Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. Moldova Competitiveness Assessment: The Wine Cluster By 2003, Russian wine imports had recovered almost to 1998 levels, but the expansion of the market has been accompanied by significant structural shifts. Over the last three years, 2001- 2003, Moldovan wines have lost almost 8 percent of the market; their market share dropped from 53.5 to 45.7 percent. The countries that gained at Moldova’s expense include Bulgaria, Argentina, Chile, and Italy, as illustrated in Figure 11. A major reason for these shifts is the evolving market architecture, together with changing preferences. At the same time, the capacity constraints in Moldova’s wine sector have also played a role. One indication that capacity constraints affect Moldova’s wine exports to Russia is the rising level of wine imports from Romania to Moldova; according to Romanian customs data, wine exports to Moldova rose from 1.4 million liters in 2000, to 16.3 million liters by 2003 (2001: 5.0 million liters; 2002: 21.9 million liters). In other words, over the last two years imports from Romania were close to 10 percent of wine exports to Russia in volume terms. While there are other factors at work, especially the preferential (duty-free) access of Moldovan wines to the Russian market, this pattern does suggest a need to source wine from Romania, since domestic production appears inadequate to keep pace with the surging Russian market. Raising Quality and Consistency, Moving to a “New World” Style Yet the fundamental challenge lies in changing consumer preferences and market architecture for wine (and spirits) in Russia. Overall, tastes for types of wine are changing slowly. The most important categories are still semisweet and semidry wines, with an alcohol percentage of 9 percent, although interest in dry wines is growing. Red wine accounts for 71 percent of sales in Moscow and 64 percent in other regions of the country. All signs point to the notion that the Russian wine market, at least in the urban centers, is converging with markets in Western Europe and the U.S. As incomes are rising and exposure to different types of wine is increasing, Russian consumers increasingly have the same expectations regarding wine quality and wine style. In effect, wine in Russia is currently undergoing the transition from a commodity to a fashion item. Moldovan wines tend to be associated with the old style, and are effectively shunned by the fastest growing segments of the Russian wine market, consumers who are becoming more sophisticated in their wine preferences. (See Annex A for a discussion of qualitative aspects and trends in the Russian wine market.) Moldovan exporters understand the need to move up the quality chain to recapture market share, or at least arrest the decline. Increased competition in their traditional, low-price (US$1.80–2.20/bottle) market segment—for example from Argentina, whose exporters took advantage of the devaluation of the peso—have lowered margins. Many of the larger Moldovan exporters are therefore beginning to target the medium-price markets, US$3.00/bottle and upwards. Maintaining or regaining market share in the low-price market segment, or expanding in the medium-price markets, will demand efforts to improve quality and consistency. Moldova’s winemakers and exporters will need to move away from traditional wine styles toward “New World” styles. Moving to higher quality wines would also affect Moldova’s position in the EU market, where consumers prefer dry wines with 12 percent alcohol, since a higher value July 2004 • DRAFT Page 8
Development Alternatives, Inc. Moldova Competitiveness Assessment: The Wine Cluster would lower the ad valorem implications of the flat rate duty imposed. (See Annex B for a more detailed look at the increasing importance of New World styles and the implications for winemaking in Moldova.) Responding to Changing Market Architectures Moldova’s wine exporters to the CIS tend to rely on market channels and rules that prevailed during the days of COMECON. Most of the Moldovan exporters have strong links to Russian trading firms that handle wine imports, wholesale, and distribution; overall, there are about 50 of these firms, importing nearly all of the wine consumed in Russia. In fact, Moldovan wine exporters established some of these trading houses themselves. These arrangements still work well to supply the traditional markets, but they are increasingly out of tune with the emerging market architecture responding to the needs and expectations in the growing market segments. The trading firms in effect compete with other wholesalers, in an environment that has seen rapid consolidation. The number of wholesalers doing business on a regular (and legal) basis has been estimated to have shrunk from 2,500 establishments to about 250. Moreover, as in Europe, supermarket chains are playing an increasingly important role in the retail of wine. In the EU, these retail outlets work on margins of 15-25 percent, rather than the conventional 35-50 percent, putting increased pressure on prices (downward) and quality (upward). In Russia, competition for shelf space in supermarkets has grown to the point where fees are averaging $500 per month per store, leading some importers to open their own retail stores. In a changing market environment, the choice of the “right” distributor, one who is familiar with western-style market architectures that characterize the faster-growing market segments, becomes critical. One indication of the changing architecture of Russia’s wine market is the growing emphasis on marketing and promotion. Moldova’s competitors, especially the purveyors of New World style wines, invest more in advertising and promotional events—efforts that pay off in terms of gaining market share. The traditional consumer of Moldovan wines may remain loyal without further promotion, but these consumers define a shrinking market segment. Active outreach and promotion are essential to defending and building the Moldovan wine brand in the growing, highly competitive market segments. Such efforts demand joint action. While individual wine producers may succeed in positioning their brand, they are still competing as Moldovan producers with Chilean producers. An appellation approach may be appropriate, but in any case, a joint promotion of Moldovan wines is a suitable response to emerging market realities. Joint promotion of course also puts a premium on raising quality, and especially consistency. It also requires a more organized response to issues of counterfeiting bottles and labels and passing them as Moldovan branded products, rather than the current ad hoc approach by individual wine producers. July 2004 • DRAFT Page 9
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