The South American Dream

06 September 2005 By db staff writer

“standfirst”>Chile’s newly appointed generic offices are promoting a premium image for wine exports, and the wineries are listening more closely to their export customers. The result? Rising prices for Chilean wines, says Robyn Lewis

it’s a swoosh of automatic doors and gleaming metal and glass that greets the visitor on arrival in Santiago. And, for any first time traveller to Chile, frankly it is not really what you were expecting from a South American country. Where are all the ponchos? Where, indeed, is the dusty tin-shack airport? Neither are anywhere to be seen. In fact the only clue that you are anywhere remotely resembling the clichéd South America of Hollywood films are the frequent ramshackle, local so-called “kamikaze” yellow buses, puffing out fumes, passing you by on the drive from the airport on the (brand new) highway into the city and (international chain) hotel.

Chile lives up to none of the Latin American myths and has indeed made rather a success out of this. Trading on its stable reputation, democratic status, its hard-won strong and growing economy, solid legal and economic framework and a hard-working, entrepreneurial people, the country has become a celebrated economic model and a benchmark for other South American and developing countries.

With a small population Chile has had to look to export markets for economic growth and nowhere is this more the case than in the wine industry. Fortunately, the Chilean model has provided plenty of opportunities, as Andreas Barros of Santa Rita testifies. “I remember 10 years ago discussing even the benefits of having Chile on the label,” he comments. “Now this has changed hugely and we are proud to be Chilean and put it on the label because we are a success story. You know Chile has more free-trade agreements than almost any other country in the world and this has helped enormously with our potential to export of course, but also with the image of the country. When we signed our agreement with Korea, for example, there was a lot of Korean press. This raised the Chilean profile and made sure consumers at least knew who we were.”

Even with presidential elections due in a few months the industry seems confident that this period of growth will continue. “I would say there is a common agreement here that the economic strategies are right and even though, as always with a change of government, there will be some new policies, perhaps in social care or health, our economic stance should remain the broadly the same,” says Barros.

Value growth

This is good news for the wine industry in Chile, which is enjoying something of a boom period. The export figures for the first six months of 2005 show prices per litre up in all of the top-10 export markets – a whopping 43.47% rise in price in Germany, despite a 9% drop in volume; a 37.4% rise in Canada to $2.02 and a 16.9% rise in Denmark. Of the three biggest markets (the US, the UK and Germany) the UK has seen the largest rise in volume – up 8.5% to some 27m litres – though the US still has by far the highest price per litre in the top five markets at $2.58. The UK records just $1.93 per litre, while Germany manages just $1.42, losing out to Ireland, at number seven, which posts an incredible $3.23 per litre, a 5% rise on the same period in 2004. China is also an interesting story with a 73% drop in volume but with a corresponding rise of 145% in price per litre.

And while all this is in no small part down to the hard work and commitment of the wineries themselves, of course, the achievements of the generic board, Wines of Chile (WOC), should also be credited. In Chile Ricardo Letelier takes the reigns (see p84), while Michael Cox and Bruce Schneider carry out the work in the designated key markets of the UK and the US respectively.

Pushing premium

Since the re-opening of the WOC office in the UK some two years ago the strategy has consistently been to push the premium wines of Chile in order to move away from the reliance on volume, entry-level and ownlabel sales. And, says Cox, they are making real progress and the strategy is set to continue. “Looking to the next year or so we are planning on doing more activities in this same area,” he explains. “Establishing in the mind of consumers Chile as a premium wine producer is a long-term effort, we know it can’t be managed overnight. So, the next stage of the plan is to further target retail channels – not just the supermarkets, but also specialists and independents – and also to focus firmly on the on-trade. It is in these areas that we can really talk to consumers and educate them about the different regions of Chile, the different varietals, terroirs and microclimates. But the trade, too, has to realise that there is so much more to Chile that they must explore.”

There seems little doubt that the Chilean industry will disagree with this, enjoying as it is, a period of sustained success in the UK market ever since Cox was appointed. But it isn’t just this one factor that has contributed to growth. The wineries themselves are also beginning to understand the importance of marketing – of branding, packaging and positive PR.

“We have certainly, as an industry and within Carmen, become more and more focused on marketing,” confirms Carmen export director, Héctor Torres. “Having recently restructured our team, we have moved the emphasis from just pure sales to also having PR and marketing expertise in the team, and we have increased the marketing budget. We’ve recruited from outside the wine industry, by and large, as the skills in this area within the wine industry are limited. We just haven’t prioritised this before and are, therefore, not sophisticated marketeers yet; that’s why we need to get the knowledge from outside.” As a result of this new approach Carmen has been keen to be innovative in its promotions and to ensure that they emphasise and build on the brand.

In targeting the UK on-trade in particular, Carmen has found some success in this approach. “We ran a promotion with the chain of Jamie’s wine bars in London,” explains new PR and communications executive, María Cristina Canales. “We knew we wanted to invest 100% of the money in branding rather than a price-promotion, so we had pink T-shirts for the staff made up – this was a rosé promotion after all – as well as other merchandising around the bars, and gave away strawberries with the bottle. We made sure the staff knew all about the brand and the wine and it went so well that a few outlets ran out of rosé. The funny thing was, when that happened, the staff would suggest another Carmen instead and so we ended up driving sales of our red and white wines as well.”

The importance of brand building in the UK is lost on very few new world wine producers these days who, even if they deal in bulk, have learned to create and support their own brands as well. This is a lesson that (relatively) new kid on the block Via Wines is putting into practice. Set up initially as a “solutions provider” to the winetrade, supplying custom brands to retailers across the globe, the company is also now beginning to branch into building its own brands.

 “Our strategy is two-fold,” explains Alex Huber of Via Wines. “Firstly, we realise that the market has more brands than it really knows what to do with, but, secondly, we do see that eventually we will need a brand of our own. And so we are building the foundations for that – in our packaging expertise, in winemaking and in the relationships we establish. In the UK, and indeed Europe in general, the retailer is the key way to the consumer, as consumers tend to implicitly trust the supermarket choice, and so building contacts here is vital. What we have learnt about brand building already is that it is vital to listen to our clients, as they are closest to the market.”

Land of opportunity?

The power of the retailers and their margin demands (as lamented over in many a db issue) is such that for some the UK is becoming a less and less attractive place to do business. At Valdevieso, for example, even Germany seems like a better prospect.

“I have very mixed feelings about the UK as a market,” confirms Christian Sotomayor at the winery. “The supermarkets are going for a 30% margin some of the time and that leaves brands vulnerable if you have only a couple of customers. If you are a Concha y Toro you can compete but it isn’t for us. In the eyes of the UK I know that Germany is seen as a cheap market but some of the big retailers there are now beginning to realise the margin and prestige in reserve wines. The UK only really works at our size if you go for on-trade and other channels.”

For others the UK remains vital to their business. Southern Sun, for example, owner of the Misiones and Tarapaca brands, says this market is key. “You can be successful there if you have a competitive product which can sit in all channels. The supermarkets are, at the end of the day, 70% of the business so you need to be in there if you want to be a player,” says Miguel Amunátegui, export director. And for the big boys like Concha y Toro , it remains a vital market, so what’s the secret?

“It is a tough market but we have done well there. We try to be a bit humble about it really, but we have done things right and at the right moment,” explains Thomas Domeyko, Concha y Toro’s export director. “We had a vision based on quality and we don’t treat wine as if it is a factory product. We add value and do not fight directly in deep price promoting.”

The second key market for the Chileans is the US, where wine consumption is growing and, despite domestic production, other New World brands are beginning to make an impact, as the success of Yellow Tail can testify. As mentioned, the US generic campaign is run by Bruce Schneider, whose objective is to increase market penetration in the US$10-$20 range for Chile. “The US is set to be the largest wineconsuming nation by 2010 and, so far, growth is being dominated by New World wines. The time is right for Chile,” he believes.

Wineries such as San Pedro have already done well in the market, with brands like Gato, recently repackaged and relaunched, although the company admits it has also made some mistakes. “There is a very big gap in our US offering between $4.99 and $10.99 and we need to catch up with the competition there,” explains export director, Paulo Rosales. “We are used to being in the top three Chilean wineries in an export market but in the US we are about seventh. We hope that with the new brand strategies and focus we’ll be in that top three within four years.” For others, such as Casa Silva, the premium sector is such a key part of the business that offering anything else to the US (or any other market) seems a missed opportunity. “We are convinced of the necessity to create prestige with the brand. We target the on-trade first in each market and then make a move to the off-trade, and this has worked well for us in the UK, Denmark, Brazil, Holland, Germany and in the US, where we are just beginning to pick up,” comments Mario Pablo Silva, MD of the winery.

As you can see from this extensive list of markets it has also been part of Casa Silva’s strategy not to concentrate its efforts in too few markets. “Our policy from the start was to enter as many markets as possible,” continues Silva. “We did not want to become too reliant on one or two. We think that is a more stable long-term strategy; we’ve been careful not to put all our eggs in one basket.” And this is a key point. With market conditions in the UK and the US remaining tough – retailers are squeezing margins, the Australian wine glut is providing consumers with cheap decent-enough quality wine and the dollar is weak – are the Chileans in danger of suffering from having concentrated their efforts on too few markets?

Wider horizons

Some would say yes. Ricardo Urresti, managing director of Errázuriz, for example, claims it is important to always be open-minded about market expansion. “Yes, we do well in the US and the UK and they are important to us but we also put a lot of effort into other markets. Germany, for example, is a very tough market but we are investing here and await the results of that. Brazil also is a market we are looking to, it is a market that likes fine wine and a market that sees Chile as a fine wine producer – there’s potential there.”

Asia has for a long time been the holy grail of the wine trade and Chile has not neglected these markets. “We’ve been in Japan for some 10 years now and it really has grown a lot,” says Alfonso Undurraga, commercial manager of Undurraga. “Initially we were working with quite a small importer but now we are with Suntory and we are doing a great job, up from 4,000 cases last year to 25,000 this year.”

At Corpora too, Asia is an important market. “Korea and Hong Kong are the Asian markets for wine now. I mean in Korea four years ago you couldn’t find wine easily, now it is booming and Chile is driving a lot of that. China, meanwhile, remains a challenge. We know the Chinese market well because our other businesses in the group work there and we would certainly be looking to capitalise on that. Although China is not without its problems – there is little understanding of wine there – the potential is there,” says a spokesman.

Others are looking even further afield. Luis Felipe Edwards, for example, is active in Russia, the Ukraine, Mexico, Thailand, Peru and the Philippines as well as all the usual markets, and even India has caught its attention. “India is an interesting market. Yes, it is poor and there is a high and complex taxation system but it has a huge population,” says Luis Felipe.

And let’s not forget the domestic market. Chile may have a small population and one of the highest per capita consumptions of Coca-Cola in the world, it is claimed, but wine drinking is on the up and can provide good business for those who want it. “Chile is our biggest single market and we sell about 30% to 35% of our volume here,” says Raul Beckdorff, commercial director at Anakena. “It is not easy in that there are a lot of wineries competing for a relatively small market and the retail environment is very tough here. That’s why Chile exports more wine than most producing countries, about 60% compared with France’s 20%.”

“We are a country that wants things to happen fast and we need to learn to be patient,” says Recaredo Ossa, managing director at Viña La Rosa. “We are on the right path and we have to persevere.”