In this post, a group of Master’s students studying International Business Administration (MaDI) at Carlos III university – Madrid, investigate the industry of vermouth in Costa Rica.
Tasting Vermouth in Costa Rica
Before delving into the industry of Vermouth in Costa Rica, what is Vermouth? Vermouth is an aromatized, fortified wine, seasoned with herbs, spices, roots, barks, flowers and/or seeds. Vermouth, dark or light, sweet or dry, evolves from white wine (yes, you’ve got it! The traditionally Italian red vermouth was once white wine!) and holds anywhere between 13 % to 22 % alcohol by volume.
The name ‘vermouth’ derives from the German word ‘wormwood’, which was the principal ingredient back in the 19th century, when vermouth was first becoming commercialized. Vermouth, native from Germany, the northwest of Italy and the south of France, has played a leading role in bars and kitchens across Europe for centuries. It is mainly served as an aperitif and can often be accompanied with a small bite to eat in order to wet your appetite.
Although vermouth can be seen as an ‘old man’s drink’. Due to the ‘arty-farty’ movement, that embraces old habits and traditions, this relatively low-alcohol, low cost beverage has once again become trendy.
A Global Overview of the Industry
Prior to investigating the consumption of vermouth in Costa Rica, what do Costa Ricans tend to drink?
Lead exporters of vermouth are as follows: Italy ($ 223M), Spain ($ 102M), France ($ 48.7M), Germany ($ 32.7M) and the United States ($ 18.9M). Lead importers are: The United States ($ 54.2M), the United Kingdom ($ 52M), Belgium-Luxembourg ($ 48.9M), France ($ 42.4M) and Germany ($ 34.7M).
EMEA leads the market due to high demand in European countries (Spain, Italy and France), which of course directly relates to the origin and history of vermouth itself. Whereas, North and South America have a lower but increasing demand for vermouth, with reasons for growth, such as consumer preference and health. As we can see from the graph below, the main alcoholic beverages consumed in Costa Rica have an upward tendency, in particular wine. These figures show that in 2016, 8.2 million liters of wine were sold in Costa Rica (sales were worth over $ 146 million, a 64 % increase from 2011 to 2016) and it is expected that in 2021, up to 11.6 million liters will be sold. However, in saying that, beer continues to be the most popular beverage in Costa Rica.
Vermouth in Costa Rica – Porter’s Five Forces
1. Supplier Power: The bargaining power of the supplier is weak. There are many (although small) vermouth producers around the globe that far outweigh the number of buyers. As grapes are easy to grow when in the right climate and can produce a number of saleable products, it is an attractive industry. However, an overproduction of grapes has led to significant price drops and a switch in power from supplier to buyer.
On the other hand, due to the importance of public relations between the supplier and the buyer within Costa Rica, Spanish speaking suppliers hold the power in comparison to non-Spanish speaking suppliers who are trying to enter the same market.
2. Buyer Power: The power of the buyer (distributors and retailers) is significantly high as there are few of them. The main spirit distributor in Costa Rica is Florida Bebidas who currently lead the market after the acquisition of HAYCOM (local distributor of DIAGEO) in 2012 and who reached a market share of 84 % in 2015. They are shortly followed by Group Pampa whose main focus is on wine importation.
An interesting topic to be considered is the smuggling of alcoholic beverages within Central America. Costa Rica has the largest share of illegal liquor on the market at 22 %, while the other regions average at 8 %. The increase in movement of beverages between countries is mainly due to the difference in incurred tax on spirits in Costa Rica ($ 70.95 per hectolitre) and near countries like Panama ($ 24.27/hl). Smuggled liquors are sold in legal places which can often be oblivious to the vendor (even though they are significantly cheaper than the legal imports). Consequently, distributors are at a disadvantage when trying to sell their products, as with few bulk buyers and low switching costs (as well as being price sensitive), buyers hold the power.
3. Substitutes: Away from the consumption of vermouth, according to Eka, the offer and demand of substitutes within Costa Rica are high. The typical alcohol beverages that people from Costa Rica consume are:
> 79 % beer
> 53 % wine
> 47 % distilled alcohol
> 14 % other alcoholic drinks
Vermouth can also be substituted by other non-alcoholic drinks, like Coca-Cola or Mosto, that represent a large section of the drink and alcohol industry in Costa Rica. As vermouth is usually enjoyed in the late afternoon/early evening, these non-alcoholic options could be considered as an alternative.
4. Competitors: Nowadays, all types of wine (including vermouth) are imported into Costa Rica, as they do not have the resources to produce it. Therefore, due to an increased demand over the years, export growth has risen significantly. As stated previously within this report, Italy is the leading exporter of vermouth; however, Spain has experienced a higher individual growth across the same period of time.
Vermouth’s main vendor is the renowned company Bacardi (CU), which lays under the Martini brand, followed by Gruppo Campari (IT) with Cinzano, Mondoro and Riccadonna, and other key vendors, such as E.& J. Gallo Winery (US) with its namesake dry and sweet vermouths, and the Wine Group (US), with Gambarelli u& Davitto, Lejon and Tribuno. However, although the market has significantly grown over recent years, there are few minor vendors resulting in low competitor power, thus making Costa Rica an attractive target to be exploited.
5. Barriers of entry: The importation of alcoholic beverages in Costa Rica is closely monitored by the Ministry of Health, which stipulates the main conditions of importation, and by the Custom Valuation and Check Division of the Directorate General of Customs, with whom all wine importers must be registered.
With no network effects, low capital requirements, no minimum efficient scale, low government regulations (most of which are related to health) in comparison to other developed countries, the majority of new vermouth producers are small wineries. Thus, resulting in low entry barriers.
Vermouth in Costa Rica, is it worth it?
According to Technavio, the global vermouth market has been forecasted to grow at a CAGR of 3.19 % during 2017-2021 and it is estimated to be worth close to $ 19 bn in four years’ time. Legally speaking, the Partnership Agreement between Central America and The European Union (Aacue) was revised in 2013 and saw a decrease in duties. Since then, the new agreement has generated an increase in the amount of wine imported into the country, the majority of those imports from Europe, specifically France, Italy and Spain.
As a whole, the findings show that the current market of vermouth in Costa Rica is an attractive one due to the evolution of wine consumption over recent years. However, when considering weak supplier power and a forecasted growth of competition (as a direct result to the increase in wine consumption), the market is going to change dramatically, implying that the market needs to be entered sooner rather than later.