Wine Exports and Brexit; Does This Create Opportunities for Georgia?

While perusing Mike Veseth’s excellent US-based blog, The Wine Economist, I stumbled upon his review of a scholarly paper published by Australian economists Kym Anderson from the University of Adelaide and Glyn Wittwer  from Victoria University regarding Brexit and the wine market.

KA

Kym Anderson is Executive Director of the Wine Economics Research centre at University of Adelaide, the premier wine economics facility in the Southern Hemisphere, and having spent some time here in Georgia, has written extensively on trade blocs and technology uptake, and their likely impact on Georgian wine exports.

The UK imports over 1.8 billion bottles of wine a year; less than 1% of consumption is satisfied by domestic wine production. Existing free-trade arrangements with the EU are coupled with concessional market access for South African and Chilean wine at present.

UK

FIGURE 1: WINE’S SHARES OF UK MERCHANDISE IMPORT VALUE SINCE 1800 AND OF VOLUME AND VALUE OF UK ALCOHOL CONSUMPTION,a 1950 TO 2015 (%)

 

The chart is taken from Anderson and Wittwer‘s paper. While the UK has been importing table wines and fortified wines from France, Spain and Portugal for over 500 years, the chart above shows that wine consumption is a comparatively recent phenomenon amongst the masses, with wine now making up around a third of all alcohol consumed in the UK by volume, and almost a half of all alcohol consumed by value.

This has relevance to Georgia as, unlike France, Italy, Spain, or Portugal, the vast majority of British wine consumers are only first- or second-generation wine drinkers. The willingness to try something novel or exotic is more developed amongst such consumers, which creates opportunities for up-and-coming wine regions.

The “Free Trade” scenario put forward by the authors could put Georgia, and possibly Armenia, in a more advantageous position. Tariff treatment of wines from the Caucasus would be identical to that of European, Australian, South African or South American wines.

The “Large Brexit” would see Georgian wines facing a higher level of tariff than South African and Chilean wines. However, tariffs are rather small compared to domestic UK excise tax.

There is a third option not considered, of the UK negotiating a FTA with Australia, New Zealand, USA and Canada, while retaining tariffs on EU and Caucasus wines. The tariff situation does not favour Georgian exports. However, more robust trade and investment between the four Anglophone economies would likely add 10-20% to the GDP growth figures of the participants in this FTA, which would likely increase demand for wine, including that from Georgia. Much the the academic establishment would disagree with me on that claim, but my guess is that the UK’s economy 5 years after Brexit will be a great deal more robust than most project.

Overall, a thought provoking and interesting article with relevance for wine producers in this region.

 

 

 

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Georgia and Bilateral Free Trade Agreements; What’s Next?

 

The Deep and Comprehensive Free Trade Agreement between Georgia and the EU, brought into effect in 2014, was hailed at the time by many as being of great importance to Georgian manufacturers and food/beverage producers. Skeptics commented that 7000 articles under the pre-existing GSP+ agreement with the EU were already duty-free and quota-free for many years, yet very few exporters had ever taken advantage of the concessions. Nonetheless, exporters of alcoholic beverages were keen for the deal to go ahead; while the EU makes up a small proportion of wine and spirits exports, free access to the world’s largest consumer goods market would facilitate steadily rising market share. This very basic treatise will look at alcoholic beverages as representative of Georgia’s primary industry; to a certain extent conclusions drawn here can be applied to other food commodities also.

Note that for all analyses that follow, wines sold are not confined to bottled wines. Cask wines and bulk wine in flexitanks are included in the totals.

Georgia traditionally has been a very Russia-focussed wine production country, as the following charts indicate.

Georgian Wine Exports by Value

Georgian Wine Exports by Volume

Source: UN Comtrade

A quick visual assessment of these charts indicates that Russia is a higher volume/lower price market for Georgian wine than the EU.

Coincidentally, 2014 was a boom year for Georgian alcohol producers; the Russian market that reopened in 2013 was robust and pent-up demand for Georgian wine meant that sales volumes were robust, while prices were acceptable.

Georgian Wine Exports to Russia, Value

Georgian Wine Exports to Russia.jpeg

Source: UN Comtrade

In the face of this, the urgency for diversifying into challenging new EU markets was probably dulled by the lure of familiar markets in Russia, despite the higher price capable of being captured in Europe if quality attributes were addressed. A few shrewd operators maintained a counter-cyclical approach, leveraging their Russian sales revenues into aggressive European and Asian marketing campaigns. Those producers are doing rather better now than their solely Russia-centric competitors.

Sales volumes of Georgian wine into the EU have shown satisfactory growth since the DCFTA was implemented, but the the average price per hectalitre has increased by almost 40% in dollar terms. Granted it is only two year’s worth of data points. It is also possible that the mix of products reaching the EU market has changed and that higher-end wines are a larger proportion of imports from Georgia. It will be interesting to observe whether exporters will restrain prices to aggressively capture market share, or continue with relatively high margins but with slower sales growth. It appears that the devaluation of the Euro in 2015 has had some impact upon dollar-denominated trade statistics. Why average price per HL goes up and volume sold goes up, but total $ revenue goes down, is something of a mystery.

Georgian Wine Exports to EU, Value

Georgian Wine Exports to EU, Litres.jpeg

Source: UN Comtrade

There are challenges in the European market; European consumers, especially in the West and South of the continent, have quite well-defined preferences and in many cases have been drinking the same wines from the same appellations for hundreds of years. Changing those preferences will not be easy. The proverbial “wine lake” of Europe means that table wine in Europe is cheaper than mineral water in many cases; Georgia does not effectively compete in this market segment, lacking the subsidies or economies of scale to do so. Data suggests that much of the Georgian wine entering the EU is premium or super-premium.

The next major Free Trade Agreement being pursued is with the People’s Republic of China. Until recently one of the fastest growing centres of wine consumption in the world, China is poised to exceed Russia as a wine consuming country before the end of this decade. However, the two-year Anti Corruption Campaign launched by the Chinese Central Government has constrained sales growth somewhat. In China, a substantial proportion of wine sold is used for gifts, for people from whom one desires a favour, so the anti-graft campaign has dulled the growth of this sector. That said, Georgian wine exporters have been capturing market share in China, from a very low base, at an encouraging rate despite economic slowdown and the anti-graft campaign. Import tariffs on wine imports into China are 14%; exporters from countries with a Free Trade Agreement with China do not have to pay this tariff.

Georgian Wine Exports Asia-Pacific by value

Georgian Wine Exports to Asia-Pacific.jpeg

Source: UN Comtrade

As one can see from the charts, China and Japan account for the majority of volume, and other markets are very much in “test-phase”. Wine sold in quantities of less than a full 20-foot container load have a very high freight price and slow transit time, which limits market uptake.

Until early this century, what little wine that was consumed in China was mostly domestic and of very poor quality. I can vividly remember buying a bottle of “Great Wall” Cabernet in 2000 in Shanghai, which had a can of Coca Cola taped to the neck of the bottle as a free gift. The serving suggestion was to blend the two, which would make the wine almost drinkable; otherwise, it tasted like furniture polish. In only 15 years, wine drinking has become a prestigious activity in China indicating sophistication, and China is poised to have one of the largest areas under vine in the world soon. Vineyard management and winemaking quality is dramatically improved. Wine imports have also boomed, with over a third accounted for by French wine, and New World exporters taking advantage of the fact that many Chinese consumers entering the wine market for the first time have yet to establish fixed habits regarding country of origin of their wines.

It is interesting to observe the average price per hectalitre commanded by exporters to the East Asian markets. France commands the highest premium, and Georgian and Australian wines fit a niche in the next tier, commanding significantly higher prices than Chilean or South African wines.

Wine Export Prices by Market

Source: UN Comtrade

Note that these prices per hectalitre are calculated on an FOB basis, not CIF. When freight and insurance are included, the picture is different and between-country discrepancies in pricing are reduced somewhat.

 

East Asia Wine Imports, Prices by Exporter

Source: UN Comtrade

This may change with time now that rail transport from Georgia across the Caspian to China has become faster and, hopefully, cheaper than sea freight. This could put Georgian wine exports at a competitive advantage to those from South America, Africa, Australasia and western Europe.

Interestingly, on average wines imported into Mainland China from France, Australia and Georgia are priced roughly the same on average on a CIF basis. This does not take into the account the price distribution of different products in the product mix, but it is still an interesting finding.

If we consider that Australia and Georgia have some similarities in this market (similar average price point), then it is worthwhile looking at Australia’s experiences in capturing emerging market share.  The following infographic from Wine Industry Insight Magazine’s Lewis Perdue should be interesting.

WineIntelligence-china-infographics-2-855x1024

Australia is a zero-subsidy jurisdiction. Georgia maintains floor prices for grape produced by smallholders, but there is no substantial subsidy for commercial-scale vignerons. Australian exporters have been able to capture significantly better prices on average than most of their competitors, through rigourous quality management, national and regional branding, and aggressive export marketing.

Concurrently, the Free Trade Agreement with China has significantly reduced the cost of Australian wine to Chinese distributors (the tariff of 14% of the Cost-Insurance-Freight value is now abolished for Australian wine) which allows flexibility for discounting to capture market share, or capturing better margins, or a mix of these strategies. It is still too early to see the effect on the Free Trade Agreement with China, effective December 2015.

Australian Wine Exports to China

Australian Wine Exports to China volume.jpeg

Source: UN Comtrade

A weakening Australian dollar over the past two years has substantially improved Australia’s trade competitiveness, so even though the drop in price per HL appears steep, in AUD terms it is much less pronounced and counteracted by a greater volume of sales.

Australia also implemented Free Trade Agreements with Japan (January 2015) and South Korea (December 2014) , and the effects on sales and average price can be seen here.

Australian Wine Exports to South Korea.jpeg

Australian Wine Exports to South Korea by volume .jpeg

Source: UN Comtrade

A 25% increase in sales turnover in one year after an FTA comes into force in USD terms is quite a good result.

In Japan’s case, the response to a FTA is a more mixed result

Australia Wine Exports to Japan by value

Australia Wine Exports to Japan by volume

 

 

 

 

 

 

 

Source: UN Comtrade

An substantial increase in wine sales in litres to Japan was noted in the first year of the FTA, with a tripling in bulk wine sales. Average price per hectalitre in USD terms has dropped in that period as a result of the change in product mix, compensated by the concurrent weakening of the AUD and improved terms of trade. Japan’s economy is still rather shaky so dramatic growth in wine prices is unlikely in the near future.

Granted these datasets only involve a few years and prices are averaged over many product classes. The next 2-3 years will yield very interesting data on the cost-benefit of FTA’s for wine exporting countries.

Hiro Tejima, Wine Australia’s Head of Market for Asia Pacific, comments on the short-term effects of these two FTA’s and how they see the future.

 

Non-traditional markets for Georgia have been core markets for Australia for some decades. The $6 billion a year wine import trade in the Asia Pacific region still has plenty of growth potential, and for wine producers in countries other than France, the opportunity exists to capture market share amongst first-time wine drinkers who are not yet firmly wedded to European wines.

Asia-Pacific Wine Imports

Source: UN Comtrade

Steady growth within the ASEAN (Association of South-East Asian Nations) FTA in wine imports is encouraging. Singapore is a Free Port, with no import duty on wines, but other neighbouring countries with high tariffs are showing good growth potential. Australia’s establishment of an FTA with New Zealand and ASEAN in October 2015 should provide impetus for further growth in wine exports. Currently ASEAN countries import between 15% (Singapore) to 50% (Malaysia) of their wine from Australia.

Asean ex-Singapore Wine Imports

Source: UN Comtrade 

Only 20 years ago, Australian wine was unknown in Asia. Now it is ubiquitous. Export market promotion has evolved over time, with levies imposed upon wineries and grapegrowers to fund export market development, vineyard R&D, and biosecurity programmes with government co-operation.

Brand Australia” is now well known, and consumers understand the diversity of product available under that umbrella, from supermarket “critter wines” like Yellowtail at $5 to $3000/bottle Penfolds Grange. Regional/appellation identities like Barossa Valley, Margaret River, and Rutherglen are understood by consumers within the larger national wine identity.

The lessons that Georgia can learn from this:

  1. Effort invested in negotiating Free Trade Agreements potentially have a bigger effect upon exports, and bigger flow-on effect to grape growers, than subsidies can.
  2. Free-Trade Agreements can affect demand for different product types of different price points in different ways.
  3. Free-Trade Agreements in the short term may, but not always, result in higher FOB prices for exported goods, but volumes sold tend to trend upwards when tariffs are reduced.
  4. Export marketing requires an industry-led approach with government co-operation. National branding is an essential component.

To what extent these conclusions can also be apportioned to other agricultural exports can be argued. East Asia is a major importer of nuts of all types, including hazelnuts, and nut consumption is a pretty good proxy for economic development. Georgia is well positioned to be a major exporter of hazelnuts, walnuts, pecans, almonds and pistachios if it can get its act together, and a diversity of target markets with no import tariffs would make this investment class more attractive to professional investors. Nut orchards are expensive to develop and have terrible cashflow dynamics for the first five years, so it requires patient capital and a professional approach; such investments are more likely to occur if market access is more favourable.

Fresh produce exports are in a state of flux, as both the EU ($12 billion a year) and Turkey ($2.5 billion a year) have lost access to the Russian market, leaving large surpluses of produce heavily discounted in the region. After some adjustment to new market realities, some niche products like Kiwifruit, blueberries, honeyberries and blackberries will no doubt increase market penetration in Europe when GlobalGAP standards are implemented in supply chains and distribution in Europe is sorted out.

The EU DCFTA is an excellent development that may yield incremental gains for Georgian wine exporters, from a low baseline, in a very attractive consumer goods market. However, it should not be seen as an end unto itself, but the first of many Free Trade Agreements negotiated with non-traditional markets. Having gone through the process of DCFTA negotiations, increasing safety standards and dealing with non-compliance to satisfy the EU, Georgia is now institutionally equipped to push through deals not only with China, but with ASEAN, South Korea, Japan, Australia, New Zealand, India and NAFTA.

 

New Logistics Options for Georgian Wine and Nuts

This month, a train from Lianyunyang port in East China’s Jiangsu province arrived in Tbilisi. Performed as a test shipment, the exercise was designed to test how a shipment of non-perishable goods (in this case electronics) could travel through China’s domestic rail network to its border with Kazakhstan at Korgas, through the Kazakhstan rail network to Aktau, cross the Caspian on a ferry to Azerbaijan’s capital Baku, and then travel to Tbilisi.

image1

The duration of travel for this journey was 15 days, which compares with the current 10-15 days that container freight on trucks taking the same route. It is 25 days shorter than the same route by sea.

From Civil.ge

According to the state-owned Georgian Railway one more container train is scheduled to deliver cargo via Georgia through this Trans-Caspian International Transport Route. The Georgian Railway also said, without specifying figures, that it expects “several thousand” of containers to be shipped via this route in 2016. Georgia hopes that completion of the Baku-Tbilisi-Kars railway in 2016, that will link Azerbaijan with Turkey via Georgia, will increase efficiency of the route.

It is worth noting that this route runs in parallel with China’s planned high-speed rail network routed between Turkey and China via Iran.

railvision-graphic-1001

As can be seen, the planned high-speed link bypasses Georgia and the Caspian altogether, with no need for moving carriages onto ferries for a slow trip over the Caspian Sea. It also avoids passing through either Azerbaijani or Armenian territory, which may or may not be linked to regional security issues. Using standard high-speed rail technology, cruising at 200-250 km/hour, a trip from Julfa in northern Iran to China’s Eastern or Southern coastal cities( a journey of 8000 km), could be accomplished in 2-3 days. Likewise, freight from Julfa to New Delhi (around 4000 km) could be accomplished in 1-2 days.

A high-speed spur line from Julfa, through Azerbaijan to Tbilisi and onwards to Poti and Anaklia would make sense, but it is not yet known if that is planned.

The high cost of freight and ponderous speed of transit has been an impediment to Georgian exports of agricultural produce to East Asia and South Asia. Wine and hazelnuts are products that Georgia has certain competitive advantages in producing, and hopefully faster, cheaper freight with better temperature control will improve competitiveness of Georgian exports in those markets

 

 

The world’s largest free trade zone is coming – what will it mean? | euronews, world news

The Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA is still being negotiated, and it has interesting implications for countries with existing Free Trade Agreements with those two entities. For the USA, the implications for its Canadian and Mexican partners in NAFTA are still being considered. For the EU, its free trade partners in many cases are still considering whether to get on the TTIP train for free access to the USA market or not. Such countries include Turkey, Jordan, Morocco, and of course the Eastern Partnership countries of Moldova, Ukraine and Georgia. Just as the DCFTA with Europe will involve a certain amount of pain, and some enterprises may fail as a result of increased regulation, restructuring industries to comply with US norms will be complicated. This paper by a Polish graduate student outlines some of the key issues quite clearly.

The issue of Genetically Modified Organisms will be an interesting one, as the EU and USA have a very different approach. GMO approvals in Europe must pass through political as well as technical assessments, whereas the US approach is more technical in orientation. To what extent a TTIP member state like Georgia would streamline GMO approvals to meet US expectations remains to be seen.

 

The EU and US are in talks to create the world’s biggest free trade zone, claiming it will make both regions richer than ever.

But critics question the alleged economic benefits of the deal – called the Transatlantic Trade and Investment Partnership (TTIP) – and say the inclusion of investor-state settlement dispute clauses will undermine democracy.

Activists will take to the streets on Saturday (April 18) in what is expected to be one of the biggest protests against the EU-US trade deal.

A huge alliance of groups have come together to organise a global day of action (#A18DoA) against the Transatlantic Trade and Investment Partnership (TTIP).

Negotiations began in 2013. The ninth round of talks is set to begin in New York on Monday, April 20, 2015.

Karel De Gucht, former EU commissioner for trade, said last year there was a “window of opportunity” to tie up the deal in 2015, or early 2016.

Everything you need to know about the TTIP trade negotiations

Why do we need an EU-US trade deal?

Talk of a trade deal between the EU and US has been around for decades but the catalyst for action was the economic crisis in 2008.

The powers-that-be decided, because the EU-US trade relationship was already the biggest in the world, it could be a relatively cheap way of boosting both economies.

The idea is that by removing trade barriers it will make it easier and simpler to buy and sell goods and services.

Trade barriers include differences in technical regulations or standards. The EU cites manufacturing a car as an example. At present, the vehicle could pass safety regulations in the EU, but would then have to go through another process for approval in the US.

What are the benefits of TTIP?

The removal of tariffs and harmonising of regulatory frameworks could bring significant gains for EU and the US, according to a report by the UK Centre for Economic Policy Research (CEPR).

It claims the deal would boost the EU’s economy by 119 billion euros a year and the US’ by 95 billion euros.

The report also says the deal would create new jobs for high- and low-skilled workers.

But some have disputed the economic riches the trade deal will allegedly bring.

They include Germany’s economy minister Sigmar Gabriel who said in April 2015: “I don’t believe the wondrous calculations for economic growth from TTIP. All the estimates about its impact… give an impression of voodoo economics.”

Another is Dr Gabriel Siles-Brügge, from the University of Manchester, who says the figures claimed by CEPR are ‘vastly overblown and deeply-flawed’.

He claims EU calculations assume that almost all sectors will be standardised, of which there is little chance, he adds.

A report published in 2013 by the Seattle to Brussels Network echoed concerns about how many jobs the deal would create.

It cited the NAFTA deal in 1993 – designed to boost investment and trade between the US, Canada and Mexico – claiming it resulted in the loss of nearly one million jobs.

Where are the main differences of opinion?

One key area where the US and EU differ is genetically modified foods.

The production of GM foods sees DNA from another organism added to them to create a perceived advantage. For example, proponents of GM crops argue they can be made to be more resistant to pests, thereby increasing productivity.

The EU has some of the strictest GM regulations in the world (each case is subject to a science-based evaluation by the European Food Safety Authority before going before the European Commission) and has authorised just 52 to date.

The US, on the other hand, is the largest commercial grower of GM crops in the world. It wants the EU’s regulatory process to be harmonised.

The EC says the trade deal will not see laws changing on GMOs: “Basic laws, like those relating to GMOs or which are there to protect human life and health, animal health and welfare, or environment and consumer interests will not be part of the negotiations.”

Friends of the Earth in Europe said: “US negotiators at the talks have been clear that one of their main aims is to increase market access for US agri-business.

“The US negotiators argue that European regulations should take a similar approach to US regulations and be based purely on scientific assessments, often provided by the biotech companies themselves – rather than needing the political approval of the European Council, Commission and Parliament, which allows wider impacts such as ethics and the impacts on the environment and on society to be taken into account.”

There is also concern that US producers will be able to sell their meat in European markets, which is produced with different standards. For example chickens in the US are disinfected with chlorine, a practice banned in Europe.

via The world’s largest free trade zone is coming – what will it mean? | euronews, world news.

Food Product Brand Development

One of our consultancy activities is in Brand Building for food produced in Georgia.

Marketing and brand development is at an early stage of development in Georgia. With competition between domestic players intensifying, new market players entering the market, and imported products with established brands an ever-present threat, it is imperative that cost-effective brand development take into account local consumer preferences while still meeting world’s best practice for efficiency and clarity. Effective differentiation of your product from your competitors can mean the difference between success and failure.

An example of a brand that we have helped develop is Berghofer. A cheese brand owned by Austrian-owned dairy factory Cheeseco Ltd, we have helped establish this new brand in the Georgian market, with customers educated about the rigourous food safety attributes and modern Austrian production technology, while traditional Georgian taste preferences are still addressed.

Our Marketing Consultant Mziko even managed to get herself included in the commercial !

In addition to television advertisements, the brand awareness is being developed in print media, social media and in-store promotions. If you see attractive young women in Austrian tracht in a supermarket, more than likely they will be offering samples of Berghofer cheese.

If you believe your product has potential as a branded product, with the superior margins that this yields, or if you feel that your brand portfolio could be improved, you should contact us to discuss your needs.