Port at the crossroads

The twin problems of years of mismanagement and economic recession have left Port with significant challenges that must be overcome to ensure the health of the historic Douro region and its workers, says Paul Symington

Port is facing fundamental challenges after strong growth throughout the 1980s and 1990s took sales to a record €415 million (£334m) worldwide in 2000. This growth was fuelled by the development of new markets such as Holland, the US and Canada. But Portugal’s accession to the EU in 1986 gradually increased rural labour costs. By 2000 the true cost of growing grapes in the Douro, the world’s largest area of mountain vineyard, had become abundantly clear.

Inevitably these costs impacted on Port’s retail price in markets such as France (2.53 million cases), where Port is largely drunk as an aperitif, and sales declined. Fashion and lifestyle also have a major influence on consumption, and in France and Belgium, which are responsible for 40% of all Port sales, other aperitifs have muscled in on Port’s traditional role as the preferred pre-dinner drink. Meanwhile in  other traditional Port markets such as the UK (0.98 million cases), the decline in formal dining, the increased quality of everyday red wine and the latter’s far wider availability across Northern Europe, have narrowed the opportunities for serving Port.

Consequently by 2011 the value of Port sales had declined to €353m. This was the principal reason for the exit of virtually all multinational drinks companies from the region and for trade consolidation. Some decline is of course due to the deep recession of the past three years. But the underlying trend is concerning, particularly as the economy of the whole Douro region is so dependent on Port.

Premium Ports

On the positive side, the sales of premium quality Port have continued to grow and last year shipments to the UK marginally increased. Historically the Port trade was based on sales of good everyday ruby and tawny Ports, and at the other end of the scale, small quantities of highly prized vintage Ports. By 2007 the sales of premium Ports had reached 20% of all Port sales by volume and 37% by value. This tremendous growth was based on good marketing and on substantial increases in grape quality from the Douro vineyards; the result of plantings in the 1980s and 1990s supervised by a new generation of viticultural managers. Major improvements were made in the wineries, again by innovative young winemakers. From the late 1990s, the Douro was no longer known as the wine region for visiting to see 17th-century winemaking. New equipment with quality as the driving objective was increasingly to be found in the wineries of the more far-sighted producers and those willing to invest.

Traditional treading in lagares, for which the Douro is so well known, is very appealing to see for those who come for

a short visit. In reality, traditional treading with a full team of treaders almost certainly accounts for less than 3% of all Port made each year in the Douro (exact figures are not available). The huge advances in winemaking that have propelled Bordeaux and several other regions to the pinnacle of quality and value are somehow not thought to apply to Port. Many consider its production methods to be stuck in a 17th and 18th century time warp. While traditional treading is appropriate in some specific circumstances, it is impossible to make more than a few thousand pipes in this ancient way. Furthermore, treading in lagares can be objectively and empirically matched by some new winemaking techniques and equipment.

The result of all this work is that today Port quality has never been higher. This great leap forward has gone hand-in-hand with good marketing and sales efforts, creating a substantial volume of premium-quality Port sales that is the envy of other fortified wines.

However insufficient planning and an almost total lack of awareness of macro-trends has characterised the Port regulatory bodies for too many years. Like many Old World wine regions, the Douro is bound up with rules. But for Port the power has been dispersed among several bodies, including the IVDP (Instituto dos Vinhos do Douro e Porto), the IVV (Instituto da Vinha e do Vinho), Customs and Excise (Direcção Geral das Alfândegas) and the Casa do Douro, with the Ministry of Agriculture in faraway Lisbon supposedly overseeing the whole process. Some of these bodies were responsible for issuing planting licences, some for assessing the vineyards, some for distributing the annual licences for making Port and others for controlling its stocks and issuing quality certificates. One regulatory body even competed with producers by buying a substantial share of a large Port company; bizarrely, it has to be said, with support from some sections of the British wine trade. This particular deal was announced in the UK at a specially authorised press conference held in the rooms of the venerable Vintners Company.

The regulatory bodies impose special taxes on farmers and Port companies at every stage and the system has led to the development of an expensive structure whose primary objective inevitably becomes maintaining its own continuity. It is extraordinary how some bureaucrats in these bodies see themselves as the guardians and the “owners” of Port, and some even appear to consider the farmers and the Port companies as something of a nuisance – people who get in the way of the proper functioning of the region and the category. In particular the generic campaigns tend to be handled by these bodies that, again, sometimes seem to think they are the ones actually developing new markets. The overwhelming evidence from around the world’s wine regions indicates that work by small, medium and large wine producers is by far the most successful way of developing markets.

Unregulated growth

One of the most catastrophic consequences of this confusion of interests and lack of planning was that the authorities have allowed the total area of vineyards to grow excessively. While Port sales were declining, the total area of Douro vineyard grew from 42,384ha in 2002 to 45,073ha in 2011. To put this in context, the entire vineyard area of Germany is 102,000ha and Chablis is 6,800ha. Furthermore, absolutely no account was taken of the significant yield increases arising from the large amount of replanted vineyards within the region (mostly EU-funded) and incredibly, no producers were ever asked for forecasts of their grape needs or estimated future sales. On what basis were the authorities working on if they never asked any farmer or Port company? Inevitably with an excess of vineyards, farmers have seen the value of their grapes devalued and unrest has been brewing in the region.

The growth in sales of Douro table wines (DOC) has been used by some as a justification for these huge new plantings. Douro DOC has certainly made great strides (sales valued at €85.6m in 2011), but a passing knowledge of the world’s wine markets would indicate that while Douro DOC wines have an excellent future, they are unlikely to achieve large volume export sales due to a very crowded world market, low Douro yields and high costs. Douro DOC wines can already be found on shelves in Portugal at below €2.00 per bottle, compromising the future of this vital new category.

In recent years the authorities finally began to realise that things were not going well. An attempt was made to concentrate the regulatory powers in the IVDP (although the IVV and other bodies still have a range of powers in the region) and a consensus emerged that the beneficio (the vineyard Port yield authorised annually) should be reduced to balance trade stocks. This is exactly what was done in Champagne in 2009.

In 2011 the authorised yield for Port was reduced to 107,000 pipes, although sales were 150,000 pipes. This has led to a dramatic 43,000-pipe decrease in Port stocks in 2012. In the forthcoming September harvest the yield is likely to remain low, with Port stocks almost certainly reducing by another 30,000 pipes. By January 2013, Port stocks will be at their lowest levels since the 1990s. The stock excess that has plagued the Douro for a decade will have disappeared.

Loss-making grapes

So one harsh but necessary measure has been taken and the authorities are at last more aware of the mistakes made. The problem is that the Douro is a region where 141,000 people live and work and where 23,800 people farm less than half

a hectare of vineyard. Only 857 people farm more than eight hectares. The region is made up of smallholders and almost the entire economy is based on the price paid for Port grapes. Douro DOC grapes are market-priced and during the past decade these have been sold by farmers at less than half the real cost of producing them. This is because the price paid for Port grapes gives the farmer a small margin over cost and the non-Port grapes are in chronic oversupply. The vast majority of Douro farmers are now making serious losses. The consequences if future Port sales decline do not seem to have been factored in by anybody.

How can this unplanned vineyard growth be reconciled with the fact that, across Europe, a handful of major supermarkets now account for some 80% of all Port sales? Just 20 years ago Port and wine sales were more broadly dispersed among many smaller wine shops, making a far less volatile customer base for producers. This is a mirror image of the situation faced by wines in Australia and many other regions, as they have found to their terrible cost. The supermarkets quite naturally take advantage of any excess production to deliver lower prices to their consumers and are not overly concerned with the welfare and social fabric of an ancient wine region. The major retailers are simply doing their job to satisfy their shareholders and consumers. In so doing they will naturally take advantage of any opportunities if a region has been mismanaged. Some commentators say that producers should simply refuse to supply supermarkets. This is naïve – the only course available to a company if it loses substantial sales is to sack staff and dismiss hundreds of farmers, with dire results across the region.

Brandy costs rocket

As if the Douro and Port did not have enough challenges, a further factor has emerged. After the withdrawal of the EU subsidy for distillation across Europe and several short harvests, the price of wine brandy, an essential part of Port making, has skyrocketed. Brandy will cost at least 60% more at the 2012 harvest in two months. Even if grape prices remain unchanged, the cost of Port will increase by at least 9.5% early next year. Not an attractive proposition to take to the markets in the current recession. But, unless Port companies pass on this increase, they will quickly and most certainly go out of business as there are insufficient margins to absorb this cost increase.

Port faces a good future – but based on sales of premium quality wines. The category will have to fight hard to retain its position in the traditional markets and to develop new ones such as Brazil, Russia and China. It should be noted that Port shipments to the UK actually increased in 2011, albeit by 0.2%. This is objectively a good result showing the inherent value of this great wine, coming as it does in the middle of a significant recession and where most commentators expected a decline.

Port volumes will probably and regrettably decrease in the years to come but the value will be higher if the right measures are put into place. This will give a better income and renewed optimism to the Douro farmer and to the many that are connected economically to Port.

But it has never been more necessary for the Portuguese government to accept that reform is necessary. The Port companies cannot alone sustain the social fabric and the economy of a region. Frequent appeals have been made by the Port companies to the government not to use the regulatory bodies as placements for their political allies every time a new party comes to power.

The Port trade and the Douro region is too valuable not to deserve professional management at regulatory level, with genuine experience of the international wine market. Rules made in the 1920s and the 1950s are not all appropriate to the harsh reality of the 21st century.

It remains to be seen if there is sufficient will to discuss these important issues in a mature, inclusive and objective way. Is there enough courage to implement reforms or will market forces be left to create devastation across this ancient and historic wine region?