province of Mendoza in late 2009 and joined the company’s existing holdings in Navarro Correas, the premium Argentina producer Diageo had acquired in 1996.
Finca Agrelo is part of Diageo’s bid to mesh its internationally known spirits brands and global marketing clout with Argentina’s growing wine success.
“Our vision with Navarro Correas is to take this Argentine gem and continue to grow it first and foremost in Argentina and then to strengthen its distribution in countries where Navarro Correas can succeed,” said Ed Pilkington, Diageo’s marketing and innovation director for Latin America and the Caribbean.
The new winery was Diageo’s only recent investment in Latin America, underscoring the company’s confidence in Mendoza wines. “Thus far, results of these investments in the Navarro Correas brand have proved quite positive,” Pilkington said.
Although Argentina is the world’s fifth largest producer of wine, most of its output had traditionally been consumed at home. This pattern has changed over the past 20 years, as winemakers began to emulate producers in Chile. They modernized production and began creating wines to appeal to international palates. The competition is intense, with vintners from Europe and the so-called New World – the United States, Australia, New Zealand and South Africa, as well as Chile – vying for consumers.
Fueling Argentine wine exports is Malbec, the runaway hit. In 2008, Malbec sales to the United States soared by more than 60 percent. This red accounted for one-third of all Argentina’s bottled wine exports in 2009 and 45 percent of the value of exports, some $230 million, according to Caucasia Wine Thinking, a consulting firm based in Mendoza. Investors from Chile, the United States and Europe have been snapping up brands and vineyards in Argentina, home to some 400 major producers. Mendoza’s Business Council estimated investments of $1.8 billion pesos between 1999 and 2005.
France’s venerable Moët & Chandon has had operations in Mendoza since 1959; there it produces sparkling wines at Bodegas Chandon and other varietals at Bodega Terrazas de los Andes.
Diageo’s expansion plans date back to 2006 when then-chairman James Blyth traveled to Argentina and met with then-President Nestor Kirchner. Blyth, who stepped down in 2008, announced during that October trip that the company would invest up to $20 million in Mendoza. Finca Agrelo is located in Luján de Cuyo, close to the capital of Mendoza and not far from the Navarro Correas winery, Cava Godoy Cruz. It boasts 50 hectares (125 acres) of vineyards and a warehouse large enough to store up to 4,000 barrels of wine. A large part of Diageo’s investment was used to buy modern equipment, including a host of giant stainless-steel fermentation vats.
At the inauguration of Finca Agrelo last year, Randolph Millian, managing director for Diageo in Latin America and the Caribbean, shrugged off the softening of worldwide demand for wine.
Diageo’s investment boosts the wine-growing region overall since the company can promote the wines via a broad and deep international distribution chain that supports dozens of brands, Johnnie Walker whisky, Tanqueray gin and Smirnoff vodka among them. “We are a premium drinks company,” Millian told the daily La Nación. “We build huge brands and we want to concentrate more in wines.”
Among its wine brands are Sterling Vineyards and Beaulieu Vineyards in the United States and Barton & Guestier in France. Diageo’s marketing and sales heft further support the creation of dynamic promotional campaigns, such as Navarro Correas’ award-winning Art Inside and Out, that invited artists in major South American cities to personalize oak casks that were later exhibited and sold via charity auction.
The new facility has an annual capacity of 1.5 million liters. The winery can be expanded to four million liters of capacity.
Navarro Correas is producing premium wines at the eco-friendly Cava Godoy Cruz. In 2009, the 200-year-old bodega exported 40 percent of its production for about $7 million, according to executives. “Each year we continue to grow at high rates and this year  we expect our growth rate to be higher than 20 percent,” said Silvio Pecora, export manager for Navarro Correas. Exports are shipped to five continents, but the fastest growing markets for Navarro Correas wines have been the United States, Canada, Peru, Paraguay and Venezuela, Pecora noted.
The Diageo subsidiary apparently bucked some of the challenges facing the industry in Argentina in 2009. Bad weather resulted in a smaller grape harvest, and the global economic crisis caused total wine exports to decelerate, although bottled wine sales still grew.
“Argentina was one of the few countries that continued to show an increase in this sector even though the increase was considerably less than in the past few years when [exports] were rising 20 percent,” said Juan Carlos Pina, manager of Bodegas de Argentina, a trade group that includes the biggest winemakers in the country.
“The 2009 grape harvest was very high quality but unusually small in quantity because of adverse climate conditions,” Pina said. “The smaller harvest meant a drop in domestic supply along with higher prices.” Another factor affecting exports was the rising value of the Argentine peso relative to the currencies of other wine-producing countries. “Argentina did not devalue its currency as did some competitors like Chile, Australia or South Africa,” Pina said.
The National Winemaking Institute in Argentina reported that the total volume of Argentine wine produced in the first 11 months of 2009 fell 10 percent to 1.21 billion liters, compared to the same period in 2008. Caucasia Wine Thinking found that the value of Argentine wine exports fell 10 percent to $770 million in 2009 versus the previous year. This figure reflected the sharp drop – 60 percent – of bulk wine exports, a significant portion of the decline attributed to changes in Russia, which previously has purchased and rebottled bulk wine from Argentina and other countries.
In 2009, Russia imported more bulk wine from Brazil, industry experts said. Yet spurred on by demand in the United States and Canada, Argentina’s exports of bottled wine rose almost 10 percent in 2009 to $553 million.
Looking ahead to the next grape harvest, Pina believes that the 2010 yield will also be small and that the vineyards will continue to suffer the effects of an overvalued currency.
But one of Argentina’s big competitors, Chile, has been dealt a setback by the earthquake, which has disrupted its wine production (see box, page 51).
Argentina may yet be able to follow the path blazed by its neighbor, whose Maipo, Libertador Bernardo O’Higgins, Maule, Rapel and Casablanca valleys produce only half as much wine as Argentina. Yet Chile sold $1.4 billion in wine exports last year, about twice the amount that Argentina exports.