Hot To Trot

International drinks companies have yet to make any bids for Chile’s major wine players, but is this about to change as the industry moves up through the gears? Mary Tabion and Noëlle Ehrenkaufer of Euromonitor International’s Latin America Research Unit report

Chilean wine producers’ vision of the future increasingly looks to distant markets for expansion opportunities. While this South American country is the world’s fifth largest exporter of wine, Chileans consume only 17 litres per capita, lagging far behind other leading wine producers, like the Italians, who consume 51 litres per head, according to Euromonitor International. Other alcoholic drinks like beer and spirits have steadily eroded demand for wine in Chile, which posted per capita volumes as high as 59 litres in 1972 according to Viñas de Chile, a national wine industry association.

A faster pace of expansion and higher prices have made export markets more attractive for Chilean wineries. Viñas de Chile reported that wine export values were up 23.4% in the period from April 2004 to March 2005. Volumes gained 11.7% for the same period, pushing prices up 10% to US$1.87 per litre. Unlike most wine exporting countries facing a glut, Chile’s wine stocks are the lowest in six years according to the trade association Corporación Chilena del Vino, which bodes well for maintaining higher prices on the world market, especially for higher quality wines.

Raising the profile and identity of Chilean wine

Building a new image both at home and abroad has become the mission for Chilean wineries. According to Jorge Horta, marketing executive at Viña Tarapacá, Chileans prefer heavier varietals like Cabernet Sauvignon and drink them year-round and are reluctant to switch to other types of wine. Another challenge in the domestic market is the dominance of economypriced products, packaged in aseptic brick packaging and glass jugs, which together account for 77% of volume sales.

Imported wines hold little sway in the Chilean market, as distribution tends to be restricted to small wine specialists, and because the domestic offer presents consumers with consistent quality at a broad range of price points. Nevertheless, Australian, French, US and Argentine wines are infiltrating the Chilean market. It is important that domestic wine is not relegated entirely to the economy end of the local market, leaving imports to carve out a more profitable, mid-priced segment.

Wine tastings and classes educating consumers about the nuances of different varietals and food pairings have been instrumental in growing the Chilean market for fine wines. To encourage Chileans to trade up to fine wines, producers have begun to define clearer niches for their products. Viñas Tarapacá promotes its Viña del Mar Pinot Noir as a lighter varietal to be served at cooler temperatures than traditional reds in the hope of attracting drinkers who might turn to a lighter drink, like beer, during the summer months.

Expanding to higher-price points is key

In the world market, Chilean wineries are making a concerted effort to build their image and establish a strong identity. Global consumers tend to know very little about Chile, but have well-defined perceptions about other wine producing countries like Italy, France, Spain and Australia. “Chilean wines tend to compete at the lower end of the price spectrum, and are known as good quality, value priced products”, says Horta. At present, Euromonitor International’s research shows that Chilean wines tend to fall into the US$3-$5 category with limited offerings in the higher price ranges.

New world wine producers, primarily Australian, but increasingly from New Zealand and South Africa, are the main competitors for Chile in the global market. The wineries from these countries trade heavily on their exotic images, often evoking images of the lush terrain or national icons (like Casella Wines’ Yellow Tail kangaroo logo) in advertising campaigns and labels.

Expectations pinned on Carmenère

The key to redefining Chile’s image in the global wine market may be found in the Carmenère grape. Thought extinct until 1994, Carmenère was discovered among vines that were thought to produce Merlot grapes, giving Chile a unique varietal to call its own, since all other plantings in France and the US were destroyed by phylloxera. Export-focused wineries have been quick to create distinctive packaging and promotions for Carmenère, recalling the European heritage of this varietal. Wineries have stepped up their Carmenère plantings, which totalled 6,045 hectares in 2003, up from only 300 hectares in 1997.

For the industry overall, improving quality is cited as a long-term goal. Trade associations like ChileVid, the Corporación Chilena de Vino, and Viñas de Chile are working to keep wine producers up to date on the latest viticultural research, marketing and promotional techniques and export strategies. Building a track record for higher quality will play an important role in how Chilean wines are perceived worldwide. “[The Chilean wineries] need to show they can consistently produce high quality wines that are worth premium prices,” says Horta.

Size matters as costs rise

Breaking into the international market poses challenges for the majority of Chilean wineries, many of which are small-scale operations. Over 300 firms are registered as exporters with government authorities, but fewer than 80 have annual sales of over US$1 million and only 3% have land holdings greater than 50 hectares, according to estimates published by El Mercurio.

The rising price of wine grapes in 2004/2005 has hit smaller wineries hard. Merlot and Carmenère grapes were priced around CH$100 (US$0.18) per kilo in 2004; these varietals fetched CH$180-200 (US$0.33-0.36) in February 2005. For white wine varietals, the prices are even steeper, reaching CH$410 (US$0.75) per kilo according to reports in El Mercurio. The weaker US dollar has also put the squeeze on small wineries, making US dollardenominated export contracts less lucrative than in the past. The combination of higher grape prices and the tighter sales margins on exports have made operations difficult for smaller players.

The buyers and sellers

Euromonitor International foresees joint ventures, mergers, and acquisitions as the way forward for small producers, since the costs of production and exporting are simply too great for them to bear alone.

Larger, well-established wine exporters have been expanding and acquiring vineyards since the late 1990s. Viña San Pedro, owned by the Chilean brewer Compañía Cervecerías Unidas, made acquisitions in the Maipo Valley as far back as 1997/98, and most recently formed Viña Tabalí, a joint venture in the Limarí Valley in August 2003. Concha y Toro’s most recent additions, meanwhile, were two properties in the Limarí Valley in March 2005.

Mergers and acquisitions on a global scale have already influenced new world wine producing countries, most notably Australia. International players have not yet made a bid for the larger wine producers in Chile, but they may take note as local wineries ramp up their export operations. There has been some speculation that the top three wineries, Concha y Toro, Viña San Pedro, and Viña Santa Rita, may be acquisition targets for international wineries, but to date nothing has materialised.

Viña San Pedro, with a volume share of 17% in the home market, seems the most likely candidate. It is controlled by CCU while with both Concha y Toro and Viña Santa Rita, the leading companies in the domestic market, local families have majority stakes and may be less open to selling up.

As for international bidders, Diageo and Constellation are perhaps the most likely of the heavyweight drinks companies to make a move, given that Pernod Ricard and Foster’s are both in the throes of absorbing recent acquisitions elsewhere. Euromonitor International also sees Vincor as a potential entrant into the market, in its quest to add more strong international brands like Kumala to its portfolio.