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Chile – Brand New Start
d=”standfirst”>Chilean wines have made enviable volume gains in the UK market, but for many this has been at the expense of profit. There is a growing realisation that reliance on own-label, at the mercy of ruthless retailers, is no longer the answer, so the focus is shifting to brand building, says Chris Losh
Cast your eyes over Chile’s vital statistics and you can’t help but be impressed. Exports last year nearly topped 400 million litres, which, considering the equivalent figure in 1995 was 128m litres, is an impressive rate of growth. Yet one thing is missing from this success story, and that’s brands.
When the Aussies took Europe by storm in the 1990s there were at least half a dozen brand names, with high recall rates and broad distribution, that battered down the retailers’ doors and wormed their way into the consciousness of consumers. It’s a similar story with California. Yet, while drinkers from Stockholm to San Francisco could probably name two or three of Jacob’s Creek, Yellowtail, Gallo, Lindemans, Penfolds or Nottage Hill, it’s highly unlikely that they could recall even one Chilean wine.
Why? Because the vast majority of Chile’s wineries grew their businesses by supplying own- and exclusive-label lines for the multiples rather than trying to build brands.
“Many wineries were trying to be all things to all men,” says the commendably honest Michael Cox, director of Wines of Chile UK. “If the customer wanted something, the wineries would say yes. It was attractive to the customer – and you can get a lot of business that way. But it was very shortterm thinking.”
It’s hard to be too critical (particularly with hindsight) of a strategy that saw exports increase by over 200% at a time of intense competition from the rest of the New World. But while the own- and exclusive-label route may have kept volume growth enviably steady at around 10% a year, it was a growth based on the whim of price rather than the solidity of branding. Indeed, the latest figures from ACNielsen make sober reading for the Chileans in their number one export market. Some 38% of all Chilean wine sold in the UK is private label, and there is only one Chilean brand, Concha y Toro, in the top 20 off-trade brands, compared to eight Aussies and six Americans. Even more surprisingly, there are just four Chilean brands in the top 50, where Concha y Toro is joined by Isla Negra, Cono Sur and Errazuriz. Even South Africa, which was crippled by sanctions and hindered by any number of structural problems, has greater representation.
The Nielsen figures should have been cause for concern west of the Andes, even when sales were going well. But the full riskiness of Chile’s reliance on ownand exclusive-label has been fully exposed since the new millennium. The global and Chilean wine surplus gave supermarkets a perfect opportunity to play hardball with prices. With no brand equity (and therefore no consumer loyalty) on which to trade, Chile’s wineries were hit hard, forced to sell at minimal profit or lose listings.
It was particularly tough in the US, where the Chileans found themselves under attack from aggressive Australians who were able not only to compete on price, but offered strong branding to boot. These wines were more than mere commodities at a good price. Just as they had in Europe, the Australians brought a cumulative dynamism to their country of origin that resonated through the entire category. “Look what Jacob’s Creek has done for Australia,” says Roger Higgs, associate director of UK importers Western Wines. “The recall on it is fabulous. It reflects on the country as a whole.”
When it comes to developing such mega-brands, Chile would seem to have one obvious disadvantage – its lack of giant drinks corporations that can go toe to toe with the likes of Gallo, Constellation, Southcorp et al. By most criteria, the likes of Concha y Toro and San Pedro are enormous concerns, but in the altered post-Constellation landscape, they suddenly seem little more than medium-sized players.
However, Michael Cox, who has firsthand experience of the Australian wine industry, isn’t convinced this comparative lack of critical mass need be such an obstacle. “Rosemount, Yalumba, Hardy’s and Penfolds were independently owned, not from big organisations,” he says. “In fact, Chile has far fewer wineries than most other countries. There are a lot of large wineries that should be able to produce brands. It’s more to do with the wineries not understanding the concept.”
Part of the problem has been an innate Chilean parochialism, from a small industry concentrated in relatively few hands. “Chilean wineries tend to see only each other as competitors, not other wine producing countries,” says Javier Bitar, MD of Santa Helena. “The big mistake we’ve made is not to collaborate strongly to develop Chile’s image as a producer of high quality wines.”
It’s one of the reasons that, despite both buyers and consumers consistently identifying it as delivering reliability and value for money, Chile’s growth has tended to be at the same speed as the market. In the UK, for instance, Chile has, until recently, remained obstinately stuck at about 5% of the market, something which is starting to change following the opening of a generic Wines of Chile office. With a concerted media and promotional campaign, the plan is to double market share inside the next few years to a powerful 10%, which would see the country move from about eighth place to fourth by value.
The establishment of Wines of Chile UK last year was a good move. Yet, as a symbol, it could also hardly be better timed, since there are very definite signs that the industry is altering its outlook with the tentative growth of a brand culture. Of course, this isn’t easy, and some who have turned to brand creation almost as a last resort, following the collapse of own-label accounts, are meeting with little success. But those for whom this is more of an attempt to shape the market, and less of a reaction to it, are making steady (and in some cases spectacular) progress. Private label sales might be 38% of Chile’s total, but that figure is down on the previous year and should continue a steady fall.
At the top of the brand-creation tree is, as you might expect, Concha y Toro. The company has followed an Australian model, allowing new lines to orbit its “mother ship” brand name. Thus, the company has created such diverse ranges as Casillero del Diablo, Trio, Marques de Casa Concha and Terrunyo, all with distinct packaging, styles and prices.
Price is key to Chilean brands, since they need to differentiate themselves from the own-label level, yet not be positioned above what consumers feel is an acceptable RRP for the country. Indeed, the success story that is Chileno is due in no small part to its pricing. “We brought it out at £4.49, at a time when there was a lot at £3.99 and a lot at £4.99,” says Pamela Dunn of Private Liquor Brands, who worked on its creation with Ventisquero. “Consumers weren’t prepared to leap a whole £1 for an up-and-coming country like Chile, but this way we could promo it down to £3.99, or even £3.49 which was own-label price, and take them back up with us.”
Discounts are something of a contentious point among Chile’s wineries – hardly surprising given some of the brutal price-slashings that the country has been subjected to over the last few years. Christian Lopez, head of Concha y Toro UK, sets his maximum discount at just 25%, and worries about the effect that major price cuts could have on the country as a whole. “There are kamikazes out there doing BOGOFs, but it doesn’t help them and it doesn’t help the category because no one buys them off promotion,” he sighs. “We got into the top 20 of the Nielsen brands figures, but it’s based on good distribution and quality, not heavy discounting. We’ve got the third highest average price, after Rosemount and Penfolds. So, yes, it’s good to be there, but it’s even better to be there for the right reasons.”
Interestingly, the second highest Chilean brand in the Nielsen stats, Isla Negra, has followed the opposite tack. It is, as Western Wines’ Roger Higgs happily admits, Cono Sur’s discount brand, turning over big volumes across the multi-grocers on the back of consistent and deep (£2-off) promotions. Where 18 months ago it was selling 250,000 cases per year in the UK, it expects to shift 540,000 in the next 12 months. Margins may not be much to write home about, but it forms a big volume counterpoint to the Cono Sur brand, and a potent onestop-shop for supermarkets looking at stocking through the price points from volume discount through varietal and mid-price up to premium.
Discounting, too, has been a big feature for Santa Helena, which has come from virtually nowhere to be a big volume player on the Chilean wine scene in the last 12 months. The perlitre price of its wine may have tumbled, but this seems to be part of a strategy to open doors with competitive listings in Scandinavia, Brazil, the UK and Ireland, then to follow it up with a range of more premium products under the same brand name.
While deep discounting is a legitimate tactic for newcomers or as part of a wider portfolio strategy, there remains deep scepticism among established brands that it can be anything other than a temporary means of shifting volume. “We would never do a BOGOF on the main Errázuriz brand,” says Patrick McGrath of Hatch Mansfield, the wine’s agents in the UK. “They destroy a brand. There’s pressure to do them, but it’s just shortsighted – and if you’re trying to trade in the on-trade, it’s a killer. All your wholesalers just go and buy the wine from Tescos.” In fact, the on-trade is an area where Chile remains thoroughly under-represented – the legacy of having tied itself so closely with the multi-grocers in the past. And this creates further problems, namely a terribly narrow distribution platform.
One of the reasons that Concha y Toro is in such a strong position, and able to reject heavy discounts is that only 50% of its sales are in the off-trade. A further 40% are in the on-trade, with 10% through convenience stores and cash and carry. On-trade, c-stores and cash and carry are not an easy sell and have required several dedicated members of staff based in the office in the UK. While such investments in staff and offices may seem out of the reach of most Chilean wineries, it’s something that Lopez feels is essential. “If Chile is to be strong, it needs to widen its platform,” he says.
Certainly, there are big brands out there which are in the middle of some fairly major strategy developments. Cono Sur, following Concha’s hook-up with UK ontrade giants Waverley, has teamed up with Novum and launched an on-trade range, Sibarita. Valdivieso, too, is looking beyond the off-trade, which is part of a general brand repositioning.
“We are going much heavier in the ontrade and especially with the reserva wines,” says Christian Sotomayor, export manager of Valdivieso. “After being major partners with the big stores, with very aggressive deals like half price, we realised this was getting us nowhere. We weren’t helping the brand and we weren’t building a network of loyal consumers.”
In 2001, Valdivieso exported 600,000 cases at low margins. In 2003, it sold 450,000 cases – over half of them under its own brand name. It’s a shift of focus away from pure volume and towards profitability that more of the established wineries are looking at. Short-term pain is expected to bring long-term gain.
Those who take the profit route could do worse than learn from Montes. Created as a boutique brand, it is now exporting 400,000 cases, mainly through a creditable refusal to believe that Chile has to equal cheap. “We started with a very clear idea as to the market niche we were aiming at, the premium and ultrapremium categories, mainly through restaurants, hotels and specialised shops, as against supermarkets,” says executive director, Alfredo Vidaurre. “In this respect we have not wavered. What we did differently from many Chilean wineries is start from the market back to the product. Once we determined what customers we were to serve and what types of wines they wanted, we went over what type of wines to produce and, therefore, where the grapes should come from.”
It is, perhaps, the perfect position; of remaining market-focused and market-driven, yet not, crucially, marketdominated. And as more and more of Chile’s wineries have come to realise that selling lots of wine is not the same thing as making healthy profits, we can expect such a position to become more common.
Brands are repositioning themselves and knowing they will lose sales in the process, but accepting that this is essential to grow a healthy brand. And brands, for sure, are Chile’s future – it’s just taken them a while to realise it.