Globalization in the Wine Industry and the Case of Baja California
Mexico
By
Carlos O. Trejo-Pecha *, Carmen López-Reynab, Lisa A. Housec, and Francisco Javier SarmientoPerezd
Presented at the 20th Annual World Food and Agribusiness Forum and Symposium 2010
Boston, MA, USA
June 2010
a Professor, School of Business and Economics, Universidad Panamericana at Guadalajara, Calz. circ. pte. 49,
Ciudad Granja, Zapopan, Jalisco, Mexico.
b Professor , Colegio de Postgraduados de Ciencias Agrícolas de México, Agribusiness Program, Km. 36.5
Carretera Mexico-Texcoco, Montecillo, Edo. de México, Mexico.
c Professor, Food and Resource Economics Department, University of Florida, P.O. Box 110240,
Gainesville, Florida, 32611, U.S.A.
d Former Director of Agriculture, Secretaria de Fomento Agropecuario del Estado de Baja California, Mexico
* Contact author and conference presenter
Globalization in the Wine Industry and the Case of Baja California
Mexico
Abstract
Wines from Baja California, Mexico, have started to gain international recognition and
win awards for their quality. This case study traces the development of the Mexican wine
industry in the State of Baja California. The industry has faced major challenges during the
economic crisis of the mid-1980s and when a major wine producer stopped purchasing grapes
produced in the region in 2001. However, during these times of crises, other companies were
able to take advantage of the opportunities and establish strong companies. Having overcome
these challenges together, the wine cluster in Baja California seems on the cusp of success. Will
Mexico become the latest of the “New World” producers of wine to continue on a growth
pattern, or will the latest series of challenges continue to keep the size of the industry too small
to make a real name for itself?
Introduction
Wines from Baja California Mexico have started to gain international recognition. The Baja
California wine cluster was formally integrated in 2006, and several projects shared by the whole
supply chain are currently in progress. There are reasons to believe that the Baja California wine
cluster has already passed the challenging learning curve of gaining supply chain’s members
cohesion. Early in 2000, the wine industry in Baja California faced a challenging crisis, when a
major wine producer stopped purchasing grapes grown in the region.
However, with the
participation of wine grape producers, governmental authorities, and wine producers, the
industry overcame the problem and focused on strengthening product quality, number of firms,
and industry organization. However, market shares of wines from Baja California are still
negligible in international markets and low (30%) domestically.
This case study provides
information to assess the position of the Baja California wine industry in both the domestic and
globally.
Baja California
The State of Baja California in Mexico (Figure 1), which is bordered on the North by
California in the United States, is the largest and most important wine production area in
1
Mexico. With a total of 2,800 hectares of grapes for wine (Table 1), Baja California accounts for
approximately 85% of the total area planted in Mexico and more than 90% of total wine
produced in the country. This amounts to 13.5 million 750 ml bottles of wine, of which 70% is
red wine. Wine production in Baja California takes place mainly in the Valley of Guadalupe
(Table 2). This valley has been said to have the perfect climate and soil conditions for grape
growing (WineCountry (2007)), and is the house of leading wineries such as LA Cetto and Casa
Pedro Domecq. According to a Euromonitor (2010) staff report, wines from Baja California
have received much international recognition, and are highly appreciated, mainly in the United
States.
Figure 1 – Map of Mexico and the State of Baja California
Table 1 – Grape-for-Wine Producers in Baja California as of 2008
Category of grape for wine producer
Small
Mid
Big
Total
Less than 20 hectares
From 20 to 50 hectares
More than 50 hectares
Number of
producers
Actual
1
hectares
132
22
14
168
1
772
725
1,303
2,800
%
28%
26%
47%
100%
Potential
hectares2
///////////////////
///////////////////
///////////////////
8,000.0
Notes:
(1) Assembled from the Mexican Cluster of Wine Staff Report, 2008, and SEFOA
(2) Projected for 2013 in Sanchez-Zepeda, 2008 (Sánchez-Zepeda (2008))
The Mexican wine industry is far from being considered an important international player in
terms of volume (total wine production in Mexico is equivalent to approximately one tenth of
wine production in Chile, which is ranked 10th in the world (Castaldi, Cholette and Frederick
2
(2005)). Even within Mexico, in 2008, the estimated market share of Mexican wines in Mexico
was only 30%. The remaining 70% of the market was dominated with imported, low priced
wines, below $8.50 USD (Wine (2008)). Table 3 provides historical statistics on the Mexican
wine industry. Sales volumes, values, price segments and wine by grape varieties are provided
from 2004 to 2009.
Table 2- Varieties of Grapes for Wine Production by Locations in Baja California as of 2009 (in
hectares)
Variety
Tecate
Palmas
Tijuana
V. de Gpe El Tule
San Rafael Uruapan Sto Tomas S.Vicente Total
Cabernet Sauvignon
3.54
1.20
372.03
11.36
19.50
55.94
129.27
592.84
Chenin Blanc
2.00
100.48
0.06
6.00
15.29
92.90
216.73
Merlot
1.00
121.03
3.50
9.17
11.00
22.73
36.85
205.28
Grenache
125.96
4.25
0.90
27.69
158.80
Nebbiolo
1.12
106.67
0.06
4.00
0.19
44.13
156.17
Chardonnay
90.10
0.06
33.70
22.00
145.86
Zinfadel
62.90
77.05
139.95
Tempranillo
2.71
63.65
1.29
9.50
20.96
27.98
126.09
Sauvignon Blanc
70.22
4.24
47.32
121.78
Syrah
1.00
62.20
3.81
19.50
15.00
11.30
112.81
Petite Syrah
80.03
2.00
28.32
110.35
Colombard
10.01
2.98
71.50
84.49
Rubi Carbenet
28.32
42.54
70.86
Barbera
7.78
20.25
34.05
62.08
Carignane
41.44
12.19
1.00
54.63
Cabernet Franc
31.51
1.56
3.72
36.79
Sangiovesse
7.45
26.00
33.45
Mission
7.28
9.85
10.12
4.25
31.50
Other
0.30
215.63
4.50
4.65
0.50
11.94
77.95
315.47
Total
14.95
5.20
62.90 1,621.41
34.00
32.02
86.37
224.28
694.80 2,775.93
%
0.5%
0.2%
2.3%
58.4%
1.2%
1.2%
3.1%
8.1%
25.0% 100.0%
%
21.4%
7.8%
7.4%
5.7%
5.6%
5.3%
5.0%
4.5%
4.4%
4.1%
4.0%
3.0%
2.6%
2.2%
2.0%
1.3%
1.2%
1.1%
11.4%
100%
Source: Assembled from data in Sepúlveda-Betancourt, 2009. Varieties with less that 1% share were grouped as
“other”.
3
Table 3 –Selected Statistics on Mexican Wines, 2004/2009
2004
2005
2006
2007
2008
2009
Volume (million liters):
Still Light Grape Wine
Still Red Wine
Still White Wine
Still Rosé Wine
Sparkling Wine
Champagne
Other Sparkling Wine
Fortified Wine & Vermouth
Port/Oporto
Sherry
Vermouth
Total Wine (million liters)
24.9
16.3
7.4
1.3
6.1
0.4
5.8
9.9
0.1
9.4
0.3
40.9
29.9
19.6
8.7
1.6
6.5
0.4
6
9.7
0.1
9.3
0.3
46.1
31.7
20.8
9.2
1.7
7.3
0.5
6.8
10.6
0.1
9.9
0.5
49.6
40
26.4
11.6
1.9
9.3
0.6
8.8
12.4
0.1
11.6
0.7
61.6
41.4
30.3
9.1
2
9.5
0.6
8.9
13.9
0.1
13.2
0.6
64.8
42.4
31.3
9.2
1.9
9.4
0.5
8.9
14.1
0.1
13.4
0.6
66
Off-trade (million liters)
On-trade (million liters)
16.5
24.5
19.2
26.8
20.9
28.7
26.1
35.5
27.7
37.1
28.3
37.7
7,081.20
8,077.70
8,908.10
11,274.70
12,938.60
15,608.50
Total Value Wine (Mx$ million)
Volume Sales of Still Red Wine by Price (% off-trade should add up 100%)
Under MX$35.99
MX$36 to MX$64.99
MX$65 to MX$90.99
MX$91 to MX$119.99
MX$120 to MX$149.99
MX$150 to MX$199.99
MX$200 and above
1.8
11.3
24.4
25.5
15.4
17.5
4.1
1.6
10.2
22.9
26
16.3
18.4
4.7
29.8
20.6
27.4
17.5
17.8
4.9
-
-
9.5
19.5
28.1
19.3
18.6
5
8
17.8
28.9
20.5
19.3
5.7
9.2
18
29
20.8
19.8
3.2
2.4
21.6
27.8
29.4
14.6
4.3
1.1
20
26.5
28.6
18
5.8
1
20.8
28.2
29.3
17.4
3.3
Volume Sales of Still White Wine by Price Segment (% off-trade should add up 100%)
Under MX$35.99
MX$36 to MX$64.99
MX$65 to MX$90.99
MX$91 to MX$139.99
MX$140 to MX$199.99
MX$200 and above
5.1
24.5
29.7
27.6
10.8
2.3
4
23.6
28.6
28.9
11.3
3.7
3.6
22.4
28.4
29.5
12.3
3.8
Volume Sales of Still Rosé Wine by Price Segment (% off-trade should add up 100%)
Under MX$35.99
MX$36 to MX$64.99
MX$65 to MX$71.99
MX$72 to MX$90.99
MX$91 to MX$139.99
MX$140 to MX$199.99
MX$200 and above
2
16.8
19.8
27.1
26.5
5.2
2.7
1.4
16.3
19
27
27.3
5.8
3.3
1.1 14.5
18.4
26.5
28.6
6.9
4
14
17.9
25.4
29
9.1
4.7
Sales of Still Red Wine by Grape/Varietal Type (% of total volume, should add up 100%)
Cabernet Sauvignon
57
56
55
54.5
Lambrusco
1
1
2
1.5
Merlot
9
10
10
10.5
Shiraz/Syrah
4
4
4
4.3
Tempranillo
28
28
28
28.3
Others
1
1
1
1
13
16.5
24
29.5
11.6
5.4
14
17.6
26.1
27
12.2
3.1
54.6 1.3 10.4 4.1 28.4 1.4 -
Sales of Still White Wine by Grape/Varietal Type (% of total volume, should add up 100%)
Chardonnay
Chenin Blanc
Riesling
Sauvignon Blanc
Others
33
2
36
26
3
32
2.5
36
26
3.5
32
2.5
36
27
2.5
34
1.8
35
27.3
2
34.2 1.5 35.3 27.3 1.8 -
Sales of Still Rosé Wine by Grape/Varietal Type (% of total volume, should add up 100%)
Zinfandel
Others
38
62
38
62
38
62
38.5
61.5
38.8 61.3 -
Source: Assembled with data in Euromonitor (2010)
4
Per capita consumption of wine in Mexico is very low – less than one liter – compared to
other countries like the US (almost 7 liters) and France (25 liters). Though both the Mexican
wine industry and per capita consumption are small, there is growth in per capita consumption of
wine in Mexico. Forecasts predict cumulative growth rates of 10% in the value of the Mexican
wine industry for the 2010-2014 period, and 8% cumulative growth in terms of volume
(Euromonitor (2010)). Table 4 provides forecasts for volumes and values by Euromonitor, from
2010 to 2014.
Table 4 –Forecast for The Mexican Wines Industry by Euromonitor, 2010/2014
Still Light Grape Wine
Still Red Wine
Still White Wine
Still Rosé Wine
Sparkling Wine
Champagne
Other Sparkling Wine
Fortified Wine & Vermouth
Port/Oporto
Sherry
Vermouth
Total Wine Volume (million liters)
Still Light Grape Wine
Still Red Wine
Still White Wine
Still Rosé Wine
Sparkling Wine
Champagne
Other Sparkling Wine
Fortified Wine & Vermouth
Port/Oporto
Sherry
Vermouth
Total Wine Value (Mx$ million)
2010
2011
2012
2013
2014
45.3
34.1
9.4
1.9
9.5
0.5
9
15
0.1
14.3
0.6
69.9
48.9
37.4
9.6
1.9
9.7
0.5
9.2
16
0.1
15.3
0.6
74.6
53.8
42
9.9
1.9
9.9
0.6
9.3
17.3
0.1
16.6
0.6
81
60
47.9
10.2
1.9
10.1
0.6
9.5
19
0.1
18.2
0.6
89
67.7
55.2
10.5
2
10.3
0.6
9.6
21.1
0.1
20.3
0.6
99
11,483.40
8,927.00
2,147.90
408.5
3,144.80
707.3
2,437.50
2,222.40
53.1
2,010.70
158.6
16,850.60
12,719.90
10,052.70
2,249.30
417.8
3,242.40
742.2
2,500.10
2,401.80
54.4
2,183.90
163.5
18,364.00
14,371.00
11,577.10
2,366.70
427.2
3,373.60
806.8
2,566.80
2,637.90
55.9
2,413.20
168.8
20,382.50
16,348.70
13,447.30
2,463.80
437.5
3,533.30
890.8
2,642.50
2,921.50
57.2
2,690.10
174.1
22,803.50
18,750.30
15,690.40
2,609.30
450.6
3,676.40
955.4
2,720.90
3,272.90
58.5
3,034.20
180.3
25,699.60
Source: Assembled with data in Euromonitor (2010)
At the same time, per capita consumption of wine is declining in some countries with the
highest per capita consumption (e.g., France, Italy, and Spain) (Table 5). The expected growth
in Mexico is attributed in part to an emerging culture for wine, where Mexicans are switching
5
from consumption of spirits to wine. This trend is driven by increases in food consumption away
from home and conscious efforts of wine firms to push sales in restaurants. The fastest growing
wine category in Mexico is the basic premium red wine segment (Euromonitor (2010)),
particularly Cabernet Sauvignon (which accounts for 55% share of sales). Wine tasting events,
wine fairs and classes are used by the industry to try to teach consumers and increase demand for
wines. Awareness of wine culture is growing fastest amongst women and the younger
population. In addition to growth in domestic consumption, there is potential for growth in
international recognition of Mexican wines, due in part to recent international awards won by
Mexican wines, and the effort by Mexican authorities to boost tourism in the Valley of
Guadalupe.
Table 5- Year to Year Growth (%) in Per Capita Consumption of Wine, Selected Countries
Argentina
Australia
Belgium
Canada
Chile
France
Germany
Italy
Mexico
Netherlands
Portugal
Russia
South Africa
Spain
United Kingdom
USA
World
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
-4.8
-2.1
-0.8
-12.3
-2.5
2.6
-3.5
-5.4
-4.5
2.2
0.5
0.9
1.7
-0.3
-0.7
0.4
0.4
0
1.6
1.5
3.2
-0.4
2.1
2
2.2
2.1
2.3
4.9
4.2
3.8
1.6
4.3
5.1
7.1
4.3
1.8
25
1.4
-0.4
4.5
-2.7
-11.3
4.6
-4.7
1.5
-4
-3.3
-1.5
-2.6
-2.5
-2.2
-1.1
-2
-1.6
2.8
1.8
2.8
0.6
-1.1
0.7
0.4
0.1
0
-4.3
-9.1
-5.1
-3.5
1.3
-2.1
-0.4
-1.5
-1.9
2.7
5
6.9
-12.6
15.7
7.6
23.4
4.8
1.1
5
4.7
4.3
6.2
4.6
3.3
3.4
2.9
2.4
-2.9
-0.7
1
-5
-1.3
-2.1
-1.3
3.2
2.5
10
8.6
9
9.1
8.4
-1.9
10.2
3.7
-5.1
0.7
-1.7
-11.1
-0.3
3.1
1.8
1.8
1.6
1.1
-4.5
-2.8
-3
-1.3
-2.4
-2.6
-3.2
-4.4
-5.7
5.4
5.1
3.2
2.1
3.9
0.9
1.4
0.3
0.4
0.1
4.4
3.1
2.2
1.2
1.7
2.1
2.2
2.6
-0.7
-0.4
0.4
-0.7
0.6
0.1
1.2
0.2
-0.6
Source: Assembled with data from the Euromonitor Data Base - Alcoholic Drinks: Euromonitor from trade
sources/national statistics. Accessed on June 7, 2010.
The Global Industry
The global wine industry is estimated to be worth $256.4 billion USD and accounts for
27 billion liters as of 2009 (this compares to 19 billion liters for spirits and 184 billion for beers)
(Euromonitor (2010)). Per capita consumption of wine in some of the historically wine
6
consuming countries has been declining, and the overall global wine industry has not grown in
the last decade (Table 5). Figure 2 shows per capita consumption of wines globally. However,
the share of wine production that is traded internationally is twice as much as it was two decades
ago (Anderson (2004)), with economic gains for the so called New World producers (i.e.,
represented mainly by Australia, Chile, the US, and South Africa) and drastic reductions in
domestic consumption and exports for traditional premium wine producers, also known as Old
World producers (i.e., France, Italy, Germany, and Spain). Figure 3 provides wine volumes for
the major wine producing countries, importers, and exporters, comparing 2003 and 2008.
Though globalization of the wine industry has been occurring, it has not resulted in
homogenization of this product (Anderson (2004)). In fact, wine is the most fragmented
alcoholic drink category. By 2002, the world market share of the three largest wine companies
was 7%, compared to 25% for beer, 27% for coffee, 43% for spirits, and 80% for soft drinks
(Deshpandé, Herrero and Reficco (2008)) 1.
Figure 2- Per Capita Global Consumption of Wine, 2009
Source: Euromonitor (2010)
1
Exhibit 2 in Deshpandé, Herrero, and Reficco, 2008.
7
Figure 3- Top Ten Wine Countries, 2003 and 2008
Figure 3- Major Wine Producing Countries
Source: Euromonitor (2010)
Bartlett (2003) illustrates the different views reflected on wine making practices behind
that fierce competitive battle between New World and Old World wine producers, quoting the
following statements:
It’s an art, not a science. We are creating products that are crafted, just as an artist or a
chef would create.
Jean Claude Boisset, CEO of a French wine company
We bring a total commitment to innovation… from wine to palate.
Mission Statement, Australia Wine Foundation
Old World producers have relied on product attributes to dominate the wine market for centuries,
defining tastes and quality (Cholette, Castaldi and Frederick (2005)). European nobility began
planting vineyards by the Middle ages as a mark of prestige, creating the niche market for
premium wines, and the French nurtured the concept of terroir, the combination of soil, aspect,
8
microclimate, rainfall, and cultivation that they believed provided the unique taste of each
region’s wines (Bartlett (2003)). The industry, under the domination of Old Wine producers, had
been a producer-centered craft derived from the combination of terroir and tradition (Deshpandé,
Herrero and Reficco (2008)).
However, New World producers have represented a real threat and headache for Old
World producers during late 1990s and 2000s. While the share of global exports is still
dominated by Old World producers, beginning in the mid 1990s, the gap between share held by
Old World producers and New World producers started to decrease. For instance, in the mid
nineties the share of global exports by Old World countries represented 76% compared to 8% by
the New World producers. In 2000, those numbers were 71% and 15%, and as of 2004, Old
World producers held 62% compared to 24% by the New World producers (Deshpandé, Herrero
and Reficco (2008)). By 2003, Old World producers became even more concerned, as for the
first time, Australia won the battle with France for the majority of share in the UK market,
holding position as the main wine importer both in terms of quantity and value.
Cholette, Castaldi and Frederick (2005) identify five key factors needed to compete
favorably in the global wine industry: a strong domestic market, domestic market growth
potential, economies of scale advantage, industry adaptability to change, and potential to attract
foreign investment. They assess the competitive advantage of selected nations considering those
key factors. Results are summarized in Table 6.
Table 6 – Overall Competitive Advantage of Selected Wine Producing Nations
Competitive Advantage
Country
Australia (NW), Chile (NW), USA (NW)
Strong
Moderate
Argentina (NW), South Africa (NW), Italy (OW), and Spain (OW)
Weak
France (OW) and Germany (OW)
Source: Cholette, Castaldi and Frederick, 2005.
Several authors agree that there has been a structural transformation in the global wine
industry, and that this transformation is more a result of actions of New World producers rather
than by exogenous forces (Bartlett (2003), Roperto (2005), Castaldi, Cholette and Frederick
(2005), and Deshpandé, Herrero and Reficco (2008)). Table 7 summarizes some of the main
9
attributes considered as important distinctions in the wine industry for the New World (NW) and
the Old World (OW) wine producers.
Table 7 – Main Attributes in the Wine Industry
Premium Segment
While the quality standard was defined by OW, NW producers overcame this attribute by penetrating this
segment with high quality wines.
Label
OW producers based their labeling system according to appellations of origin, which used to represent a
competitive advantage for them. This proved to be confusing for consumers (Cholette, Castaldi and
Frederick (2005)). NW producers took the opportunity to change this labeling system by using a labeling
system based on grape varieties. This gave them the opportunity to educate consumers on grape qualities.
In addition, as NW producers were not as highly regulated, therefore, they were able to use colorful and
innovative labels (Deshpandé, Herrero and Reficco (2008)).
Terroir
While this was almost mystified by the French (Bartlett (2003)), some experts believe that the terroirs of
NW producers were superior or at least more reliable than those of the OW producers (Porter and Bond
(Rev. 2008)).
Demand
OW countries still have a higher per capita consumption compared to NW countries. However,
consumption is decreasing in OW while is increasing in NW countries (Figure 3).
Costs
There is not a clear cost advantage. While some NW producer countries like Australia have a cost
advantage, this is not the case in other nations, like the US. However, in general, economies of scale in
NW countries have allowed more concentration, which yield higher margins for those firms.
Regulation
This is one of the most important constraints for OW nations that are highly regulated in terms of grape
and wine production In contrast, NW producers have more freedom to innovate and invest in research and
development, and have better flexibility to respond to consumers preferences.
Production
OW producers have to maintain traditional production methods, and follow conservative oenology
practices. In contrast, NW producers are flexible in this regard, which has allowed them to be able to
offer easy to drink, fruity wines (Deshpandé, Herrero and Reficco (2008)). Also, due to the fragmentation
of wineries in OW countries, they have on average, small and outdated facilities, compared with modern
facilities in NW countries.
Source: Adapted from Deshpandé, Herrero and Reficco (2008); Bartlett (2003). Other sources are cited accordingly.
Viticulture in Baja California and the 2000 crisis
The history of viticulture in Baja California Mexico can be traced back to the late
eighteen century when Jesuit and Dominican friars first planted grapes and produced wines in
10
that area 2. Because Baja California shares a border with California (US), the region is often
impacted by developments in the United States. From 1920 to 1934, the sale, manufacture, and
transportation of alcohol in the US was prohibited (Volstead Law), allowing for further
development of the wine industry in nearby Baja California. Later, in 1976, California (US)
wines won a highly publicized wine tasting competition in France. In the late 1970s, several
industries and events in California helped the by then emerging wine industry in the U.S.
(development of tourism, development of the “California Cuisine”, increasing demand for wines
in America, and so on) (Porter and Bond, 2008). Due to its geographical proximity with Napa
Valley, the wine industry of Baja California benefited from these events as well. During this time
period, the industry was reconfigured as a more modern industry –with technology imported
from Italy, France and the US, and well trained oenologists.
Just as the Mexican wine industry started to grow in the late 1970s and early 1980s, the
Mexican economic crises of the mid 1980s and mid 1990s occurred, seriously affecting the
Mexican wine industry. Between 1984 and 1988, the number of vineyards in Mexico decreased
by 36% (Sánchez-Zepeda (2007)) 3. Though the number of vineyards decreased, it was during
the same years that some of today’s most competitive wineries entered the Baja California
industry by purchasing wineries that went bankrupt due to the economic crises. These new
entrants may have perceived Mexico’s “openness” to free trade agreements as an opportunity to
move towards quality wines and updated production technology to that industry (Covert (2009)).
Firms that entered in this time period include Monte Xanic (founded in 1987), Chateau Camou
(1995), Casa de Piedra (1997), Viñas Liceaga (1983), and Cavas Valmar (1983).
By the early 2000s, the main wine firms in Baja California were Bodegas Santo Tomas,
Casa Pedro Domecq (Domecq), and LA Cetto. The three winemakers were supplied by a large
number of small grape producers located mainly in three areas, the Valleys of Guadalupe, San
Vicente, and Santo Tomás. It is estimated that more than 2,000 hectares of grapes were planted
in Baja California by small producers to supply these three firms. At least 50% of this
production, equivalent to approximately 5,000 tons, was contracted by Domecq.
Participants of the wine industry in Baja California were shocked in 2001 when Domecq,
a subsidiary of the international firm Pernod Ricard, announced to producers and governmental
2
In California, US, the first vintners are documented to come from Spain at the same time (Porter and Bond, 2008)
This decrease included States in Mexico with wine tradition other than Baja California (e.g., Aguascalientes,
Coahuila, Queretaro and Zacatecas).
3
11
authorities in the State of Baja California that due to market pressures it would stop buying
grapes from small producers in Baja California. Domecq’s decision was driven by the market
(i.e., imports gave the Mexican consumer more choices), as changes in tastes and preferences of
consumers had led to switches in the types of wine being consumed. Thus, Domecq felt they
needed new grape varieties and grapes of higher quality to produce wines that satisfy consumer
preferences. However, the supply of grapes in Baja California for wines such as Cabernet
Sauvignon, Merlot, Tempranillo (red wines); Chardonnay, Riesling, and Sauvignon Blanc (white
wines); and Zinfandel (Rosé wines), would require years to develop due to the nature of the
production process. Building quality reputation and brand recognition would also require time.
As a result of the Domecq decision, in 2001 and 2002 several small grape-for-wine growers went
bankrupt and abandoned grape production (Figure 4).
Figure 4 – View of fields from grape producer in Baja California as of 2002
Source: Secretaría de Fomento Agropecuario, Baja California
Government Support
Though Domecq announced they would stop buying grapes, they did try to honor
production contracts with growers; however, they did not pay the prices expected by grape
producers to cover their costs. To mitigate the problem, the government of the State of Baja
California compensated 50 of the most affected producers with $275 Mexican pesos per ton,
equivalent to approximately 10% of the market value of grape expected by producers by them
(expected market value estimated between $2,600-$3,000 Mexican pesos). While this support
by the government alleviated the financial problems faced by small grape producers, it was not
enough to keep all farmers from abandoning their fields.
12
The governmental institution in charge of supporting agribusinesses in Baja California,
Secretaría de Fomento Agropecuario (SEFOA), estimated that 94 producers, with a total of 1,200
hectares, were affected by Domecq not buying “old” varieties of grape for wine production
(Table 8). The total area planted by producers affected by 2001 represented almost one half of
the total area planted in the State of Baja California, with approximately 500 hectares of
production were located in the Valley of Guadalupe. Due to the magnitude of damage, the
recovery of the grape-growing industry would only be achieved by coordination of all the
participants in the wine chain supply the following years.
Table 8- Small Grape Producers in the State of Baja California, Affected in 2001/2002
Zone
Valley of Guadalupe
Number of
Producers Hectares
40
497
San Antonio De Las Minas
18
152
Santo Tomás
21
289
San Vicente
15
294
Total
94
1,232
Varieties
Grenache, Moscatel, Zinfadel,
Palomino, Thompsom,
Carignane, Mission, and
Valdepeñas
Chardonay, Zinfandel,
Thompsom, Palomino,
Carignane, Vioñe, and
Moscatel
Palomino, Thomsom, Mission,
Rosa de Peru, Grenache, and
Carignane
Chardonay, Grenache,
Valpeñas, Barbera, Mission,
Moscatel, Thompsom, and
Colombard
Source: elaborated by authors from information compiled by Secretaria de Fomento Agropecuario of the
State of Baja California
Opportunities in the crisis
As the wine industry in Baja California was in the middle of a crisis, some local
entrepreneurs found this to be an opportunity. Aware of the excess supply of grapes,
businessmen with economic activities other than wine decided to enter the wine industry.
13
Although these were new participants in the industry, they were advised by oenologists, and
learned how to produce wine. These new entrants were known locally as “huatequeros”. The
huatequeros focused on producing wines in small quantities. Due to the excess supply of grapes,
they were able to negotiate for good quality raw materials at reasonable prices. However,
because they were producing only small quantities of wine, they could only survive if they were
able to produce high quality products, and thus garner higher margins.
At the same time these new producers were focusing on quality grapes, Domecq offered
technical help to producers willing to switch their production to the new varieties demanded by
consumers. The firm was, however, unable to offer future buying contracts since the market was
uncertain. As a result of the efforts of Domecq and the huatequeros, producers established
vineyards with grapes that were resistant to plagues and diseases with the purpose of grafting
them with the desired varieties. Eventually, Domecq was unable to buy the large quantities of
the new varieties everyone expected due to “internal problems.” This created further
opportunities for the huatequeros.
The Rural Grape Growing Project by SEFOA
The Secretaría de Fomento Agropecuario (SEFOA) from the State of Baja California, a
governmental institution supporting agribusinesses, realized how difficult it was for wine grape
producers to be in such an uncertain situation. To face the problem, SEFOA promoted a “Rural
Grape Growing” project. In its first stage, the project focused on learning about the industry by
conducting surveys while visiting all grape producers in the State of Baja. This allowed the
government to assess the potential for supply in the area, as well as the conditions of the
orchards. The technical work was lead by Mr. Reyes, a former production manager from Bodega
Santo Tomás, one of the best known firms in Baja California. The work was initiated in
September of 2002.
After 6 months, the following preliminary actions were considered as a necessity:
1. To provide technical support to growers,
2. To contract scientists with experience to evaluate the current field practices,
3. To orient governmental support programs towards the infrastructure necessities
detected on the field visits, and
4. To acquire mobile equipment for the wine production. Such equipment should be
transported from farm to farm. Thus, small producers could process grapes without
having to invest on their own.
14
The federal and state governments defined as a both production and processing of wine as
a priority in the State of Baja California, authorizing exceptional support for the rehabilitation
and maintenance of the orchards, and for the acquisition of fixed assets. These actions by
SEFOA and the Mexican federal government allowed producers to continue producing and
developing the vineyards, even though their harvest revenues were very low, and in some cases
zero.
In May 2003, representatives of small grape producers, three main buying winery firms,
and representative of SEFOA and the Mexican Federal government, met in a farm in the Valley
of Guadalupe to discuss the problems the industry was facing. That meeting was considered by
participants not only as symbolic, but very important for practical reasons, since players from all
parts of the wine supply chain tried to find pragmatic actions to benefit the industry as a whole.
After more than four hours of discussions, they identified four possible alternatives worth further
exploration: a) find other possible buyer (wineries) in Mexico, b) sell grapes for fresh
consumption, as opposed to grapes for wineries, c) produce wine in small quantities (micro
wineries), and d) change grape varieties.
In 2003, the Mexican government supported nurseries to establish reproduction patterns
to produce grafts for the new varieties demanded by the market. The grafting would occur
during the years 2004 and 2005 in Baja California orchards. To support this investment in the
future of the wine grape industry, 50% of the cost was covered by the government. The varietal
reconversion was planned in stages so that grape producers would gradually add the production
of the new varieties, while maintaining some “old” varieties to harvest for revenue (with
economic support by the government).
In Mexico, a System-Product is an official organization (i.e., a committee for rural
development) governed by the Mexican Department of Agriculture. This organization is
integrated by government officials and by representatives of all the supply chain value of
strategic products, as defined by the Mexican Department of Agriculture in their National Plan
for Development. The objectives of system-products are: i) achieve consensus on national
production programs, ii) establish plans for strategic expansion or reduction of level of
production according to conditions in the market, iii) establish strategic alliances and
negotiations for the integration of chain values, iv) define norms and procedures for commercial
transactions and for derivatives products, v) participate in the definition of tariffs, quotas, and
15
other imports modalities, and vi) generate mechanisms for consensus among producers,
marketers, and the government. Based on the cohesion of the industry to work together to deal
with the crisis and develop new varieties, an official cluster for the Baja California wine industry
was established in 2004 4. The cluster integrated people from the government, the industry, and
NGO representative (Table 9), and eventually included people from universities and research
institutions. The development of a wine cluster is relevant because one of the goals of the cluster
is to o play an active role in state and federal lobbying and promote quality wine production in
Baja California. Additionally, Porter and Bond (Rev. 2008) note that some regions in Latin
America, Eastern Europe, and China had always had the necessary terroir for wine grape
growing but had not developed competitive wine clusters.
Table 9- Baja California Cluster of Wine, Created in 2004
Name
Representation
J. M. Salcedo
Ministry of Agriculture Representative
F. J. Sarmiento Perez
Director of Agriculture, SEFOA,
institution in charge of the support for agribusinesses in Baja California
F. Mosqueda
Ministry of Agriculture Representative
E. Aguilar
Industry Representative
F. Varela
NGO Representative
M. Torres
Distribuitors Representative
V. Torres
Industrial Representative
M. Cobos
Responsable for the Product Systems in Baja California
Current Status of Wines in Baja California
The number of wineries in Baja California grew from twelve to around fifty from 2003 to
2008 (Table 10) 5. As of 2008, around 170 wine grape growers cultivated 2,800 hectares in Baja
California (Table 1), a State with a potential or capacity of 8,000 hectares (Wine (2008)). Table
2 provides grape varieties produced in Baja California as of 2009, and Table 8 shows those
4
For additional information refer to the Mexican Department of Agriculture’s web site,
http://www.sagarpa.gob.mx/agricultura/Publicaciones/SistemaProducto/Paginas/default.aspx},
accessed on February 2010
5
The Mexican Cluster of Wine (2008) reports 7 wine producers in 1995 and 57 in 2008.
16
varieties that were produced in 2002.
Table 10 – Grape-for-Wine Producers in Baja California as of 2008
Category of wine producer
Small
Mid
Big
Total
Less than 50,000 bottles
50,000 to 500,000 bottles
More than 500,000 bottles
Number of
producers
750 ml
Bottles
39
4
3
46
70
1,674
11,456
13,200
%
85%
9%
7%
100%
Notes: Assembled from information by SEFOA and estimations in the Mexican Cluster of Wine Staff Report, 2008
Wines from Baja California, and particularly from the municipality of Ensenada 6, have
started to be recognized internationally. However, with only 5% of total production in Mexico
exported, the domestic market remains the most important market for Mexican wines. In 2008,
three firms held more than 30% of market share in Mexico, with two of the firms from Baja
California (L.A. Cetto in the top with 12.5%, and Bodegas Santo Tomas with 8%) (Datamonitor
(2009)).
Wines from Baja California are sold in Mexico at prices fluctuating between $100 to
$300 Mexican pesos per 750 ml bottle (from $8.50 to $25 USD). Imported wines are sold, on
average, at prices around $10 USD or below in supermarkets and hypermarkets (Table 11 shows
the share of wine distribution in Mexico as of 2008). The three leading sources of imports are
Chile, Argentina, and Spain, with total imports from all countries accounting for an estimated
70% of consumption of wine in Mexico. Deshpandé, Herrero, and Reficco (2008) cited a study
by a Chilean Winery, Montes Wines, that identified the wine price segments with the highest
growth prospects as those in the $10-14 range, followed by the $14-25 and $7-10 segments.
Major challenges facing the wine industry of Baja California in 2009 include the high
level of taxes charged in Mexico to wines; inexpensive imported wines, which accounted for
30% of the total domestic wine market; the problem of water supply shared by most states in the
north of the country; the low volume of wine produced in Mexico; and the lack of promotion to
boost the culture of wine in the country. Baja California wine participants were proud of having
the terroir for wine production; and were willing to find ways to better fulfill the growing
domestic demand.
6
The municipality of Ensenada includes the areas Valley of Guadalupe, El Tule, Uruapan, Santo Tomas, and San
Vicente, as shown in Table 2
17
Table 11 – Distribution shares in the Mexican wine market
Supermarkets & Hypermarkets
41%
Specialists Retailers
27%
On-trade
27%
Other
5%
Total
100%
Source: Datamonitor (2009)
2009 was a very difficult year for the wine industry in Mexico. Not only was there a
global recession that impacted the industry, but an outbreak of swine flu caused all activities to
be suspended for two weeks in May, decreasing growth rates seen in previous years (Table 5).
The main source of competition remains Chilean wineries that continue to offer low prices and
acceptable quality, and to the popular opinion in Mexico that foreign wine is superior.
Following the New World labeling strategies, Mexican wineries are using innovative labeling to
reach the young market in Mexico. For instance, Bodega Santo Tomas re-launched its ST lines
with a new design and a “fresh and young, no complications” slogan. Many brands, such as
Cinco Estrellas and Estacion El Porvenir from Baja California are using an atypical label for
wines (Figure 5).
Figure 5 – Selected labels of Mexican Wines
Question
Given the current organization and the recent history of Baja California within the
context of the global industry, students are asked to discuss the opportunities for the Baja
California industry in both the domestic and international markets.
18
Acknowledgements
This is an ongoing project on the Mexican wine industry with the collaboration of faculty from
Universidad Panamericana, Colegio de Postgraduados de Ciencias Agricolas de Mexico, and the
University of Florida. A Master of Agribusiness Management thesis (granted by Colegio de
Postgraduados de Ciencias Agricolas de Mexico) has been completed by Francisco Javier Sarmiento
under the co-direction of Professors Carlos Trejo-Pech, and Carmen Lopez-Reyna. Also, an
undergraduate honors thesis has been completed by Allison Covert (granted by the University of Florida)
under the direction of Professor Lisa House. An additional undergraduate thesis is in progress by a
student of Universidad Panamericana at Guadalajara.
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