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CHILE: Raising the bar
d=”standfirst”>In the sluggish UK market, sales of Chilean wine are rising fast, but the category remains fixed in the lower end of the price spectrum. Should producers be attempting to increase value? And if so, asks Ben Grant, how?
SET AGAINST a backdrop of stagnant sales, Chile has much to celebrate in the UK. While volumes from virtually all of the other major producing countries have levelled out in the last couple of years, the Latin American nation has seen its numbers shoot up at an impressive rate. Average bottle price, however, has been rather more sluggish. The category turns over a disproportionately high level of volume in the multiples and has, necessarily, relied upon price promotion to build its stature. As a result, while total UK wines rose eight pence last year to climb above the psychologically-significant £4 barrier, Chile registered just a single penny increase to hit £3.81 per bottle.
Modest value growth has been something of an inevitability as the country has fought for recognition and market share – but has the time now come for the steadily maturing category to step away from the bargain basement and demand the kind of prices that its quality clearly merits?
“In an ideal world,” says Wines of Chile’s ebullient director Michael Cox, “I’d like to see Chile at, at least the same, if not better than the average price of all wine in the UK. We’ve made fast progress as a category in terms of market share, but to be dynamic the brands have to be promoted. It’s a bit of a conundrum.” Chile over-indexes significantly in the supermarkets, with a whopping 78.5% of all sales ringing throuh multiples’ tills. This is great news for a category that is seeking exposure, but it does, of course, mean having to play ball with some pretty dramatic discounting activity.
Concha y Toro, the category’s sole stellar brand, was particularly active in the price promotion game in the last year. According to Nielsen, the company ramped up off-trade volumes by a whopping 128% last year (MAT 29.12.07), resulting in a more modest value increase of 91%. While this aggressive strategy gave the brand a massive boost in terms of exposure, the average bottle price dipped by 16% to £3.84. Isla Negro and Viña Maipo – second and third in the category rankings – managed to push up volumes by 71% and 65% respectively, while keeping prices consistent. Most of the remaining top 10 posted either very modest gains or slight losses (see table, page 34).
Viña Ventisquero export director UK and Ireland, Americo Hernandez, rightly points out that “this is the way to expose new consumers to Chilean wines – the extra 1.5 million cases introduced many new people to the category”, while Cox laments that discounting is a “way of life” in the UK. But does this strategy, so aggressively executed by Concha y Toro, place the category’s long-term future in jeopardy?
Joanne Morgan, brand manager for Percy Fox, doesn’t argue against price promotion, but she believes that the category needs to be cautious in its approach. “It has given Chile a good position in the country charts, but it’s not a sustainable strategy. Profitable brands are the right way to go – Chile mustn’t just appear to be cheap and cheerful.” It’s an argument that finds little sympathy at Brand Phoenix; wine development manager Kate Collins is convinced that the category must continue in its current vein. “What does Chile want to be?” she asks, “I think that the category does best at the volume end – it’s not a New Zealand, it produces good quality wines for the average consumer.” The category won’t collapse, she argues, but if it steps away from price promotion it will alienate those new consumers who have recently been won over to Chile. “I think we need to be wary. Does Chile need to raise the average bottle price?” she asks.
It’s a familiar refrain from Brand Phoenix that will raise the ire of many. But how to step away from the promo slots while still maintaining volumes is, as Hatch Mansfield‘s brand manager for Chile, Rupert Lovie, puts it, “the million dollar question … and nobody has yet found a magic wand to gain market share without promoting”. In the absence of such a magic wand, he believes that Chile is now “at a watershed point” and has to choose between stepping into Australia’s shoes and focusing on building big brands with big discounts, or eschewing the rapid rate of volume growth by concentrating on raising value. It is this second path that Lovie believes Chile would be best advised to tread – and he’s certainly not alone.
When it comes to value for money, Ehrmanns’ buying manager Joy Edmondson, says: “Chile is second to none. If you look at the quality of wine that the country is producing, there’s a fantastic opportunity to trade up into higher value products.” Pointing towards the growing number of Chilean reserva wines that the company is focusing on, she doesn’t suggest that the category should walk away from lower priced wines, but argues that it should strive to ensure that its pricier options gain more prominence. Hernandez agrees, explaining that, “I don’t ever present entry-level wines anymore in tastings, I only show the £6-plus wines, to demonstrate that the quality is better [than other categories] for the price.” Torres is another producer that is aiming high – as marketing director Miguel Torres Jnr points out, the company’s entry point in the multiples is £5.99 and the “main focus is at a price point around £7 with the Santa Digna range”.
Room at the top
At the higher end, Chile underwent an impressive growth spurt last year, with a percentage increase in the £5-plus bracket only matched by Italy (though, it must be noted, this was from a pretty puny base). It’s definitely the priority area for Wines of Chile and Cox is adamant that consumers are willing to pay for more expensive wines, but the challenge is getting them out there and onto the shelf. Anecdotal evidence suggests that this is gradually happening – and the fact that a number of buyers undoubtedly have something of a soft spot for the category gives cause for cautious optimism.
Getting a higher grade of wine on the shelf is certainly a positive aspiration, but equally important is aiming to derive higher value from the wines that are already out there and this, surely, must be generated via value-added – rather than value-driven – promotion. Morgan accepts that a certain level of discounting is necessary to “cement the listing” but insists that the price-off should be shallow. In a bid to establish the Santa Carolina brand, for example, she is prepared to knock off a pound to gain shelf space, “but the strategy is to add value to build long-term sustainable success”. Hernandez also advocates such a tactic: pointing towards such opportunities as POS materials, shows, tastings and advertising, he stresses that after the major volume gains of 2007 “now we really need to market and promote our brands, but not just based on price”.
It’s all well and good for the smaller players to pledge to eschew their deep discount addiction, but in order to bring about meaningful change, surely it’s necessary for the market leader to kick the habit. And, encouragingly, Concha y Toro looks set to move in this direction. “It’s a reality that we have to offer a promotional calendar,” says head of marketing Jason Duggan, “but we are investing in added-value activities to give consumers the confidence to buy at full price.” The company is placing particular focus on the Casillero del Diablo brand at £5.99 and above, and is in the process of rolling out a comprehensive integrated marketing campaign the scale of which we have never seen before from Chile. It will include a big-budget advertising concept, a new website, targeted cinema sponsorship and a massive sampling programme; as Duggan proudly states, “we’re putting our money where our mouth is”. Such an extensive (and expensive) strategy sees Chile entering uncharted waters, so it’ll be interesting to see if fortune does, indeed, favour the brave.
Strength of character
Chile has built its position in the UK based on a reputation for robust, reliable but ultimately unremarkable wines at an excellent price point. While this has enabled the category to gain good market penetration, it fails to celebrate the quality of wine that can be produced. “It has a growing reputation,” says Valdivieso UK & Europe director Paul Dunn, “but it has to allow consumers to see that it’s not just capable of a certain style.” In order to demonstrate its value, there must be a discernible point of difference. “The consumer is looking for wines with personality and with special character, this is key to selling in the premium category,” says Torres. And the way to demonstrate this breadth of variety, he argues, is to communicate the message of the country’s diverse and distinct regions.
Chile is, frankly, a geographer’s dream: from the northern desert to the glacial south via the rich, fertile central valley, it is sandwiched between the breathtaking peaks of the Andes and over 400 kilometres of rugged Pacific coast. The multitude of microclimates and terroirs that Chile offers the adventurous grape grower makes it as diverse as any wine-producing country. “The subtle difference in the environment and the terroir enable the winemakers to produce a range of mouth-watering, deep, complex wines, each with a unique and distinctive flavour profile,” says a spokesperson from Constellation brand Veramonte.
The initial challenge is to establish what varietals will work best in each of the regions and, while significant progress has been made, Dunn is adamant that the growers “are still learning and there’s plenty of opportunity to improve”. Luis Felipe Edwards agrees that the potential of the valleys is enormous: “The next big step in quality won’t come from the winemaking, but from the grapes. We must invest in our viticulture and plant in those areas where Chile has a strong competitive advantage.” This, he believes, will generate higher prices and safeguard long-term success.
Developing the regional styles is obviously an exciting pursuit for the purists, but from a purely commercial standpoint, is the concept saleable? On the whole, there appears to be a sentiment that – long term – it’s the right way to go, but Lovie sums up the mood of many when he states that “I don’t think the consumer is ready for it yet”. The problem is that the diversity is so broad that for the uninitiated it can be distinctly intimidating. To communicate such a complex issue will require significant investment, of both time and marketing resource. “It certainly won’t happen overnight,” says Duggan, “but the work that Wines of Chile is doing is definitely moving in the right direction.” Presumably, the more producers that jump on the regionality bandwagon and concentrate on extolling the value of the valleys, the more speedily and effectively the message will lodge in consumers’ minds.
While this strategy clearly has mileage at the upper end of the price spectrum, there is a risk that it will further muddy the waters in terms of helping consumers to understand Chile. The lack of a coherent identity – a famous landmark, stereotypical idiosyncrasy or strong tourism links – means that the country has little meaning to the average Brit. There’s a compelling reason to believe that if an identity could be established, it could play a role in convincing consumers to part with a little more money. Lovie, for one, is convinced that extolling the country’s untarnished natural credentials could be a valuable tool. “I can see a strong case for positioning Chile as a centre for organic and biodynamic wine. It’s ideally situated, it is ideal grape growing country where they don’t need to use all the pesticides. This is a real opportunity for Chile to differentiate itself.” It is, indeed, a message that will resonate well with a growing pool of consumers, and has the potential to be tied in rather neatly with regionality.
Change the channel
Communication and identity are all key to upping the price, but in order to truly move up in the world Chile must actively shift away from the pervading sense of commodity that continues to linger. The current total passing through the supermarkets of 78.5% is simply too high: if the category wants to step up in the premium stakes, it needs to be seen in the right places.
“We’re conscious of the reliance on the multiples,” says Adam Marshall, commercial director, Bottle Green, “there must be an increasing focus on the specialist sector. We need to explain to the consumer why they should be buying into Chile. Specialists can play a valuable role in getting the message out and talking about the category.” Interestingly (and encouragingly) it’s a theme that is also talked up by Duggan who, as a Concha y Toro representative, you’d naturally expect to enjoy the cosiest relationship with the supermarkets. “The bulk of our business has been in the grocery, but we have recently turned to the specialists. It’s a question of business priorities. The grocers do a great job, but they don’t have the staff for consumers to question and bounce ideas off. There’s a realisation of the benefit of going into the accounts that are more adept at hand-selling.”
Chile is also significantly underrepresented in the on-trade, so more of a focus on this area could play a role in improving the perception of the category. The personal nature of the sales channel can be particularly effective in the drive to communicate the regional message.
Perhaps the most important factor in the effort to push up the average bottle price boils down to the issue of self belief – as the category’s reputation rises so too does its confidence.
Producers are beginning to realise the value of their output. “Chile has always been focused on the lower end of the market, but now we have confidence in our quality,” says Hernandez. And the result is very much a virtuous cycle, he says, because “as we see that we can compete, this gives us the confidence to continue investing and innovating”, so in the years to come the wine is set to improve further still.
And, of course, with the spectre of a drought on the horizon (albeit rather less dramaic than that which has ravaged Australia), costs look set to rise, so producers will be keen to pass at least some of this burden on to the end consumer. “We’re going to see less and less of the £2.99 specials,” says Cox, “prices are rising in Chile, and they realise that they don’t have to sell the wine cheaply anymore. There’s no doubt that there’s a new maturity in the category and the way it sells itself. It must be a gradual process but I’m sure that prices can rise gently.”
Admittedly, it’s hardly surprising that Cox is bullish about the future, but a combination of last year’s staggering volume growth together with a more mature future strategy, typified by Concha y Toro’s enlightened approach, gives ample reason to believe that his positive prognosis could well ring true.
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© db April 2008