The Chilean wine industry has never quite fulfilled the potential its investors had hoped it would. Though volumes have increased steadily, the same cannot be said for volumes and many feared the country would forever be bound to the bargain bin. However, as Chris Losh discovered in a recent trip, there are now signs for new optimism.

Reading the runes of Chile's wine exports can be confusing. On the one hand, this is a country that has seen its exports increase by an extraordinary 68% in the four years from 1999-2003, while on the other, its winery owners worry about "doing a Bulgaria" and being stuck at the entry-level price point in supermarkets the world over.

It's a valid concern. While volume growth has, indeed, surged ahead over the last few years, value is up only 27% over the same period. The conclusion, it seems, is inescapable: the world is happy to buy Chilean wine, but it is less keen on paying top dollar for it.

Yet this doesn't tell anything like the full story. Throughout the 1990s, Chilean wine was achieving the dream of exporters: it was shifting higher volumes, while simultaneously increasing its price per unit, from $1.41 per litre FOB in 1995, it peaked at $2.24 per litre in 1999.

Then, several things happened at once. Demand in its then number one market, the US, started to slow as post-phylloxera Californian replantings began to bear fruit. Secondly, the rash of Chilean plantings in the mid- to late-1990s began to come on stream. Thirdly, Europe began to experience serious retail consolidation. And fourthly, Australia (and to a lesser extent South Africa) also started to find themselves with oversupplies of red wine.

In a situation where there was more and more wine arriving on the market, and fewer and fewer places to sell it, the result was obvious: a softening of prices as wineries offloaded what they could where they could.

This has been true, with very few exceptions, right across the Chilean wine spectrum, from big bulk producers to small, bottle-only outfits. Nearly every winery has seen its average price per litre fall by 10% to 15% over the last few years, and some more than that.

One of the reasons for the overall fall in Chile's price per litre has been the booming bulk trade over the last few years that has sprung up to absorb much of the overproduction wine. China, for instance, has gone from under 1m litres in 1999 to 28m litres in 2003 - but at prices that aren't likely to make anyone rich.

Germany, too, has seen a doubling of bulk sales in the last two years, while there's no question that the decision by two of the UK's biggest supermarkets, Tescos and Sainsbury's, to ship own-label wine in bulk and bottle it in the UK has had an effect on prices.

And yet there are signs that a corner has been turned. After tumbling from the high of $2.24 a litre in 1999 to $1.72 in 2002, prices last year were down only two cents a litre to $1.70, and it would be no surprise this year if they made a slight recovery.

Certainly the indications are there, after another vintage when the weather took a convenient 20% chunk out of the predicted crush, that prices on the domestic bulk market are starting to recover.

"Chardonnay is going for $1 a litre, while Cabernet is back up to $0.70," says Lorena Veliz, winemaker at Francisco de Aguirre. "That's twice what they were two years ago."

The situation on the spot market is as good an indicator as any of the health of the industry, and it certainly looks better than a few years ago.

Key to Chile's recovery, it seems, has been its ability to keep notching up double-digit export volume increases every year without taking part in the sort of Pyrrhic discounting exemplified by the giant Australian operators.

The vast majority of wine being knocked out cheap has been sold in bulk, leaving the bottled market relatively healthy. Now, sales for the first quarter of 2004 look encouraging, with the US regaining its momentum, and the UK showing figures up 25% by volume and, crucially, 30% by value on the same period for 2003.

With yields coming down every year, new plantings severely curtailed and its key markets in the ascendancy, Chile seems to have come through its difficult period and can eye the next few years with cautious optimism.

Expert Analysis

Wine Watch - Chile 2003

This comprehensive Wine Watch country report from Canadean provides a thorough analysis of consumption trends in all wine categories. Clearly set out, it will help you to understand competitive relationships within the local market, brand dynamics and market structure and trends. It will also assist you in understanding the importance of international wine marketers in the country.

To find out more about this report, download your sample or to order your copy, please follow this link