CHILE: Staying chipper

The UK’s discount culture means that Chileans are expected to produce more high quality wines at ever lower prices. Encouragingly, Jane Parkinson discovers a healthy amount of optimism as the trade widens its product range and retail base.

“We stopped everything, and I mean everything,” said Patricio Middleton, CEO of Montgras Properties, when talking about his company’s method of dealing with the recession. “It’s a [global] cash flow crisis so we stopped investment in machinery, grapes, we stopped the planting of 120 hectares of vineyards. Everything. Then we talked to our employees and to our bank about how we were going to get through it, so they know we’re doing as much as we can,” he added.

Few companies were as candid as Montgras Properties about the recession when I recently spent the week in Santiago assessing the current state of play in the Chilean wine trade. However, it’s clear that Chile sees the recession as its opportunity to seize market share, particularly in the UK when sales are dwindling for longtime favourites France and Australia.

In an effort to claim a larger share the buzzword in Chile at he moment is efficiency, and Raúl Beckdorf, marketing director at Anakena, explains why this is the case. “We need to live with the facts and need to see which areas of the business can be more efficient. If anything, it [the recession] is a good exercise to be more productive and more creative so when things do get better, we’ll be in a fantastic position.” Middleton adds: “It’s an issue of strategy and how you align that strategy with your company.” And Eduardo Chadwick, president of Viña Errázuriz, agrees: “We need to look at how to become more efficient as the crisis imposes a do-or-die situation on the trade.”

While the recession has encouraged Chilean companies to streamline their businesses, it has also exacerbated the issue that Chile is best-known in certain markets for cheaper wines. Frustratingly for Chile, this is most noticeable in its largest export market by volume – the UK.

Cristobal Ossa, CEO of Viña La Rosa, whose wine won Best in Show at last year’s Wines of Chile Awards (with UK judges), explains his frustrations with the UK: “It is one of the worst markets. People work so hard they don’t have time to catch a breath, the cost of living is high, there’s swine flu so people won’t shake hands with each other, politicians are spending money on houses and gardens, the LIWF was reduced in size this year, alcohol for drinking at home is taxed heavily and there are 50 pub closures a week.”

And as if this wasn’t enough reason for his discontentment, Ossa adds: “If you have wines on discount you will be king of the entry level. As consumers trade down, the brands who promote [on price] will be waiting for them, but they won’t make any margin. But if you don’t discount, you’re out.”

Ossa is not the only producer to feel disenchanted with the UK retailers. One award-winning winery which had its entry-level wines listed for a few years with a British supermarket, was recently in talks with the same supermarket for months regarding the possibility of listing a higher quality range. The deal-making got as far as agreeing on prices and quantities but sudddenly, the producer said that the store  chose to go with someone else. The producer said: “It’s a real pity because we thought the business relationship was much more than a mere transaction but we

were wrong.”

At Viña San Esteban, general manager and winemaker Horacio Vicente Mena is not prepared to lower his prices too much, saying: “We work our pricing out from bottle to shelf not from shelf to bottle.” Even Concha y Toro, which is responsible for nearly 40% of Chile’s wine exports by volume, understands the producers’ role in ensuring UK consumers don’t become “discount addicts”, says Thomas Domeyko, the company’s corporate export director.

While some believe the UK has already become a discount dead-end, Michael Cox, director of Wines of Chile in the UK, understands the Chilean point of view, but puts forward a different perspective. “I sympathise with the wineries because it’s tough at the sharp end of retail. For better or worse buyers are looking for ‘value’ but their definition of value is cheap.

“I am a little frustrated because, generally speaking, I don’t think the price elasticity has been challenged enough by the retailers. Even though there have been tax increases in the eurozone pushing the average price up, [general wine] sales are up in volume, and value is rising even faster. This says the hard-pressed British consumer, who is meant to be worried about spending money, is actually accepting price increases on wine.”

The year of the promotion

However, despite some resistance and increasing reluctance in Chile to trade with the UK on the grounds of margin, there are also still plenty of producers who are prepared to ride the promotions rollercoaster and work with the retailers and importers to secure consistency in listings and as an example of this, both Morande and Anakena have increased their payment terms to ease the pressure.  

Among those feeling pragmatic about the situation is Luis Felipe Edwards. “2009 is the year of the promotion which means you must invest more in selling,” he says, adding, “everyone in the off-trade must do this otherwise the retailers won’t ask, they just inform you [of listing decisions].”

Meanwhile Ben Gordon, Santa Carolina’s UK export director, says his company is looking for a compromise to prolific discounting. “Promotions like ‘three for 10’ are not going to go away and we have to respect that, although we don’t expect much return.” Beckdorf at Anakena agrees there is not much money to be made in the UK. “The UK consumer is asking for more quality and less price. You don’t get too much profit from that as the margins are so low.”

Unfortunately for Chile, this pricing issue is only exacerbated by the foundations of its exporting success in the UK – reliable wines for cheaper prices. Because of this, a number of wineries report a growth in volume but not value in the last year. Many producers put this down to a “change in the mix” or more specifically, customers trading down. José Yuraszeck, managing director of Viña Undurraga, reports: “We’ve grown less in value than volume but we haven’t decreased our prices, this is because the mix is changing.” And Edwards agrees, saying: “In the first half of this year, the FOB will be lower, one of the reasons for this is the mix of sales has changed to cheaper sales.”

Matías Elan, CEO of Morandé, has also witnessed a downward shift in consumer spending. “The consumer is looking for a different price point and has now learnt how to spend less and become more efficient with their spending of money.”

Furthermore, the permanently fluctuating value of the peso, particularly against the US dollar and the British pound, has done nothing to help Chile’s trading. Put succinctly, “We [Chile] have been pounded by the pound,” says Christian Wylie, commercial director of Santa Carolina, while Dennis Murray, export manager at Montes, adds: “To survive, you need to export. But the exchange rate is a big problem. Last year the peso went up in value threefold. When the peso is low it’s great for selling but it’s bad for you personally. But when it’s too high it’s great for you but it’s bad for selling!”

Middleton at Montgras Properties adds: “The exchange rate has made things very tough in the last three years,” while Luis Felipe Edwards says the volatility of the peso is the problem, especially when the Chilean government is implementing short-term financial measures in a bid to improve its popularity for the election this coming December. “The exchange rate is one of the problems, the peso is now strong because of the US$4 billion stimulus package, but it’s an election year so the government wants to improve the picture,” Edwards says.

The recovery

In the face of seemingly insurmountable adversity, Chileans remain impressively optimistic about the future; the words “this is a long-term business” echo around all the wineries’ Santiago offices and Michael Cox is adamant Chileans have every reason to feel upbeat about the future and positive Chilean wine growth figures from Nielsen support Cox’s call for optimism.

“I think Chile’s greatest opportunity is to get its diverse range of red, rosé, white and sparkling into the trade at prices that are between £6 and £10 a bottle, where Chile over-delivers.

“I urge every Chilean winery to broaden its horizons, cover every angle and not to be seduced into thinking the supermarkets are everything. After all, there’s another 25% of the off-trade market out there. I also urge the wineries to develop their personal relationship with their importers, to spend time talking about target customers and targeting customer channels, to better understand the intricacies of the UK trade. They need to explore every single trade sector and they should have the confidence to do that. For example, there are 600-700 really good independent stores in the UK and through them you can also reach a fair chunk of the on-trade.”

As well as rallying encouragement from the UK’s generic office, producers are also taking heart from their belief that the worst of the economic crisis is over. Edwards reports that March 2008 was when the trade hit its lowest point. “When the US dollar against the peso hit 430, this had a one-to-one effect on businesses.” And Elan too says the trade has already “touched the floor”. Signs that the worst is over can be seen in the Chilean confidence (to which Cox alludes) with regards to new releases, of which there are many.

New times, new wines

Despite its reputation for well-made and reliable entry-level wines, Chile is undoubtedly improving its reputation for premium wines, as recent Nielsen statistics demonstrate. The ultra-premium end is seeing new growth too and the recent success of the launch of Viña Ventisquero’s Herú, at £19.99 a bottle, is a case in point.

Its marketing director Giancarlo Papa explains: “We launched Herú at the LIWF with 1,600 cases available to the UK and we sold the whole allocation at the fair.” and Errázuriz too is glowing, in this case thanks to recent Parker scores of 97, 96, 94 and 92 saying that further stocks of these wines were requested by its UK agent Hatch Mansfield on the back of Errázuriz attaining these scores.

With bonafide success stories to justify the release of more premium products, it’s no wonder that Santa Carolina is launching a Speciality range, Anakena will soon launch a range that’s superior to its current top range ONA, Lauca is going to release a Carignan/Carmenère/Cabernet Sauvignon/Shiraz blend, Millamán plans to launch its icon wine Casa Millamán at £40 a bottle, Cono Sur is launching an “ultra premium” Syrah from Limarí and Chocalán is eager to launch its Gran Reserva range into the UK, to name but a few. Viña San Pedro has even appointed a UK PR agency, with the very aim of developing its (already existing) premium ranges in the UK.

While the potentially lethal cocktail of heavy discounting, volatile exchange rates and a global recession jostle against the desire of producers to retain their reputation for delivering good quality at all price points, there is another, more generic issue that some producers feel Chile needs to address in the near future. “What does Chile actually mean to people?” asks Elan of Morandé. He continues: “Argentina has football, tango and beef, Australia – wallabies and kangaroos, Africa – safari, England – tea and the Queen, California – Hollywood and beaches, but what does Chile mean? We have a stable economy? Only the bankers know that! We need everyday people like taxi drivers to know what Chile is about. That’s Chile’s problem, it’s something much bigger than the wine trade,” he adds.

Elan is not the only Chilean in the wine trade to feel this way. Wylie at Santa Carolina adds: “We need to present a united generic front to people, but we can’t even agree on three things. Wines of Chile needs a common strategy to be consistent in presenting ourselves to the world.” Cox, however, is pretty quick to dismiss this as a major concern for Chile. “It hasn’t given them a huge problem in the past, it’s more that an image would help. But at least there are no negative associations with Chile which could be very damaging to the country. The Chileans are not good at selling themselves, but they shouldn’t get too worked up about this, I’m always telling them to concentrate on what they are doing as a company and not to worry about what other people are telling them.”

Jane Parkinson, September 2009