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Like the altitudes at which its vines are planted, sales of Argentine Malbec in the U.S. are sky-high.
In 2008, the F.O.B. value of Argentine Malbec exported to the U.S. increased 61 percent, according to data compiled from customs filings by Argentine research firm Caucasia Wine Thinking. Over the past two years, Malbec exports to the U.S. increased by an annual average of 54 percent, while the varietal's share of wine exports grew from 44 to 55 percent, and the average price per case increased almost 14 percent.
Echoing these findings, The Nielsen Company reports that dollar sales of Argentine Malbec in the U.S. were up 61.7 percent over the past 12 months (leading all others) and "absolutely on fire." Led by Malbec, imports from Argentina overall were up 39.5 percent year to year, in contrast to recent declines from France, Italy, Australia and most other exporters, according to Nielsen.
While starting from a small base, this extraordinary growth testifies to the market's growing realization of the varietal's price-value advantages across a range of price points, particularly in an economy that has many wine drinkers focused on costs.
The U.S. imported approximately 2.1 million 9-liter cases of Malbec in 2008, up from 1.3 million in 2007 and 900,000 in 2006. During the same period, the average F.O.B price per case, in U.S. dollars, rose from $29 to $33 per case.
Though increases occurred at multiple price points, the fastest growing segments by volume were clustered around $10 and $20 retail. Gains were also substantial in the super-premium categories where limited production, single vineyard and Malbec-dominated blends now compete successfully with the best U.S. and international vintages.
Adding to the buzz, Wine Enthusiast Magazine named Mendoza, Argentina "Wine Region of the Year" in its 2008 Wine Star Awards, calling the region "on par with many of the best in the world." And National Geographic Traveler's November issue cited Mendoza's wineries and vineyards as the 10th best rated of 109 destinations worldwide and gave it the top rating in Latin America, bolstering the region's fast-growing wine tourism industry.
Not bad for a 20-year-old industry that, after more than 300 years making large quantities of low quality wine for a thirsty domestic market, retooled itself as a player in highly competitive international export markets.
The results are a product of several factors that have been years in the making: the realization of Malbec's ability to thrive in Mendoza's high-altitude vineyards, if grown for low yield and high quality; the favorable economics of Argentina's land and labor costs and exchange rate versus the U.S. dollar; and an influx of international winemaking talent and patient big-money investment.
These factors combined with the passion of a generation of Argentine winemakers--all of whom engaged in a constant program of experimentation to determine the clones and microclimates that would produce the best wine.
Within the industry, impressive sales gains are being registered by both the largest winery groups and an under 10-year-old generation of boutique players. The larger producers, Catena and Trapiche, for example, compete across a variety of price points, including taking on the small volume, highly focused boutiques at the high end of the market.
While the focus is clearly on Malbec, which comprises approximately 55 percent of bottled wine exports to the U.S. and is somewhat proprietary to Argentina, many winemakers are producing multiple varietals, including Cabernet Sauvignon (which also benefits from the high altitude terroir), Chardonnay and Torrontés, the Argentine white varietal.
The main Malbec-producing area is clearly the province of Mendoza, which accounts for over 90 percent of the country's wine exports by value; but other high altitude regions both north and south along the country's Andean western border are also making quality wines.
By Price Segment
By far the fastest growing large Malbec segment has been in the $28 to $35 F.O.B. per case category, which is also the highest volume segment overall. Exports to the U.S. at this price point have doubled in each of the past two years. These include such brands (with spot-checked U.S. retail prices) as Don Miguel Gascón ($10), Alamos ($10), Pascual Toso ($9), Terrazas Alto ($9), Los Cardos ($7) and Altos Las Hormigas ($9). Ratings of recent vintages of these wines from Wine Spectator and Wine Enthusiast have typically ranged from the high 80s to several 90s, indicative of their price-value appeal.
Exports of Malbec in the $35 to $50 F.O.B. bracket were the second fastest growing high-volume category, increasing at a 66 percent clip and tied in second place for overall volume. Wines in this bracket include Trapiche Oak Cask, Terrazas Alto and Séptima, all retail priced approximately in the $11 to $13 range.
Wines in these two categories, where retail pricing variations often cause the borders to blur, topped a recent Wall St. Journal Malbec tasting feature story, which included Malbec entries costing up to twice the price.
Wines in the $51 to $85 F.O.B. per case category grew at a 32 percent rate in 2008. Brands in this category (and representative U.S. retail prices) include Catena ($18), Doña Paula Estate ($14), Terrazas Reserva ($19), Trapiche Broquel ($15) and Luigi Bosca DOC Reserve ($19). These wines typically earned ratings of 89 to 91 in recent magazine tastings.
Several of the brands in this category had hyper growth in the U.S. market in 2008. The brand growth leader, Doña Paula Estate Malbec, second in volume to market-leading Catena Zapata, grew by 180 percent. The Luigi Bosca D.O.C. Reserve grew by 170 percent, according to industry sources.
The over $85-per-case bracket, which covers a broad retail span from $20 to well over $100 per bottle, was actually the fastest growing, more than doubling in value in 2008. Of note: this was the only category where average F.O.B. per case pricing actually decreased, dropping from $171 in 2006 to $136 in 2008. This is caused by the growth of such brands as market leading Catena Alta ($50), Achaval Ferrer ($24) and Colomé Estate ($26), a Hess Collection blend from Salta, where they are grown at a 5,500- to 8,500-foot altitude in what are believed to be the highest vineyards in the world.
The Malbec Industry
Malbec producers exporting to the U.S. market span a wide range--from large multi-winery conglomerates to boutique producers. In Mendoza alone there are almost 650 wineries. While the big wineries own vast estate vineyards, they are also supplied by a large number of independent growers. Argentine growers farm an estimated 355,831 acres (144,000 hectares), yielding an average of only 21.5 acres (8.7 hectares) per vineyard, according to Rabobank. That compares to an average of 99.3 acres (40.2 hectares) per grower in the U.S. and is more akin to the European norm of small producers.
By far, the largest exports of Malbec to the U.S. are the multiple offerings of Dr. Nicolas Catena, principally under the Alamos and Catena labels. In 2008 Catena shipped 230,000 9-liter cases valued at over $10 million (F.O.B.). While sales of the higher priced segment leading Catena Zapata remained relatively flat, Alamos grew by almost 50 percent. Catena, an agricultural economist by training and well-versed in the California wine industry, is often described as the "Robert Mondavi of Argentina" for his efforts in bringing export standards and practices to the country.
Not content to be the volume Malbec exporter, Catena also competes aggressively at the top of the category. His portfolio of limited-production single vineyard and Malbec blend wines has received scores from 95 to 98 in recent issues of the leading raters and retail in the neighborhood of $100.
In second position for Malbec exports and growing fast is Peñaflor, a group holding of seven wineries, the largest of which is the venerable 120-year-old Trapiche, which is the country's largest exporter of all premium brands internationally. Peñaflor is controlled by the investment bank Donaldson, Lufkin & Jenrette, now a unit of Credit Suisse, which turned a minority position into a controlling interest in 2002 and has made heavy investments in growth. Peñaflor's U.S. Malbec exports grew almost 90 percent in 2008, fueled by skyrocketing sales of Trapiche Oak Cask ($9), Trapiche ($7) and Broquel ($15) labels. It farms 2,400 acres (1,000 hectares) of vineyards, which supply about half of its fruit, the balance supplied by some 200 independent growers.
Trapiche also vies for top scores in the higher range of the category. For its line of Single Vineyard Malbecs, winemaker Daniel Pi and staff select the best barrels from 90 of their high-end independent growers to produce three single vineyard, limited production wines, which sell at around $50. These wines have recently earned 92- to 94-point ratings.
While 90 percent growth is impressive, it isn't enough to take the Malbec export crown among the high volume producers. Bodegas Escorihuela, producer of the category leading Don Miguel Gascón ($11), grew U.S. Malbec exports by 226 percent, fueled by that brand's increase from 46,000 to 152,000 cases, according to WBM analysis.
Major increases in volume and share were also recorded by the wineries of Pascual Toso, Terrazas Alto and Doña Paula.
Overall, the powerful export growth led by Malbec is shuffling rankings in the industry and causing formerly mid-sized players to enter the top tiers. An example is the 125-year-old Bodega Luigi Bosca winery, founded and still owned by the Arizu family, which reported a 72 percent increase in case volume and an 85 percent increase in the value of their U.S. wine shipments (all varietals).
Like most of the large volume players, Luigi Bosca also has an entry at the top of the quality competition. Branded ICONO, it's 54 percent Malbec and 46 percent Cabernet Sauvignon. The grapes are hand-selected from vineyards averaging 90 years and given 18 months of aging in French oak barrels. It's priced at around $150 and received a 95 rating from Wine Enthusiast.
Several of the large, traditional wineries are anything but traditional in the attention they pay to top-tier brands, though their bread-and-butter is clearly in the $10 to $20 league. In part, this reflects thinking that the success of their volume offerings will be enhanced by the market's understanding of how good "brand Argentina Malbec" can be.
The Economics
As much as the skills of its producers and the blessings of terroir contribute to Argentine Malbec, there's no denying the contribution of economics.
Raw vineyard quality land in Mendoza today costs from $5,000 to $15,000 an acre, a bargain by California standards but three or more times its cost as recently as seven years ago. Planting raw land costs from about $3,500 to $5,000 an acre or more, depending on water requirements and whether netting is used to prevent against Mendoza's No. 1 threat, hail.
Water for irrigation has been plentiful, fed by canals and rivers from the nearby snowcapped Andes. But concerns over future water supplies amidst global warming and increased vineyard and residential development have led to allocations and restrictions. By law, water rights travel with the land and can't be sold separately.
The cost to farm a typical acre for a year is in the area of $1,300 to $2,500. Very little mechanization is used in the vineyard. Experienced vineyard management and labor are generally available with migrant crews employed at harvest.
The devaluation of the Argentine peso, which until 2001 was fixed to the U.S. dollar on a 1-1 basis and now is valued at about 0.28, has been critical to the country's export competitiveness. The decoupling in 2002 fueled an export boom in all sectors and is seen by producers and the government as critical to future export success.
On the negative side, purchases of French and American oak and equipment and supplies from largely European sources have become more expensive. Additionally, Argentina has traditionally battled inflation, and the inflation rate over the past several years has been estimated at between 15 percent and 20 percent annually.
All factors considered, the economics have been sufficiently compelling to lure a cadre of international financial heavyweights to the party. In addition to DLJ (Credit Suisse) buying control of Trapiche and its Peñaflor Group, Bodegas Norton was purchased by Austrian entrepreneur Gernot Langes-Swarovski of the crystal family, Bodegas Salentein is backed by Dutch investors, and Bodegas Chandon is owned by the French producer, among others.
Future Growth Tied to Water Supply
How sustainable is Malbec growth? The acreage planted to Malbec since 1999 has increased nearly 150 percent with some acreage just now bearing usable fruit. Although reliable statistics on additional land suitable for Malbec cultivation aren't available, it appears that considerably more could be brought into production in Mendoza and other regions.
Labor is clearly in ample supply. A limiting factor, however, is the amount of water coming from snowmelt and aquifers, a situation that is becoming more regulated than in the past. Land suitable for high quality Malbec in areas such as the Upper Lujan de Cuyo and Uco Valley is available but the last decade has seen some limitations placed on establishing new wells.
As Alex Bartholomaus of Billington Imports commented, another major variable is "foreign investors' willingness to continue to bankroll expansion."
Whose market share is the growth in Malbec sales coming from? Jon Fredrickson of Gomberg, Fredrickson & Associates says it's difficult to pin down. "Malbec is still a very small percentage of the market (under 1 percent according to Nielsen)… and is probably taking a little share from all over, especially easy-to-consume reds." Bartholomaus echoes the difficulty of pinning down share losers but notes that Malbec has a flavor profile similar to Shiraz and Spanish Tempranillo.
Looking at Nielsen data suggests other imports may be competing against Argentina in the U.S. marketplace, with France, Italy and Australia all showing significant declines. But at Malbec's two pricing sweet spots of around $10 and just under $20, most reds are at some risk.
Whoever is losing, it's clear that Mendoza's high-altitude desert is producing a true competitor for the dollar value and is likely to be sticking around for some time. wbm
