Georgia's wine and spirits sector
Georgia is considered the “cradle of wine”, with a rich, 8,000-year history of winemaking and home to more than 500 unique grape varieties. Over 280,000 tons of grape were processed in Georgia in 2020, quite a large production volume for a country with a small domestic consumption base. So, it’s not surprising that on average c. 85% of the wine & spirits sector’s revenue stream comes from exports, making it highly dependent on external markets.
World wine consumption trends are changing, with quality becoming a priority. Wine consumers drink less, but better, according to Wine Intelligence. Also, global consumers have become more health and lifestyle conscious, and are searching more for low-alcohol and ‘organic’ alternatives. People also pay more attention to wine labelling and design, particularly in the UK, US, Canada, Australia and Japan, according to Wine Intelligence.
Wine quality has become a priority for Georgia’s wine and spirits sector, strengthening Georgia’s global image as a producer of quality wine. Georgian wine has received numerous awards in international wine competitions in recent years, while the International Organization of Vine and Wine (OIV) has added another Georgian wine to its list of special wines in 2020 (a total of eight Georgian wines as of 2021). And, in collaboration with private sector, Georgia’s National Wine Agency (NWA) has introduced several initiatives to further improve wine quality in Georgia (i.e. mandatory quality control of wine intended for exports, tightened quality control on grapes, etc.).
Wine & spirits business is one of the most profitable sectors in Georgia. The sector posted 30.2% gross profit and 20.8% operating profit margins in 2019, 1.4x and 1.7x above the business sector averages, respectively. Notably, top 10 companies outperform the sector, with weighted gross profit and EBITDA margins averaging 41.2% and 24.9%, respectively, over 2017-20. Large companies accounted for c.41% of total wine and spirits sector turnover in 2020, up from 12% in 2015 and we see further consolidation potential.
The wine & spirits sector showed resilience to Covid-19 crisis, with a turnover down by just 2.1% y/y in 2020 thanks to external demand. Despite pandemic-related market disruption, wine exports reduced by just 5.6% y/y to US$ 210.3mn in 2020, far below contraction level during previous crisis of 2015, when exports almost halved. Meanwhile, brandy exports increased by 6.7% y/y to US$ 113.2mn. Notably in 2020, the wine exports growth continued to new target markets (particularly to Poland, US, UK and Baltic States), partly offsetting export decline to Russia. In 1H21 wine exports growth accelerated significantly, surpassing also pre-pandemic level.
Wine exporters entered new markets, but dependency on Russia and other post-Soviet countries remains significant. Exposure to new export markets (the US, UK, China, Japan, Germany, Poland and Baltic states) increased in recent years, accounting for 21.5% of total exports in 1H21 in value terms, up from 10.9% in 2013. However, Russia still absorbed c.58.1% of Georgia’s total wine exports in 2017-20. This is a result of developed trading networks and benefits from widespread popularity of Georgian wine in Russia (removing additional marketing costs). Considering the painful effects of Russian 2006 embargo and unpredictability of this market, we believe that diversification to other markets should remain a number one priority for Georgian wine companies in medium to long term.
Wine companies should be more ambitious to grab a greater market share in new target export markets. Despite some success, Georgia still accounts for less than 1% of total wine imports in new target markets (excluding Poland, where Georgia holds 3%). One of the main obstacles behind low exports are high costs associated with marketing and product shelving and companies’ fear of investment failure. Notably, new state subsidy program aims to address the former with co-financing marketing expenses to new markets. Our expectations on exports are positive, supported by growing investments in vineyards, government support for the sector, healthy demand from export markets and free trade agreements with EU and China. We also anticipate the average export price to increase, along with gradual transition towards new export markets in the medium term. Considering this, we expect wine exports to almost double in next 5 years to c.US$ 350mn in 2025.
Premium Georgian wines should mostly be targeted to wealthier export markets like the US and UK, mass-produced wines to China and both types to Germany, we believe. Considering the consumer profile of US and UK consumers (wealthy, mature and knowledgeable wine drinkers), we believe that unique, premium Georgian wines have the highest potential to compete with established wine varieties in these countries. Meanwhile, mass-produced wines like Saperavi, Alazani Valley, Kindzmarauli could be targeted to China, considering the lowest per capita wine consumption and evolving drinking preferences in this market. Besides, considering the maturity of German wine drinkers and the fact that women are more frequent wine drinkers who favor semi-sweet/sweet wines, both premium as well as mass-produced Georgian wines would be highly welcome in Germany.