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The good old days for the Chilean wine industry, when its wines were coveted across the world, are a memory. Gone are the 1990s, when Chile’s varietals, led by Cabernet Sauvignon, dominated entry-level segments with an enviable price to quality relationship. However, Chile has not conquered the world, and despite its best efforts, has not been able to position itself in segments with higher margins, where soil, provenance and reputation are more important than price.
One of the greatest problems facing Chile is the strength of its currency. The rise of the Chilean peso relative to the US dollar, the major currency for most contracts, has eroded more than 30% of profits for a sector that had already begun to weaken. The reaction of economic authorities has been timid, in spite of calls from Chilean winemakers to intervene against the dollar, since more than 90% of the country’s wine is exported. Although the Central Bank, an independent government entity that oversees monetary policy, has begun buying dollars in recent months, it has not succeeded in turning around the fragile state of the wine industry, especially among small- and medium-sized businesses.
According to Aurelio Montes, winemaker and owner of Vina Montes, the situation has improved a little, but it is still difficult for wines struggling to survive with the dollar trading at around 490 Chilean pesos. “If some kind of minimum price cannot be maintained, there will inevitably be widespread losses where companies would be forced to close their doors. With our current levels of income, we’re not in a position to innovate,” he says.
In this sense, experts believe that Chile could replicate a phenomenon similar to the one experienced in Australia, where a handful of companies control almost 90% of total wine sales. However, Chilean wineries are biding their time, hoping that the situation changes and that several diversification plans and an increase in levels of quality will begin to bear fruit.
Low domestic consumption
Unlike other producer countries, such as France, Germany or Argentina, Chile’s domestic market is insignificant. “Wine consumption in Chile has struggled to rebound in the wake of the so called wine export boom during the nineties,” says Claudio Vallejo, general manager of Intelvid, a wine consultancy. During that decade, he explains, annual per person consumption climbed back to 26 litres, following the great collapse brought on by the economic recession of the early 1980s. But these figures are still small compared to the 1950s, when consumption was more than 58 litres per head; following the passage of the single shift labour law in the 1970s, consumption fell to 40 litres per head. Today domestic consumption is basically flat – and fell to just 15.5 litres in 2006.
According to Sebastián Ruiz, winemaker at Misiones de Rengo, beer has won the battle against wine, which now only represents 8% of |
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Regional Analysis |
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the national market. “The national scene is complicated because you have to ‘take a hit’ to get into the supermarkets,” he says, saying that it takes concessions to get a foothold in stores, including participating promotions that directly benefit the consumer’s pocketbook to the detriment of the brand’s image and the company’s profits.
The low exchange rate has had a harmful effect on the bottom lines of businesses, yet has prompted winemakers to refocus on the domestic market. In 2007, the rate of consumption finally reached nearly 18 litres, brightening the spirits of producers, in addition to more educated consumers who demand a diverse, high-quality offering.
Production costs, meanwhile, have increased in recent years, particularly for energy and labour. If it is still a relatively inexpensive place to invest compared to Western Europe and the United States, the economic success of recent decades has raised the price of land, especially in areas such as Maipo, Colchagua or Casablanca.
The French businessman Thierry Villard, who sold his farm and bodega in Casablanca to Laroche in order to focus his efforts on a small-scale family project, believes that the fall in the exchange rate has weakened the competitiveness of Chilean wine. “In Entre-Deux-Mers [Bordeaux, France], for example, a hectare in full production costs €10,000. In Casablanca, on the other hand, which is unreachable from the highway, you cannot find anything for less than €25,000,” he explains.
His Majesty, Cabernet
This difficult situation, exacerbated by worldwide overproduction, has abruptly halted the explosive growth in surface area planted during the 1990s. According to Intelvid, there were more than 56,000 hectares cultivated in 1996. By 2001, that figure had nearly doubled, reaching 106,000. Growth continues today, albeit at much more modest rates, with 116,000 hectares in production last year. Ongoing growth is driven primarily by projects in valleys where wine was not been produced in the past, such as San Antonio, Limarí and Bío Bío.
Although Carmenère has proven its ability to attain high levels of quality, especially in higher price blends, Cabernet Sauvignon still reigns supreme across the Chilean countryside, accounting for almost one-fourth of the value of total exports. Of the more than $1.2b billion exported during 2007, Cabernet Sauvignon sold more than $300m, which is more than double the sales of Sauvignon Blanc, at $137m.
“Cabernet Sauvignon is very much consolidated in Chile. If you mention Chile to anyone in the world, Cabernet Sauvignon comes to mind. But we need to diversify and expand our offering of varieties. Different ideas must emerge to make us more appealing from a commercial standpoint,” says Marco Puyó, San Pedro’s chief winemaker.
The future is Carmenère
During |
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Regional Analysis |
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the magical period of the late 1990s, what had been a nearly defunct variety, Carmenère, opened a new chapter for Chilean wines. But while the wine offers potential, its relationship with viticulturalists has yet to mature, generating emotions that range from distrust to jubilation.
“I foresee a good future for the variety,” says Andrés Ilabaca, winemaker for Santa Rita. As to whether it will become Chile’s iconic variety, he says that will take time. “A variety becomes iconic when it demonstrates consistent quality at all levels with characteristics that evoke its origin and always turn out well. So far in Chile, that has not happened with Carmenère.”
According to Francisco Baettig, chief winemaker for Errázuriz, it is indeed possible to attain a standard of quality at all price points, but beforehand vineyards must adapt to places that don’t immediately make sense, such as regions which are too cold or have inadequate soil. “Production must be lowered and we have to be patient. Carmenère is not like Shiraz, which produces good wine with young plants. It needs older plants to yield quality.” He also argues that the industry also needs to display some willpower. “If it grows at a rate of 25% to 30% and with the dollar worth less than 500 Chilean pesos, it is difficult to lower output in order to produce better wines.”
Ignacio Recabarren, winemaker for Concha y Toro, is in love with the wine and is one of its main supporters. To him, the best wines are simple enchanting. If a wine is not recognized around the world, it’s not due to quality but rather conviction. “If Carmenère were Australian, it would have been a global star thirty years ago.”
Mario Geisse, technical director of Casa Silva, says that while winemakers raise the flag of Carmenère, people should not assume that it is the only top-quality wine produced in Chile. “We must demonstrate how fortunate we are to have the conditions and diversity of soil and climate in our country”, he says.
Andrés Ilabaca wonders: “Wouldn’t it be better to have a signature variety for each valley, just as Cabernet Sauvignon as been consecrated in the Maipo Valley? I even think that taking this path would project a more mature image for the industry, and likewise a more complex and exciting image for the country.”
Other varieties
A decade ago, no one in Chile would have imagined that the number two selling wine would be a white, but Sauvignon Blanc has earned a privileged position in a country of red wines, melding together two essential variables for the international success of a variety: quality and profitability. According to Chilean producers, in the coldest valleys such as Casablanca, San Antonio or the Limarí coast, it is possible to produce very good Sauvignon Blancs, which are fruity, sharp and deep, at very |
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good yields per acre.
But Sauvignon Blanc isn’t the only rising star of Chilean viticulture. Other grape varieties have emerged, making Chilean offerings more dynamic. “Shipments of bottled wine, including Carmenère, Syrah and Pinot Noir, which were added to statistical measures in 2007, demonstrate the high level of participation of these varieties among overall national wine exports. As a result, overall growth generally has exhibited an upward trend, though this has been driven primarily by the national wine industry’s development in terms of positioning top quality wines abroad at price levels that continue to rise,” says Claudio Vallejo of Intelvid.
Specifically, Chilean Pinot Noir has reached the highest value in 2007. Its average price more than doubled the overall average of Chilean wines, reaching $4.53 per litre. Although a growth in planted surface area is expected in upcoming years, it will not match the explosive growth of other wines during the past decade. Currently there are only 1,400 hectares planted, and according to Thierry Villard, producers will think twice before planting more due to the high cost per acre that they face. “The management of a vineyard costs about $6,000 per acre,” he says, arguing that Sauvignon Blanc is less problematic. “Your management costs are much lower, and you’re not going to be paid less than $1 per kilogram. You can easily produce 15 tonnes per hectare. It’s a no brainer.”
One of the biggest headaches for Chilean wine industry has to get beyond its image as a producer of ‘good, pretty and cheap’ wines. The image-shifting strategy of Wines of Chile, the body responsible for the promotion of Chilean wines abroad, has yielded conflicting results. Though exports have grown in recent year at double digit rates, crossing the psychological barrier of $1bn, the industry’s main challenge remains raising the average price per bottle. According to Intelvid, the average 2007 price was just $2.07 per litre.
Primary markets
The United Kingdom remains the major market, with sales of more than $200m, followed by the US with $185m and Germany with $70m. If these rankings hold, concern is generated by low average prices per litre, primarily in the fragmented German market, where Chilean wine barely tops $1 per litre.
According to Intelvid, the greatest increase, both in terms of value and volume, was generated last year through exports to China, up a staggering 341% in value and 964% in volume. “However, the United Kingdom and the United States are undoubtedly the two biggest markets, representing 33% of total exports in 2007,” says Vallejo. “In terms of comparison by continent, Europe absorbed 36% of our exports last year, followed by North America with 21%.”
When looking just at bottled wines, the picture changes drastically. According to figures from Wines of Chile, exports were more |
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than $1bn, up 31% from the previous period. In this category, however, Germany yielded its position as the third largest exporter of Chilean wines to an increasingly robust Canadian market. Smaller markets include Brazil, Holland, Ireland, Denmark, Japan and Belgium.
One of the strategies of Chilean wines to make up for slow growth among traditional destinations has been to open new markets, especially in Asian countries. Although China has delivered the greatest growth in percentage terms, it remains a nascent market geared towards bulk demand. According to Sven Bruchfeld, Santa Carolina’s chief winemaker, South Korea and Malaysia are more compelling markets in which Chile has been very strong and where margins are much more promising. However, it is important to remain plugged into China, because “when the giant awakes, you need to be by his side”.
First quarter 2008
According to Wines of Chile, total exports of wine in the first quarter of 2008 reached 145m litres, to a value of $300m. Though these figures represent an increase of 11.3% in value and 1.9% in volume compared to the same period a year ago, this indicates a reduction in the growth rate.
“In spite of the continuation of positive results, they represent a wakeup call to change course,” says René Merino president of Wines of Chile. He says the export slowdown, reflected in slower growth rates, points to the need to step up international promotion that would facilitate sales of products, with greater value added and compensation for the profitability decline. “These reasons, on top of the lower value of the US dollar and the higher costs of inputs and labour, put the industry in a decidedly unfavourable position, which requires public-private initiatives to increase sales abroad.”
Perhaps as never before, Chile is at a critical juncture today. Its wine sector not only wants to be recognised as a provider of mid-market wines, but also as a burgeoning industry with great diversity and potential for quality. In addition to spurring experimentation with an increasingly rich selection of vines, new investments in valleys with more extreme climatic conditions, including coastal, mountain or Austral [southern Chile] vineyards, promise to change the nature of Chilean wine offerings.
Winemakers may speak of their unique terroir, allowing vines to reach their highest potential, but such efforts will be in vain if the boost to Chilean viticulture quality is not supported and promoted on a broad scale. Meanwhile, the Chilean landscape is complicated. Chile finds itself at the breaking point, but is ready to demonstrate that it can be a worthy competitor in all price categories.
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