CHILE: OVERVIEW: Forces of nature

Those firms that survived Chile’s currency woes have emerged fitter, stronger and ready to trade on the country’s unique natural resources. Charlotte Hey surveys the vinous landscape

2007 was a good year for Chilean wine exporters – an outstanding year in fact. So much so that even the Chileans themselves relate their success with a touch of proud surprise. The total volume of bottled wine exported soared by 22.8% to the end of December last year compared with only 6.6% growth in 2006 and a lowly 2% growth to the end of 2005, according to Vinos de Chile statistics. The total value of exports (FOB price in US$) increased by 31% at the end of last year, so the Chilean wine industry certainly had something to smile about.

2008, however, has not been as healthy, with growth in volume slowing on a MAT basis to 0.9% in May this year and in value a more healthy 11.2%. Obviously there is still quite a bit of the year left for Chile to sell, but facing a global economic downturn, increased costs, rising domestic inflation and a strong peso against a weak US dollar, the Chilean wine industry has to be realistic – and it is.

It is two years since I visited Chile and talked to its brand owners and the mood then, just when the price of copper had started to soar and the Chilean peso was strong against the dollar, for the first time in years, was much more pessimistic. Then the talk was of crisis in the industry, at least for some. This summer, or winter in their case, the atmosphere was much more pragmatic. Perhaps the tough times that they have experienced over the intervening two years and the outstanding growth despite the more challenging financial situation means that they are tougher and more efficient. There is certainly a sense of whatever the next 12 to 18 months may throw at them the attitude is one of, “Bring it on, we’re ready.”

“Trouble has been piling on slowly for the Chilean wine industry,” reveals a very pragmatic Javier Bitar, CEO of San Pedro, “2008/09 will be a crucial year for many in the industry, the strong currency, slower growth this year, smaller harvest (approximately 15% less than last year), more expensive grapes as a result – all puts the pressure on. Especially at the lower, volume end of the market.

“In January to May this year we were continuing to see growth to the tune of 13% in volume of bottled wine exports and 11% value growth for the same category; however, after May we have seen the brakes go on,” he continues. “There is still healthy, double digit growth at $30 (£16) per case FOB, which is good for the industry and this is a clear demonstration of where Chile has been focusing its efforts in the past three years. But from a global perspective the focus and image for Chile is still very much at the lower end.”

René Merino, president of Wines of Chile and managing director of Tamaya, echoes Bitar’s realism, believing that it is a complicated time for Chile at the moment: “What has affected us most is the fall in value of the dollar, which puts pressure on margin. Essentially, what is happening in the rest of the world makes it tough for us. Going forward we might see some more acquisitions or more mergers because of the currency pressure and the fact that inflation here is at 9.5%, a higher level than we would want.”

In the middle of July this year the main talking point was the recent news of the merger between two of the country’s larger wine companies – San Pedro and Tarapacá. While there was still a lot of speculation as to the whys and wherefores of the move, the general feeling in Santiago de Chile’s head offices was that in the coming months more consolidation was on the cards. Raul Beckdorf, export director at Anakena – and many others  – believe that gradual consolidation will happen. “I am sure that there will be more wineries becoming available and more wineries looking to purchase land and possibly facilities,” he asserts, “in that way the medium-sized companies will be able to improve their economies of scale, internal efficiencies and profitability.”

“The current economic climate will force some of the smaller producers to disappear and this will allow the bigger players to absorb the smaller ones,” agrees Salvador Barros, director at Luis Felipe Edwards.

“This kind of thing has been going on for the last couple of years already and I would predict that over the next two years this is where investment will continue, in the land and facilities that become available.”

Growing value is very much the key driver – and the industry as a whole right now is united, it seems, in its intention to increase the average price points of Chilean wines in all key markets and build their category share at higher price points. Wines of Chile’s Merino believes that the category will continue to see growth in the sector this year. “Probably nowhere near as much as last year but we will see growth in value, where we forecast 10% value growth by the end of 2008. The other thing that gives us a little more confidence is that people are investing at the moment, money is moving into different hands, but it is a very good moment to invest.”

Economic awareness
And this is the pragmatism and economic awareness that I refer to that is common among many in the industry. Most of the 26 brand owners that I spoke to were more than well informed about the macro-economic factors, both domestically and globally, that would affect their business in the mid-term and they were also aware of the opportunities that the situation could open up.

As Jorge Goles, managing director of Corpora, points out, “The exchange rate has made conditions tough for Chile in recent years. But I am confident that oil prices will go down, that the US crisis is not perhaps as bad as was forecast and as a result the situation will stabilise toward the end of the year. It has been hard for us but in comparison to our South American neighbours Chile doesn’t have many problems.

“That said, as an economy, we do need to grow faster than at 2% per annum. We need to be nearer to 7-8% for a country of our size and development for us to be ranked as one of the world’s developed countries in 10 years or so.”

In the economic climate of recent years efficiency in business has been key to success, says Felipe de la Jara, managing director of Carolina Wine Brands. “The current economic climate means that efficiency in key performance areas is becoming more and more important for Chilean wine brands, especially those that want to continue to have a meaningful position in the future. But Chile is used to facing challenges and adapting to what the market might demand. One area where we have to be careful going forward,” he admits, “is the area where we have made a name for ourselves… the famous ‘value for money’ reputation we have. Chile produces good value at every level, which is great, but not if you are concentrated in the lower levels of the market – you can’t build value for a category there.”

And on the point of building value, many feel that right now there are opportunities for Chile and brands operating at the higher price points. As Carlos Serrano, export director at Montes, points out, “I believe that even if the consumer is looking to spend less on wine this gives the Chilean category a lot of chances to possibly win new consumers, precisely because we can deliver wines across all value and quality sectors. Above £10 we are now producing such fantastic value that a consumer, perhaps wanting to spend less than his normal £20+ will not be disappointed.”

The value question is very much linked to image, a factor that is a constant talking point for brand owners, winemakers, export directors and CEOs alike. What is Chile’s image? What should it be? How can we promote it? These are but a few of the questions on the subject that abounds whenever image is discussed. Chile’s image has been a bit like the holy grail or the pot of gold at the end of the rainbow: promising, but, to date, hard to grasp.

Michael Cox, UK director of Wines of Chile, is firm in his opinion that the imagery related to Chile as a country will play an important role in Wines of Chile promotion over the next five years. For him, “There is still little understanding of what Chile is, even among the trade. We know how competent Chile is as a nation, but very few other people do, the Latin American association for the British carries with it many more negatives than positives.” He continues: “When you consider what the wine trade in Chile has done over the past decade without any help from outside sources, in comparison to South Africa, Australia, California or New Zealand, they have really achieved a lot. What we need to achieve now is a great understanding of what Chile really is.”

Ernesto Muller, managing director of Espiritu de Chile, is of a similar opinion: “We have established ourselves within core markets internationally, but we have not managed to position Chile in the mind of the consumer. Yes, we are a product available at a good price, but we have no core positioning or emotive connection with the consumer. When it comes to promoting our image we are still in nappies.

“The reality is that we have to grow up quickly and find out what is going to make Chilean wine more relevant to the consumer going forward. What we lack is research and consumer insight, we don’t analyse enough as an industry what the consumer wants from Chile.”

But is there still work to be done on how the consumer perceives the quality of Chilean wine? Not according to Matias Elton, director of Morandé: “When you look at what Chile has the potential to produce we have no need to envy anyone. Our problem is people’s perception of our country – what does the consumer think of Chile? Not a lot. Wine has a lot to offer but it is really a much bigger question and one that the wine industry cannot face on its own.”

Quality perception
“Chile has to be identified first and foremost with good wine and that needs to be constantly reinforced,” believes Richard Leaver, corporate commercial director at Santa Rita. “It is true that there are no associations with iconography in the mind of the consumer, but then part of the problem there is that there are so many diverse images that can be used.”

As mentioned by Juan Somavia of Wines of Chile in the box on page 61 there are plans afoot to harness some government resources to this effect and talk of promotional campaigns about Chile as a country and tourist destination being launched in important export markets. San Pedro’s Bitar is keen that support from the government should become available sooner rather than later: “We now need help from the government, they need to invest in our image. There are a lot of stories to tell but no real image or icon that Chile can hang its hat on. In fact, so far, wine has been our only real ambassador. Wine has probably done more to build our image than anything. It is now time for the government and the private sector to join efforts to take us to the next stage.”

Many are keen that the focus of the campaign should be right from the outset. “A good campaign, promoting Chile as a country, is now essential. We cannot afford to get it wrong this time,” says Serrano, of Montes. “The powers that be have started to make noises about their concern as to how we can improve Chile’s image and I think that we will now see some investment in that area. There is no denying that wine has been a good ambassador for Chile thus far, but now it is time for a programme that, in the long-term, will promote Chile at all levels to the consumer.”

One of the areas where Chile could focus image-building activity has to be the on-trade, something which the Wines of Chile organisation is very much aware of. According to José Yuraszeck, managing director of Undurraga, conquering the on-trade is not going to be easy, “but this is where we will, with time, get the message across about the quality and build our image.” He believes that any image-building activity has to include a regional message: “We have to start to make ourselves known for our regionality. I am aware that many other generics have been taking about this for longer than us but I think that the secret lies in not using it as another marketing opportunity but in trying to convey the excitement and enthusiasm that we are experiencing as we discover the real diversity of Chile. Communicating that message well will help the Chilean category to move away from its current value-for-money positioning.”

Up until now, Chile’s image is good but neutral; historically this is perhaps because the Chileans themselves denied their own identity or possible associations at a commercial level with their neighbours. The future of how Chile is perceived perhaps lies in what Chile has always proved itself to be good at, consistently reinforcing, expanding and developing its image step by step. However, now, more than ever, it is crucial that they choose carefully where the focus is going to be. What they can’t afford to do is create something that has no real sense of Chilean provenance. As has been repeated many times, Chile doesn’t have the tango like the Argentines or Bondi Beach like the Aussies. Perhaps the image will grow as the quality and diversity of their offer improves over the years as new wines from different vineyards, planted with the correct clones, become available.

Wines of Chile’s Merino comments that the expansion of the total planted area in Chile has slowed in recent years, with only 8% growth in total hectarage being planted between 2005 and 2006. What has been happening instead, according to Merino, is replanting of vineyards “and a lot of field grafting to insert new clones more suited to particular soil types or varietal changes.” He adds: “What we are achieving as a result is better quality grapes, more suited to their site.

“Also what we are seeing is the purchase and planting of vineyards away from the valley floor in the slopes and valleys to the east and west, rather than to the south and north, although this is also happening. The move now is definitely towards better site selection all round.”

Winemaker at Valdivieso, Brett Jackson, echoes this observation: “Investment in the vineyards has become very focused, very site- specific. Coastal areas are being discovered, with cooler climate sites in particular growing in number. But so much more experimentation has to be done in terms of varietals, clones and their relation to Chilean terroir and we are still very focused on the four main international varietals – this needs to change, we need to diversify with Syrah and perhaps more Rhone varietals; we are planting Roussane and Marsanne this year, for example.”

The expansion of the frontiers of the Chilean wine regions and the diversification of its varietal spread can only be good in the long term, improving the quality image of Chilean wines in international markets. Another factor that Chilean wine producers have in their favour is their “natural” advantage, that is, the excellent cultivation conditions they have, given that the country is so isolated geographically. Virtually free from disease and with little need for treatments in the vineyard means that a number of brand owners are now looking to turn their vineyards completely organic and in some cases at the higher end, as with Casa Lapostolle and Errázuriz, biodynamic.

Once again, here there is realism about how the organic message is portrayed; most producers see it not as a reason but as an additional factor to promoting a positive image for Chile.

Cristobal Ossa, managing director at Viña La Rosa has an ethical and quite holistic view of this opportunity: “Chile’s natural resources have given us the opportunity to make our wines, now we have to start to take more responsibility for our environment and tell our consumers that we are doing so,” he says. “Our responsibility now is to focus on the plants and the vineyards involved in producing the wines that we sell and to the surrounding communities that those vineyards have an impact upon. Chile is a uniquely protected place with natural barriers that will allow us to produce wines of a quality not yet known, we are very privileged to have the climate we have, as an industry now we have to make the most of those resources and really start communicating them.”

“As the president of Wines of Chile said recently, it is probable that 90% of our industry is not making money at the moment,” adds Andres Barros, managing director, Caliterra. “A strong peso, rising energy costs, high inflation and lack of cheap labour has all lead to a huge increase in costs. However, there is still optimism in the sector, due to growth at the value end and the fact that as an industry we are responding to consumer moves towards the importance of provenance and sustainability – an area where Chile has anatural advantage.”

One of the big projects that Errázuriz is undertaking is in line with this phenomenon, but as you would expect from this company they are trailblazing in terms of sustainability and carbon-footprinting. “Our aim is to develop the Aconcagua Valley, we are devolping new and existing vineyard sites from the coastal region up into the slopes of the foothills of the Cordillera,” reveals Eduardo Wexman, marketing director at Errázuriz. “In addition to this we are reviewing all of our sustainable credentials across the total vineyard. The Seña vineyard is to become biodynamic, we have built a state-of-the-art barrel cellar for our Max range to the latest sustainable criteria and we are reviewing our packaging methods, from lighter bottles for our Reserva ranges to the paper stocks and materials used in packaging.”

Fit and healthy
And perhaps as would be expected, Cono Sur is making moves in a similar direction as Constanza Vicent, marketing director for the company reveals:  “From the end of 2008 we will be moving to all organic production for Cono Sur. It is a natural move for the brand and imbued in the core principles of what the brand is about.” She continues, “Integrated sustainable farming methods and our carbon emissions are very important to us, consequently we are introducing carbon neutral distribution principles. By offsetting our shipping emissions we are now completely carbon neutral whatever we deliver, wherever in the world.” The team at Cono Sur believe that they are the first to have included the “Carbon Neutral Delivery” logo on their labels.

Indeed there is a big move among many brands to establish sustainable techniques. “It has to be the way forward for Chile, we have very little contamination and the health of the vineyards is such that we need to use little or no treatments in healthy vineyards,” says Corpora’s Goles. “We are starting to be much more environmentally conscious, particularly at the top quality levels and in the future this fact should naturally give us competitive advantage, without having to push it as the sole reason.”

So there is quite a lot for Chile to feel optimistic about even with economic slowdown on the cards. The effects of the currency issues the industry has faced in the last two years has left those companies who know what they are doing in a fitter state in pure business terms – leaner and meaner, perhaps, better prepared to cope with the period of consumer belt tightening that lies ahead in the mid to short term. That being said, the pressure is on to make the right decisions now about how to build more value for the category and really start to promote a consistent brand message for the image of Chile as a whole. What form that will take is still to be decided but one thing is for certain, the decisions made now, should the Chilean government put its money where its mouth is and launch a meaningful campaign, will have an impact on how Chile is perceived for some time to come. The danger will be, as will any decision made by committee or politicians, that the message could be diluted and lacking in impact.

However, one can be sure that the consistency and stoicism that Chilean producers have become known for will stand them in good stead going forward. Maybe what the Chileans need to do now is be a bit more confident and spice up their image.

db © September 2008