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The Douro Revolution

End of harvest festivalThe Douro Valley with its dramatic and breathtaking landscapes is one of the most distinctive wine regions in the world. But that is not why this area is famous; whether you are cruising the Douro river or exploring the streets of Porto and Gaia, you are never far from being seduced by a glass of Port. Indeed, Port wine production runs through veins of Douro history, culture and even politics. It is the region’s distinguished and age-worthy Ports that enjoy a worldwide reputation. However, the recent shift to the production and marketing of characterful table wines is changing international perceptions and the reputation of what this hot, dry, remote and once barely inhabitable place can offer.

Douro DOC (Denominação de Origem Controlada) was one of the world’s first regulated wine regions, initiated by Marques de Pombal and created in 1756. The growing demand for its sweet, rich and opulent wines with high alcohol spurred commercial interest in fortified wines and subsequently in regulating its production by classifying the vineyards and certifying the wines. This laid the foundation for what was to become one of the most successful wine brands – Port. As shippers based in Villa Nova de Gaia started to blend and market their own brands, local table wines remained largely overlooked as it became difficult for individual producers to make and sell wine economically. Recent law changes (in 1986) brought new dynamism with many new Quintas (winegrowing estates) focused back on developing and perfecting table wines.

Of the region’s 45,700 ha of land planted with vine, close to three quarters are designed for Port production. Out of the three subzones (Baixo Corgo, Douro Superior) Cima Corgo is still the center of Port production but a search for land that is suitable for production of quality table wines (with high altitude and north facing slopes) has caused a frenzy of renovating and planting on new sites over the last decade. Thanks to considerate investment, incentives from the Portuguese government and the EU and the evolution of modern winemaking and a new generation of well-educated winemakers, Douro is undergoing an exciting change.

The economic prospects of the region are challenged by the wide gap between the relative poverty of the hundreds of small growers and the wealthy flagship Port houses. Over 40,000 individual vine growers work the majority of the land, each owning an average of 1.2 hectare giving them minimal profits. The additional challenge for the production of fine unfortified wines lies in the fact that grapes destined for Port production fetch a better price (Port grapes fetch €900 per pipe but table wine grapes only €225) and that 80% of local consumers buy wine in supermarkets under €2 a bottle, unprepared to pay premium prices. Port’s biggest challenge is the rising price of brandy in Europe (due to short harvests and the removal of an EU subsidy for the distillation of excess wine stock), forcing producers to pay an extra €14 million for the fortifying spirit in 2013, on top of a €21 million rise in 2012.

Convincing both local and international consumers of the value of wines across all price points and getting them to explore the diversity of more premium table wines is the next big step, and one that will require creativity. Angola, France and the UK are the largest export markets with the US, Brazil, Canada and China promising the highest potential for growth. Although the perception is often that Portugal is about cheap and cheerful brands such as Mateus, Lancers or Sir Cliff Richards’ Vida Nova, consumers are also starting to embrace more premium Portuguese wines. Recent figures from ViniPortugal show a remarkable value increase of 31% in 2014 UK exports (a 22% increase in volume) indicating consumers are trading up when purchasing Portuguese wines.

Douro’s producers are creating their own identity for unfortified wines. The great diversity of indigenous varieties such as Viosinho, Rabigato, Codega de Larinho, Donzelinho, Malvasia, Gouveiho (Spain’s Godello) and Bastardo, Sousão or Tinta Amarela (known as Trincadeira) is remarkable. While the majority of the wine world is focusing on growing international varieties, this challenging yet unique point of difference could make or break the Douro. Dirk Niepoort is one of the pioneers of the Douro as a source of such high quality table wines. This stubborn, highly charismatic and often controversial man has revolutionized the way the world views Portuguese wines and has successfully entered export markets that many producers can only dream of through his approach, balancing tradition with innovation.

In order to produce characterful, approachable fresh wines with good acidity and lower alcohol, the focus is on terroir and a winemaking philosophy where less is more. For example, Niepoort’s own vineyards are farmed organically and many of their growers follow the same path. There is evidence of a move from buying grapes across the region to a focus on individual sites or soils in order to drive unique styles and single block expressions. The growing shift is towards farming own vineyards and taking better care of the land, a trend that has seen a global revolution. Christian Seely is proposing to increase his vineyards by 100ha, doubling his current area with not only indigenous varieties but also a plan to experiment with Syrah, which should be suitable to local schist and granite soils.

This ongoing revolution is slowly changing the relationship between fortified and unfortified wine production in the Douro. While attention is still fixed on fortified wines, economic prospects for the region are turning towards more approachable whites and reds labeled as Douro DOC or more flexible Duriense VR (Vinho Regional). The flagship red varieties – Touriga Nacional, Touriga Franca, Tinta Roriz (Spain’s Tempranillo), Tinta Cão, Tinta Barocca – make the best Ports but are also capable of making noteworthy unfortified wines. This adaptability and the fact that these still wines do not require ageing like Ports (either prior or post release) allow early consumption and providing commercial benefit.

In years ahead, Douro will not be a place known just for cheap fruity wines but for great wines. The outstanding diversity of indigenous varieties, the rising quality and immediately approachable and affordable styles have unique potential in both established and emerging markets. What is more important is that there are an increasing number of people – producers, wine critics, sommeliers, importers – that share the same desire to promote Douro wines. Prospects will heavily depend on whether this enthusiasm will inspire consumers to actually buy these wines in years to come. Growing value and not volume and embracing innovation and fresh thinking is the key for long-term success for the Douro.

 
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Posted by on November 23, 2014 in Portugal

 

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How fair are government taxes on wine around the world?

Screen Shot 2014-11-12 at 00.19.37Government tax rates on wine differ significantly between countries and it is difficult and complex to accurately compare them. Different considerations and challenges such as economic, cultural, political and legal determine how taxes are applied. Whether they are fair or unfair depends on your point of view. The wine industry constantly fights to avoid increases in excise duty in order to protect their sales and profits. Producers that rely on local demand call for higher import tariffs in order to protect their domestic wine industry. Alternatively, those relying on exports call for free trade or tax rebates in order to sustain and grow their business. Consumers are principally against any type of tax. Whereas governments rely heavily on tax revenue, yet never seem to be satisfied.

There are huge differences in government taxes. For instance excise duty rates vary from €6 per bottle of wine in Norway to zero in Hong Kong. On the first glance, this significant rate difference seems unfair. Why should consumers pay so much for their favourite tipple in one country while others enjoy much lower pricing? However, comparison of taxes is complicated as the value of rates is based on different cultural, political and economic philosophies of countries. Following a period of alcohol prohibition, Norway’s high taxes are linked with strict restrictions by the government alcohol monopoly Vinmonopolet. Whereas Hong Kong, thanks to its global connectivity has had zero tax since February 2008 with a view to economic dynamism and liberalism.

However, even within the European Union where the majority of members share the same currency and similar economic goals, the excise duties vary so remarkably it can hardly be considered fair. The United Kingdom is one of the highest tax paying countries at £2.05 per bottle in comparison to traditional wine producing country such as France which only charges €0.03 per bottle. So if you buy £5 bottle of wine in the UK (being the average price), 57% is tax and about 28% is retail margin and the liquid is barely 25%, making it poor value for money for consumers. No wonder then that thousands of Brits travel across the channel every year to take advantage of the bargains in Calais.

Governments can receive a significant amount of funding through wine taxes. Some of this revenue is used to offset the cost of crimes and health damage that are related to alcohol abuse. The wine industry in the UK paid over £15 billion in duty and VAT to the government in 2010 yet the Institute of Alcohol Studies claims that alcohol related harm was estimated to cost society (England) £21 billion in the same year. This includes £3.5 billion of NHS cost, £11 billion of alcohol-related crime and £7 billion of lost productivity due to alcohol. This estimate suggests that alcohol consumption brings more financial losses then benefits to the government. However an accurate estimate of the economic cost of alcohol consumption is difficult to calculate due to the number of variables involved.

From the wine industry’s point of view, there is a danger that taxes reach a level where reduced consumption materially impacts sales and profits. In order to avoid this, the UK duty increase was postponed in 2014 (as a result of the Call Time on Duty initiative). It was estimated that action will save the industry £175 – 230 million and protect over 6,000 jobs. On the other hand, the French government (starting from a much lower base) is keen to drastically increase the tax from €0.03 to somewhere between €0.30-0.60 per bottle, estimated to bring an extra €2 billion to the state government.

Taxes vary depending on whether wine is imported or locally produced. For example in Shanghai, tax for imported wines adds 48% to the cost of a bottle compared to domestic wine which only adds 30% to its cost. This protects the local industry. However, in India, the import tax is so high (a whopping 150% of the value of the wine), that a bottle of Jacob’s Creek costs US$40. Imported wines are therefore incredibly expensive and difficult to access for an average consumers. In order to make imported wine more available and pricing more affordable, discussions about reducing the duty to 40% are underway.

In Australia the tax is the same for wines regardless whether they are imported or locally produced. Thanks to the WET rebates, New Zealand wine exports to Australia have increased by 139% since 2005 when it was introduced. This is currently causing a lot of issues for local producers despite its fairness in free trade terms. In order to protect the Australian wine industry and control overseas competition, the Winemakers’ Federation of Australia is calling for Wine Equalisation Tax reform to address this issue. It is believed that the reform could earn the Australian government AU$25 million a year.

The notorious complexity of US taxes have been known to discourage wineries from trading directly to consumers. The original idea to lift restraints of the three-tier system in 37 states (including California) was to help the availability of wines produced by small and less known wineries and to promote selling wine directly to consumers. Whereas federal excise duty tax is fixed according to alcohol level, and for still wine up to 14% abv is charged at $0.21 per bottle of wine, state tax is much more complicated. Each state has its own rules and regulations, each requires different record keeping and payments. This challenging tax regime limits the number of states that wineries are prepared to work with and limits consumers’ choice of wine from other states.

Keeping tax systems simple and consistent may seem to be a good idea from administrative point of view. But when it comes to the link between taxes and the alcohol level of wine, there are some who call for more versatile tax bands. It is no coincidence that the majority of red wines do not reach an alcohol level over 15.5%. For example, in the UK still wines with alcohol between 5.5% and 15.5% are taxed the same. The result is that nearly all wines end up being taxed by the same amount which may be considered unfair. In order to encourage responsible drinking, promote lower alcohol wines and introduce fairer trading, many producers together with the Wine and Spirit Trade Association are therefore proposing a different alcohol tax band between 9% and 12% abv.

Government taxes on wine are so sensitive and impactful that their fairness and subsequent challenges or benefits are being reviewed constantly. Arguably, many governments struggle to balance fairness when applying their taxes. What some producers may view as fair trade others view as a threat to their profits and a limit to their growth. What some view as a restriction of free choice others view as beneficial control of alcohol consumption. However, what is certain is that hardly anyone believes that taxes on wines are fair to them and there will always be groups who lobby for change.

 
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Posted by on November 12, 2014 in Uncategorized

 

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