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CHILE GLOBAL GROWTH – New Horizons

01 September 2006 By db staff writer

“standfirst”>Faced with diminishing returns from their more traditional export markets, Chilean wineries are finding surprising success in Korea and much closer to home in Brazil. Fionnuala Synnott reports

The strong peso has had a significant impact on Chilean wine exports, making traditional markets such as the US very difficult for Chilean wineries. The industry’s move to reposition itself as a provider of quality, rather than entry-level, wine has also led to a drop in US sales volume of nearly 10%. But, despite these problems, the US is still Chile’s number-one export market in terms of value and is second only to the UK in export volume.

Many Chilean players are anxious to get their share of this lucrative market with an estimated value of $145.3 million. But, in order to be successful in the US market, foreign wineries have to learn

to cope with the idiosyncrasies of all 50 states. Marketing your product in the US can be tough. Raúl Katz, commercial manager at Viña La Rosa, explains, “The marketing rules in the US vary greatly from state to state. For instance, in Georgia, you’re not allowed to pour in stores, whereas in Ohio, you’re obliged to charge for pouring.”

The fact that the US produces its own wines makes pricing very competitive, and the three-tier system (importer-distributor-retail) makes operating in the US a complex process. Melanie Whatmore, marketing manager at Viña Ventisquero, says, “This system means that you have to get to know each tier and understand its needs before you can begin to support it.”

Carlos de Carlos, commercial director for Errázuriz, feels that having to go through wholesalers makes life more complicated for importers. “The US is a tough market with a bigger chain business than the UK. Supermarkets are taking a big proportion of the market, leaving purchasing power in a small number of hands. Buyers are very demanding and very knowledgeable, so you have to have all the relevant information at your fingertips and be backed by a full marketing campaign before you even meet them.”

Unusual suspects

But the real growth for Chilean exports has come from unexpected markets such as Brazil, which has gone up by 28.6% in value and 20.9% in volume since last year. Although it is difficult to be precise about what the drivers for growth are in this market (most evidence is anecdotal), it is likely that the increased stability of the economy under Lula has contributed to an increasing demand for luxury products such as wine. Brazil, as a nation, also tends to prefer Chilean to Argentinian wine.

Katz comments, “Brazil has been a surprising growth market for us. Consumption is increasing, and we have been able to sell some high-end wines into the market with some volume. The restaurant scene in São Paolo is booming, and demand for wine is increasing.”

The logistics of exporting to the South American market also make it appealing. “We are able to send goods by truck, which gives us greater flexibility than fixed shipping schedules. We can also load more wine into a truck than a container,” continues Katz.

Chilean producers also see opportunities for growth in China and hope that the buoyant economy there will translate into greater demand for its wines. Some wineries, such as Errázuriz, are making significant investments in The People’s Republic. De Carlos at Errázuriz explains: “We have appointed a new regional director in Shanghai because of China’s huge potential. We are making a very long-term investment in China, but it will not be an easy market to crack since the Chinese have a different culture and a different mentality. The added-value sector will grow in China, but the popularity of local, traditional drinks will make it difficult for the volume players.”

Miguel Amunátegui, export director at the Southern Sun Wine Group, is also excited about China. “Our China office is our bet for the future. It is a place we have to be. At the moment we are seeing steady growth of 15% to 20% in China, but we really expect the market to develop over the next five years as Chinese people look increasingly to Western icons, including wine,” he says.

Thomas Domeyko at Concha y Toro agrees: “At the moment market demand is low and does not exceed 50,000 cases, but China has huge potential. As an industry, we should invest in increasing Chinese wine consumption.”

But not all Chilean producers think that China’s economic growth will convert into a greater demand for wine. Katz says, “When it comes to China, people are blinded by hype. The reality is that the Chinese diet does not go with wine, and wine consumption is very low. We are taking China very slowly as we want to get to know it. We produce 600,000 cases per year and always sell out so we have to grow our business gently in order not to disappoint anyone. We feel that Japan, Korea and Hong Kong are more exciting than China.”

Whatmore at Viña Ventisquero also sees great growth opportunity in the rest of Asia. She says, “Obviously, the Asian market, particularly Japan, has huge potential in terms of profit through sales of the more premium wines. So far we have experienced sustained growth in markets such as Korea, Singapore, Hong Kong, Vietnam and the Philippines.”

Eastern promise

Despite the roller-coaster ride of the past decade, Japan is still the most important Asian market for Chile, representing a market of nearly $23.9m. The economy appears to have recovered from its extreme fluctuations, but the wine market is flat and not showing much sign of growth. This makes Japan a complicated market for newcomers.

Amunátegui explains, “In the past, we flooded the Japanese market with very cheap wine, so it will take time to change the Japanese perception of Chilean wine.” Quality is particularly important in Japan, which is more image-led than price-driven. Amunátegui continues, “In Japan, people are far more loyal to brands than in other markets. Consumers want to know who else is drinking your wine and like to know that important people such as politicians and celebrities are drinking it.”

Meanwhile, across the water, Korea has learned from Japan’s experience and is not making the same mistakes. De Carlos says, “Since the 2004 free trade agreement between Chile and The Republic of South Korea, we have witnessed a real sales boom in Korea. Chile, as a category, is growing at an annual rate of 70% and is the second best-selling wine category in Korea after France. We sell more added-value wines in Korea than anywhere else, even though consumption is still low at one litre per capita (only half that of Japan). However, this can easily be doubled in five years’ time.”

Eastern Europe is also proving to be an exciting growth market for Chilean exporters. Whatmore says, “In the past two years, we have achieved important growth in terms of reaching out and gaining coverage in Europe. This has been accomplished mainly through new distribution in Eastern European countries such as Estonia, Poland and Russia, which have large potential and will allow us to increase awareness of good-quality Chilean wines.”

Domeyko at Concha y Toro has noticed a significant change in Eastern Europe in the past two years. He explains, “Consumers in Eastern Europe used to drink low-quality wine from countries such as Moldova but, since joining the EU, they have better salaries and are waking up to drinking better-quality wine. Poland, Estonia and Lithuania, in particular, have realised that they can get better value for money from the New World than from Old World countries such as France. They are very interested in learning more about Chile.”

Soviet challenges

But, of all the Eastern European countries, Russia is by far the most interesting. This year’s ban on Moldovan and Georgian wine, which formerly accounted for 50% of the market, has turned Russia into a land of opportunity for producers from other countries, particularly the New World. Chile, as a category, is growing by around 45% in both volume and value in Russia, making the Soviet Republic the number-12 market destination for Chile.

However, no one has been able to capitalise on Russia’s potential yet because of the duty-stamp fiasco. Earlier this summer, the Russian government decided to introduce a new system called EGAIS in order to put an end to bootleg products. EGAIS requires that all bottles of imported wine and spirits carry excise-duty strip stamps with electronic bar codes in order to allow customs and tax authorities to track every bottle in the country. However, a shortage of excise stamps and delays in installing the equipment that can read them has led to all bottles of imported wines and spirits being withdrawn from the shelves and held in storage in customs warehouses.

De Carlos sees potential in Russia but is concerned about these developments. He says, “There is an appetite for wine in Russia, and retail outlets are used to paying high prices for vodka. We are therefore trying to take advantage of this situation by introducing premium wine brands into the market. But the recent change in excise-duty stamps makes Russia very complicated to operate in. The market will be very challenging in the next six months, particularly for distribution companies – some of which will fail – leaving the door open for a number of new brands. There are very few good importers in Russia, which makes the route to market very complicated. These route-to-market issues could limit the growth opportunities in Russia.”

There is no doubt that the strong peso has slowed growth in traditional export markets and affected the bottom line of many wineries, sometimes swallowing all of their profit margins. Raúl Beckdorf, commercial manager at Anakena, explains, “Big producers have had to postpone large investments and have had to be more cost-efficient because it’s difficult to raise prices. At the other end of the scale, many smaller wineries are up for sale.” But Domeyko feels that producers should have anticipated this currency change. He says, “Many producers came into the market when the peso was very strong and based their business model on an inflated exchange rate. They should have been prepared for change and factored future fluctuations into their margins.”

Giant leaps in quality

Domeyko warns against creating a negative image for Chile, “We need to be more positive when talking about the Chilean wine industry because, if we are not careful, all the doom and gloom will end up becoming a self-fulfilling prophecy. What other countries do is more important than how strong the peso is. France boosting its marketing activities and Argentina’s dynamism will affect Chile more in the long term. We cannot use the strength of the peso as an excuse not to present a good image to the market.”

In fact, there are many ways that Chile can enhance its offering abroad. Mario Pablo, managing director of Viña Casa Silva, says, “Chilean wineries across the board have been investing considerably in the last five to 10 years, and the quality of our wine has increased proportionately. We need to get the message across that a lot has happened in Chile as far as winemaking is concerned, to the extent that it is a different country that deserves another look. It could be said that Chile has a spring in its step that it didn’t have a few years ago.”

There are still a large number of opportunities for Chilean wine producers looking to build their export portfolio outside the UK, as long as they do it right. Katz says, “Chilean producers have to do their homework and find out what the market needs by going directly to the market and building relationships.”