Among all the world's emerging markets, there's one Osvaldo Solar Venegas of wine group Concha y Toro finds particularly enticing: The United States. With wine accounting for less than one-fifth of all alcohol consumed in the country, the U.S. has "an important base of consumers and low [per capita] penetration," giving it all the high-growth ingredients of an emerging market, says the chief financial officer of Chile's largest wine maker.

The U.S. is also a market which has been the center of Concha y Toro's attention lately. Last spring, the 128-year-old company made its biggest-ever acquisition — the US$234 million purchase of California's Fetzer Vineyards from Brown-Forman, a Louisville, Kentucky-based multinational most known for Jack Daniel's and other liquor brands. With the deal, Concha y Toro gets 429 hectares of vineyards on the Northern Californian coast, several local warehouse and production facilities, andthe six Fetzer brands that moved the Chilean company from eighth place to sixth place in the global league of top wine vendors in volume terms, according to CFO Solar.

But make no mistake: The U.S. may be important for Concha y Toro, but so are plenty of other markets. Unlike rivals that have largely bulked up sales in their home markets, Concha y Toro is now sold in 135 countries, with domestic sales accounting for less and less of the top line. "We are interested in targeting all markets, not only emerging markets, because we believe we have the right wine to target each one of them," states CFO Solar. "We believe it is necessary to be truly global."

Yet just a few years ago, that strategy seemed outdated, and the cards seemed stacked against pure-play wineries like Concha y Toro. Beer, liquor and other beverage multinationals were buying up many of the pure plays, ultimately aiming to draw them into their supply chains and drive even greater economies of scales by expanding their product ranges. "At the time, we all thought this was the logic behind these moves," recalls Andrés Izquierdo, head of investor relations and overseas finance officer.

Flash forward a few years and the tricky economics of the wine business — plus the downturn — have cast a cloud over such logic. For one thing, despite a flurry of dealmaking, the sector remains frustratingly fragmented. In a recent report from Euromonitor International titled,"Can Any Wine Company Gain 5% Global Volume Share?," analysts noted that back in 2005, the top 10 wine companies accounted for less than 15% of global wine volumes — and that was still the case in 2010. (The world number one pure-play wine company, E&J Gallo, accounts for less than 3% of global volume.) In contrast, the leading 10 players in beer and spirits account for 61% and 26% of global volumes, respectively.

All this, say experts, has put the wine industry at a turning point. That was clear with Foster's of Australia, which recently split its beer and wine companies in two. Meanwhile, debt-laden Constellation Brands of the U.S., most known in wine circles for its US$1.4 billion acquisition of Napa Valley's Robert Mondavi Winery in 2004, divested its U.K. and Australian businesses earlier this year.

Senior executives like Solar and Izquierdo — both wine industry veterans who joined Concha y Toro in the 1990s — could be forgiven for feeling a sense of vindication. They kept the company focused as a pure play while also ramping up a narrow portfolio of exports from operations in Chile and Argentina, including Concha y Toro's globally recognizable Casillero del Diablo family of reds and whites. But the same challenges remain, or even perhaps are intensifying: Delivering more and more shareholder value out of every bottle sold, whether at home or abroad. 

Chile's Different Mindset

It's not by accident that Concha y Toro and Chile's other wine companies have helped make the country not only the eighth largest wine producer in the world, but also the fifth largest exporter. Today, about one bottle of wine is bought domestically for every three bottles exported. Part of the reason is that the overall, the domestic market (of 15 million) is small, as is per capita consumption (now 30% that of France), wrote Deutsche Bank analysts in their inaugural coverage of the firm published in October. Relatively low land and labor costs as well as a climate and geography conducive to abundant grape harvests have burnished Chile's global reputation as producer of low-cost wines.

Unlike Spain, France and other countries that mainly produce wine for domestic markets, wine makers in Chile “produce a wine with a very different mindset, because they're not selling to the local shop, the neighbors or the supermarkets around the corner," says Juan Park, senior research manager of Wine Intelligence, a London-based consultancy. "From the beginning, they have the intention of selling the wine to Asia, for example. In this context, Concha y Toro has excelled."

It was in1933 that Concha y Toro began itsexporting business with shipments to Holland, the same year it listed on the Santiago Stock Exchange. Exports — primarily to the U.K. and other parts of Europe — have increased rapidly over recent years. A mix of premium brands (with a retail price of between US$10 and US$13 a bottle) and varietals (for around US$5 a bottle) helped makeexports account for 74% of annual sales of Ch$374 billion last year, making it by far the country's largest wine exporter.

Even at home, Concha y Toro has a commanding lead. In 2010, it held 37%of the domestic market, and with more than 8,000 hectares of vineyards planted and 355 million liters of storage capacity, it's easily more than three times the size of Chile's other big wine rivals, San Pedro Tarapacá and Santa Rita. Combined, however, the three hold more than 60% of Chile's wine industry.

Faster and Faster

Beyond the wine, the key to gaining more market share at home and abroad lies in how quickly the company can adapt. Though not as fickle as, say, the fashion industry, wine tastes are "changing faster and faster," says Park. Keeping up is no small feat — he points out that while consumers may favor Merlots over Malbecs from one season of the year to the next, the key ingredient — the grapes — can't change as swiftly, with as long as four years needed between their planting and being ready for crushing. That means running their businesses on a combination of short-term and long-term levers.

One of those levers falling squarely with Concha y Toro's finance strategists is cost control, says Izquierdo. For any global company dependent on the whims of nature — and their customers — keeping a grip on costs is not easy at the best of times, but for the wine business, it has been even tougher over recent times. As Izquierdo describes it, 2010 and 2011 have been years when costs were particularly high with "pressures on the demand side and pressures from the supply side."

A big culprit has been foreign exchange and the Chilean pesos hitting all-time highs in 2010 and 2011 against major currencies — in the first nine months of this year, the peso appreciated 8.9% against the U.S. dollar, 2% against the euro and 3.8% against the pound sterling. For Concha y Toro, most of its costs are in pesos, and they are only offset slightly by price increases it can pass on to consumers in the U.S. and other export markets.

Then there's the price of grapes. Wine and grapes account for more than 40% of the company's cost of sales, which has been increasing steadily. Over the past two years in particular, yields from harvests were down, and that was even before the earthquake struck in early 2010 affecting Concha y Toro operations in Chile, depleting what little overcapacity there was. "This, combined with the business model of Concha y Toro, in which we buy around 65% of all the grapes we need, [meant] we were very exposed," he says.

The upshot has been a disconcerting "distortion." Concha y Toro mainly uses its own grapes for its higher priced brands, but needs to buy around 65% of its grapes from suppliers for its cheaper brands. For that reason, says Izquierdo, a liter of a varietal brand produced from outsourced grapes can cost more than producing a liter of a premium brand, like Casillero del Diablo, with the company’s own internal production.

While Concha y Toro executives– and analysts such as those at Deutsche Bank — see both those pressures easing soon, the company took action. At the beginning of this year, CEO Eduardo Guilisasti (whose family owns own over 25% of the company through several investment companies) announced that 2011 would be focused on profitability, not just growth. To that end, the firm hiked up prices 10% across the board, a bold move as many economies continue to wobble.

Costs continue to rise and demand has slipped in the UK and other key markets. In an October earnings announcement, the impact was evident. Although total sales rose 8.3% in the first nine months of 2011 from the same period in 2010,the operating margin was 10.2% compared with 12.6%. The total cost of sales rose 8.1% to Ch$75.87 million.

Despite the hit to short-term earnings, the company stands by that longer term pricing strategy, perhaps with good reason. At a time when other businesses have been hanging on for survival, 2011 has been a record year for investment at the winery. Along with the Fetzer acquisition, it has been expanding itsvineyards in Chile and Argentinaand its production capacity.

It's all part of a drive for "greater self-sufficiency," says Izquierdo. So, too, is one of the most pivotal components of Concha y Toro's growth strategy — controlling its own distribution channels in important markets. When the company sees that it has achieved, or will soon achieve, sufficient scale in terms of volume or sales, it sets up its own distribution operations rather than relying on third-party providers."This strategy has allowed the company to see strong growth from low bases in a large number of markets," according to Euromonitor. That's been case in the U.K. in 2000, Brazil in 2008, Scandinavia in 2009 and soon in the U.S., thanks to Fetzer.

"By producing wine in the United States, Concha y Toro is acquiring a partial natural hedge, and given its expertise in export markets in Europe and Asia, should be able to expand Fetzer’s reach to the rest of the world," wrote Deutsche Bank's analysts. "But the main rationale for the acquisition is that it will strengthen the marketing and distribution platform at home [in the U.S.]"

It’s a welcome change for Concha y Toro, whose presence in the U.S. had been eroded by multinational push, accounting just a few months ago for less than 20% of the import market from a peak of 47%. Can Fetzer change that?

Perhaps. In July, the Chilean firm set up a new distribution joint venture with Banfi Vintners called Excelsior Wine Company, in which Concha y Toro's current 20% stake  will gradually increase. It's one of reason why the markets applauded the acquisition, boosting Concha y Toro's share price 7% the day it was announced in March.

Value Adding

That sort of market recognition reverberates throughout the company, says Solar. Unlike in his early years at the firm in the 1990s, there's far greater awareness among Concha y Toro's senior management of the importance of measuring and communicating every investment's ability to benefit shareholders. "Nowadays, it is key in every aspect of day-to-day operations of the company to be able to measure the increase in economic value," he says. "This was not fully understood 20 years ago [when] commercial decisions were isolated and financial aspects [of those decisions] were not taken into account."

Izquierdo agrees. With the growing attention that the investor community is now giving emerging markets like Chile, "there is a much closer link between what happens in the company and the stock price," he says. "When we started a joint venture in the U.S. to distribute our wines, investors phoned immediately to ask what the impact [on our business] would be. We have to be much more agile in linking company news and the stock price. The market wants to see numbers."

As for its biggest customers — that is, the supermarket chains where 75% of New World wine is sold — what do they want to see? Mainstream brands that will fly off their shelves, he replies. "If your [wine is] in a Tesco, you will sell lots of volume. The Tescos want you prove to them that you're willing to invest in your brand."

Concha y Toro is obliging. Earlier this year, for example, it entered into a three-year deal to be the official sponsor of Manchester United, a football club not only hugely popular at home in the U.K. — Concha y Toro's biggest import market — but also in Asia, where it wants its Casillero del Diablo brand to gain more traction.

But even with the best brand campaigns, can it distance itself from Chile's traditional reputation for down-market wines? In the U.S., for instance, "Chile means cheap and, however hard Chilean exporters try, few U.S. wine drinkers are prepared to look to Chile for anything other than a bargain," wrote wine critic Jancis Robinson in a Financial Times article last year.

In May this year, however, Intangible Business, an Anglo-American consultancy, awarded Concha y Toro second place, after E&J Gallo, in its Power 100 ranking based on a number of metricsranging from market share and projected brand growth to brand awareness and loyalty. That's no small feat, the consultancy observes, given that there are over 10,000 spirits and wine brands in the world.

As the entire wine industry evolves, so too will the reputation of Chilean wine, predicts Izquierdo. One day, he hopes, the whole wine market will become more like Latin America, where "there's no such thing as Old World or New World wine, just The World — and that [World] is Chile and Argentina."