Without INDEC’s guidelines and without dollar devaluation, each winery makes an attempt to improve a declining profitability. Main exporters have reached a tacit consensus on increasing prices for wines over USD 32 per case, with some exceptions. There is not so much unanimity in regard to the segment below USD FOB 26 per case, where competition is fierce.Does inflation equal price rise? In the wine business, the formula is not that simple. First of all, you need to wrestle an agreement with the importer. Then, you should look around you, see what external and internal competitors are doing, weigh up to what extent your share in a certain market is shrinking, or whether a brand which represents the sweat of your brow is losing importance; and all this while you are trying to make up for a fall in profitability.
Argentinian exporters have been focused on these calculations ever since inflation increased rampantly in the country, at the beginning of the year, first affecting grape and wine prices, and then other internal costs such as supplies, workforce, logistics.
Today, they are struggling hard to avoid losing share or, at least, to recover healthy profit margins as they pray for a new devaluation. The analysis of the US market -Argentina’s main market- shows there is some degree of internal consensus: “We’re increasing prices,” revealed big Argentinian exporters, such as Terrazas, Trapiche, Trivento, Doña Paula, Norton and Luigi Bosca. When it comes to the question as to how much prices will increase, some answer openly while others dodge answering.
On the contrary, Álamos, the best selling brand in the US, apparently will not raise prices, at least for the time being. Neither would other brands – those producing the highest volumes in a very complicated price segment: USD FOB 15-20 – increase prices, according to sources. “The great difficulty lies in this price range, and this is not only because competition is relentless, but also because important brands, by preestablished contracts with big retailers, are subject to tough price rise restrictions. This is what the future scenario looks like: those who produce greater volumes within that price category will decide to resist, by modifying internal price structures or by applying new strategies for 2011,” analysts commented, strictly off the record.
Catena, strong shoulders to resist
Unlike other brands, Catena is not planning to increase prices. Catena’s wine case has been exported at USD FOB 68 during, at least, the last two years. In turn, while Álamos’ wine case, according to MRT data, is sold at a lower and lower price each year, the volume of its sales is increasing by leaps and bounds.
In 2002, the brand exported 57,000 cases at a price of USD 35.77, while last year it exported around 290,000 cases to the US at USD FOB 30.88. What is more, this year, there was a decline of 7.8% in the January-April revenue in comparison with 2009. According to the data provided by MRT, Don Miguel Gascón, the brand of the joint venture Gallo-Escorihuela, cut its FOB value per case to 14.8% for the period under consideration.
These brands commercialized by different wineries seem to have strong shoulders to resist. “The current price is fine for us; we are not considering any price change,” winery staff pointed out. This is also true for both the Catena and Álamos lines.
Doña Paula, agreed prices
Carlos Trad, who worked as US export manager for Doña Paula until recently, revealed that the prices of all their products went up 10-12%. “Our experience indicated that it was necessary to correct prices.” We had been discussing these price rises for two years and, although the situation in the US is difficult, we made changes in the packaging as well as in the wine promotion strategy. We could see it was possible, although we knew we wouldn’t grow as much as we desired. It’s a profitable business.”
Trad acknowledges competition and does not play down its impact. He believes there is no risk that Argentina may lose market share, because it is competitive in the segment comprising products of USD 15-20 retail: “That’s where we are a little bit more competitive in price and quality. In other segments, especially lower ones, the risk is higher.”
He warned, however, that the crisis in the US is not over yet. “Buyers learned a lot last year and they know they can demand more, particularly large chains. Competition is intense; wines from Australia, Chile and even California are sold at despicable prices; so we have to be careful as to what is being negotiated.”
Higher but reasonable prices
“We need to renegotiate prices because we are haunted by inflation and internal costs, and the dollar is static. We are planning to raise prices by up to 6%, starting from next January. I don’t think we have much leeway to increase prices; otherwise brand repositioning will come into play and each winery will implement their own strategies in that terrain. No doubt the price increase will be less than 10%,” declared Alberto Arizu, commercial manager at Luigi Bosca.
When asked about the price range below USD FOB 26 per case, he assured that “the necessity for a price rise is imperative. “We don’t operate below that price category, because we’d be talking about wines priced USD 10 retail, and there is a huge amount of Argentinian wines competing with volume in that segment. Each winery will have to evaluate how to manage the situation with their importers and the issue of brand positioning in each market.”
Arizu is optimistic when considering the overall scene. “Today’s average price in Argentina is around USD FOB 30 per case. It has increased more than USD 2 per case compared to last year, and there is an upward trend. Export growth in value has been more significant than growth in volume.”
Terrazas enhances and defends brand value
Then, we have the case of Terrazas from Möet Hennessy Group. Andrés Belinsky, export manager of Terrazas and Chandon said: “We’ve been increasing prices gradually for 4-5 years in the US because inflation in dollars has caused us to lose competitiveness. Devaluation never compensated and had a negative effect on us since some Argentinian competitors kept prices flat and gained share. Anyway, consolidating product value is important for us.”
Regarding competitors, he added that “it’s quite surprising to see the price promotions launched by some brands in the US. We’re afraid this may affect Malbec just like it did Shiraz. Our strategy has been quite the opposite: stop promoting points of sale and keep product value. We’re trying to preserve the value of our brand.”
According to data provided by Caucasia, between 2006 and 2009, Terrazas increased prices by 14% on average per year, reaching an average price of USD FOB 42 per case, while in the case of Terrazas Reserva (USD FOB 77 per case) prices showed a 10% annual average rise. A risky strategy? Since these decisions are not taken in isolation, for the time being, this is the strategy that the French corporation has chosen for its Argentinian subsidiary.
Trivento: “There is no other way out but to raise prices”
Leandro Bastías, Trivento`s export manager, admitted that the company is putting up prices in all markets and lines from 10% on, and this will have an impact on shelf prices in about three months. “The lines that more urgently call for a rise are those priced around USD FOB 20 per case. There is a compelling need for price rises in this segment. In view of current inflation, the exchange rate stagnation and the price increase in wine and grapes this year, no price range can possibly remain flat.
In the US, the best sold brand, associated with Concha y Toro and Trivento, is Frontera, but Trivento only makes Malbec. “Our strategic focus in the US is Trivento Reserva. We’re doing battle there to gain distribution – USD 10.99 retail, USD FOB 35 per case – since we’re competing with the entire world in that market. But we’ll also raise prices. We’ll have to work jointly with the distributor to avoid losing market share. We’ll have to do a lot of pull-push marketing, invest to increase the added value of our brand and create any type of promotion or strategy that consumers may perceive as a plus, but which doesn’t involve discounts.”
It is clear that the battle will be much harder in other markets, such as Europe, and that the US still represents what locals call a veranito (little summer) for Argentinian exporters. “The US is a special case. Average prices for this market are higher than for other destinations: USD FOB 32 per case, as compared to USD 29 for the other countries. Although higher costs are never welcome, everybody in the wine industry agrees that it is necessary to raise prices. We continue focusing on the process of improving our margins by stressing the sale of premium wine categories.”
Argentina’s situation is more uncomfortable than that of its competitors
Juan José Canay, Trapiche`s export manager, said that the new price rises will start to show up as of August and September, depending on the markets. He did not mention percentages but said that their winery “is selectively and gradually raising prices in order not to lose market share and at the same time make sure the business remains profitable. This is the way to go about price adjustments since not all markets are the same. Europe is lowering prices in euros, but we have to deal with higher costs of raw material and supplies, and with the increasing dollar exchange rate. Obviously we cannot apply a general 20% rise, which is actually what we need. Maybe the price of only one line will go up. Those in the segment under USD 26 are the most complicated ones.”
Canay recommends being very careful about the general evaluation stating that the average price in the US tends to rise and that exports continue growing. “This piece of data calls for a more in-depth analysis because the wineries that are truly growing are the first five on the list, influenced by their outstanding development. Not everybody has succeeded.”
In addition, he does not agree with his colleagues’ idea that the situation is more unfavorable to Argentina than to its competitors.
Alejandro Panighini, Norton`s export manager, added that the negative effects of inflation, coupled with a dollar devaluation that only reached 4% in the last 12 months, have created a complex scenario for exporters. “Wines from the 2010 harvest will be in the export markets towards the middle of the second semester, so price adjustments are coming soon. We’ll have to see how Argentina responds in terms of competitiveness in relation to the other suppliers, such as Chile, Australia, South Africa and Europe. I don’t think they will respond by raising prices. It’s going to be complicated,” he anticipated.
“Today, Argentina is the only wine producing country that has to face these two factors together: inflation and higher grape prices. The prices of Argentina’s more basic wines will surely go up, and in other types of wine, rises will depend on the segment. At Norton, we’re in the midst of negotiations with several markets.”
According to Panighini’s analysis, “there are signs showing a recovery in the segment above USD 20. However, it is necessary to be cautious: in the US, as a consequence of the global crisis, producers of premium wines, mainly Californian wines, had to bring prices down; these wines started to compete with Argentinian wines that were comprised in those price segments. That’s why it’s very difficult to raise prices without having a negative impact on volume.
Written by Gabriela Malizia for Winesur.com
Translation: Inglés del Vino
Source: http://www.winesur.com/news/struggling-to-increase-prices-in-united-states
