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Feb 19, 2020
Alcoholic Beverages: Heritage of Splendor
- 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.