Chilean pisco producers are once more riding high and attracting the potential investment from the world's leading drinks groups. But as Owain Johnson reports, the impact on international aspirations of a trademark dispute between Chile and Peru should not be underestimated.

The picturesque Chilean village of Pisco Elqui has always been extremely popular with tourists for its traditional adobe houses, charming main square and fine restaurants. But what really brings in the visitors is the opportunity to pay homage at the home of Chile's national drink, pisco.

Pisco is a clear spirit distilled from grapes that is often compared to brandy. It is extremely popular in Chile where the pisco sour (pisco, lime juice, egg white, sugar and ice) is a potent national symbol.

But although pisco is Chile's national drink, it is also Peru's. Indeed, the very name of Pisco Elqui would cause a Peruvian producer to choke on his pisco sour. Their resentment stems from the very name itself: the village of Pisco Elqui was known as La Unión until 1939, when the Chilean government decided to change its name in order to head off Peruvian attempts to trademark the spirit.

Not that the tourist office in Pisco Elqui would admit it, but the name pisco actually derives from a port town hundreds of miles to the north in southern Peru. Peruvian producers can date their product back to the sixteenth century when a Spanish ban on Peruvian wine exports to the mother country left grape producers looking for an alternative use for their harvest.

Peru versus Chile
Both Peru and Chile continued to produce pisco after winning their independence from Spain, but it was not until the twentieth century that their trademark squabble began. The issue has since become one of Peru's many grievances against its more powerful southern neighbour.

The Peruvian government is currently considering following the example set by French Champagne producers by asking the World Trade Organisation to restrict the use of the name pisco to the spirit produced near the port of Pisco.

The impact of the trademark dispute between the two countries on the international expansion of pisco should not be underestimated. Potential purchasers remain confused about the drink's origins and it therefore lacks a strong identity such as that enjoyed by Mexican Tequila. Meanwhile, potential foreign investors in either nation's pisco industry have been deterred by the uncertainties surrounding the product.

The most likely solution, however, is that both countries will be given the right to market their products as pisco. This, at least, has been the stance adopted by the European Union and the United States during their recent trade negotiations with Chile. This position was spelled out by the EU in its recent Joint Declaration with Chile, where it noted that: "The Community will recognise the denomination of origin Pisco for the exclusive use of products originating in Chile. This shall in no way prejudice the rights that the Community may recognise in addition to Chile, exclusively to Peru."

Chilean pisco's potential
Even in the unlikely case that Peru wins its legal battle outright, the country's pisco industry is in no position to compete with its Chilean rival. Chile produces around 50 million litres of pisco a year compared with Peru's 1.5 million litres, while Chilean earnings from pisco exports total $600,000, three times more than Peru's.

The success of Chile's wine producers and the country's reputation for economic stability, transparency and openness to foreign investment are also factors in its favour, particularly at a time when Peruvian pisco production has been badly hit by environmental problems and a move towards rice and sugar cane cultivation in traditional grape growing areas.

Chile's pisco industry is dominated by two co-operatives, Pisco Capel and Pisco Control, which are owned by hundreds of small producers. Both have been through difficult times in recent years and have seen their positions affected by the growing popularity of whisky in Chile, poor investment decisions and by overproduction of the grapes used in production.

In response, the two pisco giants, which have ruled out a merger, are planning radically changing the nature of their business. Pisco Control recently announced that it is in preliminary talks with a number of major international drinks businesses with the aim of attracting a strategic partner within the next year.

The company, which is set to post sales of US$22m in 2003, has also set itself a one-year timetable to reform its current co-operative status. The company's general manager Elio Elorza has spoken of his belief that the company needs greater financial and distribution muscle if it is to survive and grow.

The benefits for the Chilean pisco industry of reaching an agreement with the international majors are obvious: an agreement would lead to new investment in modernisation, provide economies of scale, access to supply and distribution networks and sophisticated marketing expertise, all of which would boost exports and provide some stability after years of fluctuating internal demand.

So what's in it for the potential partners, which include Allied Domecq and Pernod Ricard according to recent speculation in the Chilean business press?

Firstly, pisco has a large amount of potential, but is currently hampered by its low profile. There are few comparable opportunities of this type left, where a relatively modest investment could create a new market for a brand and thereby deliver significant international growth. Exports would also benefit from Chile's recent trade deals with the United States and European Union, which ensure reduced tariff access to two key markets.

Secondly, despite recent fluctuations, there remains a proven mass-market demand for pisco among Chilean consumers who drink an annual average of two litres. And last, but far from least, the success of Chilean wines has created a positive image of the country among foreign consumers, while the country's booming tourist industry has introduced large numbers of potential purchasers to the delights of pisco and pisco sours. Investors may well be advised to take a trip to Pisco Elqui. Just so long as the Peruvians don't find out...