Would a price increase take the wind out of malbec’s sales?

argentina_inflation_FX_rateIt’s no secret that malbec has been on a tear in recent years. I had fun researching a piece on Argentina’s adopted grape for wine-searcher magazine. Check it out to read snippets about the transformation of the Argentine wine industry, the rise of malbec there and in export markets, and why Miles from Sideways may have helped open the door to malbec.

Argentina has been on a tear internationally this year with the new Pope, Lionel Messi’s passing and scoring acumen, the gracious Ángel Cabrera coming one putt away from a second green jacket, and malbec. One thing that’s perhaps not as well known here is that Argentina’s economy is suffering what The Economist calls a case of “gaucho blues.” In the face of high inflation–the unofficial rate hovers just under 30%–the government of Cristina Fernández has been trying to impose capital controls and mandatory schemes to boost exports by offsetting imports. But they’re not working: while the official exchange rate with the US dollar is 5.1 pesos, a side market for “blue dollars” currently is about 9 pesos to the dollar.

For the piece, I spoke with Ed Lehrman of Vine Connections, which imports estate wines from Argentina. He told me that for the first time in a decade, his growers have raised prices to him–some two or three times in the past year simply because they have to pay their workers 30% more than they did last year to keep even with the eroding purchasing power. Lehrman is working with his US distributors to maintain key prices points for his wines as best he can. But he said two things are happening in light of this inflation: more malbec is leaving the country in bulk to be bottled closer to points of consumption and more malbec is being exported at higher price points.

Malbec sales in the US have thus far weathered the economic storm in Argentina by posting strong growth in Nielsen data last year. But if prices rise or quality falls, will this be the year that malbec’s decade-plus run in the export markets leads producers to sing the gaucho blues? And, speaking of inflation, given malbec’s skew toward retail over restaurants and associated reliance on point scores, does point inflation also pose a threat to the category? What is your anecdotal experience with malbec recently?

Malbec: the whole nine yards

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13 Responses to “Would a price increase take the wind out of malbec’s sales?”

  1. I think they can command a higher price, but if quality falls they’ll be in serious trouble. I think Malbec has made a good showing because, when compared to other wines at a similar price point, they are of better quality. If the prices rise, then they could be said to reflect that quality. If the quality falls, then wine buyers currently active in the market will begin to feel betrayed, and the sales will suffer terribly for it.

  2. The issue goes far beyond an increase in labour costs, which are mandated by the government.

    I know a producer that has to import his barrels at government dollar rates and a very high tax as they are luxury items, yet then has to export at Government dollar rates and move all transitions through the Government. He thinks 2-3 more years of this and the quality of medium sized producers and exports will suffer greatly. He is a small high quality producer and is forced to sell inventory he normally holds in bottle for 2 years after 12 months in barrel. He legally can’t import barrels (or anything for his winery) without exporting an equivalent amount of wine in dollar value. His saving grace is that he was dealing a few barrels as a side business and has several years of new wood on hand from before the sh!t hit the fan.

  3. I’m not surprised Argentina has done so well.

    I’ve checked out Wines of Argentina recently in a Wine RMO internet marketing research study. It does comparatively well (3rd overall of 61) in Google, Facebook, Twitter, Pinterest as well as a presence in Google+ and YouTube.

    I haven’t reviewed their PR but from all the Malbec World Day press I’ve seen they’ve got that covered as well.

    Sharp operators and deserve the price increase if this was decided on marketing ability alone (alas it ain’t).

  4. I don’t drink malbec, but I feel for everyone affected by the economy.

  5. I am an Argentine working for a major winery in the Mendoza Area. SO far, we have been able to maintain quality and cope with inflation by cutting costs where possible, but mostly by reducing margins. The problem is, we don’t know how much longer we’ll be able to do this. We are currently working just to keep our business running, not to make money. Unfortunately, we’ll have this President for another three years, so we doubt things will change in the short term. We hope to be able to continue to provide good malbec to the world, but it is an incresaingly harder task…

  6. There’s nothing like a good financial crisis to make a wine more affordable and popular – Spanish, Argentinian, Greek if they have any to sell.

  7. Specialist importer of Argentine wines here.

    The category is indeed challenged by current government policy and high inflation. Its all they are talking about here (im in Mendoza now).
    I have been working with my producers as best I can to keep a handle on this and stay competitive to maintain the growth we have achieved.
    Several competing importers have taken price hikes and paid the price. Unfortunately, the marketplace doesn’t care much about Argentine politics!

    Having said that, most of the risk IN THE SHORT TERM will be at the lower price tiers (under $15; particularly under $10 SRP). The consumer is fickle. Smaller producers that have carved out a niche for themselves but don’t have economy of scale or fat margins to dig into will be forced to raise prices. If they were competing on price alone they will be hurt. The very large producers with better margins will be in a better position to absorb the shock/ride out the crisis and work with distributors to maintain pricing (the bigger you are the more pressure you can exert on distributors to cut their margins). They are also the ones shipping in bulk to bottle in US.

    What I would foresee is a major shakeup with some small producers/importers taking the brunt of the shock.

    In our case, while we are still small, we have focused since the beginning on higher quality wines in more premium price tiers so have already established a reputation at prices generally higher than what the category is known for. Still, price increases will be on the horizon. How they are managed will be key.

  8. I think that Argentina has concerns for diversity and educating the public about differences in ADDITION to the currency issue. Australia is a prime example of not pushing diversity (even though Australia has much more diversity in regions and styles than Argentina) as well as education. That fact coupled with a near flip in the AUD to the USD created a very difficult market to overcome.

    I believe that Malbec is not taken too seriously in the over $30 price point, which is a shame as there are some really tremendous wines out there.

    This is always the risk of dealing with imported wines (labor/currency/etc) to say the least.

  9. Seen this movie before. I remember speaking with the two Argentine wineries present at the Miami Wine Festival in 2001 (they had bought their plane tickets before the crisis really took hold so they decided to come despite all of the difficulties). The Minister of the Economy Domingo Cavallo was trying to save the economy from financial collapse (again) and the price of a hectare (not an acre) in Mendoza was down to $2000 – planted!!! The Argentine people are very resilient, but once again the economic mismanagement by the government is threatening to hollow out one of the country’s most promising industries. Truly a shame. It’s amazing what the population puts up with.

  10. As more than half the population is on the government payroll it really isn’t that amazing. It’s patronage on a massive scale to win elections, but it’s killing business. Also, the wine industry, as important and promising as it may seem to us, is really only a tiny part of the economy, tainted by the perception of elitism. Not high on Cristina’s priority list.

  11. “As more than half the population is on the government payroll…”

    Nonsense. Public sector administration is 5% of Argentine GDP.

  12. 30% of the population is either employed by or receives direct subsidies from the government.
    At least another 20% work in industries heavily subsidized by the government.
    It’s a huge voting bloc for Cristina.

  13. […] Would a price increase take the wind out of malbec’s sales? […]


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