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CHILE UPDATE: Feeling the heat
Chile’s wine industry has been hit hard by economic crisis. But the category must look forward and focus on creating an identity and increasing value, says Ben Grant
Other than the metal used for crafting stills, you would be forgiven for failing to spot the connection between copper and the drinks industry – but for Chilean winemakers the link is all too real. The price of the metal has rocketed in recent years, strengthening the peso considerably. This is good news for the economy as a whole, but an unmitigated disaster for exporters who invoice in US dollars and have seen their revenues eroded by up to 40%.
The currency issue has been an enormous burden on the Chilean category. But finally the signs seem to suggest that, in the words of Concha y Toro UK managing director Christian Lopez, “the worst of the storm has passed now.” And it is testament to the resilience of the category that it has managed to weather a difficult few years without too much negative long-term impact. There have been some isolated examples of cash-strapped suppliers underselling themselves and undermining the wider category but, on the whole, companies have managed to avoid such strategies. The structure of the organisations may well have played a major role in this. Wineries tend to be owned by wealthy individuals for whom wine is just one of a number of revenue streams – they are therefore able to absorb short-term losses without having to resort to tactics that might have a long-term impact.
In business terms, in fact, it may well transpire that the category emerges from the crisis as a leaner more efficient beast. “Businesses have had to streamline as much as possible,” says PLB’s John Osborne. “Internal restructuring has made them as competitive as possible,” so when exchange rates return to normality Chile will be fighting fit to contend with the other categories. In the meantime Lopez, whose Concha y Toro brand leads the market, issues a plain-speaking piece of advice to those who remain preoccupied by the currency issue: “I’m tired of reading about negatives,” he says, “we can’t just cry about the exchange rate, this is not our business and there’s nothing we can do about it. Instead we must focus on what we can do well.”
And the evidence suggests that what the category can do is deliver an increasingly wide assortment of high-quality, high-ticket wines.
Chile has historically traded at a relatively low price point with too much reliance on own-label. It is clearly capable of producing well-rounded, reliable wines and this more premium positioning definitely appears to be the focus for moving forward. “We need to fight against the old image of low-priced wines,” says Anakena’s Raul Beckdorf. “We are making a big effort to position our wines at a higher price point. It’s succeeding slowly, and many [of our competitors] are also producing better wines.” And by selling these wines through the on-trade and specialist retailers the reputation of the category is undoubtedly on the up.
Growing confidence
The key area where Chile has been registering significant growth has been the £5-plus bracket, according to ACNielsen figures. While total volume increased by 3% (MAT 31.12.06), sales over the £5 mark were up almost 10% to just over 500,000 nine-litre cases. “Growing this end of the category has definitely been our priority,” says Wines of Chile UK managing director Michael Cox. This has also helped the average bottle price to creep up to £3.80.
Cox argues that the improving quality of the output is the result of a growing confidence among the Chilean winemakers. “There’s a growing realisation of what’s possible. The nation is growing in stature and as wine exporters they are standing taller and being bolder in expressing pride in what they are and what they do.” As confidence grows, the producers are increasingly willing to innovate and experiment – taking the kind of risks that are dramatically improving quality and carving out an increasingly positive reputation for the category.
This growing self-confidence has inspired the Chilean trade to experiment more in terms of developing regionality (for more on this subject, see the feature on page 42). It is also encouraging the winemakers to be ever more adventurous in terms of plantings. “There’s much more confidence, which is making people try new things,” says Beckdorf. “It’s not all about Cabernet Sauvignon – obviously we will still pay attention to this, but we are also giving a wider offer to the market.”
In terms of predicting which grapes will work best for the category, opinion is divided among the producers. The general consensus seems (unsurprisingly) to be that Chilean Pinot Noir will work well – “there’s high demand from around the world, not just the US,” says Beckdorf, who also predicts that “Syrah is going to be the next big varietal for Chile”. Colin Cameron, marketing director at Percy Fox, argues that the whites will continue to grow strongly, in particular “Sauvignon Blanc is a strong contender, it offers a great alternative to New Zealand”. He also believes that Chile has the potential to produce excellent Shiraz and Gewürztraminer.
Lorne Gray of John E Fells is enthused by the growing confidence that is apparent across the category, saying “it’s really positive that they’re being so adventurous, there’s so much more dabbling taking place.” And he argues that a new direction in varietal choice could play a significant role in solving Chile’s perennial problem: forging a coherent sense of identity in consumers’ minds. He explains that Torres has recently begun to plant Spanish grapes – principally Tempranillo and Grenache – in order to increase interest in the category. “There’s definitely a logical link to using Spanish varietals,” he says, “Spain has real meaning for the UK consumer.” Torres’ theory is that by reinforcing the link between Chile and Spain consumers will be better able to understand what Chile means.
Missing identity
Creating a coherent sense of identity for Chile is clearly a priority for the category, though it is a very difficult objective to achieve. Located half a world away from the UK, well off the map for all but the most adventurous travellers and speaking a foreign language littered with names that stumble uncomfortably over Anglo tongues – Chile as a country simply doesn’t mean very much to the average consumer. In fact, we are so clueless about the country that our limited understanding of the country’s wine is actually one of our stronger associations.
Michael Cox believes that understanding among English imbibers is gradually increasing. Wines of Chile is in the process of conducting its first major piece of research in three years and Cox is confident that this will demonstrate growing awareness and appreciation. PLB’s Osborne is rather more pragmatic in his appraisal. There is no real positive association, he argues, but on the plus side “at least there is no negative stigma attached to the category”, a problem that plagues some markets, such as Bulgaria.
It is scarcely surprising that the consumer does not truly understand what the category stands for, seeing as the suppliers themselves appear to be divided in terms of what message to emphasise. In line with Gray’s Spanish connection, Tony Cloke, trade marketing, Bibendum, believes that the Latin link is the most relevant association. “Geography and growing conditions are a very hard sell,” he says, arguing that the main focus should be on “the Latin spirit theme – this has some meaning for the UK consumer.” However, Percy Fox’s Cameron argues against such a strategy, suggesting that such an emphasis actually has a negative impact. “There’s a steady growth in understanding Chile, but many people still see South America as one big country.” Grouping the category together with Argentina simply reinforces this assumption and fails to give Chile a coherent identity of its own.
Cox argues that the best strategy is to focus on what makes Chile unique: the environment. Squeezed on a thin strip of land between mountains and ocean the country benefits from exceptional growing conditions that require a minimum of artificial treatment – and Cox believes this should be the focus of the Chilean message. “Consumers are increasingly conscious of what they are consuming,” and to tap into this trend, “we must develop ways to promote the naturalness of the category.” He cautions, however, that the strategy must be subtle, communicating a “subliminal” message.
Ready to hit the big time
While Chile may still have much to do in terms of establishing meaning for international consumers, it has certainly managed to get on the radar of international financiers – foreign investment continues to pour into the country. The country is acknowledged as the most economically vibrant and politically stable in the region, giving backers the confidence to pump money into the category. The last few years have seen E&J Gallo take more significant strides into Chile, Foster’s Group begin to source Chilean wine for the Lindemans brand and Racke establish a joint venture with Aresti to develop Espiritu de Chile.
Such investment from established global giants implies there is a high level of confidence in the category’s potential – and could also prove pivotal in the long-running quest to develop stronger brands to drive the category forward. Pointing towards the US$5million that has been pumped into Santa Carolina’s facilities, Cameron believes that it is only a matter of time before a Chilean brand bursts into the top ten. “It’s difficult to predict how long it will take,” he says, but “brands are gaining strength compared to own-label, and I’m sure … that a Chilean brand will hit the big time.”
Following the ravages of the currency crisis, it is inevitable that the multinationals are circling above Chile looking for any “opportunities” that may arise – and it seems safe to assume that a certain level of consolidation is on the cards in the coming years. Such activity would seem to be a logical step in the evolution of this still relatively young wine country. The big suppliers look to be relatively safe and the small boutique operations will continue to find favour among adventurous consumers looking for diversity. However, for some of the medium-sized companies – already hard hit by currency woes – the economies of scale may simply prove to be impractical, and either mergers or acquisitions may prove to be the only viable opportunity. As Osborne puts it, “only the strong will survive”.
Growth in the £5-plus bracket has been buoyant in the last year, but Chile still suffers from too many suppliers pushing poor-quality, low-priced wine onto the market. Beckdorf is at his most diplomatic when he says “this doesn’t help”. He continues, “We still have to fight against ourselves sometimes as some suppliers sell product too cheaply, which undermines the entire category.” While most of the category has steered clear of such a counterproductive strategy, it is still common practice among some – and this is causing moderate concern for Osborne. He points out that there is already a significant inventory of excess stock, and “there is a big harvest coming in”. In such circumstances it is important that suppliers hold their nerve and avoid undervaluing their produce. “Companies must avoid swamping the market,” he cautions, “they need to use their integrity”.
New beginning
For the problem with dropping prices in the short-term is that it is a monumentally difficult task to restore value once it has been allowed to slide. Chilean wine’s status in the US is a case in point. For too long the category has been trading at an unnecessarily low price point, and now low consumer perception is making it very difficult to increase value. Other markets, however, are providing more reason for optimism. The fastest growing territory, according to Wines of Chile, is Brazil with volume up 17% and value up a whopping 32.8%. Holland is also performing well, though the German market continues to slump steadily. A number of brands are performing well in Asian markets – the volumes will never be particularly high, but value is phenomenal and Asian consumers are showing a strong tendency towards Chile.
In the UK the multiple grocer sector has performed particularly well in the last year. Nielsen figures indicate that the category punches above its weight, commanding 7% of total supermarket sales by volume (versus 6.5% of total market). While this performance represents good news in terms of increasing exposure and making consumers more comfortable with the category, it is important not to become too reliant on the channel. “The multiples are where we can make the most noise, but this should not be the priority,” says Beckdorf. He argues that Chile should only focus on the supermarkets if “it makes sense for the business in terms of stability”. Lopez, meanwhile, believes it is important to develop stronger distribution channels to ensure that Chilean wines are “equity brands, not just trading brands”.
Set against a static UK market, Chile’s modest growth in the last year is certainly a positive development. And, as the category emerges from the currency crisis, the future looks overwhelmingly positive. While the past few years have served to create far leaner, more efficient businesses, producers are also demonstrating a growing willingness to deviate from the norm.
© db April 2007
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