Alcoholic Beverages:
Heritage of splendor
FEBRUARY 2020
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 1
TORNIKE KORDZAIA, CFA DAVITI ZHORZHOLIANI GIVI ADEISHVILI LUKA CHIGILASHVILI ANDRO TVALIASHVILI
+ (995 32) 2 27 27 27 [email protected] www.tbccapital.ge www.tbcresearch.ge
2|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY TABLE OF CONTENTS
EXECUTIVE SUMMARY ...... 4 INDUSTRY OVERVIEW ...... 5 WINE SUPPLY: PRODUCTION HITTING THE ALL TIME HIGH ...... 6 WINE DEMAND: ENTERING THE NEW EXPORT MARKETS ...... 11 WINE DEMAND: TOURISM TO DRIVE THE LOCAL MARKET ...... 16 CONSUMER BEHAVIOR AND NICHE MARKETS...... 18 WINE PRICES: LOCAL MARKET ...... 19 WINE PRICES: EXPORT MARKETS ...... 20 SPIRITS: BRANDY PRODUCTION ON THE RISE ...... 25 BEER: REBOUNDING FROM SLOWDOWN ON ACCOUNT OF EXCISE TAXES ...... 27
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 3
EXECUTIVE SUMMARY
Wine production is gaining momentum in Georgia, underpinned by the growing harvest and demand from international markets. The volume of produced wine is expected to surge by 28% YoY in 2019, reaching 21.7mln decalitres, with total estimated value of GEL 1bn. Rtveli broke the 30-year record two times in a row. The amount of processed grapes increased by 9% YoY to 271 thousand tons in 2019. We expect the wine production to increase at 5.1% CAGR till 2025, reaching the output of 381 thousand tons.
Georgia lags behind other winemaking countries in average productivity. At 5.1 tons per hectare, grapes yield is three times lower in the country compared to other top exporters. However, the yield equals 8.5 tons/ha on average for the large-scale producers. We believe that the consolidation of sparse vineyard plots, modernization and the renewal of the vine stock will positively impact the productivity.
The wine and spirits market remains largely fragmented. Currently there are 420 companies producing the wine, most of them small-scale. Currently, one third of wine production in Georgia is informal, coming from mostly scarce vineyards owned by small-scale farmers. We see the potential for consolidation on market for achieving the economies of scale.
IRR for production of different grape varieties ranges between 14% and 18%. The project payback period varies from seven to nine years. State subsidized credit program can further boost these returns.
We believe the share of informal production will decrease in future. The growing urbanization and decline in self-subsistent agriculture will underpin the process. Alternatively, former informal wine producers might increasingly act as grapes suppliers for the formal producers, or organize into enterprises themselves.
Georgia is among the top 20 wine exporting countries globally and foreign demand is the main driver of the sector. Wine exports increased by 13% YoY in 2019 and constituted USD 223mln, capturing 5.9% of Georgia’s total export value. The share of export in wine turnover is estimated at over 80% for 2019.
We expect the proportion of produced wine to shift further in favor of red wines, as target exporting markets prefer Georgian dry and semi-sweet red wines. Currently accounting for over 60% of total production, the wines made of Rkatsiteli are mostly consumed within the country, or used for spirits production, while wines made solely or partially from Saperavi grapes constitute 73% of exports. We further believe Georgian PDO wines to have a great export potential for high-end market.
We see the need and potential in export diversification. Of Georgia’s total wine exports in 2019, 60% of value (USD 133.3mln) and 62% of volume (43.4mln litres) came from trade with Russia. The rest of CIS and Ukraine accounted for 19% of generated export revenues. Interconnected economies of these countries and the political risks in the region remain one of the main challenges for Georgian wine sector, as the economic state and exchange rate dynamics of the trade partners affect the demand and prices of Georgian wine there.
The USA, Germany, China, Japan, the UK, Canada, Poland, Switzerland, the Netherlands, Russia, Ukraine and Kazakhstan are the most attractive countries for Georgian wine export. Total imports of these countries from traditional wine producers equals USD 18bn, whereas imports from niche countries totals USD 1bn. These are the two primary segments Georgian wine could compete in.
The upside on domestic markets can be found in bottled refined products and tourism. The turnover of wine and spirits companies on local market are stagnating. At 19.9 litres per year, per capita wine consumption in Georgia is declining, as the consumers switch to standardized bottled products. We believe that in line with increasing visitor numbers and the average length of stay, tourism will increasingly drive the domestic consumption of wine in future.
The wine sector in Georgia is financially healthy. Sector’s stable and low leverage underlines room for further growth. Liabilities accounted roughly 40% of wine producers’ assets, while NWC ratio increased from 2.1 to 2.3 YoY in 2018. EBITDA/Interest expense and Debt/EBITDA was 6.3 and 2.6 in 2018, respectively, meaning the industry’s liquidity risks are low. However, the high concentration of sales on single market poses the risk for sales and profitability. 4|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY INDUSTRY OVERVIEW
Georgia counts its history of producing alcoholic beverages not into centuries, but rather into millennia. The UNESCO recognizes Georgia as the Cradle of Wine, acknowledging that the locals were already making wine here 8,000 years ago. In addition, the UNESCO listed traditional Qvevri method of winemaking in its Intangible Heritage of Humanity list in 2013. According to the Georgian Wine Agency, 525 endemic grape varieties are found in the country, of which c.30 are cultivated commercially, and 20 Protected Designation of Origin (PDO) wines are produced as of the end of 2019.
Turnover of Georgia’s alcohol industry is on a rise. Total revenues generated by local alcoholic beverage producers increased at a 9-year CAGR of 16.1%, expected to total GEL 1.47bn in 2019 (+15.7% YoY). We expect the formal alcohol market to account for 91% of total turnover in 2019, while informal producers (wine and spirits) to grab 9% of total turnover, approximately the same as in 2018.
FIGURE 1: GEORGIA-BASED ALCOHOLIC BEVERAGES FIGURE 2: NUMBER OF ACTIVE COMPANIES IN PRODUCERS’ TURNOVER1 (MLN GEL) ALCOHOLIC BEVERAGES SECTOR
Beer companies 450 420 Spirits informal producers (TBC Capital estimate) Spirits companies 3.0% 400 Wine Wine informal producers Beer
1,500 3.0% Wine companies 2.8% Spirits 337 Sector turnover to GDP 2.8% 2.7% 350 317 285 Millions 2.8% 32 300 2.3% 267 2.5% 253 1,000 217 2.1% 2.1% 236 31 250 215 215 27 186 91 181 177 1.8% 235 196 184 85 2.0% 200 170 167 1.7% 201 1.6% 40 21 201 22 67 129 152 150 500 202 141 32 77 105 64 844 149 1.5% 84 18 136 99 700 106 135 17 106 600 100 60 67 15 14 90 46 51 52 51 67 60 92 99 414 401 35 36 40 70 61 299 283 50 121 153 73 105 1.0% - 18 25 19 20 25 23 25 22 27 27 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 H1
Source: GeoStat, ITC, GWA2, TBC Capital
The growing market and sizable profit margins is attracting new producers. Availability of finance via state- subsidized loans and grants in past years increased the sector attractiveness among potential entrants, resulting in a large number of small-size registered companies in the wine sector. The industry features 420 producers of wine (2.3x increase from 2010), 84 of spirits (2.4x), and 27 of beer (1.5x), excluding unregistered producers (mainly households).
TABLE 1: DISTRIBUTION OF COMPANIES BY SIZE3 Size Wine Spirits Beer Large 5 1 4 Medium 27 5 2 Small 388 78 21 Source: GeoStat
The wine and spirits market is largely fragmented. The large companies generated 29% of the market turnover in 2018, up from 27% in 2017. The reason for such a low concentration level is the current agricultural land ownership structure in the country, as mostly small-scale farmers (95.4% of whom owned less than 1 ha as of 2014 census) own vineyards. In the past years, wine producers focused on purchasing grapes from locals rather
1 Including household shadow turnover. The turnover of companies registered as either a Wine Producer, or a Spirits Producer (according to the NACE.2 Classification) is counted in respective category. Nevertheless, part of the Wine Producer’s turnover comes from selling spirits, and vice versa. 2 Georgian Wine Agency numbers tend to slightly diverge from GeoStat data due to methodological differences. 3 As of H1 2019. Large: number of employed > 249 persons and/or volume of avg. annual turnover > GEL 60mln. Medium: number of employed ranges from 50-250 persons and avg. annual turnover – GEL 12mln-GEL 60mln. Small: number of employed < 50 persons and avg. annual turnover < GEL 12mln. GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 5 than cultivating. Going forward, we expect the concentration of large companies to increase due to the growing demand for standardized, high quality products as well as for achieving the economies of scale, needed to push the costs down in the long term.
FIGURE 3: GEORGIA-BASED WINE AND SPIRITS FIGURE 4: GEORGIA-BASED BEER PRODUCERS’ PRODUCERS’ TURNOVER4 (MLN GEL) TURNOVER (MLN GEL)
1,40 0 Lomisi GBC GBG Argo Medium & Small companies 350 1,185
1,20 0
300 285 1,002 267 1,00 0 236 879 250 9% 10% 9% 800 200 7% 11% 8%
600 71% 150 73% 32% 33%
400 100
200 50 44% 39% 27% 29%
- - 2017 2018 2019E 2017 2018 2019E Source: GeoStat, SARAS, TBC Capital
Unlike wine, beer production is highly concentrated, with large companies capturing 90.6% (+0.6pp YoY) of the total sector turnover in 2018. JSC Lomisi led the sales in 2018, representing 38.5% of the market. Georgian Beer Company JSC (GBC) was a runner up, accounting for 32.8% of the total turnover. On the expense of Lomisi and other (medium and small) companies losing their portions of the market, Global Beer Georgia LLC (GBG) and JSC Argo have increased shares in 2018, increasing to 10.5% and 8.7% respectively, from 7.6% and 6.7% in 2017. After the acquisition of the brand name and commercial assets of Kazbegi JSC by GBG in the first half of 2019, the level of market concentration increased further.
WINE SUPPLY: PRODUCTION HITTING THE ALL TIME HIGH
Georgian wine industry has progressed through many challenges since 2006. With Russian embargo in place, supply declined sharply in 2006 and continued to weaken for the next three years. Before the embargo, Russia was easily the exclusive importer of Georgian wine, with 87% and 77% shares in export volume and value, respectively. Facing the ban, Georgian producers started targeting alternative markets, refining their production and product quality. Supply started to pick up from 2010 and skyrocketed in 2014, when the embargo lifted.
Wine production in Georgia is gaining momentum. The volume of wine production is expected to surge by 26% in 2019, reaching 21.7mln decalitres, with total value of GEL 1bn. The formal production is already up by 40.3% in 9M 2019. This surge is mostly attributable to the fruitful Rtveli of last two years. Production of sparkling wine almost doubled in last two years, but remains modest. 0.31mln decalitres were produced in 2018, with a value of GEL 21mln and the production is expected to increase to 0.53mln decalitres (GEL 30.8mln) in 2019.
Higher production of wine from large-scale producers will further substitute household production. Household wine production has been decreasing from 7.3mln decalitres to 4.1mln decalitres until 2016, after which the production increased to 5.2mln decalitres in 2018. We expect the household production to reach 5.7mln decalitres in 2019, on the back of increased harvest. In longer term, in line with the increasing purchasing power, the local demand will continue shifting towards better quality, standardized drinks and away from homemade wine. The growing urbanization and decline in self-subsistent agriculture will push the formalization, and people who used to be on the supply side of the market will move to the demand side for bottled wine. The accumulation of harvest-bearing vineyards stock by registered winemakers underpins the trend. Alternatively, former informal wine producers might increasingly act as grapes suppliers for the formal producers, or organize into enterprises themselves.
4 We have consolidated wine and spirits markets, as the players producing wine also produce brandy (and other spirits) and vice versa. 6|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY FIGURE 5: PRODUCTION OF WINE AND SPARKLING FIGURE 6: PRODUCER’S VALUE OF WINE AND WINE GOODS – VOLUME (MLN DECALITRES)* SPARKLING WINE GOODS – VALUE (MLN GEL)
Wine - formal production Wine - shadow production Sparking wine Wine - formal production Wine - shadow production Sparking wine
25. 0
1,20 0 Russian 22 Russian 1,006 Embargo Embargo 20. 0 1,00 0 17 91 16 16 5 753 14.6 800 15. 0 13.3 14 13 13 11.5 12 5 5 601 85 10.0 10 600 533 9 4 4 473 67 10. 0 9 6 431 452 8 77 10 885 400 64 7 16 99 11 263 136 10 7 247 215 647 5.0 8 11 7 6 11 191 163 155 507 200 152 9 9 136 99 443 397 7 8 101 92 342 4 107 61 283 4 95 78 70 155 2 2 2 3 137 79 85 112 - 1 1 - 59 63 57
Source: GeoStat, TBC Capital; *Note: Stocked wine from previous harvests can be used for producing finished goods by companies; Winemakers increasing production to match excess demand from Russia caused a relatively higher jump in 2014
White grapes represent a bigger chunk of the production. 29% of the total harvest is estimated to be red grapes in 2019, -1 pp compared to 2016. Switching to production of non-common grape species is of a great necessity, as they can produce high quality niche-type wines. More varieties, with small scale production each, can satisfy diverse small-scale markets with distinct tastes worldwide. Past decade witnessed Kisi and Rose entering the market, but the vineyards substitution is a long and expensive process. We expect the proportion to shift further in favor of red wines, as target exporting markets prefer Georgian dry and semi-sweet red wines and the proportion of red wine producing grape varieties is higher in new vineyards, while Rkatsiteli share is rather limited.
Kakheti represents nearly three quarters of Georgia’s total grape production. 73% of Georgian vineyards are concentrated in this region, accounting for 72% of the total harvest in 2018. Imereti constitutes for 12% of the production. Racha-Lechkhumi and Kvemo Svaneti with the scarce vineyard area and smaller share of the harvest (up to 2%), boasts with special micro-zones and high concentration of PDOs.
FIGURE 7: GRAPE TOTAL HARVEST BY TYPE OF GRAPES (000’ TONS), AND SHARE BY REGIONS* 300.0 282.7 259.9 6% 250.0 White Red 2% Kakheti 30% 2% 31% 6% 200.0 180.8 Imereti 159.2 12% Shida Kartli 150.0 33% 30% Kvemo Kartli 100.0 69% 70% Racha-Lechkhumi 72% 50.0 70% 67% and Kvemo Svaneti Other - 2016 2017 2018 2019E Source: GeoStat; *Regional distribution as of 2018, 2019 numbers will be available in June 2020.
“Rtveli” broke the 30-year record twice in a row5. Within the Government’s “Rtveli” program framework, the amount of processed grapes (estimated 90% of country’s harvest) increased by 10% YoY to 271 thousand tons in 2019. 430 wineries were involved in the process. In 2018, 249 thousand tons (+86% YoY) of grapes with total value of GEL 316mln (+92% YoY) were processed into wine or related products. Despite the fruitful harvest, revenues from grape processing stagnated in 2019 at slightly above the GEL 300mln level, as Rkatsiteli prices declined YoY. The lower demand was mainly due to the excess stock of Rkatsiteli wines from the previous year.
5 Rtveli data is based on Georgian Wine Agency statistics, which differ from GeoStat data, mainly due to the difference in coverage of grape harvests GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 7
The Government of Georgia is actively supporting the industry. The state-initiated Agro insurance program co- finances 50% of insurance premium for grape harvest vineyards on up to 5ha area. Per EU-Georgia Association Agreement, the Government works on traceability of grapes species, ensuring the higher quality. Since 2008, the government had been subsidizing grape production until 2018, as the industry evolved and gained strength.
Rkatsiteli and Saperavi account for more than 90% of total grape production in Georgia. The share of Rkatsiteli in the total grape harvest has decreased by 4 pp for the seven-year period and it accounted for more than 60% of total estimated harvest in 2019. In contrast, the share of Saperavi decreased marginally to 30% (-1 pp) in the same period. The reason for such dominance of these two varieties were the relative ease of cultivation and good resilience to unfavorable weather conditions. Nowadays, the growing diversification of tastes drives interest for other endemic species too. Processing of Kakhuri Mtsvane, Tsolikauri, Ojaleshi and others had been increasing over the past years. Although according to GWA preliminary data, the combined share of these grapes decreased to 6% of total processed harvest, these numbers tend to get reviewed by June, and we expect this share to be somewhat higher.
FIGURE 8: PROCESSED GRAPE (000’ TONS) FIGURE 9: SHARE OF PROCESSED GRAPES SPECIES (%)*
300 Rkatsiteli Saperavi Other Rkatsiteli 271 Saperavi 67% 67% 249 Kakhuri Mtsvane 10 63% 63% 250 60% Aleksandrouli-Mujurtuli 24 55% 57% Other 82 200 48% 160 78 36% 41% 150 9 134 123 33% 31% 118 29% 30% 46 10 28% 28% 93 92 5 6 100 2 2 41 43 55 172 26 26 141 11% 12% 50 100 9% 9% 5% 5% 7% 6% 62 62 74 65 64
- 2012 2013 2014 2015 2016 2017 2018 2019E 2012 2013 2014 2015 2016 2017 2018 2019E Source: GWA; *We expect the share of other grapes to align more with the trend after the final review of the harvest figures.
Limited feasible capacity of production will remain a natural barrier for Georgian wine to become a mass product in the short term. Country’s limited supply of vineyards, currently at 55 thousand6 ha in total (<0.5% of the world vineyard stock), paired with low productivity in the sector, results in limited production capacity. Although small in absolute terms, note that vineyard area in the country has been increasing with CAGR 3.4% since 2014.
FIGURE 10: VINEYARD AREA 2014-2018 (000’ HA)*
250 212 218 191 192 200 146 147 150 126 106 92 100 66 69 55 39 42 49 50 32
0
Source: OIV, FAO;*According to GeoStat, the total area of vineyards in Georgia is 36.1 thousand HA as of 2017;
With an average yield per hectare, Georgia lags behind most of other, major wine exporters globally. Although rising, the current grape yield in Georgia stands low at 5.1 ton/ha, falling behind to regional wine producer peers. According to the World Food and Agriculture Organization data, per hectare productivity has been on the rise in
6 OIV statistical report 8|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY Russia (8.3), Ukraine (9.9) and Turkey (10.1) in a six-year period. Further, the yield in high-tech producers like Argentina and South Africa surpasses Georgia’s per hectare productivity by factors of 1.7x and 3.4x, respectively.
In contrast, productivity of large-scale producers who own new and productive vineyards stands at 8.57 tons per ha in Georgia, 2.1x higher compared to the average of the rest of the country. Domestic producers can improve the productivity through consolidation as the current low level is defined with high saturation of small- scale farmers, who are unable to achieve the economies of scale and, respectively, have costlier production. Old vines, lack of modern cultivation techniques and technology are additional issues.
FIGURE 11: VINEYARD PRODUCTIVITY – GEORGIA: 2012-2019* (TON/HA)8
20 Traditional winemaking European countries 17.1 18 High-Tech winemaking countries 16.5 16.9
16 Regional peers of Georgia 14 13.3 Georgia - Large-scale producers 11.7 12 10.7 10.1 10.1 9.3 9.9 10 8.9 8.5 8.0 8.3 8 5.1 5.7 6 4.6 4.9 4 2 - Georgia Moldova Portugal Spain France Russia Argentina Chile Ukraine Turkey Germany Italy New Australia USA China South Zealand Africa
Source: FAO, GeoStat, TBC Capital; *other countries 2012-2017; Note: Vineyard area for Georgia is based on OIV data; According to FAO, productivity is 3.654 ton/ha
There is a delicate balance between overproduction and the quality of wine. Higher grapes yields are achievable through consolidation of sparse vineyard plots into bigger units, investing in technology, and renewing vineyard stock. Compiled by the National Wine Agency of Georgia, the vineyard cadaster will back the streamlining of the consolidation process. On the flip side, keeping the yields below certain threshold is a precondition for high quality – a rational behind the National Wine Agency of Georgia recognizing only up to first 10 tons of Saperavi grapes per hectare suitable for producing PDO wines such as Kindzmarauli, Mukuzani, Kvareli and Akhasheni.
FIGURE 12: PROJECTED GRAPE PROCESSING AND WINE PRODUCTION (TON) IN 2019-2025
450 400 350 300 250 200 150 100 50 - 2020E 2021E 2022E 2023E 2024E 2025E Vineyard area (000' Ha) 57 58 60 62 64 66 Vineyard yield (Ton/Ha) 5.2 5.4 5.5 5.6 5.7 5.8 Harvest (Mln Tons) 297 312 328 345 362 381 Conversion factor 0.66 0.66 0.66 0.66 0.66 0.66 Wine from harvest (Mln litre) 196 206 216 228 239 251
Source: TBC Capital
7 Based on a sample of large producers 8 High-tech winemaking countries entered the winemaking market recently and rely heavily on technology and industrial production techniques. The productivity and cultivated area increases in those countries; Decreased productivity in Argentina and Chile was due to unfavorable weather conditions in 2016-2017. GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 9
We expect the wine production to increase by CAGR of 5.1% until 2025, on the back of new vineyards and increased productivity. Up to 20% of the total vineyards area is new, the production efficiency of which will reach its maximum level by 2025. By that date, we project the amount of the annually processed grape at 381 thousand tons (six-year CAGR 5.1%).
IRR for production of different grapes ranges between 14.0% and 18.0% and a project payback period varies from eight to ten years. Our estimated initial investment per ha for different grape varieties for factory level production ranges between USD 21,000-40,000, with vineyards of PDO wines, or in special microzones being the costliest. With new vineyards, producers could expect up to 10 tons of grapes on one ha. Yield reaches its full capacity within the first six years and the harvest volume largely depends on geographical area of the land, and quality of production factors (e.g., pesticides). Rkatsiteli is the most widespread and fruitful grape variety, while the maximum capacity for some rare types of grapes and PDOs are generally lower. Current state program of subsidizing the interest on agricultural loans helps increase the equity IRR significantly.
TABLE 2: IRR AND PROJECT PAYBACK PERIODS FOR DIFFERENT GRAPE SPECIES9 100% Equity financed Initial Grape Type Investment IRR Payback (Y) (USD) Ojaleshi-Chkhaveri 33-35K 17.5-18.0% 7-8 Saperavi (Kindzmarauli, Mukuzani) 33-35K 16.0-16.5% 7-8 Aleksandrouli-Mujuretuli 38-40K 16.0-16.5% 7-8 Khikhvi, Kisi 21-23K 16.0-16.5% 7-8 Krakhuna 21-23K 16.0-16.5% 7-8 Shavkapito 22-24K 15.0-15.5% 7-8 Chinuri, Goruli Mtsvane 22-24K 15.0-15.5% 8-9 Tsolikauri 21-23K 15.0-15.5% 7-8 Tavkeri, Tetri Budeshuri 22-24K 14.5-15.0% 7-8 Otskhanuri Sapere 22-24K 14.5-15.0% 8-9 Rkatsiteli 21-23K 14.5-15.0% 8-9 Saperavi 22-24K 14.0-14.5% 8-9 Source: TBC Capital Research
Georgia imports insignificant amount of wine, and the share of sparkling wine in these imports is dropping. In 2019, total value of imported wine amounted to USD 3.46mln and the share of sparkling wine was down to 38% versus 84% in 2010. Respectively, the structure of imports by suppliers also changes. Accounting for 79% of total imports in 2010 (56% on average in 2010-2018), France accounted only for 39% of import value in 2019 in Georgia.
FIGURE 13: IMPORTS OF SPARKLING WINE AND OTHER FIGURE 14: IMPORT STRUCTURE BY COUNTRIES TYPES OF WINE IN GEORGIA 2010-2019 (MLN USD) 2010-2018 AVG vs 2019 (%) Other types of wine Sparkling wine France Italy Russia Ukraine Netherlands Lithuania Other 100% 11% 11% 4% 5% 80% 6% 4% 1.3 7% 1.8 24% 60% 14%
15% 2.2 40% 1.6 1.1 1.7 1.5 2.1 1.1 56% 0.8 1.6 20% 39% 0.4 0.7 0.4 0.5 0.4 0.4 0.3 0.3 0.3 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2018 avg. 2019 Source: ITC Source: UN Comtrade;
9 Projected IRR and Payback Period for different grape types is based on the modelling of TBC Capital research team 10|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY WINE DEMAND: ENTERING THE NEW EXPORT MARKETS
Georgia is among the Top 20 wine exporting countries globally. With the export value of USD 197mln, Georgia ranked 18th in 2018, improving its position by one place from the previous year. As of 2019, the export value grew to USD 223mln.
FIGURE 15: TOP COUNTRIES EXPORTING WINE – EXPORT VALUE (MLN USD)
3,000
2,500
2,000
1,500
1,000
500
-
Source: ITC; Note: Countries except Georgia are as of FY 2018. France, Italy and Spain are off axis limits, with export values totaling USD 11.0bln, USD 7.3bln and USD 3.5bln respectively
Georgia’s wine export of 2019 improved the record of 2018, growing 13.2% YoY. Reaching USD 223mln in the last year, the value of exported wine has been increasing with CAGR +23.5% in the last four years. The proportion of exports to total turnover of wine companies is expected to reach 83% in 2019, up from circa 79% in 2018. The sizable share of exports in total turnover comes with no surprise, as Georgia’s wine production largely exceeds the local consumption and wine, the fourth largest export good of the country, generated 5.9% of Georgia’s total export revenue in 2019. For 2019, estimated volume of export exceeds 93mln bottles.
FIGURE 16: WINE EXPORT FROM GEORGIA IN 2005-2019, VALUE (MLN USD) AND VOLUME (MLN BOTTLES) Russia Ukraine & other CIS China EU Other Total bottles exported (mln) 93 300 87 84 78 90
250
61 223 70 Thousands 50 48 197 10% 50 200 180 36 33 171 27 9% 8% 23 23 8% 20 17 3% 9% 10% 30 150 13 19% 128 12% 26% 113 19% 8% 10 3% 96 19% 100 81 13% 12% 43% 13% (10 ) 3% 65 9% 16% 54 23% 60% 41 41 14% 62% 29% 58% 50 37 32 58% 29 16% (30 ) 77% 9% 16% 45% 16% 20% 19% 76% 44% 49% 77% 75% 45% 40% 73% 73% 71% - (50 ) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: ITC, TBC Capital; Note: Russian embargo hit the market in mid-2006; Economic problems in Russia and Ukraine resulted in decrease of exports in 2015;
Russia is the leading buyer of Georgian wine by a sizable margin. Georgia generated 59.8% (USD 133.3mln) of total wine export revenues in 2019 from Russia, with the proportion in volume standing even higher at 61.5% (43.1mln litres). For the last decade, the exports of Georgian wine in China grew from negligible USD 0.6mln in 2009 to sizable USD 18.9mln in 2019 and the country became third biggest importer of Georgian wine worldwide. Exports in Kazakhstan were down to USD 8.5mln in 2019 from USD 16.5 five years ago, now close to 2011 level. The sales picked up in Ukraine at a +31% CAGR between 2015 and 2019 and reached USD 23mln, still lower compared to the USD 30mln in 2013.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 11
Mid-to-high class wines10 represent c. 44% of Georgia’s total wine exports. Khvanchkara is the most expensive, with average export price standing at USD 7.63 in 2019, while the prices of other top exported wines ranges between USD 2-3. Alaznis Veli are the top exported Georgian wines, generating 28% of the total wine export revenues and this share has been stable for the past five years. Share of top 4 wines from Rkatsiteli grapes make up to 21% of exports, while share of top 5 wines made solely or partially from Saperavi constitute 63% of export.
Red semi-sweet is the most popular exported wine type, with red dry as a runner up. Together they accounted for 73% of total wine exports in 2019. The high proportion of these wines in export is a result of consumer taste in the CIS that holds the lion’s share in Georgia’s wine export.
FIGURE 17: GEORGIAN WINE EXPORTS BY TYPE OF FIGURE 18: GEORGIAN WINE EXPORTS BY TYPE OF WINE 2012-2019 (VALUE) WINE 2012-2019 (VALUE) 100% 11% 11% 10% 8% 9% 8% 8% 9% 90% 20% 18% 18% 19% 18% 16% Other 12% 3% 3% 23% 2% 4% 4% Khvantchkara 13% 12% 12% 11% 12% 80% 2% 2% 2% 4% 4% 4% 13% 4% 2% 5% 4% 4% 16% 3% 4% 2% 2% 5% 4% 4% 6% 5% 4% 4% 2% 2% Rkatsiteli 4% 6% 4% 70% 4% 3% 2% 9% 10% 3% 4% 3% 9% 9% 15% Other 2% 10% 2% 2% Tsinandali 60% 10% 2% 26% 2% 7% 7% 24% 25% 26% 26% 25% White Dry 12% 2% 7% Pirosmani 4% 22% 13% 3% 6% 6% White Semi-Sweet 50% 3% 5% 2% 17% 17% Alaznis Veli (white) Red Semi-Dry 4% 5% 16% 16% 20% 14% 15% Red Dry 40% Akhasheni 15% 13% Red Semi-Sweet 30% 22% Mukuzani 18% 17% 19% 20% 22% 10% 14% 45% 48% 46% 47% 48% 48% 48% 20% Saperavi 36% Kindzmarauli 10% 18% 16% 17% 18% 17% 17% 17% 18% Alaznis Veli (red) 0% 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 Source: GWA, TBC Capital Source: GWA, TBC Capital
Wine export structure differs markedly by destinations. White semi-sweet wines represented 35% of wine export value in Poland in 2019, while red dry wines captured 53% of value in China. As for Russia and Kazakhstan, over half of the exports (55% and 51%, respectively) were red semi-sweet wines. The breakdown was similar for the rest of the CIS and the overall pattern was broadly unchanged from 2018.
FIGURE 19: GEORGIAN WINE EXPORTS IN TOP EXPORT MARKETS BY TYPE OF WINE IN 2018-2019 (VALUE) Red Semi-Sweet Red Dry Red Semi-Dry White Semi-Sweet White Dry Other 100% 9% 4% 6% 2% 3% 4% 9% 0% 6% 4% 10% 12% 15% 13% 5% 80% 3% 17% 11% 13% 4% 22% 23% 9% 3% 53% 35% 60% 18% 4% 18% 23% 19% 40% 21% 55% 51% 11% 20% 44% 43% 39% 37% 19% 0% Russia Kazakhstan CIS (excl. RUS, KAZ) EU (excl. POL) China Ukraine Poland Source: GWA, TBC Capital
Tastes on target export markets are heterogeneous: European consumer prefers classic wines, light and dry. Color is not of a high importance, although of Georgian product, red dry wine matches their taste better. Consumers from Russia and other CIS countries prefer sweet and semi-sweet red wines, with higher concentration of alcohol. As for the Chinese market, high-income individuals tend to consume more dry and semi- dry wines, while people with lower income mostly purchase sweet and semi-sweet wines.
10 Saperavi, Kindzmarauli, Mukuzani, Khvanchkara and Tsinandali and other. 12|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY Analyzing the sample of countries with annual wine consumption of over 1mln hectoliters, produces results in line with Georgia’s wine strategy. We base our analysis upon the criteria of attractiveness and riskiness. Based on these criteria we assessed potentials of different foreign wine markets to identify the potentially lucrative markets for Georgian wine, sorting them by the ranking produced.
TABLE 3: EXPORT MARKET ATTRACTIVENESS AND RISKINESS ANALYSIS
Market Attractiveness Market Riskiness Weight 30% 30% 20% 20% 100% 40% 30% 30% 100% Import from Avg. price Economic Total wine Georgian of Freedom Transparency Country Rank Rank Distance to Rank Rank S&P Credit Rank Rank Rank Total import wine imported Total rank of the International parameters (1-5) (1-5) Capital (Km) (1-5) (1-5) Rating (1-5) (1-5) (1-5) Rank (USD) producers wine World CPI (USD) USD/Ton Index USA 6,449,227 5.00 2,139 3.60 9,291 2.62 5.60 4.00 3.90 AA+ 5 77 4.32 69 3.83 1.60 China 2,855,245 2.77 18,996 3.90 5,842 3.72 4.18 3.28 3.40 A+ 5 58 1.90 41 2.00 2.99 Russia 1,051,134 1.65 166,147 5.00 1,982 4.95 1.79 1.71 3.33 BBB- 3 59 1.93 28 1.00 3.92 Germany 3,144,628 2.95 1,644 3.50 3,194 4.57 2.14 1.94 3.24 AAA 5 74 3.88 80 4.59 1.46 Japan 1,687,726 2.04 1,206 3.26 7,820 3.09 6.35 4.71 3.15 A+ 5 72 3.69 73 4.10 1.82 UK 4,357,680 3.70 356 1.67 4,228 4.24 3.10 2.57 2.97 AA 5 79 4.60 77 4.38 1.39 Ukraine 125,253 1.07 20,664 4.00 1,836 5.00 2.61 2.25 2.97 B 2 52 1.05 30 1.14 4.46 Poland 354,096 1.21 7,549 3.70 2,620 4.75 2.69 2.31 2.89 A- 4 68 3.12 58 3.07 2.42 Canada 1,995,589 2.23 872 2.63 8,668 2.82 4.73 3.65 2.75 AAA 5 78 4.44 77 4.38 1.35 Switzerland 1,214,700 1.75 41 1.08 3,954 4.32 6.79 5.00 2.71 AAA 5 82 5.00 85 4.93 1.02 Kazakhstan 41,698 1.02 9,189 3.80 3,261 4.55 1.74 1.68 2.69 BBB- 3 65 2.80 34 1.41 3.54 Sweden 783,496 1.48 56 1.10 3,556 4.45 5.82 4.36 2.54 AAA 5 75 4.11 85 4.93 1.29 Netherlands 1,367,171 1.84 372 1.70 3,814 4.37 3.34 2.73 2.48 AAA 5 77 4.32 82 4.72 1.29 Belgium 1,153,583 1.71 114 1.21 3,891 4.34 3.51 2.85 2.31 AA 5 67 3.05 75 4.24 1.89 Norway 439,834 1.27 21 1.04 4,054 4.29 4.94 3.78 2.31 AAA 5 73 3.81 84 4.86 1.40 France 1,136,854 1.70 518 1.97 4,373 4.19 1.58 1.58 2.25 AA 5 64 2.59 69 3.83 2.16 Austria 255,998 1.15 94 1.18 3,205 4.56 3.62 2.92 2.20 AA+ 5 72 3.68 77 4.38 1.62 Finland 263,572 1.16 89 1.17 3,085 4.60 3.37 2.75 2.17 AA+ 5 75 4.07 86 5.00 1.32 Czech republic 263,412 1.16 215 1.40 3,487 4.47 2.97 2.49 2.16 AA- 5 74 3.91 56 2.93 2.11 Bulgaria 23,360 1.01 96 1.18 2,195 4.89 2.74 2.34 2.10 BBB+ 4 69 3.28 43 2.03 2.73 Greece 49,871 1.02 41 1.08 2,749 4.71 2.85 2.41 2.05 BB- 3 58 1.77 48 2.38 3.71 Italy 407,469 1.25 126 1.24 3,870 4.35 1.97 1.83 1.98 BBB 4 62 2.37 53 2.72 2.83 Romania 74,347 1.04 - 1.00 2,295 4.85 2.14 1.94 1.97 BBB- 3 69 3.23 44 2.10 3.20 Croatia 35,967 1.02 - 1.00 1,984 4.95 1.49 1.52 1.90 BBB- 3 61 2.27 47 2.31 3.43 Spain 256,289 1.15 25 1.05 5,178 3.93 2.55 2.21 1.89 A 4 66 2.84 62 3.34 2.38 Serbia 31,572 1.01 - 1.00 2,595 4.76 1.43 1.48 1.85 BB+ 3 64 2.60 39 1.76 3.53 Hungary 20,041 1.01 - 1.00 2,970 4.64 0.71 1.00 1.73 BBB 4 65 2.75 44 2.10 2.90 Portugal 195,534 1.11 - 1.00 5,732 3.76 0.93 1.14 1.61 BBB 4 65 2.79 62 3.34 2.52 Brazil 375,640 1.23 20 1.04 11,387 1.95 3.09 2.57 1.58 BB- 3 52 1.00 35 1.48 4.22 Mexico 271,813 1.16 2 1.00 12,263 1.68 3.53 2.86 1.56 BBB+ 4 65 2.71 29 1.07 3.19 Argentina 10,794 1.00 - 1.00 13,470 1.29 3.90 3.10 1.48 B 2 52 1.04 45 2.17 4.16 Australia 622,263 1.38 132 1.25 13,595 1.25 2.52 2.19 1.48 AAA 5 81 4.87 77 4.38 1.23 South Africa 49,983 1.02 - 1.00 12,231 1.69 2.68 2.30 1.40 BB+ 3 58 1.85 44 2.10 3.65 Chile 11,147 1.00 - 1.00 14,381 1.00 3.63 2.93 1.39 A+ 5 75 4.13 67 3.69 1.81
Source: TBC Capital, OIV, FAO, S&P, Economic freedom of world index, corruption perception index
The attractiveness criterion is based upon the following four pillars:
1. The total wine import (USD): This pillar measures the total dollar value of the import to indicate the size of the excess demand for wine in the listed countries; 2. Import of Georgian wine (USD): Existing higher sales in the country indicates familiarity with Georgian wine. Lower entry barriers are associated with the well-established trade markets; 3. Average price of imported wine (USD/ton): This criterion measures how much the country pays for the imported wine per ton on average. These costs incorporate the transportation expenses; 4. Distance to the country’s capital (Km): This criterion is a proxy for the cost effectiveness of export based on the geographical proximity;
The risklessness criterion is based upon following three pillars:
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 13
1. Credit ratings: We used S&P credit rating as a proxy for country’s economic soundness; 2. Transparency International CPI index: This criterion assesses the misuse of public power for private benefit; 3. Economic freedom index ranking: We used the Fraser Institute Index For Economic Freedom of the world as a proxy for market freedom in the selected country;
FIGURE 20: CRITERIA ASSESSMENT FOR WINE EXPORT MARKETS (CURRENT AND POTENTIAL)
Source: ITC, OIV, WB
Based on the overall ranking, the USA, Germany, China, Japan, the UK, Poland, Canada, Sweden, the Netherlands and Switzerland are attractive countries. Russia, Ukraine and Kazakhstan fall into attractive, yet risky category. This list of attractive countries contains countries recognized by the GWA as strategically important markets (like Poland, UK, USA and Japan). According to the Georgian Wine Agency, 1 million bottles of wine are planned to be exported to the USA in 2020.
Lack of familiarity can be addressed via active marketing campaigns. Georgia has free trade agreements with many of the analyzed countries and Georgian wine satisfies many of the international quality requirements. The bigger challenge might be achieving a high level of familiarity with Georgian wine among potential customers.
Demand for foreign wine is increasing in China, Poland and Russia. Net wine imports in China grew at a 12.9% CAGR from 2015, totaling 6,775 hl by 2018. The wine industry of China is still emerging and consumer taste is not fully formed, which encompasses a great potential considering 1.4bn population of the country. As for Poland, net imports of wine grew at a 5.5% CAGR since 2015, amounting to 1,239 hl in 2018. We expect the market to exceed 1,300 hl in 2019. The net import in Russia is larger (5,818hl in 2018), but the CAGR is smaller, equaling 3.7% over the same period.
The United Kingdom and the Northern Europe are active buyers on international markets, but due to natural conditions lack own production. The UK was the fifth largest consumer of wine worldwide in 2018, but 99.7% of domestic consumption was satisfied by foreign wines with total value of USD 3.5bn (+4.1% YoY). Sweden, Norway and Finland rely heavily on wine imports, with shares of net imports in total wine consumption standing at 99.7%, 99.5%, and 99.3% in 2018, respectively. Collectively, these three countries spent USD 1.4bn (7.3% YoY) on foreign wines in the same year. We consider Sweden the most interesting country for Georgian wine among the three.
14|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY Germany is the world’s fourth largest wine consumer, with half of its consumption being net imports. In 2018, the country spent USD 1.9bn (+8.4% YoY) on foreign wines. Despite the volume of net imports fell in the last year, the dollar value has increased as the country concentrates more on high quality, healthier, more expensive wines.
FIGURE 21: GAP BETWEEN CONSUMPTION AND PRODUCTION OF WINE BY COUNTRIES (HL ‘000)
35
Net import Production 30
25 Total consumption
20
15
10
5
0
2016 2015 2015 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018
USA Germany China UK Russia Canada Netherlands Japan Switzerland Ukraine Sweden Poland Kazakhstan Source: ITC, OIV, TBC Capital
Georgian exported wine is in medium segment by average export price in the world market. Wines from Chile and Australia are cheaper, compared to Georgia. Mass production and new technologies used in those countries give them the competitive advantage of the lower price. We believe that Georgian producers should concentrate on quality and benefit from the niche market to sustain the market share.
FIGURE 22: AVERAGE EXPORT PRICE OF WINE IN SELECTED COUNTRIES 2013-2019* (USD/LITRE)
8.00 7.53
7.00
6.00
5.00 4.15 4.00 3.67 3.27 3.18 3.18 3.05 Avg. export price of Georgian wine 3.00 2.52 2.35
2.00 1.70 1.00 1.00
- France USA Italy Germany Portugal Georgia Argentina Australia Chile Spain Moldova
Source: ITC, TBC Capital; Note; Georgia 2013-2019, other countries 2013-2018
Georgia has a potential to boost wine exports in target markets. Excluding the imports from traditional and high-tech winemaker countries, in 2018, the country satisfied only 18% of the rest of demand in its target markets. We consider countries from the abovementioned segment as primary competitors, as Georgian producers can compete with them in terms of quality and have enough production capacity to compete in price. We consider the traditional winemakers as secondary competitors, against which Georgia could utilize the 8,000 year-old history of winemaking and the concept of Qvevri wine for positioning. Premium Georgian wines may be a better fit to compete with that segment. Georgian wine will also stay competitive versus some wines of new world high- tech winemakers in terms of quality.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 15
FIGURE 23: WINE IMPORT STRUCTURE BY COUNTRIES (2018) Traditional producers High-tech producers Niche producers Georgia
7,000 6,449 6,000 USD 1,451 USD 5,000 6bn 4,358 18bn 4,000 1,394 3,145 USD 2,855 1bn 3,000 404 4,829 1,996 USD 2,000 1,324 1,688 0.2bn 1,367 1,215 2,856 911 422 1,051 2,563 783 1,000 273 74 440 1,457 113 146 354 264 1,059 1,249 1,101 125 42 892 693 554 - 372 216
Source: ITC, TBC Capital
Total imports of the selected countries from traditional wine makers equals USD 18bn, whereas imports from niche countries totals USD 1bn. Hungary (6%), Moldova (6%), Greece (5%), Israel (4%), Bulgaria (3%), Ukraine (2%), Romania (2%), Macedonia (2%) and Serbia (1%) are among the producers of the niche exporters to the listed markets.
WINE DEMAND: TOURISM TO DRIVE THE LOCAL MARKET
Domestic consumption has gradually lost its place as a largest use of produced wine. From 39% of total wine balance in 2009, its share decreased by 20 pp over the decade down to 19% in 2018, as the exported wine was gaining share. The average stock of wine in the country has increased significantly in 2018, by 7.2mln decalitres, or by 43%, expected to increase further in 2019, due to the fruitful Rtveli, which depressed the grapes prices.
FIGURE 24: WINE BALANCE (MLN LITERS)11 FIGURE 25: WINE AND SPIRIT COMPANIES OF FORMAL AND INFORMAL PRODUCTION TURNOVER: EXPORT VS LOCAL (GEL MLN)
Beginning stock Production 1,200 Import Import 300 Ending stock Wine domestic consumption Export turnover Export Loss 1,000 Local turnover 19%
800 21% 200 26% 600
25% 35% 81% 400 27% 100 29% 79% 74% 200 75% 65% 73% 71%
- 0 2013 2014 2015 2016 2017 2018 2019E 2009 2010 2011 2012 2013 2014* 2015 2016 2017 2018
Source: GeoStat, TBC Capital, *beginning stock reevaluated in 2015 Source: GeoStat, TBC Capital
11 Based on the grapes balance by GeoStat 16|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY Volumes of consumed beer and wine in the country had been close, but consumption of wine has been dwindling faster for the past years. The wine consumption is expected to keep approximately the same level at 5.9mln decalitres in 2019, marginally up after the drop of 2016-2017, on the back of growing demand from the tourists. As for beer, the main reason of decreased consumption was the increased excise tax, transferred to the pricing. With growing purchasing power, we expect this effect to fade and the beer consumption trend to reverse.
Per capita wine consumption in Georgia has been decreasing. Currently ahead of the CIS and the Eastern Europe, it is more comparable to Western European countries. The annual per capita consumption of wine has been steadily decreasing from 29 litres in 2010 and is expected to just below 20 litres in 2019. According to the World Health Organization, average Georgian adult (+15) consumed 24.6 litres of wine in 2016. Of primary established export markets, per capita wine consumption rebound in Ukraine and Russia, while China displays a steady growth trend. The measure is increasing in the UK, Japan and Czechia as well, while the consumption remained relatively unchanged, but on a higher level in the USA and Germany.
FIGURE 26: WINE CONSUMPTION PER CAPITA 2017- FIGURE 27: WINE AND BEER DOMESTIC 2019 (LITRES PER YEAR) CONSUMPTION (MLN DECALITRE) Domestic consumption of beer 35.00 Primarily established Target and emerging export markets export markets 31.3 14.0 Domestic consumption of wine
30.00 28.0 26.4 12.0 24.1 25 .00 23.0 10.0 19.9 20.00 8.0
15.00 13.6 11.9 6.0
10.00 4.0 7.0 4.6 3.8 5.00 3.5 2.0 1.7
- -
UK
USA
China Japan
Russia
Poland
Czechia
Ukraine
Georgia
Belgium
Germany
Kazakhstan Netherlands
Source: GeoStat, WHO, TBC Capital forecasts; Source: GeoStat, TBC Capital Note: Average alcohol concentration equals 13% per litres of wine
Popularity of lower alcohol beverages increases. According to WHO, strong spirits satisfied 50% of all recorded consumption in 2004, but they lost 11 percentage points in consumption share in Georgia since. Wine claimed 9 pp, the biggest part of this spirits share’s loss, while beer claimed the rest 2 percentage points. For now, wine (43%) is the main source of consumed pure alcohol, followed by spirits (39%), and beer (18%) holds the third place.
With growing household income, demand for alcoholic beverages is expected to increase. In developing economies, income boost gradually translates into increased alcohol consumption in value. The World Health Organization (WHO) forecasts 10.5% gain in total (recorded and unrecorded) consumption of alcoholic drinks from 2020 to 2025 in Georgia. We believe this might positively impact the stagnant domestic wine consumption.
We believe that tourism will drive the domestic consumption of wine in future. The tourist expenditures on served food and drinks has increased by 2.3x from 2015 to GEL 2.27bn in 2019. Mainly driven by the number of visitors, the value also correlates with the increasing length of stay of the international visitor, up from 3.4 days in 2015 to 4.3 days as of 9M 2019. The Georgian National Tourism Agency further targets the average length of stay of 5.0 days by 2025. Tasting Georgian wine and cuisine is one of main tourist activities in Georgia. According to GNTA survey of 2018, 67% (4.4mln) of international visitors, named tasting Georgian cuisine and wine among the conducted activity, 2x more than that of 2015. The proportion increased to 74% in 9M 2019, from 66% in 9M 2018.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 17
FIGURE 28: EXPENDITURES BY INTERNATIONAL FIGURE 29: TASTING GEORGIAN CUISINE AND WINE BY VISITORS (GEL MLN) INTERNATIONAL VISITORS Other (GEL MLN) International visitors tasting local cuisine and wine Served Food and Drinks (GEL MLN) Share in total visitors % Number of nights spent by int. visitors
34.0 80.0 % 30.2 6.0 74% 70.0% 10,000 27.7
29.0 66.6% 66% 70.0 % 25.7 64.3% 24.6 5.0
8,000 20.7 24.0 60.0 % 4.0 17.7
19.0 50.0 % 6,000 71%, 3.0
5,651 14.0 40.0 % 71%, 72%, 4,000 4,924 74%, 4,570 2.0
4,285 9.0 30.0 % 76%, 76%, 3,329 2,000 3,080 1.0 20.0 % 29%, 4.0 26%, 29%, 28%, 24%, 24%, 2,267 1,477 1,873 1,908 10.0 % - 978 1,051 -1.0 - 2015 2016 2017 2018 2018 9M 2019 9M 2016 2017 2018 9M 2018 9M 2019 Source: GNTA Source: GNTA
Wine Route Project supports the wine tourism development. The Wine Route Project by the Government of Georgia offers wine-tasting locations for tourists in different regions of the country. 91 out of total 164 are situated in Kakheti with Telavi, Gurjaani, and Kvareli municipalities having 30, 24, and 17 wineries respectively. Imereti has the second biggest stock of these destinations, 15 in total, with Shida Kartli and Racha-Lechkhumi & Kvemo Svaneti having 11 destinations each.
CONSUMER BEHAVIOR AND NICHE MARKETS
Stable economic growth signals wine producers to increase production. The correlation between economic growth and wine consumption worldwide exceeds 0.68 and demand fluctuates with economic cycles, accelerating with economic growth and falling sharply with recessions.
FIGURE 30: ECONOMIC AND WINE CONSUMPTION GROWTH WORLDWIDE 2004-2019 5.0% World financial crisis, Wine consumption growth worldwide decreasing consumption 4.0% World average economic growth and recovery 3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: OIV, WB, TBC Capital
International consumer trends that affect exports eventually will be mimicked domestically too. According to the Gallo Trends report regarding the US consumer, Millennials are four times more likely than older generations to select a bottle of wine based on its label. Millennials are looking for personality and originality in wine. Consumers are two times more likely to try something new in restaurants or bar than in retail stores. 43% of wine shoppers say that store tastings have a strong influence on what they buy and 73% say that they would enjoy a wine tasting class. 60% of wine drinkers prefer wine with little sweetness. 40% of alcohol beverage shoppers
18|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY said they are likely to shop alcohol beverages online in the next year. 41% of wine consumers say they would buy wine in alternative packaging if they knew the wine was high quality.
Growing demand for quality rather than quantity of alcoholic beverages opens a new window of opportunity for niche products. On the domestic market, higher income individuals are increasingly consuming high-end wine, mainly sold by specialized shops and organized FMCG retailers in limited quantities. As for the international markets, consumers in developed countries (largely in EU) are more concerned with alcohol-related health risks, accumulating demand for quality products. With DCFTA, this could be an opportunity for Georgia, which has modest production capacity, but boasts with high quality grapes of endemic species.
PDOs and bio (organic) and naturalist wines target the niche markets. Currently, Georgia produces 20 PDO and 17 bio wines, mostly in Kakheti. Switching to bio-production is expensive and lengthy process for wine makers, incentivized by price. Due to higher price, we consider bio and naturalist wines more as an export focused products, while PDOs could fulfill the demand of premium segment on the domestic market as well.
PDO wines represent up to one third of the total wine export. In 2019, Georgia exported 93mln bottles of wine, of which 30.5mln bottles (32.4%) were PDOs. Three red semi-sweet wines (Kindzmarauli, Akhalsheni, and Khvanchkara) accounted for 66.2% of exported PDOs, followed by red dry (17.5%) and white dry wines (15.3%).
FIGURE 31: SHARE OF PDO WINES EXPORTED IN 2019
93mln bottles
1.0% 15.3% Non- Red Semi-Sweet PDO wines, Red Dry 67.6% White Dry 30.5 mln 17.5% bottles White Semi-Sweet
66.2% PDO wines, 32.4%
Source: GWA
Georgia has a great potential of positioning as boutique style exotic wine producer on foreign markets. Although low in production volume, wide variety of grape species could serve as an asset for making diverse style wines, with different level of sugar content and flavor, satisfying the niche market demand for exotic wines.
WINE PRICES: LOCAL MARKET
Domestic price for wine has been increasing slower than the general level of prices over the past years, with non-bottled wine price growing faster compared to bottled wine. This can be partially explained by the dwindling local consumption and intense price competition. From 2011 to 2019, consumer price index (CPI) grew by 27.4%, while bottled and non-bottled wine prices was up 15.5% and 21.2% respectively. The average retail prices for wine grew more than the index itself due to the changing mix of the marketed wines in favor of more expensive products, as well as the rising costs of production.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 19
FIGURE 32: WINE DOMESTIC PRICE INDEX IN GEL FIGURE 33: RETAIL PRICES FOR MARKETED WINE, GEL (DECEMBER 2011=100) 140 Non-Bottled Wine Nominal Price Index Non-Bottled wine (1 litre) Bottled Wine Nominal Price Index Bottled wine (0.75 litre) CPI Vodka (0.5 litre) Cognac (0.5 Litre) 130 19.2 18.9 18.9 20. 0 Beer 18.1 17.8
18. 0 16.7 120 15.0 16. 0 14.6 13.4 13.9 110 14. 0 12.7 12.2 11.9
12. 0 9.9 10.6 9.5 13.3 9.3 10. 0 12.2 100 11.6 12.0 7.0 7.1 8.0 6.4
90 6.0 3.9 4.0 4.1 4.3 3.2 3.2 3.2 3.5
4.0 80 2.0 3.3 3.3
Jul 3.0 3.0 3.1
Oct Oct
Apr Jan
Jan 2.8
Jun Jun
Feb
Sep
Dec
Nov Nov
Aug Aug
Mar Mar May May 2.6 2.6 - 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 Source: GeoStat Source: GeoStat
Market shift to bottled wine affects the price dynamics. We believe that the supply side of the market is the primary reason for larger price gain of non-bottled wine compared to bottled wine. Seeking for higher margins, small-scale winemakers are switching to bottled wines, on the expense of reduced supply of non-bottled wine to the market.
WINE PRICES: EXPORT MARKETS
The declining USD price trend for exported Georgian wine has reversed. Average export price was up 7.0% YoY to USD 3.14 per litre in 2018, increasing somewhat less to USD 3.18 (+1.3% YoY) in 2019. While up in GEL, an average export price for Georgian wine is still down in USD compared to 2014. Compared to 2014, the average price of an exported litre of wine was down in 2019 by 19% in USD, while up by 14.7% in GEL. On a country level, the USA and Germany export markets are the most attractive in terms of price. Although, high prices express demand for high quality products in these countries, transportation and market entry costs should also be taken into account.
FIGURE 34: AVERAGE EXPORT PRICE12 OF GEORGIAN WINE TO SELECT COUNTRIES 2013-2019 (USD/LITRE) $5 $5 $4 $3.65 $3.29 $3.30 $4 $3.18 $3.13 $3.10 $3.14 $3.21 $2.81 $2.83 $3 $3 $2 $2 $1 $1 $0 Avg. price CIS EU Ukraine Russia Poland Latvia Kazakhstan Belarus China Source: ITC, TBC Capital
Economic state in trading partners majorly affects export volume and price of Georgian wine. Export price of Georgian wine decreased after 2014 with the currency crisis in main export destination countries, Russia and Ukraine. The weighted average exchange rate of main importing countries to USD displays high correlation (0.82) with the average export price of Georgian wine. For now, we observe export price picking up with the stabilized exchange rates in the trading partners. Besides, the volume and value of export proves to be highly correlated (0.94 and 0.87 respectively) with the GDP growth of the key trading partners.
12 Export is valued at FOB prices 20|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY FIGURE 35: GEORGIAN WINE EXPORT DYNAMICS VS FIGURE 36: GEORGIAN WINE EXPORT PRICE VS ECONOMIC GROWTH OF KEY IMPORTERS EXCHANGE RATE DYNAMICS OF KEY IMPORTERS Wine export from Georgia (ton) (LHS) Weighted average REER with USD on export markets Wine export from Georgia (USD) (LHS) Weighted average export price Weighted average GDP growth on export markets (RHS) 160 108 110
140 106 100 120 104
100 102 90
80 100 80 60 98 70 40 96
20 94 60 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Source: GWA, GeoStat, NBG, TBC Capital Source: GWA, GeoStat, NBG, TBC Capital
GRAPES PRICES
Grape prices change with international demand on Georgian wine. In 2014, before the economic crisis in Russia, and after the embargo lifted, the demand for grapes in Georgia was unusually high. To satisfy the demand and boost sales in Russia, Georgian winemakers purchased unusually big amount of grapes back in 2014 and had to pay high prices (1.25 GEL/kg) to grape producers. Since then, until 2019, export volume and grape prices moved in the same direction.
Grape prices stagnated in 2019. Thanks to the fruitful Rtveli 2018, Georgian winemakers have been able to satisfy the wine export demand and at the same time increase the stocks. Thus, the peak price level for grapes in 2019 was 48.3% lower YoY and the expected price for grapes for the year averages 1.11 GEL/kg (+0.9% YoY). Cheaper Rkatsiteli grapes mostly drove the price reduction. Rkatsiteli is mostly consumed domestically and is used in brandy production and we believe that this trend will not change in near future.
FIGURE 37: AVERAGE GRAPE PRICES BY SPECIES FIGURE 38: SEASON OF RTVELI 2016-2018 (GEL/KG): 2013-2019E (HARVESTED GRAPES IN KG) 7.0 20,000 6.10 2016 6.0 2017 15,000 2018 5.0
4.0 10,000 3.0 2.28 2.0 5,000 0.95 1.1 0.69 1.0
- -
Rkatsiteli Saperavi Kakhuri Aleksandrouli- Grape
1-Oct 8-Oct
Mtsvane Mujuretuli average price 3-Sep
15-Oct 22-Oct 29-Oct
10-Sep 17-Sep 24-Sep 27-Aug 20-Aug
Source: GeoStat, TBC Capital Source: GWA
Saperavi prices are increasing steadily, as Aleksandrouli and Mujuretuli grapes benefit from the limited supply. Since 2015, prices on the major grape species cultivated in Georgia had been increasing, but in the light of good harvest and abolished state subsidies in 2018, the growth halted into 2019. Nevertheless, with increasing export demand for red wine, Saperavi prices increased by 33.1% YoY in 2018. Price for Aleksandrouli-Mujuretuli averages 5-6 times higher compared to widely spread Rkatsiteli or Saperavi (94% of processed grapes in 2019) as the priors are used for producing high quality PDO wine Khvanchkara and in total only 1,848 tons (0.7% of all processed grapes) of these grapes were processed in 2019.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 21
PRODUCTION VALUE CHAIN AND COMPANY FINANCIALS
For a typical bottle of wine, the grapes and the gross margin of the producer are the two largest components of the price. In case of the exported bottle of Saperavi, the grapes accounts for one third of the price. Processing grape into wine contributes to 9.3% of the value. Rest of the cost breakdown is labeling and packaging, which represents the quarter of the price, leaving 37.0% for the gross margin.
FIGURE 39: INDICATIVE BREAKDOWN OF PRODUCER’S PRICE – A BOTTLE OF SAPERAVI
Grape (Saperavi) Bottle 32% 37% Cap Cork Label Box
12% Processing 9% 1% Gross margin 3% 4% 6%
Source: TBC Capital Research USD exchange rate appreciation drives up the COGS of Georgian wine producers. Georgian wineries import significant amount of packaging and other materials from abroad, hence the weaker national currency pushes COGS up. YoY growth in direct expenses as of 2019 would have reached almost 9% in USD terms.
Bottled alcohol production depends highly on imported glassware. Georgia imported 103 thousand tons of bottles, carboys, flasks and other glass containers in 2019, with total value of USD 46.8mln (+28% YoY). The only major local producer JSC Mina produces 5 thousand tons of glassware annually and has capacity to satisfy up to 40% of the market.
Nevertheless, Georgian glassware producers sell their products on international markets. In 2018, the country started to export glassware to France and the total exports exceeded USD 9mln (+75% YoY). Before 2018, Georgia exported glassware mostly to Azerbaijan and Turkey, value of which totaled USD 1.0mln and USD 4.5mln respectively, in the same year.
FIGURE 40: GLASS BOTTLES & CORK IMPORTS (USD MLN) vs WINE & SPIRITS PRODUCTION (USD MLN) 60 Glass Bottle Imports (LHS) 1000 Cork Import (LHS) 900 50 Wine & Spirits Production (RHS) 5 800 4 4 700 40 5 600 30 2 3 500 400 2 44 2 47 20 42 1 3 3 1 37 300 2 29 30 2 1 200 10 2 21 21 16 17 18 19 14 13 100 9 12 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: GeoStat, ITC Georgia imports a ready-to-use cork stoppers, rather than a raw material itself. The import dynamics of cork follows the wine production, increasing to USD 4.6mln (+64% YoY) in 2018. Processing of cork blocks into their marketable form is not a complex or expensive process, but the raw material required is unavailable in Georgia.
22|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY Selected wine producers display high profitability. We have analyzed financials of wine producers with total turnover exceeding GEL 550mln, which represents nearly 80% of the formal market13. Sector’s average gross margin was down by 1.1 pp YoY in 2018, totaling 37.3%. EBITDA margin (24.4%), Net Profit Margin (16.8%) and ROE (14.2%) also decreased in the same period.
Low level and stability of sector’s leverage underlines room for further growth. Liabilities accounted roughly 40% of wine producers’ assets, while NWC ratio increased from 2.1 to 2.3 YoY in 2018. EBITDA/Interest expense and Debt/EBITDA was 6.3 and 2.6 in 2018, respectively, meaning the industry liquidity risks are low.
FIGURE 41: PROFITABILITY METRICS FOR GEORGIAN FIGURE 42: SOLVENCY AND LEVERAGE METRICS WINE PRODUCERS (2017-2018) FOR GEORGIAN WINE PRODUCERS (2017-2018) 50%
8.7 38.4%37.3% 2017 2018 40% 2017 2018
30% 6.3 24.6% 24.4%
17.9% 20% 16.8% 15.9% 14.2% 2.5 2.6 10% 2.1 2.3 1.8 1.8
0% Gross Margin EBITDA Margin Net Profit Margin ROE EBITDA / Interest Debt / EBITDA NWC ratio Assets to Equity expense
Source: SARAS, TBC Capital Source: SARAS, TBC Capital
DOMESTIC PRODUCERS: INCREASING EXPOSURE TO THE RUSSIAN MARKET
Georgia is the third largest exporter of wine to Russia, the twelfth largest wine importer worldwide. In 2018, Russia’s wine import totaled USD 1.1bn, of which 16% originated from Georgia. Italy (29%), France (18%), Spain (15%) and Chile (4%) were the other four in the top five largest wine exporters to Russia by value.
Georgian wine export diversification increased during the Russian embargo, but the exposure of the domestic wine sector to Russian market is still high and increases. All other wine exporters, but Armenia, that sends 70% of its small-scale wine exports to Russia, have lower exposure to the Russian market. In 2018, Georgia sold 58% of all its exported wine to Russia (60% in 2019), while the corresponding figure stood at 50% for Ukraine, 36% for Serbia, only 8% for Moldova. The exposure for the traditional or high-tech wine producers was even lower, ranging 0-3%. Familiarity to Georgian wines in Russia easies the export, but the current high exposure to single market encompasses higher risks for businesses in the long-term.
FIGURE 43: RUSSIA WINE IMPORT FIGURE 44: SHARE OF RUSSIA IN WINE EXPORT (2014-2018) AND BREAKDOWN (2018) TOTAL VALUE OF EXPORTED WINE IN 2018 100%
10% 13% Italy 90% $9mln $197mln $40mln $20mln $138mln $783mln $7bn $2bn $4bn $1bn $11bn 80% 70% 2% 29% France 8% 3% 70% 58% Georgia 60% 50% 4% 6% 50% USD 1.1bn Spain 36% 40% 4% Chile 15% 30% South Africa 20% 8% 2% 10% 2.6% 1.8% 1.5% 1.2% Portugal 0.6% 0.4% 18% 0% 0% 16% Other Armenia Georgia Ukraine Serbia Moldova South Italy Chile Spain Portugal France Africa Source: ITC
13 As of 2018 GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 23
Russian embargo in 2006 forced Georgian winemakers to seek the new markets and modernize production. Following the embargo, Georgian wine producers started to invest heavily to improve the quality to focus on markets with higher purchasing power, directing their products to European, as well as Asian markets. As Russia lifted trade restrictions in 2013, diversification decreased, but export concentrations remained below 2005 level. Overall, the political risks and low average export price of this particular market remain a challenge for the Georgia’s wine industry in general. On the flip side, currently the sector is more resilient to potential downsides.
FIGURE 45: EXPORT CONCENTRATION INDEX14 BY COUNTRIES 2001-2019 (1.0=ABSOLUTE CONCENTRATION)
Wine export concentration index Total export concentration index 1.00 0.90 Russian embargo, new markets and High dependence on the Russian High growth of exports but 0.80 improved quality of wine market and low quality of wine decreasing diversification 0.70 0.59 0.61 0.56 0.60 0.57 0.49 0.50 0.41 0.39 0.40 0.36 0.37 0.29 0.29 0.27 0.28 0.30 0.26 0.25 0.25 0.20 0.22 0.23 0.20 0.10 One time effect of abolished trade restrictions with Russia 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E
Source: FAO, TBC Capital
Hypothetically, the embargo would depress the profitability of wine producers but the industry can remain resilient below the dependency threshold of 30%. A hypothetical company with the dependency beyond this level might start experiencing the problems with debt service through operating cash flow.
Farmers producing grapes are more vulnerable to embargo than wine producers. Wine producers could decrease production costs by purchasing lower amount of grapes and smooth the negative effect from decrease in sales but farmers will need subsidies from the government to compensate losses and remain resilient.
TABLE 4: STRESS SCENARIO FOR EMBARGO AND PROFITABILITY AND LIQUIDITY METRICS FOR GEORGIAN WINE PRODUCERS
Base scenario Wine producer 1 Wine producer 2 Wine producer 3 Wine producer 4 Wine producer 5 Without embargo With embargo Loss of sales 0% -20% -30% -40% -50% -60% Gross Margin 37.3% 35.1% 33.5% 31.4% 28.4% 23.9% EBITDA Margin 24.4% 20.9% 18.5% 15.2% 10.7% 3.9% Net Profit Margin 16.8% 11.6% 7.8% 2.7% -4.3% -14.9% ROE 14.3% 7.8% 4.6% 1.4% -1.8% -5.0% ROA 8.1% 4.4% 2.6% 0.8% -1.0% -2.9% DEBT / EBITDA 2.62 3.80 4.92 6.96 11.91 41.21
Source: SARAS, TBC Capital
14 Index calculations follow the Herfindahl-Hirschman Index (HHI) calculation methodology. 24|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY TABLE 5: SWOT ANALYSIS OF THE WINE INDUSTRY
Factor Comment 525 endemic grape varieties are found in Georgia, of which 30 are cultivated Unique wine varieties and tastes commercially and 20 PDO wines are produced. Reputation for ‘Cradle of Wine’ The oldest wine region in the world, acknowledged by UNESCO. STRENGTHS Wine is the fourth largest export product countrywide, while Georgia is in Top 20 Experience in export countries exporting wine worldwide. In 2019, Georgia exported 94mln bottles of wine, with total value of USD 223mln. Profitability metrics stand high in the wine sector. Gross Margin 37.3%; EBITDA Margin Strong financials 24.4%; Net Profit Margin 16.8%; ROE 14.3% in 2018. Share of Russia in Georgia’s wine export stood at 60% in 2019. Of countries exporting Lack of diversification wine to Russia, the exposure is higher only for Armenia with insignificant exports. Low vineyard productivity 5.2 tons of grape cultivated per ha on average, 8.5 ton/ha for large-scale producers. Rkatsiteli and Saperavi account over 90% of grape production in the country, while Only two species of grape make other unique varieties with high export potential and financial returns have lower WEAKNESS up almost all production share in production. Limited supply of vineyards, mostly owned by small-scale farmers (95.4% own less Limited production capacity than 1ha area as of 2014 census). Circa 390 small-size wine producers; No economy of scale; Share of large companies Fragmented production in wine & spirits sector turnover at 28%. Usage of modern cultivation techniques in viticulture, new vineyards and high quality Investing in technology irrigation systems will lead to increased vineyard productivity. Mergers and achieving Merging with other wineries for more efficient production and increasing scale of economies of scale vineyards will lead to increased capacity and the economies of scale. With increasing recognition of Georgian wine through promotion and free trade OPPORTUNITIES Targeting new export markets arrangements, Georgian winemakers could enter new foreign markets, characterized with higher purchasing power and consumer taste for wines similar to Georgian. Rapid growth of international visitor trips in the country and high interest in Georgian Demand from tourists wine among tourists will drive local consumption. Increasing penetration of formal Homemade, non-bottled wine, which captures a great portion of the local market, market locally can be partially substituted by bottled wine, as consumer behavior slowly changes. Regional instability and high dependency on single export partner remain a key New embargo challenge for Georgia’s wine sector. THREATS Spread of pests, hail and Unfavorable natural conditions encompass a significant threat for the harvest, as disasters many farmers do not have agro insurance.
SPIRITS: BRANDY PRODUCTION ON THE RISE
Production of brandy and other spirits are expected to hit the record high in 2019, reaching GEL 258mln (+10.7% YoY) in value. As Brandy is made by distilling wine, production can be switched between the two, if the wine sales are dwindling. This strategy was utilized during the Russian embargo, when production of Brandy increased sharply from 2006 to 2013 and declined after. The volume of spirits production surged by 10.6% in 2018, and is expected to increase by marginally in 2019, to 2.5mln decalitres. Among the incentives for the local producers are the growing exports, growing wine production creating the resources for spirit production as a by-product, the growing popularity of Georgian chacha among tourists, and increasing interest for cocktails among locals. Since 2016, still with small-scale production, whiskey is a new addition to Georgian alcoholic drinks assortment.
The availability of wooden cask stocks in Georgian wineries supports production of brandy and other spirits in the country. Previously used for aging wine, wooden cask is essential for producing brandy, whiskey, and other alcoholic drinks. Hence, wineries represent the common base for brandy and whiskey production in Georgia.
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 25
FIGURE 46: PRODUCTION VOLUME (MLN DECALITRES) FIGURE 47: PRODUCTION VALUE (MLN GEL) Vodka - shadow production (estimate) Vodka - shadow production (estimate) Vodka & liqueur - formal production Vodka & liqueur - formal production Brandy & brandy spirits - formal production Brandy & brandy spirits - formal production 3.0 2.8 300 258 2.5 2.5 2.4 250 233 2.5 0.6 2.2 32 2.2 0.4 0.4 2.0 200 31 0.5 0.3 192 22 2.0 1.8 1.8 1.8 0.4 0.2 0.2 200 13 1.7 0.5 0.4 1.7 0.2 162 27 1.5 40 1.4 0.4 14 1.5 0.5 0.7 0.4 1.3 150 21 0.7 0.4 121 26 126 0.8 0.7 24 107 0.6 98 0.7 0.6 0.2 0.3 18 32 1.0 2.0 100 204 0.6 0.1 1.8 1.9 76 71 17 24 22 189 1.8 66 17 8 159 0.6 51 52 1.2 1.3 45 15 14 23 126 0.8 0.8 22 18 117 0.5 1.0 1.0 0.9 50 17 19 0.7 0.8 9 23 20 78 78 78 0.6 18 57 0.5 35 14 14 43 38 - 0.2 0.1 0.2 - 15 11 17
Source: GeoStat; Note: Formal production value of spirit is somewhat less than spirit producer company turnover, as they have additional revenue streams.
Georgian brandy producers have diversified export markets. Brandy exports reached USD 106.5mln (65mln litres) in 2018 and is expected to reach USD 107.9mln (+1.3% YoY) in 2019. The largest export market is Ukraine, constituting broadly 30% of total exports in both 2018 and 2019. Overall, the export market for Brandy has a different structure compared to wine. The producers of brandy are less concentrated on the Russian market. The traditional wine making countries like France (18%) and Spain (11%) are expected to be among the Top 5 export destinations in 2019.
FIGURE 48: EXPORT BY COUNTRIES (USD MLN) FIGURE 49: EXPORT BY CATEGORY (USD MLN)
129 131 Ukraine 127 Rum (mostly reexport) 131 127 129 Russia Gin and Geneva (Reexport) Ethyl alcohol (partly reexport) France 4% 4% Liqueurs and cordials (partly reexport) 4% Spain 100 41% 41% 9% 9% 95 100 12% Other 92 Vodka (partly reexport) 95 64% Whiskies (mostly reexport) 92 80 Brandy 5% 80 5% 4% 57% 12% 11% 17% 68 62% 65 68 19% 12% 4% 65 57 59 56 71% 18% 59 54 3% 18% 57 54 56 16% 69% 5% 5% 76% 16% 18% 83% 81% 43% 61% 26% 16% 2% 11% 7% 6% 18% 80% 86% 20% 25% 9% 11% 30 61% 82% 19% 29 6% 14% 29 30 73% 79% 26% 23% 72% 19% 72% 29% 8% 17% 24% 79% 71% 76% 67% 72% 84% 79% 73% 62% 46% 23% 31% 30% 64% 74% 70% 74% 34% 86% 85% 65% 24% 20% 23% 23%
Source: ITC; Note: Production value of spirit is less than spirit exports, due to re-export and changes in stock
Average adult consumes less than 8 litres of spirits annually in Georgia. According to the latest estimates by WHO, the per capita consumption was slightly down to 7.5 litre in Georgia, but it still exceeded the corresponding figure of the EU, 6.8 litre per adult. Consumption in Georgia fell behind Ukraine (7.9 litres), Armenia (8.2 litres), Russia (8.6 litres), but was much higher than in Azerbaijan (0.5 litres) and Turkey (1.2 Litres). Average alcohol concentration equals 38% per litres of spirit.
Excise tax reform affected prices for spirits on the domestic market. In the beginning of 2015, in response to increased excise tax on strong spirits, prices for vodka and brandy spiked. Vodka prices increased by 25.3% YoY, while brandy prices increased by 8.6% YoY and fully absorbed effects of the new regulation within 9-months. Vodka added 23% to its prices in half-year time, and brandy added 9% in the same period.
26|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY
FIGURE 50: SPIRITS DOMESTIC NOMINAL AND CPI-ADJUSTED PRICE INDEX IN GEL (DECEMBER 2011=100)
200 Vodka Nominal Price Index Brandy Nominal Price Index CPI-Adjusted Vodka Price Index CPI-Adjusted Brandy Price Index 180 Excise Tax Up 160 Excise Tax Up 140
120
100
80
Oct Oct Oct Oct Oct Oct Oct Oct
Apr Apr Apr Apr Apr Apr Apr Apr
Jun Jun Jun Jun Jun Jun Jun Jun
Feb Feb Feb Feb Feb Feb Feb Feb
Dec Dec Dec Dec Dec Dec Dec Dec
Aug Aug Aug Aug Aug Aug Aug Aug
2012 2013 2014 2015 2016 2017 2018 2019
BEER: REBOUNDING FROM SLOWDOWN ON ACCOUNT OF EXCISE TAXES
Beer production has been rising after three years of decrease. Beer production had an upward trend during 2005-2014 and doubled in volume to 11.9mln decalitres (GEL 152mln value) in 2014. Excise taxes and consumer sensitiveness to higher prices decreased the production in the post-excise-tax-reform years to 8.4mln decalitres in 2018. Expected production for 2019 equals 9.8mln decalitres of beer with total value of produce estimated at GEL 156mln.
FIGURE 51: PRODUCTION OF BEER – VALUE AND VOLUME 14 200 Beer production value - Mln GEL (RHS) 11.9 Excise Tax Up 180 12 Beer production volume - Mln decalitre (LHS) 9.8 9.9 10.1 10.2 160 10 8.8 156 140 8.3 152 8.6 8.4 7.9 7.3 120 8 7.1 6.9 131 128 6.2 123 121 5.9 117 115 100 106 6 101 4.8 80 76 76 79 4 70 60 40 2 44 35 20 - - 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E
Source: GeoStat Georgian breweries’ turnover has been increasing since 2016. More than five-fold increase in exports (in GEL terms) from 2015 to 2018, paired with 11% hike in prices in the same period, compensated reduced consumption of beer in litres in Georgia. Although we expect the exports of beer in 2019 to be down YoY, due to the price effect and recovering consumption in the country, Georgian beer producers’ turnover in 2019 is expected to reach GEL 284mln (+6.5% YoY).
Thanks to high quality water, Mtskheta municipality is a preferred area for industrial beer production facilities. Water, suitable for beer production, is abundant in surroundings and even represents a unique selling preposition for some of domestic brands. Another advantage of Mtskheta municipality is its proximity to Tbilisi, to the biggest market in the country. Major producers, like JSC Georgian Beer Co. (produces 20mln decalitres of beer & soft
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 27 drinks annually), JSC Lomisi [Efes Georgia] (production capacities 10mln decalitres of beer annually, sales of 1600 decalitres in 2018), and Global Beer Georgia (produces 0.05mln decalitres annually), base their production capacities in Mtskheta municipality (Saguramo, Natakhtari, and Tsilkani, respectively).
More than 20 world-renowned beer brands are produced in Georgia. The internationalization of Georgia’s beer production started in early 2000s and, at the moment, four Georgia-based companies produce brands owned by world beer market leaders like Efes, Carlsberg, or Heineken. German, Belgium, Dutch, and Czech beer brands prevail, but domestic producers also produce (or have license to produce) beer originated from five other countries too. This creates an opportunity for domestic breweries to meet the tastes of wider range of domestic consumers, and pocket additional profits. Furthermore, Georgian breweries can expand their sales on neighboring markets, like Armenia, where collaborations with named international producers are less developed, or Azerbaijan, where beer represents more than 60% of alcohol beverage consumption.
The excise tax raise had the largest impact on beers with higher alcohol concentration. Beer was an object to tax reforms in two instalments. In the beginning of 2015, doubling the excise tax on beer resulted in +17% price increase throughout the year. The second stage of excise tax reforms applied to beer in July 2017, when the method of excise tax calculation changed. According to the new regulation, each percent of alcohol in beer is a subject to GEL 0.12 excise tax, thus softer beer benefited more.
FIGURE 52: BEER (DOMESTIC) PRICE INDEX IN GEL (DECEMBER 2011=100) 150 Beer - Nominal Price Index 140 Beer - Real Price Index
130 Excise Tax Up
120
110
100
90
80
Oct Oct Oct Oct Oct Oct Oct Oct
Apr Apr Apr Apr Apr Apr Apr Apr
Jun Jun Jun Jun Jun Jun Jun Jun
Feb Feb Feb Feb Feb Feb Feb Feb
Dec Dec Dec Dec Dec Dec Dec Dec
Aug Aug Aug Aug Aug Aug Aug Aug 2012 2013 2014 2015 2016 2017 2018 2019 Source: GeoStat, NBG, TBC Capital Local beer producers depends on the domestic demand, rather than foreign. For ten years from 2004 onward, beer production, generally, had an upward trend and the correspondence was step-by-step changing in favor of value compared to the volume of production. Consequentially, in 2014, the record year for Georgian breweries, beer production reached GEL 152mln in value (2.5 times more than in 2004) and 11.9mln decalitres in volume (4.4 times more than in 2004). Beer consumption has a consistent seasonal pattern. Summer season captures 40% of annual production and sales, while only 15% of the beer market activities happen in winter. Ready-to-drink market is growing and the average volume of the bottle sold reduces by 0.7% YoY depicting this change in the sales mix.
Georgia consumes less beer per capita compared to other countries. According to the latest estimates by WHO, Georgia’s annual per capita consumption of pure alcohol in beer form (1.25l) is only 38% of what a typical EU citizen consumes in a year (3.30l). Beer consumption in neighboring Russia and Ukraine is also higher, totaling 3.50l and 2.511 per capita respectively.
28|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY FIGURE 53: ANNUAL BEER CONSUMPTION (LITRE PER CAPITA) IN 2010-2019*
100 90 83 84 80 70 66 60 49 50 40 34 35 30 20 15 8 10 5 0 Azerbaijan Armenia Turkey China Georgia Ukraine Russia USA EU
Source: WHO, TBC Capital; Note: Average alcohol concentration equals 5% per litres of beer; Georgia 2010-2019, other countries 2010-2016
Georgian breweries turned to foreign trade markets, slightly compensating losses on the domestic market. Although modest in absolute terms, beer exports skyrocketed in 2017 (USD 3.9mln) and increased further to USD 4.5mln in 2018. However, more than half of beer export in 2018 was actually re-export. Beer export is rather diversified and its geography widens. Azerbaijan was almost a sole importer of Georgian beer until 2013 with c. 90% of the export share in 2010-2013. In 2018, the share was down to 11%, with Israel and Russia accounting for 21% and 19% of Georgia’s beer export, respectively. These two countries are expected to be the biggest importers of Georgian beer in 2019 too, accounting for 39% of total beer exports of the country.
Georgia imports beer in small quantities but from different markets. In 2018, 22 countries exported beer to Georgia and the number of suppliers increased by one in 2019. Netherlands (29%), Germany (22%), and Russia (10%) are leading the imports with combined import value expected to reach USD 5.2mln in 2019. On the other hand, the imports from Belgium (6%) fell sharp since 2018. In addition, note that the popularity of Mexican beer, not available on the local market before 2009, grew steadily until 2018 and the import value neared USD 1.0mln, but the imports are expected to be down to USD 0.3mln in 2019.
FIGURE 54: BEER EXPORT (USD MLN) FIGURE 55: BEER IMPORT (MLN USD)
5.0 14.0 Other Czechia Israel 4.5 Russia Belgium Turkey 11.2 Azerbaijan 3.9 12.0 Ukraine Russia 4.0 Other 3.5 Germany Netherlands 10.2 9.4 10.0 8.7 9.0 2.8 3.0 7.6 7.4 7.6 2.5 8.0 6.7 7.0 6.0 2.0 1.8 1.4 1.1 4.0 0.9 1.0 0.5 0.5 2.0 0.2 0.1 0.1 0.2 -
0.0
2014 2010 2011 2012 2013 2015 2016 2017 2018
2005 2010 2015 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017 2018 2019 2019E
Source: GeoStat, UN Comtrade Source: GeoStat, UN Comtrade
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 29
ACRONYMS AND ABBREVIATIONS
BN, bn Billion CAGR Compound Annual Growth Rate CIS Commonwealth of Independent States COGS Cost of Goods Sold DCFTA Deep and Comprehensive Free Trade Area agreement EU European Union FAO Food and Agriculture Organization of the United Nations GEL Georgian Lari GeoStat National Statistics Office of Georgia GNTA Georgian National Tourism Agency GWA National Wine Agency of Georgia HA, ha Hectare HII Herfindahl-Hirschman Index HL, hl Hectolitre (100 Litre) HoReCa Hotels, Restaurants and Cafes IRR Internal Rate of Return ITC International Trade Centre JSC Joint-stock company L, l Litre MLN, mln Million NBG National Bank of Georgia OIV International Organization of Vine and Wine PDO Protected Designation of Origin pp Percentage Point SARAS Service for Accounting, Reporting and Auditing Supervision UK United Kingdom UN Comtrade United Nations International Trade Statistics Database UNESCO United Nations Educational, Scientific and Cultural Organization USA United States of America USD United States Dollar WB World Bank WHO World Health Organization YoY Year over Year
30|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY DISCLAIMER:
This publication (the “Publication”) has been produced and distributed by the “TBC Capital” LLC (the “TBC Capital”). It is provided to our clients for information purposes only, and TBC Capital makes no expressed or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this Publication.
TBC Capital is operating and performing its professional services on the territory of Georgia and is duly authorized to produce and distribute this Publication on the territory of Georgia. The Publication does not constitute an offer of, or an invitation by or on behalf of, any company indicated in Publication or TBC Capital to subscribe or purchase the investment and shall not form the basis of, nor may it accompany, nor form part of, any contract to acquire the investment in any jurisdiction. The distribution of the Publication and the offer or sale of the investment may be restricted by law in certain jurisdictions and the Publication does not constitute an offer of, or any invitation by or on behalf of any company or TBC Capital to offer or sell the investment in any jurisdiction in which such offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation. Accordingly, the investment may not be offered or sold, directly or indirectly, and the Publication may not be distributed in any jurisdiction, except in accordance with the legal requirements applicable to such jurisdictions. Persons who come to possess the Publication are required by the TBC Capital to inform themselves about and to observe any such restrictions. Neither TBC Capital nor its affiliates accepts any liability to any person in relation to the distribution or possession of the Publication in or from any jurisdiction.
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Head of Research | Tornike Kordzaia, CFA | [email protected] Senior Associate | Givi Adeishvili | [email protected] Associate | Andro Tvaliashvili | [email protected] Associate | Luka Chigilashvili | [email protected] Analyst | Davit Zhorzholiani | [email protected]
GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY| 31
32|GEORGIAN ALCOHOLIC BEVERAGES INDUSTRY