Arequipa sits at the centre of Peru's growing global alpaca business

Peru holds over 80% of the global alpaca population with Arequipa sitting at the centre of the alpaca growing and manufacturing industry. Arequipa benefits from a variety of advantages in this segment, ranging from a high concentration of alpacas, to the presence of a key set of regional alpaca manufacturing companies. While the largest share of revenue still comes from fibre exports, higher value-added products such as garments have displayed a strong potential for growth and investment in recent years.

Thanks in part to a successful internationalisation campaign, the industry has quickly developed and there are now more actors, especially small and medium-sized enterprises (SMEs), working to take advantage of existing business opportunities. However, in the medium to long term, greater investment in research and development (R&D) will be necessary in order to improve product quality and help ensure competitiveness in global markets.

Alpaca In Numbers

In 2014 the Ministry of Agriculture and Irrigation recorded a population of 4.1m alpacas in Peru, of which approximately 80-85% were employed in alpaca fibre collection, producing a total 4485 tonnes of crude fibre.

Arequipa accounted for 465,000, or around 11.4% of the total population, producing 415 tonnes of alpaca fibre, or around 9.3% of total production. The logistics situation in the region, however, is unique to the rest of the country. “Around 70% of the Arequipa’s herds are concentrated in the Caylloma province. While Puno, for example, another region to the south comprising nearly 45% of the country’s alpacas, has a much more dispersed population,” Daniel Aréstegui Otazu, project coordinator at the International Alpaca Association (Asociación Internacional de la Alpaca, AIA), told OBG. The especially high concentration of animals in one area translates into advantages for the segment’s development, especially seeing as alpaca textile manufacturing companies and garment makers have located themselves in this region of the country as well.

From Farm To Market

The country’s 50 alpaca production cooperatives and associates play an important role as market intermediaries bringing crude fibre from farmers to manufacturers. The nine located in Arequipa are responsible for around 80% of regional crude alpaca fibre transactions.

Of the six regional textile manufacturers – in particular, Grupo Inca and Michell Group – have dominated alpaca textile manufacturing. Together, they process about 90% of total alpaca fibre generated each year in the country. Running their operations out of Arequipa, the companies cover a wide variety of products. “Alpaca fibre tops, yarns and finished goods account for about 20%, 60% and 20% of the company’s turnover, respectively,” Juan Pepper, commercial manager at Michell & Cia, parent company of Michell Group, told OBG.

In addition, there are approximately 30 companies involved in garment making in the region. Most are SMEs carrying out outsourced work for larger textile manufacturing firms, with only a small portion exporting their products directly. According to national investment promotion agency PromPerú, there are about 100 alpaca fibre exporting companies in Arequipa. Moreover, alpaca textile manufacturing and garment making in Arequipa is estimated to account for about 5000 jobs.

Growing Niche Market

If Michell Group’s experience provides any indication as to the segment’s structure in Peru, the core of the alpaca business still lies in the creation and sale of yarns. Within this subsegment, almost-finished products stand out as a particularly well-performing niche market, with high value-added goods on offer and room for growth in the future. “While yarns are generally supplied to industrial and artisanal clients, who then transform them into finished goods, they can also be sold as almost-finished products, such as hand knitting yarn. This segment has in fact proven to be a profitable, high-end niche market growing in recent years as consumers take up knitting with noble fibres as a hobby, against the background of a more widespread do-it-yourself consumer trend. To give you an idea of the value, the price of a hand-knitted alpaca product begins at around $20 and can increase to $1000 for a high-end product,” Raul Rivera, marketing manager at Michell & Cia, told OBG.

From Sme To Major League

Grupo Inca and Michell Group outsource a number of activities, including garment making. This has created space for SMEs to grow over time as they integrate into the alpaca production chain, shifting from service providers to garment makers and finally exporters in their own right. Arequipa-based natural fibres clothing maker Art Atlas has been particularly successful at this. “A few years ago Art Atlas started to surface in the big leagues of alpaca garment production, competing increasingly alongside Grupo Inca and Michell Group,” Aréstegui Otazu told OBG.

According to PromPerú, three Peruvian alpaca garment manufacturing firms earned more than $1m per year in 2015, exporting $17m in garment sales, comprising 36% of total alpaca garment exports by value between January and December 2015.

Exports In Numbers

Notwithstanding the positive evolution of garment exports in recent years, and the likely potential for further growth in the future, alpaca textile exports still make up the largest segment. Indeed, as reported by PromPerú, garment exports jumped 17.5% between 2011 and 2015, from $40m to $47m. By comparison, alpaca textile exports increased 23.8%, climbing from $84m to $104m over the same period. Alpaca household textiles increased 40% in this period, from $5m to $7m, representing the smallest subsegment of the country’s alpacabased exports, but one that is growing the fastest.

In terms of alpaca garment exports, knitted garments represented the largest share of this segment in 2015, accounting for $35m, or 74.4% of total alpaca garment exports. Moreover, sweaters (33%), scarves (12%) and coats (12%), represented together 57% of all alpaca garment exports in 2015. Out of a total 51 markets, the main alpaca garment export destinations by value in that same year were the US, which held the largest market share (49%), followed by Germany (10%), Japan (5%), France (5%) and the UK (5%).

In short, while there is room for growth in alpaca garment exports, the largest share of revenue continues to derive from major alpaca textile exports, such as yarns. In 2015 alpaca garments represented 28.9% of all revenue generated from Peruvian alpaca fibre exports, as opposed to 65.1% from alpaca textiles and 4.4% from alpaca household textiles.

Going Global

The growth and diversification observed in Peruvian alpaca products has been in large part due to a concerted push by the industry to promote the product in global markets in recent years. In November 2014 Peru successfully launched its own alpaca brand, an initiative aimed at promoting the country’s alpaca products in the world with the support of the Ministry of Foreign Trade and Tourism (El Ministerio de Comercio Exterior y Turismo, MINCETUR), PromPerú and the non-profit Peruvian Institute for Alpaca and Camelids.

The strategy underlying this action has consisted of implementing a marketing campaign targeting global luxury brands so that they take up Peruvian alpaca fibre in their own fashion collections; reaching out to the international press to focus on the Alpaca supply chain in Puno, Cusco and Arequipa; promoting alpaca exports through international fairs and trade missions; and selecting international buyers and identifying market opportunities.

In this context, AlpacaModa Perú and Alpaca Fiesta, a set of promotional events organised by PromPerú, MINCETUR and the AIA, have stood out as key instruments in the internationalisation of Peruvian alpaca. The most recent AlpacaModa Perú, the biennial international event for alpaca textiles and fashion, took place in Arequipa in October 2016. The event attracted about 5000 attendees and brought together a variety of fashion industry and garment making professionals, including 80 national brands and 60 international alpaca fibre buyers, to take part in business sessions, conferences and commercial shows. According to local media, events organisers expected to secure about $20m in business deals from the convention. The Alpaca Fiesta is an international event of conferences, meetings and fashion shows organised every four years for the larger alpaca production and transformation. The most recent gathering in Arequipa took place in November 2014, bringing together 50 alpaca garment companies and 70 international buyers, generating an estimated $15m in business deals.

The success of the Peruvian alpaca internationalisation strategy is also demonstrated by the fact that the Italian luxury fashion brand, Max Mara – a long time user of alpaca in its products – presented an alpaca-based cardigan collection in 2016, displaying for the first time the Alpaca del Perú, or Peruvian Alpaca, label. Max Mara has more than 2000 stores across the world, and takes part in major fashion shows in New York, Paris and Milan.

New Business Models

Local actors, such as Peruvian Connection, have also played an important role in introducing alpaca into foreign markets. The 40-year-old brand, owned by US designer Annie Hurlbut, recently saw its work nominated as an Alpaca del Perú ambassador by MINCETUR. Indeed, as Aréstegui Otazu told OBG, “Peruvian Connection has proven key in bringing alpaca products in the US.”

The company has nine distribution stores, located in New York, Chicago, Kansas, Boston, Washington and London. Local firms, such as Michell Group, Grupo Inca and Art Atlas, have also developed an international network of retail stores associated with their own brands, Sol Alpaca, Kuna and Anntarah, respectively. As the alpaca market grows, so does their presence abroad. Chile, for example, is increasingly becoming an attractive destination for alpaca fibre garments, with exports amounting to $1.33m and growing by 42% between January and June 2016. Kuna was the first to set up shop in this country, opening a store in 2008, with Art Atlas following in 2013 and Sol Alpaca in 2016. Eduardo Ferreyros, the minister of foreign trade and tourism, told local media in March 2017, that going forward, it would seem that one of the challenges is developing new business models, focusing on higher value-added supply and internationalisation schemes, ranging from franchises to retail or own brands.

Challenges & Priorities

To further take advantage of growth potential, the segment must address a series of challenges, starting with the quantity and quality of primary input that makes it to the industrial process. “About 7500 tonnes of crude alpaca fibre make it to industrial processing plants each year, of which only 18% is of the finest alpaca fibres employed in luxury alpaca garments. This quality of fibre represents the largest share of international demand in fine fibres employed in luxury garments, the segment in which alpaca must position itself, making it essential to focus on developing finer fibres going forward,” Aréstegui Otazu told OBG.

For this reason, investing in R&D and promoting innovation, including in such key areas as genetics and breeding, could provide a long-term strategy for the industry. In the short term farmers and other industry actors are looking to address other challenges, such as implementing established shearing practices and ensuring better feeding and care of animals, especially given that many studies suggest that there is a correlation between good nutrition and the quantity and quality of fabric produced.