In the late 1970s and early 1980s, tourists who visited Chile were surprised to discover the low prices and delicious taste of the country’s wines. It was not at all rare to see tourists at the airport carrying home several bottles of wine. According to Alvaro Peña, an agronomist on the faculty of the Universityof Chile, that’s when vineyards in the country began to make significant changes in their mentality. “They adopted advanced technology and invested in new machinery for optimizing the winemaking process in the field – especially irrigation and planning – and they started using rustproof steel barrels and casks made of French oak.”


Viña Miguel Torres pioneered introducing technology in its production processes, notes Fernando Herrera, country manager of Gori Chile, and an expert in the wine supply chain. Miguel Torres used rustproof steel barrels that were much lighter, attractively scented and fruity. The winemaker offered an innovative higher-quality product that was conducive to the development of new wine varieties.


Between 1980 and the 1990s, notes Herrera, “producers also perfected their wine cellars and invested in better labels and packing – boxes, bottles and cartons – that were more attractive to consumers. In addition, the country developed effective marketing campaigns. All of this combined to spark growth in the industry and enabled it to open new markets.” Between 1994 and 1998, Chilean wine exports underwent a strong boom, notes Herrera. There were more than 120 companies on the market, shipping thousands of cases to such international markets as Peru, Argentina, Paraguay, Uruguay, Ecuador and Brazil. Later, Chile also moved into the United States and Europe, and more recently, into Asia.


Chile’s Model for Exporting


It was 1997 that was the decisive year for this phase of exporting, with the country recording 129 million liters of shipments to foreign markets, worth $446 million, according to Focuswine, a local company that provides specialized services for the sector. By the end of 2007, the volume of shipments reached 592 million liters (worth about one billion dollars). That means the Chilean industry grew by 112% over the decade. Currently, Chileexports 62% of its production, to buyers in 90 different countries.


According to Alvaro Peña, “The quality of Chilean professionals – engineers, agronomists and university-trained wine experts – combined with Chile’s free-trade agreements with the largest trading blocs in the world were the keys to developing the country’s current model for exporting.” The wine industry has been included in all of Chile’s free-trade agreements, a list that includes more than 40 nations. In several of these agreements, wine is the only sector that has its own separate chapter.


Marcos Mora, director of the agrarian economics department at the University of Chile, notes that “the trading strategy of the country is based on the efficient management of the ports of Valparaíso and San Antonio, which made it possible for the country’s products to be well positioned in the principal export destinations (the U.K., the U.S., Canada, Germany and Brazil, as well as Asian countries).” Adds Mora, “It’s also important to note the undeniably attractive characteristics of the country’s agricultural environment – the valleys of Apalta, Casablana and Maule – and the support related industries have provided for winemakers, such as the food industry’s slogan: “Chile: A global food and agricultural power.”


Chilean food producers have focused on incorporating traceability systems into their supply chains ever since the European Union made them obligatory in 2005. Various Chilean companies have reacted to the EU regulations by designing a special system for wine traceability. “Known as Kupay, it’s a digital platform that records data from the moment when the grape is planted until the delivery of the final product to its ultimate destination,” explains Rodrigo Balliván, general manager of Chile Vid, an organization that promotes the winemaking industry.


Without doubt, the local wine industry has undergone a positive period of expansion. But what is missing if Chile is to become more competitive with wines of France, the U.S., Argentina and Australia? What has been its most effective price-quality strategy? Also, what is the prognosis for the future of the industry?


The contrast with Argentina


Argentina, one of the leading wine-producing nations in the Americas, has undergone a significant expansion in recent years marked by increased exports, notes Mora. Although the current volume of Argentine exports lags behind Chile, Argentina is a strong competitor thanks to its range of strengths, Mora says. “The size of the industry in Argentina is one of its main comparative advantages because the cultivated land area is 80% larger than in Chile. In addition, Argentina’s wine producers can count on their country’s highly developed glass sector, a basic input.”

Add to that the fact that unlike Chilean wine, Argentine wine is very well positioned in Brazil. As Aurelio Montes, founding partner of Viña Montes and director of the SNA, Chile’s national agricultural organization, explains, “Brazil is a natural market for Argentina because there is a natural chemistry between them, and there are no tariffs on Chilean exports [to Brazil].”


Nevertheless, experts point out that the greatest merit of Argentina is that it has quickly developed products that sell at higher prices than Chilean wines. For a long time, notes Alvaro Peña, Chile’s wine strategy for winning foreign markets has been based on providing good value for the money. That strategy implies that “Chilean wines sell at a lower price than its competitors’ wines but they are intrinsically just as good. There is a meaningful gap between their intrinsic quality (physical-chemical and sensory) and their perceived quality, which makes buyers pay a lower price [for Chilean wines],” according to a report by consultants Edmundo Bordeau and Gonzalo Vargas entitled, “Prospects for the Fine Wine industry: Competitiveness and development for Chile 2010.”


The Price-Quality Strategy


 Fernando Melchor Riera, an independent winemaker who does business in both Chile and Argentina, agrees. “Chilean wine has positioned itself in a niche that provides very high quality at a cheap price. That can also be a barrier because it is very hard to move out of this segment and up to another, higher-priced niche.” In Argentina, the opposite trend has occurred. Until the end of 2007, he explains, “a case of 12 bottles of Chilean table wine cost an average of $25, while a case of Argentine wine of equal quality traded for about $40.”


Mora rejects that argument, noting that “our wine has been growing in value lately, and some cases are selling for more than $30, especially those that come from Colchagua valley, and Maipo and Maule.” In reality, Chile’s current price policy continues to be a great barrier for the Chilean winemaking industry’s prospects in international trade. Javier Troncoso, an agricultural economist at the Universityof Talca, has strong views in that regard. At the latest annual meeting of the Argentine Agrarian Economic Association, Troncoso presented a chart showing that a case of 12 barrels of premium [Argentine] red wine sells for $833 in the United States and $1,702 in the U.K. but Chilean wines of the same quality run only $492. “Chilean wine always costs less for the same quality,” he noted.


In their study Bordeau and Vargas note that this phenomenon “can be explained by the image of the country, the quality of services and the level of support for marketing.” The main countries that import Chilean wine find it hard to distinguish Chilean wines from those of other countries. “More than a problem of bad image, this problem is that the country has no image,” conclude the consultants.


Álvaro Peña agrees, and he emphasizes that promoting the national image of Chile is a task for the country’s industrial sector. “For many people, Chile is an unknown country, and since it is in South America they know little about its business practices. When it comes to innovation, they know us in other sectors outside of wine. Clearly, Wines of Chile, an organization that promotes 90 Chilean wines from its offices in Santiago and London, has done little to change that. If you watch a Davis Cup match and then look at the promotions for Colombian coffee, for example, it becomes obvious that they are still investing little in Wines of Chile.”


Chile’s weakness is the money that it invests in promoting its wines,” adds Troncoso. ProChile is an organization that depends on the Ministry of Foreign Affairs and whose sole objective is to promote the image of the country. “However, in 2007 ProChile spent only $10 million [on promoting wine.] That’s nothing compared to how much other countries like Australia and New Zealand are spending [to promote their wines].”


The Gap with the United Statesand Europe


According to the Food and Agriculture Organization, the list of top 10 wine-producing nations is headed by France, followed by Italy, Spain, the United States, Argentina and Australia. Chile occupies the tenth spot on that list. When you look at the gap in those countries’ competitiveness, you can see major differences.


Troncoso asserts that “Chilean exports to the U.S. have been flat because the U.S. is producing more and more of its own wine.”     High quality wines are produced in certain zones of California where there are micro-climates, and the wines from those valleys provide more and more competition for Chile, Mora says, adding that Chile’s suffers from weaknesses when competing with European winemakers. “The wines that come from Spain, Italy and France all exploit their countries’ long traditions of winemaking, and their prices are quite competitive. Add to that the efforts of Eastern Europe wines to win a larger share of the European market.”


Regarding France, Mora adds, its comparative advantages include geographic proximity to import markets where wine is consumed; the indisputable prestige of its products throughout history (especially in the niche of vintage wines) and the scale of its wine industry, currently approaching one million hectares.


“You also have to emphasize that the successful positioning of Australia in various consumer markets has presented an important barrier for Chilean wine and forced Chile to redouble its efforts to remain competitive,” says Mora. Several factors make Chile less competitive against Australia, he adds. “Chile faces a challenge, especially in such areas as business management practices and strategic planning. In short, you can see problems in the way companies and the sector are managed.”


Nevertheless, Chilean winemakers have shown skill at adapting their local vineyards to the needs of global consumers, notes Mora. “It is important to mention that Chilean vineyards have sent clear signals to Japanese consumers aimed at getting them to buy Chilean wine.” One example is the approach of Viña Santa Carolina. Nivaldo Reyes, export manager of that winemaker, emphasizes that “We have established different goals for various segments of the market. For the Asian market, we have defined a certain kind of packaging that is different from what we do for the products that we export to Europe and to the United States.”


The Dramatic Fall of the Dollar


Nevertheless, the low value of the dollar is clearly a major source of concern for Chile. Small and midsize winemakers, as well as the larger producers who sell more than 50% of all exports, are alarmed that the low value of the dollar is increasingly affecting their profitability. As Melchor Riera puts it, the problem is that “earnings in dollar terms are low, and the costs for producing the product have risen a great deal in local currency [the Chilean peso]. As a result, profit margins of [Chilean] producers are so low that they are almost unsustainable.”


According to Mora, “the exchange rate is a variable that has negatively affected the wine industry, now that the return on investment has dropped. Nevertheless, there is no way that we can change exchange rates, which depend on external factors, largely in the U.S.” In that regard, economists say that the current recessionary environment is the main factor triggering the fall of the U.S. currency, and they predict that it will recover slightly in 2008 and wind up at between 515 and 520 pesos per dollar. That means “the low exchange rate is here to stay for a long time,” concludes Mora.


As a result, Herrera has this recommendation: “What wine exporters are going to have to do is the same thing fruit producers have done. This year’s fruit production season will have to be less focused on exports to the U.S. In much the same way, Chilean winemakers will have to focus on those destinations where the currency is stronger and more stable, such as Europe and Asia.”