Prices increase financial squeeze as Chile braces itself for fall out
It appears that the Chilean government considers the wine industry mature enough to look after itself. That's the impression it gave when it closed down the Wines of Chile office in London a few weeks ago.
Chilean wine is still growing in terms of exports, by 11.7% for the period of January to November 2000, compared with the previous year, which is an additional 212.15m litres of wine. That all seems entirely healthy. What's more - big investment has been piling in since the early- to mid-1990s. Existing bodegas have invested for the future. New vineyards keep coming on stream and newcomers to the wine industry keep arriving, looking for a piece of the action.
Vina Mont Gras
In Colchagua Valley, long-established Casa Silva made the switch from bulk wine to bottled, introducing its first brands in 1998. They have 650 hectares (ha) already planted and plan to plant the rest of their 800ha with vines. This has added further investment. "When we moved to bottled wine we had to rebuild the winery," explains MD Mario Pablo Silva. "After the new tanks go in, we will have enough for eight million litres."
The vision is very much fixed on the export market. That's the area which is recession proof, because Chile has still not recovered from the Asian crash of 1997 which sent shockwaves around the world. "The companies which concentrated on the export markets are performing very healthily," says Guy Barhoilet, export director of Bisquertt. "Those looking at the domestic market are in trouble." Bisquertt exports an astonishing 95% of its production. "We used to export 100% but we have been asked by some supermarket chains to sell our wines in Chile."
They have also increased in size dramatically. "Three years ago we had 350ha planted and the winery capacity was five million litres," says Barhoilet.
Currently they have 600ha in production and another 200ha coming on stream in three years. Next year capacity will have jumped to 15m litres in the winery and planting has not stopped either. "The plan is to have 1,000ha under production," he says. "We should achieve that in the next two years."
"Growers are having problems finding a home for their grapes and that is being reflected in the prices"
Is the export business really booming that much - how else can a company justify this level of investment? "We make the stainless steel vats," says Barhoilet. "Effectively we've got the expansion for free." An example of cost-effective expansion, but everyone else is also spending, expanding and getting in on the wine business.
Across the road from the MontGras, for example, another new winery is currently under construction. It looks pretty impressive but Hernan Gras of MontGras views it ruefully. "There are other wineries coming in, but it is a hard time," he explains.
In a developing wine region it is often the price of land that brings pressure to bear on new ventures. However in this case the evidence of that is not compelling. "I wouldn't call it dramatic," Gras says of the rise in the cost of land, "but they have doubled prices at least." So where is the cause for concern?
"Growers are having problems finding a home for their grapes and that is being reflected in the prices," he says. "They are going down." This is shown in statistics for January to November 2000. The volume of exports has risen but the average value has fallen from $2.25 per litre to $2.15. This is a situation that is not aided by the fact that a lot of new investors in recent years, such as MontGras' new neighbours do not come from a wine background. "There are a lot of people who went into the market, but they didn't know enough - they didn't even speak English," says Gras. "They ended up saying how much do you want for it. They ended up cutting their own throats."
It's the same story across all Chile's regions. In "cutting their own throats" these producers have left some room for the solid businesses, but they haven't helped in all areas. "Until now we are quite secure in our average price, as a matter of fact we grew in value last year compared to 1999," says Christian Sotomayor, international business director of Santa Ines/De Martino. "The thing is, now we have to invest more and more in the market compared to previous years, competition has made the whole market much more competitive, and at the level of the big customer, the fight is won by the company that has most marketing support for its customers."
Yet, because of the nature of the wine industry, there is always a time delay between hatching the plan and getting money back on your investment through the release of the first wines.
The newest high-profile big player is going to be Super-Pollo, the Chilean livestock magnate with a 1,200ha plan. If they realise it, they could easily be producing another 10m litres of wine from Chile. With such a large investment at stake it will be interesting to see whether Super-Pollo holds its nerve to fight it out on the market or whether the plug will be pulled early on.
The threat of over-production already seems to have become a reality, driven by the very nature of the free market economy in Chile which encourages people into the business. "There are still a few new producers, which started last harvest, that still have all their wine in their bodegas and are facing the coming harvest with most of their capacity occupied by the old harvest. A very tricky scenario," says Sotomayor.
"The growth in vineyards is probably 40% higher than the growth in storage capacity, which represents another big problem," he adds. "All this makes for a very weird frame at the moment and I am sure that this will explode via lowering the prices." As Hernan Gras points out: "The lower end of the market is a jungle." And this looks set to continue.
This is where the split in the market must come. There will be a differentiation between the high volume, low cost producers and those with the commitment to quality and frequently higher price points. "We compete in the top 15% of the market," says Ronald Grasty Cousiño, vice president international business at Cousiño Macul, Chile's longest established privately-owned winery. "We don't compete with all the mad dogs. All this volume will go into the 85% volume market."
The inexperienced producers will be the first to suffer, along with the growers. But those who want to stay around are in little doubt what they have to do. "More and more customers are now directly asking for money to support their promotions, sales force, communications and others, so the operation is looking less profitable because of this," says Sotomayor. "But we see this as an investment, to create more needs, to keep the customer happy and to drive into the consolidation path, which is our ultimate goal."
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