Two years ago, the world watched in shock as Argentina's economy crumbled into chaos. After defaulting on $95 billion in state bonds, the country went bankrupt and foreign investment fled. Poverty rates soared, and civil unrest brought down five successive presidential administrations. The country looked down for the count.
Amid all this, Argentina's wine industry has managed to flourish, making Mendoza -- the country's dominant wine region -- something of a miracle in the broken economy. This success lies in two factors: substantial foreign investment during the 1990s and increased export potential thanks to today's devalued peso.
"[The devaluation] has made it more viable to bring the product into the U.S.," said Robert Elding, whose company, Vinos Divinos, first began exporting Argentinean wines to the United States in May 2002. "Now they are good value for the money."
Prior to the 1990s, Argentinean wine was mostly a domestic affair. The country consumed large volumes of inexpensive local table wine (made from the Pais grape), which meant producers did not have to concentrate on quality production and exports to be successful. When the government introduced its otherwise disastrous "convertibility" plan -- artificially pegging the value of the peso to equal that of the dollar -- in the early '90s, it opened the door for massive foreign investment.
"It's somewhat strange," said Luis Fontana, an enologist with the government's National Institute of Viniculture. "The industry is one of the few [in Argentina] that grew during the convertibility years."
Argentina's vineyard owners were able to drastically improve quality by importing the best global technology and expertise. Large companies such as Kendall-Jackson of California, Codorníu in Spain and Pernod Ricard of France all bought into Argentina. Long-established players made large investments, such as Moët Hennessy-Louis Vuitton (LVMH), which put $25 million over three years into its Chandon division. Argentinean family operations, such as Catena winery, used the prosperity to gain a foothold in the U.S. market.
By the time the government stopped pegging the peso to the dollar in late 2001, Argentinean reds could compete quality-wise with other New World wines. And the devaluation of the peso -- which plummeted to nearly 3.8 pesos to the dollar but has held steady at around 3 to 1 for more than half a year -- allowed the products to better compete in U.S. stores.
Exports of fine wines for the first 10 months of 2003 (the latest figures available) totaled $114.7 million and were expected to reach $130 million or more by year's end, according to the National Institute of Viticulture. In comparison, sales for all of 2002 totaled $103.3 million. The United States makes up the biggest share of the export market.
In the 1990s, fine-wine exports rose substantially, from only $7.5 million in 1990 to $120 million in 2001, the year the economic crisis started. (Those figures dropped substantially in 2002 in the aftermath of the crisis, as producers tried to regain their footing and buyers were reluctant to deal with Argentina as the peso fluctuated.) But the earlier figures reflect the overvalued peso; the 2003 growth is notable for the fact that the total was achieved with a product that is priced 65 percent lower than two years ago.
"What devaluation created was the export mindset," said Paul Ashworth, marketing director at Chandon. "Before, it made no financial sense [to export] when internal consumption and prices were so high." Today, winemakers can work in pesos and sell in dollars, providing a substantial return on investment.
"When the dollar and the peso were one-to-one, our profit margins were quite low and the cost of living and labor in Argentina was high," said Laura Catena, owner of Luca winery and vice president of her family's Bodega Catena Zapata, one of Argentina's top wineries. "Nevertheless, my father made a tremendous investment in research and development. ... In the last two years, we have been able to use the beneficial exchange rate to continue investing heavily in our vineyards."
The combination of competitive pricing and excellent Malbec vintages over the past few years has been driving demand in the United States and other countries. This export boom has created a ripe environment for the growth of smaller boutique wineries, producing fine wines with foreign markets in mind.
New York-based businessman Enrique Foster is one example of the new investor. His Bodegas Foster winery, which opened in Mendoza a little over a year ago, aims to produce small quantities of high quality Malbec destined for the U.S. and U.K. markets. "Had there been no export possibility, I would not be here," said Foster, who characterizes Mendoza as an "oasis" in Argentina's economy.
Still, problems exist, particularly for small, quality producers. "Wineries have to buy premium corks, barrels, wine labels, bottles and other winery equipment that may not be available from Argentina," said Ed Lehrman, partner in Vine Connections, a U.S. importer that brought in more than 14,000 cases of Argentinean wines last year. "All these have to be paid for in euros and U.S. dollars."
Complicating matters is the lack of available credit, high domestic inflation rates, governmental regulations on banking that restrict cash flow, and export taxes on companies shipping their products abroad. "In the end, we figure the Argentinean wineries are still making out better than they were before," said Lehrman. "But the spread is not as big as it may seem on the surface."
Also worrisome is the sagging value of the U.S. dollar, which could push up prices for Argentinean wine imports -- and lower their appeal to value-conscious drinkers. But Argentinean economist Rodrigo Sacca predicts that the peso will hold its current value for some time, noting the government "knows too strong a currency could derail the economy."
And wine traders assure that they won't be raise prices. "My profit margin is reduced," said Elding of Vinos Divinos, "but I have to keep prices fixed to enter the market. What this means is better value for the consumer."
"Compared to our European and Australian counterparts, our currency is still much lower than the dollar," Catena pointed out. "So that gives us a relative advantage compared to these other countries in the U.S. market."
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