Vertical integration in the Azerbaijani Wine business

Today wine production in Azerbaijan totals to about two million decalitres a year. Yet, the yearly wine consumption is only one million decalitres resulting in a total surplus of about one million decalitres of wine. In consequence, export is gaining in importance resulting in an increase of importance to produce high quality wine. In this context the production of high quality grapes is very important. In this context the paper addresses the question why vertical integration is considered as a major importance for quality wine production. Preliminary version for discussion Please do not cite Vertical integration in the Azerbaijani Wine business 2 INTRODUCTION Azerbaijan, considered to be the birthplace of the vine, is very rich in grape varieties, not only for the production of table or technical grapes, but also wild ones. According to a study, more than 600 local and introduced grape varieties can be found Azerbaijan today. During the Soviet Union Azerbaijan was one of the major wine producers of the Soviet Union. Not only was the production area much larger than today but also yields were much higher so that produced wine was considered of low quality not matching today’s standards. After Mikhail Gorbachev’s “anti-alcoholism campaign” the majority of vineyards were cleared ruining the sector. In the beginning of the transformation process the wine sector was not revitalized. The revitalization of the wine sector has begun at the beginning of the new millennium when a number of new companies have been established. Right from the beginning these new companies started to work with European experiences and technologies. Today about fifteen years later according to the State Statistics official statistics the number of wine producing companies in Azerbaijan is seventeen. As there are no dramatic changes the majority of them have been established since the year 2000. According results of the conducted interviews the recent wine production in Azerbaijan totals to about two million decalitres a year. Yet, the yearly wine consumption is only one million decalitres resulting in a total surplus of about one million decalitres of wine. In consequence, the majority of the interviewed companies stressed that the production of good quality is key for success. According to the results of our interviews, which correspond to the view expressed in the EU report on value chains, the majority of wine makers prefer to grow their own grapes. In this context we want to analyze why vertical integration is considered as a major success factor for quality wine production. THE AZERBAIJANI WINE SECTOR Domestic grape and wine production In Azerbaijan last year a total area of 16’115 ha of agricultural land was covered by vineyards, of which 13’128 ha actually produced grapes. The total grape production of Azerbaijan was of 154’123 tons (State Statistical Committee of the Republic of Azerbaijan 2014). In average the productivity of one hectare of vineyards in Azerbaijan was of 11.7 tons, but the average yield varied strongly according to regions. For instance, the yields obtained in the Sherur region of the exclave Nakhchivan was 19 tons per hectare whereas in the city of Sumgayit the average yield was under seven tons per hectare., About 40% of the total grape production, corresponding to approximately 65’000 tons of grapes, is transformed into wine. The bigger part of the production is consumed as table grapes (EU report on value chains in Azerbaijan 2014). There is no information or data on the amount of grapes processed into raisins or juice. The production of technical grapes is divided into approximately 80% of red wine grapes and 20% of white wine grapes. 10’000 – 15’000 tons of these grapes are used for the production of sparkling wine and brandy. The producers of grapes can be divided into two categories: agricultural enterprises, who produced in 2012 13% of the total production of Azerbaijani grapes, and private owners, who produce at a higher yield per hectare the main part (87%) of the total amount of grapes grown in Azerbaijan. The agricultural enterprises usually have a lower yield than the private owners because agricultural enterprises grow grapes to process them into wine or other products, thus attaching more value to Vertical integration in the Azerbaijani Wine business 3 the quality of the grapes, while the private owners sell grapes and thus want the highest possible yield in order to earn more money. According to the results of the interviews, which correspond to the view expressed in the EU report on value chains, five out of seven wine makers prefer to grow their own grapes. As a result, there is no information available on prices of technical grapes since the market for technical grapes is very limited. However information on general grape prices (mainly table grape prices) is available. According to the State Statistics Committee of Azerbaijan grape producers received between 0.42 AZN/kg to 0.35AZN/kg of grapes depending on whether the seller was an agricultural enterprise or a private farm owner. Further, prices varied according to years. The 2013 cost price of grape production was 0.22 AZN/kg for private farm owners and 0.29 AZN/kg for agricultural enterprises. Four of the seven interviewed wine producers grow both local and international varieties. Only one grows solely international varieties. The reason for this decision is the aim to export to Europe and the assumption that those varieties are more compatible with the taste of European consumers. Another reason expressed by an interviewee was the greater sensitivity of local varieties to illnesses and pests. The European varieties cultivated by the companies in the sample are mainly Merlot, Cabernet Sauvignon, Shiraz, Chardonnay, Muscat and Petit Verdot. The main local varieties are Saperavi, Madrasa, Rkatsiteli and Bayan Shiraz. According to one of the interviewees, the choice of the varieties depends first of all on the philosophy of the winery, further on the popularity of the variety and lastly on consumer preferences. The number of wine producing companies in Azerbaijan was seventeen in 2013 (State Statistics official statistics). The interviews revealed that total wine production in Azerbaijan is about two million decalitres a year, but the yearly consumption is only one million decalitres . The resulting surplus of about one million decalitres was confirmed by all interviewees. As a result the majority of the interviewed companies stated that they do not work with full capacity. As there is a lack of qualified suppliers all most all oenological inputs are imported including corks, labels, barrels, bottles etc. In order to enhance the quality of the production process the companies invested heavily in modern production technologies as well as stainless steel tanks so that high depreciations are resulting. Further, due to a lack of well-educated domestic oenologists foreign oenologists were hired. In-between summary: production A small number of domestic wine producers is producing about two million decaliters of wine. According to the official State Statistics Azerbaijan has seventeen wine producing companies.