Focus - Growing Pains for Chilean Wine

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Chile's wine industry is facing enforced consolidation due to pressure on wineries' profitability, but the country's longer-term future looks much brighter.


Concha y Toro's purchase of Fetzer Vineyards has thrust Chile's wine industry further into the spotlight this year. Amid Australia's bloated production and Constellation Brands' isolationist strategy, Concha y Toro's purchase of Fetzer is something of a rarity in 2011.

It is more symbolic, however, that Fetzer is Californian. Concha y Toro, the spearhead for Chilean wine in the wider world, has landed a significant acquisition in a region that was itself once considered to embody the future.

However, Chile's 'coming of age' is under pressure, at least in the short-term, according to a new report from Netherlands-based Rabobank. The country's strong peso currency is wiping out export earnings and an over-reliance on the lean and mean UK market is eating further into wineries' margins.

"Any price increases the Chilean wine industry has been able to achieve with suppliers over the past two years have failed to keep pace with the appreciation of the currency, which has severely eroded profit margins," Rabobank said in its quarterly wine update, published late last week. At the end of April, the Chilean peso was around 19% above its average for the past decade.

There are pricing issues, too, in the key UK market. "Several producers indicated [to us] that they were considering pulling out of, or at least reducing their dependence on, the UK," said Rabobank. Prices for Chilean wine in the UK are a fifth lower than Chile's global average export price, despite some gains at the expense of volume so far in 2011, it added. 

It's a tough situation for a country that exports 70% of its wine production. There is talk of consolidation in Chile, due to cost pressures. Speaking to just-drinks recently, Mario Pablo Silva, the MD of Casa Silva, said: "Most wineries are having to reconsider their strategies in order to be stable in the short-term."  

Casa Silva is Chile's third largest premium wine company in terms of value sales, behind Vinas Santa Rita and Concha y Toro.

According to Pablo Silva, a lot of wineries have been slow to investigate ways of mitigating foreign exchange risk by using policies such as hedging. "Most of the companies don't understand financial items and so they don't take opportunities," he said. 

At the same time, he said that prices need to rise. "Average prices must be increased in the near future. This doesn't necessarily mean prices for the consumer, it means trying to sell more high-end wine. It means changing the composition of the wines in our portfolio."  

The much-used 'premiumisation' tag is a policy that is already enshrined in Wines of Chile's 2020 strategy. Published in 2009, it seeks to grow exports of bottled wine by 9% in value per year, to reach a goal of US$3bn by 2020. 

Many in the industry are very aware that this will require Chile to open up new markets, potentially in Asia. Alongside this, the country has work to do on its image as a wine-producing nation.

"Chile's lack of a strong, positive image in the mind of consumers is a major barrier to achieving better pricing," said Rabobank. "But, the process of building a country's image takes years." 

Some Chileans must eye Argentina's progress around the Malbec grape varietal with envy. Of course, Chile has Carmenere as its signature grape, but the country's 14 wine regions appear somehow more dislocated. For all Chile's wineries' willingness to embrace new technology, the country 's diverse climate looks to have given it more in common with the Old World producers than with its neighbour.

This is not necessarily a bad thing, but it means that Chile's route to greatness may be slightly different. Rabobank agrees: "It seems unlikely that Chile will find its success from one single varietal or single solution," it said. "Instead, improving long-term profitability will come from the range of intiatives that wineries are beginning to implement." These include brand building, better quality and use of higher-valued varietals, it added. 

Casa Silva's Pablo Silva has spent the last two years at the forefront of efforts to further differentiate Chile's key wine regions, in particular the Colchagua valley. The country's government is on the cusp of giving the go-ahead for new denominations within those that already exist, in order to help Wines of Chile highlight the diversity offered by Chilean wine. 

France and Italy are prime examples of how this strategy can go awry by confusing consumers with too much detail. But, the central direction provided by Wines of Chile, together with hindsight, is likely to prove useful in avoiding such pitfalls.

"Consumers will not understand immediately," said Pablo Silva of the expected new classifications. "But, if the product is a good product, and if we have good communication, then we can explain the situation over time and, in the end, consumers will understand. I'm thinking in the process of ten years."

Playing in Chile's favour alongside this strategy is Concha y Toro, which can likely do just as much to promote Chile in the wider world as it continues to expand. "They give prestige to Chile, the quality of their wines is very good," said Pablo Silva. "It's a name to respect."

In ten years, he hopes to be saying the same about Chile as a whole.

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