Copper-Bottomed

A strong Chilean peso and a dipping US dollar are forcing Chile’s wineries to tone up their operations. The fittest will thrive, says Simon Meads

China’s demand for copper is expected to continue to rise, according to industry analysts. Checked the magazine? Yes, it still is the drinks business, so how, you have every right to ask, has this got anything to do with new vineyard plantings in Chile’s up-and-coming regions, such as Limarí or San Antonio? Well, let me explain.

The economic revolution in China has led to growth spurts in the construction and manufacturing industries. The need for everything from wiring through to computer circuit boards and air conditioning units has turned China into the world’s largest copper consumer, taking around 20% of global supply. As the economic restructuring reaches further into the rural areas of China, development and demand are expected to go hand in hand.

Chile is the world’s largest copper producer, and its output has grown rapidly in just a few years to account for over one-third of global supply. However, a dip in production from 2004 to 2005 meant a tightening of supply and, as demand continued unabated, a rise in copper prices. That, in turn, resulted in record profits for the Chilean copper industry and a strengthening of the Chilean peso against all major currencies, including the US dollar, which was already having its own problems for reasons Alan Greenspan, the recently-retired head of the US Federal Reserve, could better explain.

Diminishing returns
Over the last couple of years, the Chilean peso has strengthened around 30% against the dollar and, as Chilean wine producers bill exports in dollars, this has meant a comparable slide in profits. Concha y Toro, one of the few Chilean wine companies to report its financial results, saw net profit slide by 19% in 2005, even though exports in dollar terms were up by nearly 12%.

It’s an odd contrast to have a successful Chilean wine industry that is seeing steady export growth, but is banking less and less money. Michael Cox, director of Wines of Chile UK, believes the currency situation “will improve, but probably slowly”.
It’s an assessment the likes of Greenspan, or his successor, could enlarge upon. However, what is very clear is that the Chilean industry can either wait until the currency situation improves, or it could try and find its way around it.

Raul Katz, the newly-appointed commercial manager of Viña La Rosa, is sanguine about the situation. “The exchange rate runs in cycles,” he says, “and today we see a less favourable exchange rate.” The future, he believes, is to keep focusing on the long-term health of the business and, “This means to continue to invest in the markets and to promote
our products.”

But there are signs that in the short-term the exchange rate is not only impacting on the profits of Chile’s wine producers, but is also slowing sales in the key markets, such as the UK.

Cox explains that Chilean volume growth was 7% in the UK in 2005, compared with strong double-digit growth in 2004. It’s still a good performance, but it’s behind Australia (also suffering from the weak dollar) and the US (which is benefiting). “They have the ability to fill the promotional slots,” he adds. “It’s less easy for Chile to fall for the siren demands of the supermarkets.”  

John Osborne, business development manager at PLB, which markets the Chileno brand in partnership with Viña Ventisquero, says, “If you look at market stats then approximately 80% of all sales of brands in multiple grocers are made on promotion. The key for a brand is to move this split to favour ongoing sales, thus decreasing your dependence on promotions. This is only achieved by investing in the brand to build up brand loyalty, which is a very costly and long-term process.”

If building up a brand is a costly and long-term process, then something will have to be done to combat the diminishing returns the exchange rate is imposing, and this will either mean price rises or fewer promotional offers – which largely amounts to the same thing. Osborne adds, “At some point, this will have to be passed on to the consumer as wineries cannot continue to operate with little or no profit.”

The situation on the high street is a little more mixed, however. Matt Pym, Chilean buyer at Majestic, says that Chile is “moving away from key price-points”, giving the example of Casillero del Diablo promoted back to £3.99. 
Pym argues that this could open the door for Argentina to come in with more budget offerings. However, he is introducing 10 new listings from Chile, taking the total number of lines to 45 across the price-points, indicating what he believes is “some of the best value for money in the world”.

At Oddbins, Chile buyer James Forbes has an ongoing range of 60 wines plus 12 fine wine offerings. Sales were up 10% in volume and 15% in value in 2005, eating into the share of other countries, and placing Chile third behind only France
and Australia.

According to Forbes, the future very clearly lies upmarket. “I think we are ahead of the game here, having realised the potential of Chile to produce genuinely fine wine years ago – £5-£8 is bread and butter to us and we are seeing great interest in the £9-£20 range.”

The only way is up
Improving the mix, increasing distribution outside the supermarkets is the way many of the large and, particularly, mid-sized producers want to go. “We’re trying to tackle the currency issue head-on and hiking our investments on the land and in the cellar to increase qualities significantly,” says Dominic Harmsworth, export manager at Casa Silva. “We’re pretty sure that the way out of this is up and not down.”

Casa Silva is halfway through a micro-terroir project, mapping the terrain and studying how different varieties perform under a wide range of conditions across its three estates in its home region of Colchagua. The results will be made available to the whole industry on completion of the study next year, but if maximising the quality of production from your existing vineyards is one way of improving quality, then uncovering the best regions and zones is another. MontGras partner Hernan Gras explains, “Now the market is demanding more and more, and you have to find the right place for grapes.”

Take the rapid development of San Antonio and its sub-region Leyda as a barometer reading on the change. In the last year, Cono Sur, Luis Felipe Edwards, Anakena and MontGras have all bought land in this coastal region to focus on production of in-vogue varieties Sauvignon Blanc and Pinot Noir. And there is scope for other varieties there, as trials with Syrah and Merlot have yielded some “very interesting results” according to Gustavo Llona Tagle, MD of Viña Leyda.

BrandPhoenix director, Greg Wilkins reports on the success of the Porta brand through Thresher, especially its Pinot Noir from Chile’s most southerly region, Bío Bío. “The consumer has picked up strongly on it and is showing interest in other areas in Chile,” he says. “Coastal and cooler climate vineyards are coming forward and there is increasing demand for the style of wine those climates create.”

At the other end of the country, investment is pouring into the northern region of Limarí, with a focus on Syrah and Chardonnay. Following San Pedro’s investment to create Tabalí, Concha y Toro bought Viña Francisco de Aguirre in early 2005. Meanwhile, Santa Rita, Cono Sur and a host of others are looking for land or established vineyards.

As in Leyda, the benefits can be two-fold; winemakers can create denomination-specific brands and line extensions, or they can use the fruit to bring a new dimension to their existing wines, ultimately improving overall quality and, over time, justifying the move to stronger pricing.

Marcelo Papa, winemaker at Concha y Toro, is doing just that. Later this year, the company will launch a premium Limarí denomination of origin brand, while the Casillero del Diablo Chardonnay is already benefiting from the mineral input of up to 10% of Limarí fruit.

Limarí and San Antonio are already tried and tested locations, but the reasoning goes that, if Limarí and San Antonio benefit from those cooling Pacific elements, then within Chile, with its 4,000km of coastline, there must be a few other similar places still to be discovered.

Papa explains that Concha y Toro has recently acquired “a very nice farm” with about 250-280ha of plantable land about 20km south of Leyda in the zone of Ucuquer in coastal Cachapoal. “We are going to plant Sauvignon Blanc and a little Pinot Gris,” he says.

Meanwhile, Santa Rita is looking to double its vineyard holdings to 4,000ha and has gone a long way towards that goal by buying 1,200ha of plantable land in Pumanque, coastal Colchagua. Export director, Andres Barros says the aim is
to “increase own production” to cater for the growth of the group and to reduce reliance on contracted grape production. The benefits are two-fold, he claims, being able to ensure a high level of quality is one, being able to keep a long-term handle on costs is the other. “If you look at mid-sized wineries today, they are looking at huge costs for fruit,” he points out.
And with the industry being squeezed by the exchange rate, trimming costs will certainly help increase profits and build a very resilient industry for the long-term.

Chile has not reached the maturity of the US or Australian markets where consolidation is an everyday occurrence, but activity is speeding up. In 2005, Santa Rita narrowly failed to acquire Undurraga for a record $90m, while Concha y Toro paid a hefty $17m to buy Francisco de Aguirre. And rapidly rising star, Southern Sun Wine Group, owner of Tarapacá, Misiones de Rengo and Viña Mar, snapped up Casa Rivas for $8m. Claudio Cilveti, general manager believes that market conditions will lead to more opportunities for acquisitive wineries. “Wineries with less than 50,000 to 80,000 cases will have to face a very tough scenario, and will find it very hard to continue without major back-up,” he says.

Though the group intends to maintain and develop the Casa Rivas brand, the main reason behind the purchase was the 200ha of planted vineyards in central Maipo, which will also boost the Tarapacá brand. db  April 2006