Competitiveness Enhancement and Enterprise Development (CEED) PRE-STRATEGY ASSESSMENT OF THE MOLDOVAN WINE SECTOR JULY 30, 2007 This publication was produced for review by the United States Agency for International Development. It was prepared by Chemonics International Inc. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. CONTENTS About This Assessment Report i Acronyms ii SECTION I Executive Summary I-1 SECTION II Introduction II-1 SECTION III Global Wine Market Overview III-1 A. Wine Production and Consumption III-1 B. Wine Trade Flows III-7 C. Regulatory Aspects of the International Wine Trade III-19 D. Global Trade Practices III-26 SECTION IV Industry Assessment IV-1 A. Overview IV-1 B. Overview of Wine Producers IV-35 C. Industry Support Services IV-49 SECTION V International Benchmarking V-1 A. Major Producers: Western Europe V-1 B. Major Producers: New World Countries V-7 C. Eastern Europe: Comparison to Regional Competitors V-13 D. Georgian Wine Industry since March 2006: Response to the Ban V-23 SECTION VI Conclusion: Challenges and Opportunities for Moldova VI-1 A. Challenges VI-1 B. Opportunities VI-1 SECTION VII Making Moldovan Wine Competitive Globally: Recommendations VII-1 A. Strategic Recommendations VII-1 ANNEX I Emerging Markets A-1 ABOUT THIS ASSESSMENT REPORT The final assessment report is a very comprehensive and lengthy document. Readers are encouraged to read the entire document from front to back; but as a guide for those readers wishing to focus attention only on particular portions of the assessment report, we have developed short summaries of each section of the document. Underlined text indicates those portions of the assessment report that the CEED team believes are particularly relevant and important for Moldova and its wine industry. Section I: An executive summary of the entire report, outlining key strategic recommendations made by local and international experts for increasing wine sector competitiveness. Section II: An introduction of the current situation facing the Moldovan wine industry, and the rationale behind this pre-strategy assessment and a national wine sector strategy. Section III: A comprehensive review of the global wine market, including production and consumption trends and a breakdown of the major market categories facing Moldovan wine producers; an overview of world wine trade (i.e. imports and exports); a summary of the key difference in regulatory framework of New World and Old World wine producing countries; and critical for Moldova, a thorough assessment of key trends and influences affecting global wine commerce. Section IV: An overview of the current state of the wine sector in Moldova, from three perspectives: (i) the industry, including viticulture, winemaking, markets and distribution, and the legal and regulatory structure; (ii) wine producers, again examining viticulture, winemaking, and marketing; and finally (iii) sector support services, such as education and training for the labor force and certification. Section V: An overview and benchmarking of competing wine production nations from Western Europe; New World countries, such as the United States, Argentina, and Australia; and regional competitors Bulgaria, Hungary, and Romania. Each section ends with a presentation of key lessons that Moldova can learn from the experiences, including where each country as done well and where they have not. This section contains many valuable lessons for Moldova, based upon the experience of other nations. Section VI: A review of the key opportunities and challenges facing the Moldovan wine sector. Section VII: A presentation of thoughtfully developed recommendations for upgrading the competitiveness of the Moldovan wine sector, including strategic recommendations and short-, medium- and long-term recommendations for the sector; specific recommendations dealing with technical issues covering viticulture, wine making, branding and marketing, the legal and regulatory environment, and sector support. Annex I: An overview of the wine industries of China and India, and an assessment of the current and future market opportunities in these countries for wine. ACRONYMS ACSA National Agency for Rural Development AOC appellation d’origine contrôlée (appellations of origin) AVA American Viticultural Areas INVV National Institute of Vine and Wine CAGR compound annual growth rate CEFTA Central European Free Trade Agreement CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development FAO UN Food and Agricultural Organisation GATT General Agreement on Trade and Tariffs GSP+ generalized system of preferences GPRI Grape Processing and Research Institute WTO World Trade Organization OIV International Organization for Vine and Wine IFAD International Fund for Agricultural Development NIAO National Institute of Appellations of Origin NGO non-governmental organization SAWIS South Africa Wine Industry Information and Systems SIVAP State Inspection for the Supervision of Alcoholic Products SPS Sanitary and Phytosanitary TBT Technical Barriers to Trade Agreement TRIMs Trade-Related Investment Measures TRIPS Trade-Related Aspects of Intellectual Property Rights Agreement VQA Vintner’s Quality Alliance UOM Union of Moldovan Oenologists SECTION I Executive Summary National Wine Sector Crises Lead to Action Hungary. Around the time of the 1990 regime change Moldova-Vin’s desire to think strategically Hungary lost access to its high-volume Eastern-bloc about the wine sector is timely given the markets causing oversupply. Export volumes fell 70 current situation of the Moldovan wine percent from 1989 to 2002. Producers were forced to industry and the changing global wine market. find other markets and respond to demand for higher Many of the world’s leading wine producing quality wine. Investment and international advice in winemaking techniques meant that Hungary was able countries are going through a process of to export to new Western markets, reaching a peak of strategy development and continuous 1.5m hl by 1996. But the country failed to capitalize on reassessment. With the survival of the wine this development and has experienced a further industry at stake, this process is urgent for decline in export sales in recent years. However, it has developed a strong domestic market that now Moldova. The importance of the sector for the consumes around 80 percent of all production. Moldovan economy and poverty alleviation is well known; a long list of supporting statistics New Zealand. Successful industry results in the late related to economic growth, employment, 1970s led to increased investment, hectares planted, industrial output, rural household incomes, and land prices, and local interest and pride. By the 1980s, over planting, particularly in the "wrong" exports show the sector’s far-reaching impact varietals that consumers no longer preferred, led to a both pre-ban and post-ban. Moldova can learn glut. In 1984 the government paid growers to pull up from other countries whose wine sectors fell vines. Many growers used funds not to restrict into crisis (see text box). In each instance planting, but to swap out unpopular hybrid and other port and sherry-producing varieties to more government and the private sector worked fashionable ones (Chardonnay, Sauvignon Blanc). together to develop and quickly implement short-, medium-, and long-term strategies that South Africa. South Africa’s wines were shunned by eventually turned around the market. the world during apartheid. With the advent of democracy, the South African Wine Industry Trust (SAWIT) was established in 1999 to promote the The recommendations in this assessment take exports and transform the industry, focusing on into consideration the objectives defined in varieties and wines preferred by consumers. As a Moldova’s Law of Vine and Wine (see text result, South African wine volumes rose from 22 box), international best practices within the million liters in 1992 to 282 million in 2005. Moldovan context, identification of an advantageous regulatory regime, and the following critical factors: Law on Vine and Wine: Overarching Objectives • Protect the economic interests of the state and • The Russian ban, as well as the changing society in viticulture and winemaking global wine market, offers the wine sector • Create adequate conditions for production of the opportunity—some would say obliges commodity grapes, wines, and other must and the sector—to quickly improve its wine-based products understanding of new markets, their • Adjust to international requirements in viticulture and wine making areas consumers, and the skills necessary for a • Consolidate the image of Moldova as a country competitive wine industry. Ultimately for with traditions in viticulture and winemaking, Moldova the goal should be a more increasing the export of quality wines nimble, market-driven sector. • Combat and counteract counterfeiting of wines and of other must and wine-based products • Even as exports resume to Russia, • Improve the wine consumption culture Moldova has seen damaging effects on its reputation and its commercial aptitude in Russia eroding. Increased competition from other suppliers who established a foothold in the Russian market during the ban period and new Russian stipulations are limiting Moldova’s ability to recapture its previous market share. Moldova must identify and ready itself