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Georgian Wine: Plan for the Worst, Hope for the Best

"You mean there's a catch?"
"Sure there's a catch", Doc Daneeka replied. "Catch-22. Anyone who [claims he is crazy because he] wants to get out of combat duty isn't really crazy."
Joseph Heller, Catch 22
 Пока гром не грянет, мужик не перекрестится.
Русская народная пословица

 

The Georgian wine industry had a couple of very good years in 2013 and 2014, following the opening of the Russian market. Exports skyrocketed, prices of grapes followed suit. For all the talk about diversification, within just two years, Russia’s share in the total exports of Georgian wine shot up from 0 to almost 68%.

Chart 1: Georgian wine exports by value (current USD)

 

The red grape varieties – providing the raw material for semi-sweet wines that are particularly popular on the Russian market – soared to hitherto unthinkable levels. For example, as exporters vied to place Stalin’s favourite Khvanchkara wine on the Russian supermarket shelf, the Alexandrouli grape variety, from which it is made, fetched a price of about 8 GEL per kg.

Needless to say, higher wine and grape prices provided powerful stimuli for additional investment in vineyards and processing capacity, putting even more eggs into the Russian basket. In just three years, grape production more than doubled from 144,000 ton in 2012 to about 290,000 ton in 2015 (expected harvest of this year).

With the Russian market sharply contracting in 2015, the amount of pain inflicted on the Georgian farmers and winemakers has been directly proportionate to the windfall gains they made in the previous two years. Grape prices fell to levels only slightly higher than prior to 2012. Saperavi, Georgia’s main red variety, is currently trading at roughly 82 tetri per kg, well less than half of the peak value (1.94GEL, on average) it achieved in 2014.

Kakhetian farmers are once again taking it to the streets, protesting over the prices offered to them by the wineries, and lobbying for higher government subsidies. And given that Georgia is entering an election year, they are likely to be successful.


THE WRITING WAS ON THE WALL!

The fact that overexposure to the CIS and Russian markets carried with it significant commercial risks for the Georgian wine industry was on everybody’s minds ever since the first shipment of Georgian wine crossed the Russian border in summer 2013. Initially, the main concern was that Georgia (and its wines) would once again fall out of favor with Russia, leading to the re-introduction of tariff and non-tariff restrictions on Georgian exports. But, even leaving politics aside, it was clear that having the entire industry depend on Russia subjected Georgia to the (uninsured) risk of a sudden downturn in that particular market.

Yet, despite these well-justified concerns, a paradoxical Catch 22 situation was created with the opening of the Russian market since most private actors in the value chain lost any incentives to invest in marketing their wines (and Georgia!) outside Russia and CIS. With every bottle of wine sucked into the Eurasian vacuum, they were busy celebrating and investing in additional grape growing and processing capacity. And, let’s face it, private Georgian wineries would have been crazy doing anything else since, taken alone, none of them have sufficient size to engage in the kind of massive international campaigning that would be required to introduce the fabulous story of Georgia’s winemaking to new markets.

While it is difficult to blame private companies for re-capturing the Russian market, perhaps the worst mistake was committed by the Georgian government, which failed to seize on the opportunity to prepare for the rainy day (which came sooner than anybody expected).

Table 1: Grape Prices and Subsidies, 2013-2015

  2013 2014 *2015
Average subsidy per kg (GEL) 0.36 0.28 0.27
Average price per kg (including subsidy) 1.12 1.34 0.73
Average share of subsidy in price (%) 33% 25% 38%
Total volume processed (ton) 89,849 117,861 92,653
Total public funds spent (mln GEL) 32.0 33.0 24.8

*as of 1 October, 2015 (most of the grape harvest is finished). Source: Ministry of Agriculture and National Wine Agency

Thus, instead of engaging the private sector and coordinating a well-targeted marketing campaign (that could be financed by some of the windfall profits) to promote Georgian wines to new markets, the government spent tens of millions of lari on subsidizing the industry at a time when money was its least concern. As grape prices soared, the government slightly reduced the subsidy from 36 to 28 tetri per kg (on average). However, the total amount of taxpayers’ money thrown at wine producers and farmers (including, since 2013, not only smallholders but also large farmers cultivating more than 10ha) exceeded 30mln GEL in both 2013 and 2014.

What a waste!


THE WAY FORWARD: CHINA AND CHURCHKHELAS?

While not representing a very large share in Georgia’s total exports (or GDP), the wine sector is of key significance for the livelihoods of the vast majority of Georgian farmers. At the same time, given how long it takes to go from grape seed to placing a bottle in a grocery cart, it is a sector that is extremely sensitive to changes in demand. Hence, the need for some sort of insurance.

Understandably, all governments in Georgia’s recent history were eager to provide price support and subsidize smallholder farmers in order to prevent a social and political crisis. Such a policy is equivalent to spreading the risks that are specific to winemaking over all the other sectors of the economy.

What the Georgian governments have failed to achieve thus far, however, is to properly insure the industry against extreme demand fluctuations which have been plaguing it since Gorbachev’s anti-alcohol campaign of 1985-1988. Such insurance can only be achieved through greater diversification of Georgian wine exports, on the one hand, and promotion of new and traditional products such as organic and kosher wines, Chacha, brandies, and even Churchkhelas, on the other. Risks could also be reduced by investing in locally branded products and agritourism through a Japanese-style “one village-one-product” policy.

Finally, what about China? Almost a dozen small Chinese companies are currently trying to bring Georgian wine to China and the results are showing. Yet, the challenge these companies are facing can be summarized in one word: information. The average Chinese consumer is simply unaware of a country called Georgia, let along its being at the origin of the world’s wine history. As we have learned through interviews, one or two containers of Georgian wine may take a year to distribute (through friends and relatives) as large Chinese wholesalers would rarely take upon themselves the risk of placing a relatively unknown product.

The Georgian government has recently established an office in Beijing to promote Georgia’s brand as a country. Such investment in international marketing is, of course, a great step forward, but many more (smart) steps would be needed. The government has 58 embassies (all of them in potential wine markets) across the globe. Mikho the wine-maker from Kakheti does not have a single embassy. It would therefore be highly beneficial for the government to take some of the money wasted on subsidies and, instead, make use of its diplomatic infrastructure to promote Georgian wine-makers around the world. (Incidentally, in this way, the government will also buy its own image insurance against regular farmer protests in Kakheti.)


 

The article was produced with the assistance of the European Union through its European Neighbourhood Programme for Agriculture and Rural Development, Austrian Development Cooperation, CARE Austria or CARE International in the Caucasus. The contents are the sole responsibility of the authors and can in no way be taken to reflect the views of the European Union, Austrian Development Cooperation, CARE Austria or CARE International in the Caucasus.

 

 

 

 

 

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Simon Appleby on Saturday, 03 October 2015 22:44

Your article raises very interesting arguments, well done!

Grape prices in Georgia in 2013/4 rtveli were higher than that of South Africa, Argentina, Chile, Australia and New Zealand (none of which are substantially subsidised); up to double or triple the average price of those countries. Yet all these countries develop and maintain excellent national branding schemes in emerging markets with relatively little state subvention. Proper pruning/fertilisation/pest control/irrigation would reduce the cost of production by 30-70% for small vignerons, but blocking highways and threatening government officials seems to have a higher marginal return than hard graft in the minds of many.

Some more forward-thinking Georgian wine firms have made inroads into the Chinese wine market without much state assistance. Tbilvino wines can be found in many Hong Kong supermarkets, a market of 7 million people importing over USD$1 billion worth of wine each year, and Winery Khareba even has its own wine stores in western China.

Deregulation of Georgian farmland ownership will encourage more investors from UK, Europe, USA, Australia, South America, South Africa, China, India and Southeast Asia to invest in wineries, and diversify Georgia's markets from the traditional feast/famine market of Russia. Younger generations of Georgian wine entrepreneurs are becoming more comfortable dealing with non-Russophone distributors in novel markets, which ultimately will buffer Georgian grape producers from the wild fluctuations in price caused by the unreliability of our northern neighbour as a trading partner.

For more data on market trends, see here https://yfngeorgia.wordpress.com/2015/07/31/the-great-convergence-changing-patterns-of-global-alcohol-consumption-the-wine-economist/

and here https://yfngeorgia.wordpress.com/2015/04/14/georgian-wine-exports-down-67/

and, in the case of the Chinese market, here https://yfngeorgia.wordpress.com/2015/02/13/the-chinese-wine-and-spirits-market-opportunities-and-challenges-chasing-the-vine/

Your article raises very interesting arguments, well done! Grape prices in Georgia in 2013/4 rtveli were higher than that of South Africa, Argentina, Chile, Australia and New Zealand (none of which are substantially subsidised); up to double or triple the average price of those countries. Yet all these countries develop and maintain excellent national branding schemes in emerging markets with relatively little state subvention. Proper pruning/fertilisation/pest control/irrigation would reduce the cost of production by 30-70% for small vignerons, but blocking highways and threatening government officials seems to have a higher marginal return than hard graft in the minds of many. Some more forward-thinking Georgian wine firms have made inroads into the Chinese wine market without much state assistance. Tbilvino wines can be found in many Hong Kong supermarkets, a market of 7 million people importing over USD$1 billion worth of wine each year, and Winery Khareba even has its own wine stores in western China. Deregulation of Georgian farmland ownership will encourage more investors from UK, Europe, USA, Australia, South America, South Africa, China, India and Southeast Asia to invest in wineries, and diversify Georgia's markets from the traditional feast/famine market of Russia. Younger generations of Georgian wine entrepreneurs are becoming more comfortable dealing with non-Russophone distributors in novel markets, which ultimately will buffer Georgian grape producers from the wild fluctuations in price caused by the unreliability of our northern neighbour as a trading partner. For more data on market trends, see here https://yfngeorgia.wordpress.com/2015/07/31/the-great-convergence-changing-patterns-of-global-alcohol-consumption-the-wine-economist/ and here https://yfngeorgia.wordpress.com/2015/04/14/georgian-wine-exports-down-67/ and, in the case of the Chinese market, here https://yfngeorgia.wordpress.com/2015/02/13/the-chinese-wine-and-spirits-market-opportunities-and-challenges-chasing-the-vine/
Eric Livny on Saturday, 03 October 2015 23:58

Thanks, Simon, both for the compliments and the very useful comments and links!

Thanks, Simon, both for the compliments and the very useful comments and links!
Guest - BekaGonashvili on Sunday, 04 October 2015 01:26

Subsidies are making even "lazy" Georgian Farmer's to be more lazy!

Governmental subsidies should go Mostly in Marketing, Research, increasing Farmers Knowledge not only in grapes and wine, but in every agriculture sectors, and Market will not leave any grape on the wine tree, demand will be huge, as world population increases but they don't have source to get Good (it is also very important to improve the quality!!!) Wine.

Georgian Must not Hang on Russian Market!!! 2 Years ago, when people started making new wine yards I was telling everybody to take care of it, unless they have to Produce as Brilliant wine as produces by for example: Iago Bitarishvili, John from Signagi, and other Organic wine producers, who may have 1 Hectar only but there wines are sold on 5-8 EURO on Ex-Work.

Also we have to take note that all wine factories have there own wine yards already, they nobody can push them to buy extra grapes for them. in this case I think that farmers should decrease productivity with Increasing Quality and grapes market will not be difficult to find.

I have also wine yard, but first of all I am against subsidies, as IT WILL MAKE ME LAZY!!! and I don't want to look like other farmers :)

All The Best,

Beka

Subsidies are making even "lazy" Georgian Farmer's to be more lazy! Governmental subsidies should go Mostly in Marketing, Research, increasing Farmers Knowledge not only in grapes and wine, but in every agriculture sectors, and Market will not leave any grape on the wine tree, demand will be huge, as world population increases but they don't have source to get Good (it is also very important to improve the quality!!!) Wine. Georgian Must not Hang on Russian Market!!! 2 Years ago, when people started making new wine yards I was telling everybody to take care of it, unless they have to Produce as Brilliant wine as produces by for example: Iago Bitarishvili, John from Signagi, and other Organic wine producers, who may have 1 Hectar only but there wines are sold on 5-8 EURO on Ex-Work. Also we have to take note that all wine factories have there own wine yards already, they nobody can push them to buy extra grapes for them. in this case I think that farmers should decrease productivity with Increasing Quality and grapes market will not be difficult to find. I have also wine yard, but first of all I am against subsidies, as IT WILL MAKE ME LAZY!!! and I don't want to look like other farmers :) All The Best, Beka
Pati Mamardashvili on Monday, 05 October 2015 13:46

Very good article!
Yes, today's situation in the Georgian wine sector was expected. The government was preparing for this "rainy day", though. The budget for wine marketing campaign was more than doubled in 2014 compared to 2012. As argued by Mr. Danelia, out of 5 million GEL allocated to wine promotion campaign nothing was spent in CIS countries (all went to other markets such as Poland, Great Britain, China, Japan, etc). In 2015, they even spent 10 million GEL for such campaigns. So, the government put quite a lot of effort into this... Perhaps it was not enough and the money spent on price subsidies in 2013/2014 (when it was really not necessary) should also have gone to marketing campaign. But would this really help to market such an excess production? Moreover, some sweet wines (e.g. Khvanchkara) are only loved by Russians (and people from former Soviet Union) but not appreciated by other consumers.
In addition, putting a substantial amount of government money in marketing campaign is not the best solution. EU is allocating a lot of financial resources to promotion support to the wine sector. Many misappropriation have been uncovered and studies were not able to demonstrate impact of such measures on the competitiveness of EU wines. Despite all that, EU has increased the budget from EUR 152 million in 2009-2013 to EUR 1.2 billion for 2014-2018. Lobbies seem to be quite successful there...

I agree with Beka (and the authors of this article) that instead of price subsidies it would be better to put government money in increasing farmers' knowledge, restructuring the sector, and promoting value adding activities such as Churchkhelas or winetourism.
Spending nights in wine barrels is very popular in Switzerland: http://www.rueedi-ferien.ch/uebernachtungen-schlafen-im-fass/

Very good article! Yes, today's situation in the Georgian wine sector was expected. The government was preparing for this "rainy day", though. The budget for wine marketing campaign was more than doubled in 2014 compared to 2012. As argued by Mr. Danelia, out of 5 million GEL allocated to wine promotion campaign nothing was spent in CIS countries (all went to other markets such as Poland, Great Britain, China, Japan, etc). In 2015, they even spent 10 million GEL for such campaigns. So, the government put quite a lot of effort into this... Perhaps it was not enough and the money spent on price subsidies in 2013/2014 (when it was really not necessary) should also have gone to marketing campaign. But would this really help to market such an excess production? Moreover, some sweet wines (e.g. Khvanchkara) are only loved by Russians (and people from former Soviet Union) but not appreciated by other consumers. In addition, putting a substantial amount of government money in marketing campaign is not the best solution. EU is allocating a lot of financial resources to promotion support to the wine sector. Many misappropriation have been uncovered and studies were not able to demonstrate impact of such measures on the competitiveness of EU wines. Despite all that, EU has increased the budget from EUR 152 million in 2009-2013 to EUR 1.2 billion for 2014-2018. Lobbies seem to be quite successful there... I agree with Beka (and the authors of this article) that instead of price subsidies it would be better to put government money in increasing farmers' knowledge, restructuring the sector, and promoting value adding activities such as Churchkhelas or winetourism. Spending nights in wine barrels is very popular in Switzerland: http://www.rueedi-ferien.ch/uebernachtungen-schlafen-im-fass/
Eric Livny on Monday, 05 October 2015 14:56

Loved your commentary, Pati! We've just seen (at the monthly macroeconomic review session) that Georgia's exports to Poland have increased quite sharply in the last few months. I hope that at least some of this growth reflects the ever growing Polish fascination with Georgia as a tourist fascination and Georgian cuisine. It may also reflect a persistent effort by the Georgian government to market Georgian products in Poland. So, yes, you are right that the Georgian government does understand the importance of international marketing and is committing quite a bit of funding for this purpose.

Now, how effective is this type of spending is a very important policy question that the government should try to answer in a rigorous fashion. I even see the possibility for policy experiments (spending money on different types of marketing activities from TV/media ads to visits by Georgian artists and singers, to participation in trade exhibitions, etc.). One should try to capture any changes in exports and tourism as a result of these specific activities (and their different combinations).

That said, I would like to refer our readers to two older blog articles by Jacques Fleury which provide a detailed treatment of the Georgian government policy options and a very interesting discussion of how new wine countries such as Australia, Chile and Argentina, have dealt with the same challenge of establishing their reputation in the global markets. As he explains, the government should never try to do it alone. It should work TOGETHER with the private sector. It should use modest public funds as a means of coordinating among private sector actors and solicit their contributions -- financial resources and knowhow.

Part 1: http://www.iset-pi.ge/index.php/en/iset-economist-blog-2/entry/georgian-wine-industry-recent-past-and-the-way-forward
Part 2: http://www.iset-pi.ge/index.php/en/iset-economist-blog-2/entry/the-georgian-wine-industry-recent-past-and-the-way-forward

Loved your commentary, Pati! We've just seen (at the monthly macroeconomic review session) that Georgia's exports to Poland have increased quite sharply in the last few months. I hope that at least some of this growth reflects the ever growing Polish fascination with Georgia as a tourist fascination and Georgian cuisine. It may also reflect a persistent effort by the Georgian government to market Georgian products in Poland. So, yes, you are right that the Georgian government does understand the importance of international marketing and is committing quite a bit of funding for this purpose. Now, how effective is this type of spending is a very important policy question that the government should try to answer in a rigorous fashion. I even see the possibility for policy experiments (spending money on different types of marketing activities from TV/media ads to visits by Georgian artists and singers, to participation in trade exhibitions, etc.). One should try to capture any changes in exports and tourism as a result of these specific activities (and their different combinations). That said, I would like to refer our readers to two older blog articles by Jacques Fleury which provide a detailed treatment of the Georgian government policy options and a very interesting discussion of how new wine countries such as Australia, Chile and Argentina, have dealt with the same challenge of establishing their reputation in the global markets. As he explains, the government should never try to do it alone. It should work TOGETHER with the private sector. It should use modest public funds as a means of coordinating among private sector actors and solicit their contributions -- financial resources and knowhow. Part 1: http://www.iset-pi.ge/index.php/en/iset-economist-blog-2/entry/georgian-wine-industry-recent-past-and-the-way-forward Part 2: http://www.iset-pi.ge/index.php/en/iset-economist-blog-2/entry/the-georgian-wine-industry-recent-past-and-the-way-forward
Salome Gelashvili on Monday, 05 October 2015 14:42

I think Japanese-style “one village-one-product” (OVOP) approach is quite interesting and since it was initiated by the head of Japanese town’s cooperative, one can consider cooperatives as one of possible engines to develop this approach (given current cooperative movement in Georgia). However, local governance plays an important role here. Georgian government developed municipal information centers and local government has some decision-making power, but more work has to be done in order to strengthen local government of regions.

I think Japanese-style “one village-one-product” (OVOP) approach is quite interesting and since it was initiated by the head of Japanese town’s cooperative, one can consider cooperatives as one of possible engines to develop this approach (given current cooperative movement in Georgia). However, local governance plays an important role here. Georgian government developed municipal information centers and local government has some decision-making power, but more work has to be done in order to strengthen local government of regions.
Simon Appleby on Saturday, 10 October 2015 18:07

Georgia's current wine export promotion efforts are rather complicated, with substantial duplication of effort. SAMTREST, the Georgian Wine Association, and the Ministries of Economy, Agriculture and Foreign Affairs all have wine export promotion activities. Unless carefully co-ordinated, turf wars can arise.

The Georgian Ministry of Agriculture has been examining the New Zealand model of wine export promotion funding for at least the past 5 years. New Zealand's wine exports have shown very strong growth over the past two decades, now recognised as some of the world's best cool climate wines. New Zealand has a strong industry-based focus to its export promotion efforts. By law, a levy on all wine produced is collected from wineries and a levy on all wine grape purchased is collected at the point of sale (at winery gate), which then supports the activities of New Zealand Winegrowers, namely export promotion and R&D.

http://www.nzwine.com/about-nz-winegrowers/

Regardless of changes in government or state budgetary issues, the New Zealand industry has a stable funding base to support export promotions. The legislation for such levies is quite simple and can be seen here

http://www.legislation.govt.nz/regulation/public/2010/0460/latest/DLM3426201.html
http://www.legislation.govt.nz/regulation/public/2010/0191/latest/DLM3058427.html

If Georgia were to adopt this model, the Georgian Wine Association would be the logical beneficiary organisation. The Georgian Ministry of Finance would be the agency tasked with collecting the levy via the Revenue Service and passing proceeds onto the GWA. The Ministry of Finance should also be providing matching funding for export promotion, sourced from excise on Georgian sales of liquor, on a 5:1 State/Private basis initially, phased back to 1:1 over time as exports grow and the industry becomes more self-sufficient.

Georgia's current wine export promotion efforts are rather complicated, with substantial duplication of effort. SAMTREST, the Georgian Wine Association, and the Ministries of Economy, Agriculture and Foreign Affairs all have wine export promotion activities. Unless carefully co-ordinated, turf wars can arise. The Georgian Ministry of Agriculture has been examining the New Zealand model of wine export promotion funding for at least the past 5 years. New Zealand's wine exports have shown very strong growth over the past two decades, now recognised as some of the world's best cool climate wines. New Zealand has a strong industry-based focus to its export promotion efforts. By law, a levy on all wine produced is collected from wineries and a levy on all wine grape purchased is collected at the point of sale (at winery gate), which then supports the activities of New Zealand Winegrowers, namely export promotion and R&D. http://www.nzwine.com/about-nz-winegrowers/ Regardless of changes in government or state budgetary issues, the New Zealand industry has a stable funding base to support export promotions. The legislation for such levies is quite simple and can be seen here http://www.legislation.govt.nz/regulation/public/2010/0460/latest/DLM3426201.html http://www.legislation.govt.nz/regulation/public/2010/0191/latest/DLM3058427.html If Georgia were to adopt this model, the Georgian Wine Association would be the logical beneficiary organisation. The Georgian Ministry of Finance would be the agency tasked with collecting the levy via the Revenue Service and passing proceeds onto the GWA. The Ministry of Finance should also be providing matching funding for export promotion, sourced from excise on Georgian sales of liquor, on a 5:1 State/Private basis initially, phased back to 1:1 over time as exports grow and the industry becomes more self-sufficient.
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