We are very happy to post the second part of  Jacques Fleury's commentary on the Georgian Wine Industry. In the first part, Jacques reflected on the experience of surviving the Russian embargo, on the one hand, and dealing with a series of heavy-handed and incompetent government interventions, on the other. In the second part of his comment Jacques proposes a new vision for the future of the Georgian wine industry, a future in which the government and the private sector work hand-in-hand to support small vine growers and promote Georgian wines to new markets.

PART B: SUGGESTIONS FOR A STRATEGY TO DEVELOP THE GEORGIAN WINE INDUSTRY, 2013-2017

1. Open new export markets

We can safely assume that there is little awareness of the Georgian wines outside the ex-USSR region and the ex-USSR immigrant communities in the West. My own research in the largest import market in the US convinces me that less than 1% of the potential wine consumers are aware of a country called Georgia (they first think of the State of Georgia), producing wine and furthermore being at the origin of the wine history.

Therefore, there is no way to diversify Georgian wine exports without a massive effort to create awareness of the fabulous story of the Georgian wine.

Why reinvent the wheel? A look at the New World wine countries

Georgia’s strategy should incorporate the main lessons learned from the successful experience of such New World countries as New Zealand, Australia and Chile during the last thirty years.

1. Establish close cooperation between the state and the private sector.
2. Create a Marketing Board to promote better awareness and image of the Georgian wines abroad. In other countries, this effort was managed either fully by the private sector, or in close cooperation between state institutions and the private sector, but still driven by the dynamism of the private sector.
3. Launch targeted marketing campaigns designed and monitored by the Marketing Board, staffed by Georgian professionals and having limited support of experienced marketing experts from the New World wine countries or from countries having launched new wines in the last twenty years.

2. Establishing close cooperation between the state and the private sector – development of the GWA

In previous years, promotion of Georgian wines has been primarily initiated by the public sector without close cooperation with the private wineries. This has to be reversed. The state cannot replace the private sector, especially in the field of marketing. Georgian wines should be promoted under the leadership of the Georgian Wine Association (GWA) which could create a marketing board within its structure, as is the case in other countries.

Helping the private sector to develop the Georgian Wine Association

As is well known, the Georgian wine industry was severely hit by the Russian embargo, bringing FDI to a halt. No wine industry in the world had to face so many disasters in the last 6 years! It was quite symptomatic of the situation that Pernod-Ricard, the number 2 company in spirits and wines in the world, has quit Georgia in 2011. Despite this, a handful of private Georgian companies have been growing remarkably. None of them, however, have sufficient size and profitability to engage in international communication campaigns. Thus, if Georgia really wants to come back and be on the world wine map, this still fragile industry is in need of effective coordination and strong support.

We suggest to:

1. Redirect public funds from loss-making industrial investments to marketing campaigns properly managed in cooperation with the GWA, representing the private sector.
2. Facilitate the financing by IFI’s of the institutional and professional strengthening of the Georgian Wine Association.

Facilitating support of GWA by the International Financial Institutions (IFIs)

A close cooperation between the new Government, the Georgian Wine Association, the grape growers, and the IFI’s is essential for the industry’s expansion and the future of Georgian wines.

During the past several years the Government has ignored the key role of the private sector, and even positioned itself as a competitor to the private sector. Moreover, a $4 million financing prepared by the USAID to support the institutional build-up of the Georgian Wine Association was cancelled at the request of the Government. Likewise it was impossible to obtain any financing within the large World Bank support package for the sector due to the will of the Government to keep all those funds managed by its own administrative resources.

At this stage of development, the Georgian private wine industry needs the support of the state or IFI’s in order to undertake strategic marketing investment similar in size (relative to the sector’s present size) to investments made by other New World countries.

3. Providing support for the small growers without causing value chain destruction

The success of the Georgian wine industry will be complete if the whole chain is successful. The future and the responsibility of small grape growers must not be considered only as an electoral challenge.

As long as the Russian embargo is in place and until the wine industry has not fully recovered its pre-embargo volumes, grape prices resulting from a free market situation may be below production costs, forcing some of the growers to abandon the sector. The private sector and the state should closely collaborate on the identification of commonly acceptable solutions.

The Georgian wine industry needs the support of the thousands of small growers. The state and the wineries should favor grouping these small farmers into communities of interests so as to deliver technical assistance, support and help for the commercialization of their crops.

Small growers should be helped to join an association of grape growers that could merge with the association of wineries as it is the case in several countries of the New World and Western Europe.

In the Old World, the production of wines is more fragmented, due to a tradition of vine growers who are at the same time wine processors. Subsequently, the European organizational designs for the wine industry are frequently based on a dual system, where both growers/producers and processors/traders are represented in dedicated organizations, which are responsible for the negotiation of economic matters (i.e. reference prices of grapes or wines) and establishing common promotion strategies through an “inter-professional” approach (especially in France). This kind of structure, where the state – a key stakeholder – acts as a referee, is better than the one in which the state appears as a direct economic actor. Such a structure could inspire the future design of a new, better-balanced wine sector organization in Georgia, serving the interests of all parties by improving the entire value-chain.

State funds that are now used to destroy value in our chain (through industrial investments in the sector or by imposing operating losses on the private wineries) should be redirected towards the support of the small farmers with a view to improving their technical performance. Their income would thus increase not only as a result of the imposition of a “political” price but also from improvements in productivity, which is quite low in many cases.

Excess crop should be treated professionally to produce good quality wines and should be put back at the disposal of the private sector under a tender system or subject to an agreement with the industry. Alternatively, it could be redirected towards the local market as explained below.

4. Developing the local market

A large quantity of Georgian wines is sold in bulk on the local market, including home-made wines, etc. Despite the fact that some of these wines are of excellent quality, there is a number of bulk wines that are not meeting microbiological quality standards in the market. Everyone here has experienced at least once the next morning headache after a Supra. It is the responsibility of the industry to provide cheaper, safer bottles of wines to the market at prices that would not be so much superior to the existing bulk wines. Instead of mishandling the surplus of grape production, the state in association with the private sector should use these surpluses for the production of cheaper bottled wines for the current home consumption of bulk table wines.

5. Supporting research and new product development

Georgia probably has more than 500 varieties of existing vines. Only a few of these varieties are commercially exploited now. All efforts should be made to create new wines from those forgotten vines. Some of the latest archeological findings provide evidence that the story of wine started here some 8000 years ago. We need to pursue this line of inquiry and develop DNA and genetic tests in collaboration with foreign research centers and universities to identify similarities between the famous world varieties and old Georgian varieties in order strengthen the global awareness of the historical connection of modern winemaking abroad with the ancient Georgian traditions.

We also strongly recommend developing an international class Education Center for Oenologists in Georgia.

6. Attracting famous wineries to invest in Georgia

We should definitely attract some of the famous names in the world wine industry to invest in Georgia. This would have enormous consequences for the success of communicating the Georgian wine story.

We would definitely like to hear more renowned wine producers such as the owner of Pétrus who claimed a few years ago, while responding to the Russian journalists:  “My next ambition as a wine producer would be to invest in Georgia, the country where it all started”.

7. Unified approach to negotiations with Russia

There are reasons to think that the Russian borders will soon reopen for Georgian wines. It would be important to reenter in a unified way, in close cooperation between the Georgian Government and the Georgian Wine Association.

The reopening of the Russian market would probably solve many problems for the Georgian wine sector in general, and for the small grape growers in particular. Nevertheless it should be done with very strict discipline, having the high quality objective in mind. Mistakes of the past should not be repeated. The Georgian Wine Association is asking the Georgian Government to be a part of any negotiations with the Russian Government. GWA is recommending to all of its members not to engage in unilateral negotiations and not to contact other parties before we are given the green light by the newly elected Georgian Government.

by JACQUES FLEURY

Vice Chairman of the Board, The Georgian Wine Association
C.E.O. Georgian Wines and Spirits
Founder and Director Chateau Mukhrani