CHILE INVESTMENT – Moving Mountains

Despite a currency crisis rocking the Chilean wine market, investments continue and the category is climbing its way up, writes Peter Richards

Talk to any Chilean producer about investments and you may well notice a pained expression cross their face.

When I broached the issue with one export director from a successful, mid-sized winery recently he sighed, “Before, when you made new investments, you could expect a return within around ten years. Now, you’re looking at much longer. If the current situation persists, it could be 35 years, or even longer.”

The reason for the pessimistic outlook, and the disquiet in the Chilean wine industry in general, is the ongoing currency woes caused by a strong peso and weak dollar. The steep dip in income streams that this has engendered has inevitably meant that investments have been slowed or even shelved by producers who are simply looking to weather the storm.

What is more, the current situation may be proving a disincentive for foreigners looking to push their dollars into Chile. I asked one foreign investor in Chile just this and he agreed, noting that other countries, including Argentina, could stand to benefit as a result. He added, pointedly, “I believe there could be a postponement of investment until the peso (and copper) trades at a more reasonable rate.”

Strong momentum

But Chile is nothing if not contradictory. It seems as though the current momentum of the Chilean category, built up over several years by the hard graft of the producers in conjunction with promotional bodies like Wines of Chile, is paying dividends. This momentum appears especially strong in terms of premium wines. As a result, investments continue.

San Pedro recently provided a good example of this phenomenon. The group posted annual losses of some £900,000 (CLP 950 million) on the Santiago Stock Exchange in early 2007, partly as a result of the poor exchange rate. Almost simultaneously, it announced the ambitious takeover of the boutique San Antonio operation Viña Leyda (at a cost of around US$6-8m) via its Limarí-based subsidiary joint venture Tabalí.

It was significant that San Pedro CEO Pablo Turner hailed the deal by referring to the fact that the group now had a presence in, “the two most interesting emerging wine zones on the local scene [San Antonio and Limarí].”

Starting point

San Antonio is a good place to start in terms of monitoring the trend for investment in Chile’s premium wine territory.

Since the Fernández family (previous owners of Viña Leyda) installed an irrigation pipeline in 1997 and the first wines emerged to considerable acclaim after the turn of the millennium, the region has attracted investors like bees to a honey pot.

Cono Sur bought a 160-hectare plot in San Antonio in 2005 and has since spent $2.8m developing the vineyard from scratch, mostly for Pinot Noir. Cachapoal-based Anakena bought 150ha also in 2005, while Luis Felipe Edwards has acquired 162-ha in the region. Chocalán and MontGras are also developing vineyard projects in the area.

Most recently, the Spanish O. Fournier group revealed it was in advanced negotiations to purchase a 50-ha plot in San Antonio and had plans to build a small winery and plant the likes of Sauvignon Blanc, Pinot Noir and Tempranillo. Group president José Manuel Ortega estimated the initial investment, which also includes a contract vineyard and winery in Maule, as in the region of US$300,000-700,000, depending on whether the land purchase was successful.

“The investment will be significantly higher once we start building the winery and purchasing additional vineyards,” he added.

It is a similar, though less marked, trend elsewhere in Chile, where the aim is to make premium quality wine – even in areas which have no history whatsoever of winegrowing.

Concha y Toro is developing extensive vineyard projects in both Limarí and a new, previously virgin area to the south of San Antonio across from the Maipo River. The 500-ha site is known as Ucuquer and the 2007 vintage is the first for Sauvignon Blanc, while Pinot Grigio is expected to debut in the 2008 harvest.

Errázuriz has also been developing previously uncharted territory for wine, this time in coastal Aconcagua in a site known as Manzanares. Initial plantings in 2005 included Sauvignon Blanc, Chardonnay, Merlot and Syrah; the first vintage to be released will be Arboleda Sauvignon 2008.

Prime developments

There are many other examples of this trend around the country. Western Colchagua is currently seeing phenomenal investment, particularly in Marchihue, where the extent of planting has been so marked that new water rights are now being restricted. Among the prime developers of this promising sub-region has been Montes, which has so far spent some $4.5m on planting its Marchihue vineyard – with another $4m earmarked for further plantations, mainly in this site.

Lolol is another example of Colchagua’s western diversification through large-scale investment. Lurton and Casa Silva are developing vineyards here, while Viña Santa Cruz has invested a phenomenal US$9.5m to date since its inception in 2004, mainly on hillside vineyards and a spectacular winery and tourist centre. A further $5.5m has been set aside, mainly for development of a cooler-climate vineyard nearer the coast in Patacón.

Investing in the future

Investments are not just taking place in vineyard expansion or premium wine projects, however.

New brands are appearing. Espiritu de Chile is a new mass-market brand launched in the UK in 2006, a joint venture between German firm Racke and Curicó producer Aresti, with costs split equally between partners. An initial £550,000 investment went into market research and product development, while a further £1.5m went into rolling out the product. A further investment is planned for brand development between 2008 and 2010 and initial results have been 20% better than expected, with shipments of some 122,000 cases between July and December 2006.

Foreign investments continue. Apart from O. Fournier (mentioned above), another example of recent foreign investment is that of Norwegian banker Alex Vix, who has reportedly stumped up some $5m for initial investments in 4,000 hectares and a six-million-litre winery in Millahue, southern Cachapoal. (An interesting addendum to this is that, conversely, Chilean wineries continue to invest abroad – Montes has recently started up a venture in Napa, and many Chilean wineries continue to invest or expand in Argentina.)

Consolidation and renovation remains ongoing among the larger, more traditional producers. Santa Carolina (or Carolina Wine Brands, as it is now known) continues its ambitious rebranding and renovation programme launched in 2004 after a period in the doldrums. Meanwhile, The Southern Sun Wine Group, owners of Tarapacá, acquired Casa Rivas in 2005 for $8.5m and now have investment plans for 2007 of $6m, including a premium winery in Casablanca.

Though the pained expressions may yet be in evidence for some time to come in Chile, it is clear that investment continues across the industry. Which means that Chile could yet emerge from this period of economic hardship a broader, altogether more diverse wine industry.

The Peso situation

For any export-orientated business, exchange rates are of vital importance. And for the Chilean wine industry it is more crucial for most, because it has one of the highest export rates in the wine producing world (56% of production was sent abroad in 2006, at a value of US$962 million). It is an industry that receives much of its income in dollars and incurs many of its fixed costs in pesos.

Since early 2003, the peso has strengthened against the dollar to the extent that the value of the dollar has fallen from around 750 pesos to the mid 530s by early 2007. This has been largely due to a buoyant mining sector, which constitutes the vast majority of Chile’s economic activity. It has meant financial hardship for wine producers, many of whom have effectively seen up to a third of their income wiped out and profits tumble as a result.

Reactions to this situation in Chile are mixed, though all agree it is putting pressure on producers to economise. Some are quietly slowing or shelving investment plans. Prices are starting to edge up in key markets. The large volume business is where the pinch is being felt most keenly – those with larger margins are better placed to weather the storm.

Most agree the situation will not improve in the near future and are planning accordingly.

© db April 2007