Tuesday, June 5, 2007

Investing in Argentina - Wineries

I have been doing some research lately in the wine industry and here are some of my findings.
1 - The wines and vineyards market is in very high demand in Argentina and it is no small feat to find an operating winery/vineyard with "Brand" and presence in the foreign market for sale. It is possible nevertheless to find vineyards with wineries that need some work (refurbishing) or vineyards without wineries and then invest in the winery.
Adapting a winery to elaborate premium wines can cost close to U$2/lt, thats is to say between U$100,000 and U$150,000 based on your production requirements of 50,000 to 100,000 bottles per year. In addition, you need to add that cost of the Oak Barrels which depending on origin can cost between U$900 and U$1200 for a 225 lt barrel (U$4.5 to U$5.5 per lt). If you would want to park (age) the wine for 2 years, you would need 670 barrels = 600k to 800k, which would be outrageous. This is only done by those who have an established brand in the premium market. If you start from scratch, you have to go slower and sell part of the wine with less aging through a "second brand". Besides there are ways to add the oak flavour without the need for the oak barrel. All this to say that with a little bit of "know how" there is no need to have in advance a fully operating winery and it is possible to start in the business with a smaller investment.
2 - The size you a lot small investors are looking for (50,000 to 100,000 bottles/year) is a bit small and works only for operations that produce premium wines U$10 per bottle in the local market and U$4 FOB export market).
3 - Well located vineyards (Zone 1 = Agrelo, Perdiel, Lujan de Cuyo, Tupungato) and planted with high quality vines are priced anywhere between U$35,000 and U$50,000 per ha. In San Rafael (you want to start becoming familiar with the different regions) vines planted in areas of good soil and with anti ice pellets net installed are around U$25,000 per ha. If the goal is to produce premium wines, specially if it
includes champagne (sparkling wines) and white wines, San Rafael is an interesting alternative. If the portfolio of products will be focused on super premium red wines, specially Malbec, you need to stay in Zone 1.
4 - For wineries adapted to make premium wines the price is between U$1 - U$3 per ltr of capacity, depending on installed equipment. Large and old wineries, set up for regular (non premium) wines are priced much lower but they also require a lot of (expensive) investment.
5 - With a good vineyard, operated to produce quality wines, the yield is about 9000 to 9500 bottles of premium wine per ha. So in order to reach the goal of 100,000 bottles as per your requirements you do not need a large establishment. 15 - 20 has ought to do it. We need to add to this the cost of the winery.

The business in wines today is to produce premium (vs regular or intermediate) wines. Based on all the above info, find below the opportunities i have been able to find, to wit:
- A vineyard in Tupungato, 80 ha total, 60 ha planted 5 to 6o years ago (Cabernet, Merlot, and some Malbec), drip and furrow irrigation system, U$33,000/ha.
- A vineyard in Tupungato, 294 ha all planted, U$43,000 ha.
- 60 /120 ha in Alto Agrelo (excellent for Malbec, next to well know wineries Septima and Ruca Melen), at U$14000 / U$16000 ha. no plants and with wells and irrigation systems in place.
- A winery looking for equity partners, but not sure you are interested in equity investment instead of acquisition.

As per my experience, the most difficult task is to adequate the initial requirements of most small investments to the reality of the local wine and real estate market (one is inexorably affected by the other one) and to the logic and time frames of this business activity and the business cycle. I think that if you
believe that the project is feasible (given your own assessment), even if you might not start with a turn key project there is still a lot of opportunity because there are many properties available.