EPI Investment Case Study: Competitiveness of Georgian Agriculture – Georgian Wine and Spirits

Georgian Wine and Spirits (GWS) is a French-owned beverage company based in Telavi town, Kakheti region, engaged in viticulture and winemaking. Acquired in 2011 from French beverage giant Pernod Ricard by Marussia Beverages, the enterprise has recently been aggressively investing in management reform, administrative reform, technical innovation in vineyards, expansion of areas under vine, and quality management.

This study examines the existing shortcomings in the business enabling environment and how GWS has been dealing with them. A key shortcoming identified is managerial training and productivity, which the company is addressing by investing in staff training and the implementation of an Enterprise Resource Planning (ERP) system to monitor productivity parameters both physically and financially. Importantly for Georgia, many of the company’s technical innovations are imitated by suppliers and competing ventures.

Unlike some other large agribusinesses, GWS has been able to maintain constructive dialog with the local community and government. This seems to be a matter of the age of the business—the company has been operating in different guises since 1970s—and having an “inclusive” business model that integrates considerably with the local economy. GWS employing many locals, retains the services of local contractors, and outsourced grape production to smallholders. In particular, the enterprise purchases 70% of its grape requirement from small and medium-scale producers in the Alazani and Iori valleys of Kakheti, both of which are low-income regions. All told, GWS disburses almost GEL 8 million a year to the local economy in the form of wages, payments for grape and fees paid to local contractors, helping maintain a healthy symbiotic relationship.

The GWS experience carries many lessons to be learned for private investors, the first of which concerns the benefits of acquiring an existing enterprise instead of undertaking a greenfield development. In Georgia, the risks of a greenfield investment include the potential of a falling out with the local community before cooperative relationships can be developed. When considering this risk, and applying an appropriate discount to the Net Present Value of a greenfield investment, in many cases the acquisition of an existing enterprise may represent better value.

Second, continued improvements in Georgia’s access to export markets, as experienced by GWS, and the legislative requirements of Georgia’s Deep and Comprehensive Free Trade Agreement (DFTA) with the European Union, will provide an impetus for the Georgian food and beverage processing companies to expand their supply chains to keep up with demand. It will also require processors to implement internationally accepted food safety and quality assurance standards. To remain competitive, Georgian companies should:

  • Seek opportunities to integrate vertically by investing in their own land and/or developing long-term contractual relationships with commercial farms, farmer organizations and smallholders. Sourcing arrangements will eventually need to include rigorous safety and traceability protocols
    as part of their contracts.
  • Make better use of existing land assets by putting fallow land into production, investing in modern production and post-harvest handling technologies, and providing extension services to farmers and farmer organizations that form parts of their supply chains.
  • Implement other measures to improve productivity (and competitiveness), including modern IT solutions to monitor operational and financial performance and investing in foreign management when skills deficits are obvious and cannot be addressed by local hiring.

To enable Georgian companies to maintain their competitive edge and take advantage of new export opportunities, the Georgian government is advised to:

  • Repeal the ban on foreign investment in agricultural land and put in place a comprehensive set of land market regulations taking into account the needs and interests of both foreign investors and smallholder communities;
  • Maintain the current “cheap loans” policy framework, possibly with the help of EU and other donors, to facilitate the implementation of (expensive) food safety and quality standards, and investment in productivity-enhancing cultivation and post-harvest treatment technologies;
  • Exercise great care in the implementation of the EU-compliant regulatory framework concerning food safety and quality standards. The main concerns should be i) to provide Georgian businesses with sufficient time, knowhow and resources to make necessary adjustments, and ii) make sure that the new standards uniformly and simultaneously apply to all businesses in the each sector (to incentivize compliance and ensure fairness);
  • Carefully evaluate the unintended consequences of interventions in particular value chains (e.g. provision of price support in the grape market) and consider repealing interventions that do more harm than good;
  • Co-operate with technically advanced processing enterprises that are willing to integrate smallholder farmers and farmer groups into their supply chains and invest to lift yields and enhance product quality.