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Georgia's Tourism Sector - Tourism Market Watch | July 2019

6 Aug, 2019

  • International visitor growth (tourists and same-day combined) slowed to 4.3% y/y (0.9mn persons) in July-19 after 19.9% y/y growth in Jun-19. This growth was predominantly driven by 11.1% y/y increase in same-day arrivals.  Tourist arrivals slowed but still posted growth of 1.0% y/y in July 2019 despite Russia’s ban on direct flights to Georgia from 8 July 2019. The number of Russian arrivals reduced softer than expected - down 6.4% y/y in July. This was largely compensated by increased Russian arrivals through land border and via alternative transit flights. 
  • Visitors from the EU were up 14.4% y/y to nearly 55k visitors, with Germany (+33.7% y/y) and Poland (+15.7% y/y) driving growth in July.
  • Tourism generated US$ 428mn revenues in July-19 by our estimates, down 1.1% y/y. This figure reflects reduced Russian arrivals via air, which usually are considered high spenders than those crossing the land border. In 7M19, tourism revenues stood at US$ 1.9bn, up 5.0% y/y. We expect tourism revenues to be flat y/y in 2H19 at US$ 1.9bn as we estimate tourism revenue loss of US$ 200mn in 2019 from reduced Russian arrivals. For the full 2019 year we project tourism revenues at US$ 3.4bn

Please see the full note here, which brings together tourist arrival data for reporting month, most recent statistical information available in the sector and 2019 forecast.

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Georgia's Wine & Spirits Sector - In Vino Veritas

30 July, 2019

Georgia is considered the “cradle of wine” with a rich, 8,000-year history of wine-making and home to over 500 unique grape varieties. Having interrelated production processes, several large wine-making companies also produce brandy. While the history of Georgian brandy only begins in the 19th century, Georgia is already 10th-largest exporter of brandy globally. In 2018, 245,000 tons of grape were processed by over 300 winemaking companies, quite large production for a country with a small domestic consumption base. So it’s not surprising that some 85% of the wine & spirits sector’s revenue stream comes from exports, making it highly dependent on external markets.

Wine & spirits business is one of the most profitable sectors in Georgia. In 2017, the sector’s net profit margin stood at 26.0% far above 8.4% recorded for the total business sector. The sector’s revenue almost doubled over 2013-18 reaching GEL 867.9mn, with external demand being the main driver of revenue growth, as domestic sales stagnated. Wine is Georgia’s 4th-largest export product and brandy is the 8th-largest with 5.9% and 3.2% of total, respectively. Wine and brandy exports from Georgia increased at a CAGR of 6.0% to US$ 305.3mn over 2013-18, or 65mn liters of wine and 32mn liters of brandy exported in 2018. We expect 2019 to be another record-breaking year for the sector, with revenues set to increase up to 10% y/y thanks to an unprecedented grape harvest in 2018 and expected export growth.

2006 Russian embargo improved the quality of Georgian wine and diversified destination markets. Russia was almost sole consumer of Georgian wine before 2006 absorbing 92% of total wine exports. The embargo forced producers to improve wine quality and direct their exports to EU, Asian and other markets. As a result Georgia is exporting wine to 53 different countries now.

Reorientation from Russian market is high on agenda again. Re-opening of Russian market in 2013 quickly made it largest single market again absorbing c.60% of Georgia’s total wine exports in 2018. This is the result of brand awareness and reactivation of old trading networks. While the topic of a possible Russian trade embargo is closed for now, it disturbed winemakers and needs for further diversification dominated recent headlines. Low price per exported liter in Russia is another argument to intensify efforts to reorient from Russian market. On a positive note, number of wineries rejected relatively easy money in Russian market since 2013 and invested heavily in expanding in non-traditional markets.

Wine and spirits exports to non-traditional markets tripled in dollar terms over 2013-18 which seems a good achievement considering bottlenecks in brand promotion and positioning. The availability of various grants and subsidized loans from government in recent years considerably increased number of small-scale wineries, with little capability to invest in brand development and distribution networks. Given continued growth in wine consumption in Asian markets, enhanced efforts in brand recognition and distribution networks can generate US$ 120mn in exports in next 5-years, surpassing what Russia absorbs currently.

Wine & spirits sector lacks unified strategy. We interviewed a number of market players with an aim to identify major bottlenecks for export diversification. Absence of an industry collaboration platform or agreement regarding long-term positioning in export markets, weak corporate governance, and little progress in cluster-building were identified as key difficulties by sector players amongst others. Technologically unsophisticated production methods, high production cost of grape, the low yields, a lack of consistency in price and quality and fragmented processing base are other factors dragging consolidation and economies of scale in the industry.

Georgia's Wine & Spirits Sector - In Vino Veritas (ENG)
Georgia's Wine & Spirits Sector - In Vino Veritas (GEO) - Executive Summary only
Georgia's Wine & Spirits Sector - Presentation (GEO)

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Georgia's Auto Business Sector - Regional Hub for Car Trade

10 July, 2019

Enhanced customs procedures and trade infrastructure have transformed Georgia into a regional hub for the car trade since 2005. Successful reforms have enabled the economy to become a car-exporting country without its own car production industry. In the beginning, car re-exports were directed to its immediate neighbors Azerbaijan and Armenia, with destination markets diversified later. After continued growth during 2005-13 (with the exception of 2009), car exports fell sharply in 2014-16 due to the introduction of Euro-4 regulations in Azerbaijan coupled with the regional economic slowdown. However, car re-exports have recovered since 2017 as regional economies stabilized. Azerbaijan and Armenia are the largest export markets, with 71% of the total car re-exports in 2018. We expect car exports to traditional and new markets to grow, taking into account their improved economic outlook and low levels of car ownership.

Auto business turnover posted impressive growth of 14.8% CAGR over 2010-18, reaching GEL 2.6bn in 2018, up 17.6% y/y. The sector’s net profit margin averaged 5.1% in 2015-17 – in line with the total trade sector’s average of 5.2%. Car imports generated more than GEL 123mn in excise tax revenues in 2018 while car re-exports – Georgia’s second-largest export category – stood at US$ 408.3mn.

Government policy targets environmental and safety issues, addresses auto park renewal by making car ownership costly. With environmental and safety issues in mind, the Georgian government increased excise taxes on cars and fuel in 2017 and rolled out a mandatory vehicle inspection program in 2018. The government has also introduced a property tax on cars, pilot paid zonal parking, and car-sharing schemes, among other initiatives. Tax measures have incentivized hybrid car ownership, which has risen to over 48,600 cars in 2018 from 1,198 cars in 2015. This is only expected to continue. Despite growth in recent years, fully electric car ownership overall is low, with only 1,231 cars registered as of 2018. The development of charging infrastructure, the launch of an electric vehicle production plant, free parking facilities for electric vehicles and other government initiatives are set to support greater electric car presence in Georgia in the coming years.

Changes in excise tax structure expected to renew country’s outdated auto park. Georgia has one of the oldest passenger car stocks in the region at an average age of 20.3 in 2017 – higher than Poland (17.3), Romania (16.2), Lithuania (15.5), Russia (13.1) and Ukraine (19.6). Importantly, higher excise taxes on old cars and fuel from 2017 already yielded positive results in auto park renewal. Over 2017-18, 36.2% of the cars that received state registration were under seven years old, up from 9.4% of total clearance over 2012-16.

Georgia lags behind developed countries by number of private passenger cars per capita, showing room for further growth. On a per 1,000 capita basis, private passenger car penetration in Georgia is only 256 – far below the ratios found in Latvia (322), Estonia (419) and Russia (307) but still above Azerbaijan (112) and Turkey (147). We believe that actual car penetration number in Georgia is lower as official statistics incorporates idle vehicles and ongoing vehicle inspection program expected to reveal real numbers by the end of 2019.

The main catalysts shaping the future demand on cars will be the growing number of women drivers, the gradual renewal of auto park and rising household incomes. Despite the rising number of Georgian female drivers, out of the 1.23mn people in the country who hold a valid driver’s license, only 23% are women, showing room for further expansion. On top of this, mandatory technical inspection is expected to force drivers to move to relatively newer cars as 81.4% of vehicles registered in Georgia are already 12+ years old. Mandatory inspection also raises demand for auto parts and repair services. All of these, together with strong demand for car re-exports, are expected to drive auto sector revenue in the coming years.

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Georgia's Tourism Sector - Tourism Market Watch | June 2019

4 July, 2019

  • International visitors (tourists and same-day combined) surged 19.9% y/y to 0.7mn persons in June-19 after 14.2% y/y growth in May-19. This growth was mostly driven by 18.0% y/y increase in tourist arrivals, while same-day arrivals also posted strong growth of 23.6% y/y. Turkey contributed most to total growth, as arrivals surged in June-19 (+45.8% y/y), after continued decline from Sep-18 to May-19. Turkish visitors were main reason of same-day arrival growth in June-19. Arrivals from Russia remained largest source market, growing 30.8% y/y – mostly reflected in tourist growth figures.
  • Visitors from the EU were up 29.3% y/y to nearly 52k visitors, with Germany (+67.7% y/y) and Poland (+17.4% y/y) driving growth. Visitors were also pronounced from Ukraine, Saudi Arabia and Kazakhstan, while arrivals from Iran more than halved (down since Jun-18 with the exception of Nov-18).
  • Tourism generated US$ 379mn revenues in June-19 by our estimates, up 16.5% y/y bringing 1H19 revenues at US$ 1.5bn, up 11.4% y/y.
  • We revise our tourism 2019 growth projection taking into account temporary travel restrictions on flights from Russia to Georgia starting on 8 July 2019. We expect tourism revenues to be flat y/y in 2H19 at US$ 1.9bn as we estimate tourism revenue loss of US$ 200mn in 2019 from reduced Russian arrivals. Therefore, we revise tourism revenues forecast for the full 2019 year at US$ 3.4bn from our initial projection of US$ 3.6bn.

Please see the full note here, which brings together tourist arrival data for reporting month, most recent statistical information available in the sector and 2019 forecast.

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