Concha y Toro has adopted a strategy that sacrifices volumes for the sake of growing value

Concha y Toro has adopted a strategy that sacrifices volumes for the sake of growing value

When the aristocratic Don Melchor de Casa Concha wanted to keep thirsty winery workers from drinking his best wine, he made up a story that the devil lived in the wine cellar where the barrels were kept.

It was a high-risk strategy. It would, after all, only have taken one inquisitive worker to call his bluff and head into the cellar to realise that there was nothing to the warning, and his reputation - and possibly his authority - would have been shot to pieces.

Instead, the gullible workers stayed away, the owner got to drink his wine and, unwittingly, a powerhouse brand was created.

Casillero del Diablo (Devil's Cellar) remains the big beast in the Concha y Toro stable and, 150 years after the Don's superstitious con-trick, the company is engaged in a fairly high-stakes strategic gamble to mirror that of its founder.

Concha is now several years into a value-driven strategy; one in which it has been prepared to sacrifice volume, if necessary, in order to sustain workable margins. For an industry that's spent most of the last 30 years doing the opposite, it's a bold move – particularly from such an influential operator.

Of course, many wineries have put their prices up over the last 12 months, as a response to short harvests.

Concha's strategy is proactive, rather than reactive - a plan put in place in the early years of this decade that the group has stuck to ever since

Concha's strategy, however, is proactive, rather than reactive - a plan put in place in the early years of this decade that the group has stuck to ever since.

How (or, indeed, whether) the company manages to pull it off lends an added layer of interest to its recent set of figures, not least for competitors struggling to make a buck in a tough marketplace.

That the industry needs to find a way of getting customers to pay more for its products is incontestable. CHAMP CEO John Haddock made the point to just-drinks, as he sold Accolade to Carlyle Asia, that the race to the bottom doesn't end well for anybody.

"Some in the wine industry need to acknowledge that businesses need to make money" - just-drinks talks to CHAMP CEO John Haddock

The global oversupply of wine (though temporarily not an issue following the smallest vintage in 50 years) has been partly to blame. It's ensured that multiple retailers, in particular, have always been able to chase a cheaper deal should existing suppliers be tempted to dig their heels in over price. Consumers, too, in many markets have proved tough to shift, often simply following this week's deal and migrating from brand to brand at will.

For their value-centric proposition to work, Concha y Toro is working on two assumptions:

  • The company has enough emotional equity built up in their brands that consumers (and, indeed, retail buyers) will stick with them through the price rises
  • Any fall in volumes in established markets will be made up for by an enhanced presence in growing markets such as Asia.

At the heart of the strategy is Casillero del Diablo. Though not the most expensive product in Concha's portfolio, the brand is the company's 'halo brand', its success casting a warm glow on the likes of Trivento and Cono Sur.

Casillero certainly has all the key ingredients to justify loyalty; big sales, enviable brand recognition, a solid range of good wines and - perhaps, most importantly of all - a personality. That devilish imagery conjured out of thin air by Don Melchor in the 19th Century is box-office gold.

Two families retain significant stakes, making it easier to stick with a hard-nosed strategy when times get tough

Structurally, the company has another advantage, too. While it might be publicly-listed, two families retain significant stakes, making it easier to stick with a hard-nosed strategy when times get tough.

And, recent times have been tough: Following a good run of results in the earlier years of this decade, the group's figures slowed significantly in 2016 and through most of 2017. Concha has been quick to point out that this was largely due to events beyond its control. Volatility in the Peso and a depreciation in Sterling following 2016's EU Referendum - the UK is one of its key export markets - combined to cause headwinds against which any businesses would struggle.

Either way, the company spent most of 2016 and 2017 with its share price languishing within a few dollars of the five-year low it recorded in December 2015.

It's at times like this that weaker companies blink. Concha, however, has stuck to its guns. Sales picked up in the final quarter of 2017, and even Sainsbury's, the UK supermarket with whom it had a very public falling-out a year ago, resulting in a flouncy delisting, seems to have come back on board. By mid-April, the group's share price was at a five-year high.

The reason for this seems two-fold; a steadying of the ship in its key established markets, coupled with hugely-encouraging signals from Asia. Value sales were up 30% in the region, which has grown steadily over the last decade and now accounts for over 20% of the company's sales.

While there are, doubtless, elements of Concha's experience over the last few years that are particular to it, there are still several wider lessons to be teased out of the last set of figures.

The first of these is the pain involved in following a value- rather than volume-driven strategy. Clearly, there is no sense in selling products at zero or minimal margin, yet this is the model that has been pursued by some of the industry's biggest players for much of the last 20 years. Turning that mindset around - both in buyers and consumers - is not easy. Bumps are to be expected.

Secondly, while there's no room in business for pig-headed stubbornness in defiance of the facts, a consistent strategy, implemented from top to bottom and adhered to for long enough to take effect, is a clear advantage. Concha has proved, not least in its spat in the UK with Sainsbury's, that it is possible to engage in a tug of war with a powerful retailer and come out on an equal footing. Equally, it has proved that companies needn't necessarily change tack with reactive policy shifts at every set of negative figures.

Thirdly, Asia's importance remains crucial. To be able to withstand falling volumes (even if they come with better margins) in mature countries, it's a big advantage to have alternative outlets for them in younger, more vibrant markets. Interestingly, this needn't necessarily just mean China. Concha has worked hard across Asia and its broad-based approach is paying dividends. 

Yet, equally, the company has not had its head turned by the noise from the Far East. One of the features of its export mix over the last decade has been just how solid Europe and the US have been. It's perhaps no coincidence that Concha has stuck with the 'regional offices' model, even as some of its competitors have been closing or shrinking their own in-market operations.

Finally, the continued success (or otherwise) of Concha y Toro might finally tell us whether there's any truth in two of the most often-cited wine trade clichés: that people are drinking less but better - and will pay for it - and that it's not possible to build a genuine brand in the world of wine.

If Concha's figures continue to move northwards - and some analysts have predicted extraordinary rates of growth over the next few years - then perhaps their alt-wine value model might take over from the volume-driven version that's held sway for most of the last 30 years.

Concha y Toro Performance Trends 2013-2017 - results data

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