Chillian Wine Export

7/31/2019 Chillian Wine Export

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Globalisation strategies of Chilean wine exporters

David E. Hojman

University of Liverpool Management School

Abstract

Chilean wine exports are booming. But not all wineries are equally successful.

Quality production may be easier to get right, as compared with international

marketing and distribution. The best export results reflect innovation, award winning

at international competitions, opportunities offered by large supermarkets and other

distribution channels, good relations with the specialist press, and embracing organic

production and if possible wine tourism. Failures of some very small wineries may

be inevitable. Inability or unwillingness to face dramatic changes in the industry and

international markets, leading to poor handling of expert winemakers, may be behind

some big winery failures.

Keywords

Globalisation, Exports, Innovation, Knowledge workers, International wine

competitions, Chile


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I.Introduction

This paper examines the determinants of success of individual Chilean firms

in the international wine market. Chilean wine exports are booming, but individual

winery performances are uneven. Globalisation offers unique opportunities to

Chilean (and other) wine producers. The promises and challenges to the wine

industry presented by globalisation have been discussed by several authors.

Cusmano et al (2010) examine innovation strategies and institutions. The roles of

networks and cooperation have been emphasised by Bek et al (2007) and Patchell

(2008). The importance of place, geographical territory or terroir, which includes

both recovering old places and developing new ones, has been highlighted by

Overton and Heitger (2008) and Patchell (2008). The role played by country of origin

in the buying decisions of wine consumers has been analysed by Felzensztein and

Dinnie (2005). Some wineries have opted for the slow but eventually rewarding

process of reputation building (Macchiavello, 2010). Campbell and Guibert (2006)

are particularly interested in how Old World (France, Italy, Spain) producers are

responding to New World (the Americas, Australia and New Zealand, South Africa)

expansion. According to Remaud and Couderc (2006), the differences in business

practices between Old and New World wineries are affected by differences in

products and owner-manager goals. The largest wine producers are now

international and have developed sophisticated financial strategies to minimise costs

and risks and maximise liquidity and capital returns (Coelho and Rastoin, 2006).

Tipples (2008) has addressed the demands and pressures derived from a winerys

need to have its wine sold by the larger supermarket chains in consumer countries.

Ethical concerns have been discussed by Bek et al (2007).


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The Chilean wine boom, which started in the early 1990s, may be described

by many aggregate indicators, all of them impressive (Richards, 2006; Decanter,

2009a; Cusmano et al, 2010; Sanchez et al, 2010; Tapia, 2011). For example, the

area planted with grapes for wine production more than doubled between 1994 and

2002. The volume of Chilean wine produced increased by a factor of eight, to 360

million litres, between 1990 and 2002. The value of Chilean wine production rose to

over one billion US dollars in 2007, three times its value just eleven years before. As

to Chilean wine exports, they increased by 95 percent between 2003 and 2009, or by

75,000 (seventy five thousand!) percent between 1988 and 2008. Chilean wine

exports climbed from less than 3 percent of wine production in the late 1970s, to

over 85 percent in 2005-2007. To be included among the top ten Chilean wine

exporters, a winery in 2004 had to export over USD 16 million, but the threshold had

risen to USD 22 million by 2007, and to USD 30 million by 2009. This Chilean wine

industry expansion is all the more remarkable since it took place in the context of a

stagnant or very slowly growing world market.

However, not all Chilean wineries have been equally fast or effective when

identifying the promises or meeting the challenges of globalisation. It would be a

mistake to assume that all Chilean wineries have been profitable during this boom

period, or are profitable today. Some (and not always the very small ones) went out

of business, or were taken over or sold, or felt forced to attempt to improve their

results by adopting increasingly desperate measures, or just disappeared. The

success of Chilean wine is the success of some, or even many individual companies,

but not of all of them. This paper explores the conditions that made, or make, some

individual Chilean wineries successful, and others not.


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The aggregate picture is one of very favourable natural and man-made

conditions: good and diverse soils and climates, stable macroeconomic rules, a

mature political economy, cheap land and labour, foreign investment, a moderate

amount of government support, and highly skilled local experts. But substantial

heterogeneity exists among wineries. There is no such thing as a typical winery.

Over 300 wineries are registered for export purposes, exporting on average about

USD 4 million per year. However, the largest company exports more than 20

percent of the total, and the top ten exporters, slightly over 50 percent. The structure

of supply keeps changing at a fast rate, but there is no clear, unequivocal trend

towards further firm concentration or consolidation.

This paper examines the globalisation strategies of Chilean wineries. We

divide these strategies according to whether they were designed and implemented to

face production challenges, or international marketing and distribution challenges.

The paper looks first at patterns of new winery creation. Then we discuss innovation

in production, and how it is reflected in factors such as vine plantings in new

locations, new grape varieties and new blends, higher prices, better quality, and

scale economies. Not everything is new. Sometimes the old is being creatively re-

invented, including the pais grape variety and long lost grapevine plantings in

unusual places. Then the key role played by the winemaking experts or oenologists

is examined. The question of winery size is addressed in connection with

concentration in the market for Chilean wine exports. We look at participation in

international competitions, selling in supermarkets and other retailers in the

consumer countries, wine tourism, and organic wine. The last section concludes.

The research used secondary sources, interviews, and quantitative methods.

It started with an extensive consultation of secondary sources, including a


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comprehensive review of winery websites. Semi-structured interviews were

conducted with representatives of six wineries and with other key informants.

Quantitative methods included the compilation of a 400-winemaker database and a

180-winery database. Statistical tests and multiple regression exercises were

performed.

II.The production challenges

II.1.New winery creation

Geographical, macroeconomic, political economy, and human capital

conditions are all favourable to Chilean wine production (international conditions will

be discussed in following sections). It would be surprising if new wineries were not

being created in Chile all the time. The fact is that they are. The Chilean wine

industry is over 400 years old (Del Pozo, 1998), but most companies are new. Out

of 129 wineries studied by Richards (2006), 77 were established in the 1990s or

more recently.

A common pattern is that of a large group, conglomerate, diversified family

business, or highly successful entrepreneur, without previous activities in the wine

industry, deciding to go into wine. Either they use their own financial resources or

have solid financial backing. All they need is to hire a good oenologist or maybe a

team of them, which should not be difficult because not only good wages will be

paid, but this is a wonderful opportunity for professional development. The total

investment could amount on average to about USD 3 million (Kunc and Bas, 2009),

which would be used, among other purposes, to buy 100 hectares of land (or much

less or much more, depending on where the land is, and on whether it is already


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planted with vines or not). Some of the most successful new wineries in Chile today

have been created following this model.

In a second pattern the initiative starts with a winemaker, or two or more who

wish to work together. In this case getting financial support is more difficult but not

impossible. It may be easier to find a venture capitalist who wants to become a

partner, than borrow from a bank. A bank may be reluctant to lend, unless against

collateral or the winemaker is highly experienced and prestigious. New wineries

formed in this manner are likely to be smaller, but wine quality could be equally good

or better. Some very small projects (garage wineries) may be of surprisingly high

quality.

The third pattern is that of a grape growing farmer who has been selling his

grapes for a long time to a winery, but now he has decided to make and bottle his

own wine. He already has some assets and know-how, and therefore is almost

halfway there. Depending on where the finance for this new attempt at vertical

integration comes from, this model becomes similar to either pattern one or pattern

two.

Pattern number four is foreign direct investment. Often, but not always, it

takes the form of a joint venture between a foreign investor (or oenologist) and a

Chilean partner. In theory, the foreign investor may bring innovative production

techniques and its international distribution network. This model is often, but not

always, successful. Some well-known international names which went to Chile since

1979 (when the first international investor, Miguel Torres, arrived) are Antinori,

Bodegas y Bebidas, Dassault, Franciscan Vineyards, Guelbenzu, Kendall Jackson,

Lafite-Rothschild, Lurton, Marnier-Lapostolle, Massenez, Mildara Blass, Mondavi,


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Mouton-Rothschild, Pernod Ricard, and Sogrape (Vergara, 2001; Siler, 2007,

www.vendimia.cl).

II.2.Innovation in production

Innovation in Chilean wine production comes in many different forms. It

includes new plantings in coastal areas and up the first slopes of the Andes, far

away north (Elqui) and south (Bio-Bio, Itata and Malleco), and experimenting to

achieve the perfect match between grape variety and locality. Temperature-

controlled stainless steel tanks, French and American oak barrels, screwtops and

environmentally-friendly bottles are being used. New wines are being made by new

and old wineries. New grape varieties and new blends featuring these varieties are

being introduced. Among grape varieties now being used in Chilean winemaking,

the Guia de Vinos de Chile2010 mentions cabernet franc, carignan, gewrztraminer,

lacrima christi, malbec, mourvedre, nebbiolo, pedro jimenez, petit verdot, pinot

grigio, pinot noir, riesling, sangiovese, sauvignon gris, syrah, tempranillo and

viognier (Sanchez et al, 2010). In 2001, about 400 wines were offered in the Chilean

domestic market, of which 80 were single grape new varieties and 10 were non-

traditional blends (the only traditional red blend was cabernet sauvignon merlot). By

2006, the number of wines in the domestic market had increased to 700, of which

230 were single grape new varieties and 80 were non-traditional blends. Four years

later, by 2010, the number of wines offered in the domestic market had doubled to

1,400.

Higher international prices of Chilean wines are reflecting both better quality,

and international recognition of these quality improvements. For example, top

recommendations were given by the British magazine Decanterto a Chilean syrah


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retailing at GBP 40 (forty British pounds) and a Chilean cabernet sauvignon retailing

at GBP 30 (Decanter, 2009b, 2010a). Success in international markets has led to

substantial scale economies. About 160,000 cases were made of the Palo Alto

Reserva 2006 Maule, a cabernet sauvignon carmenere syrah blend, retailing at GBP

8, which was given 85 points (out of 100) by the US magazine Wine Spectator. On

the other hand, only 175 cases were made of the much more prestigious and

expensive Cono Sur Ocio Pinot Noir 2006 Casablanca, which retailed at GBP 25 and

was given 90 points by Wine Spectator. Both Palo Alto and Cono Sur are subsidiary

companies in the Concha y Toro group. Ocio, which has won prizes at many

international competitions, may have been part of a silver bullet strategy (suggesting

high quality in your inexpensive wines, by winning awards with your top wines, Van

Agtmael, 2007; Deshpande et al, 2010).

The carmenere grape variety, originally French and believed to be long extinct

everywhere, was rediscovered in Chile in the mid 1990s (Pszczolkowski, 2004;

Richards, 2006). Some have suggested making it Chiles flagship variety. Table 1

shows all the new luxury wines, that is, retailing at USD 50 or more, made from

carmenere in 2011, either as a 100 percent varietal, or as part of a blend. The total

number of wines in Table 1 is large, 28 (there are also other luxury wines in Chile

which are not made from carmenere). Out of these 28 wines, most of them are

blends (21). Only two of these blends are with cabernet sauvignon. The rest are all

more creative combinations. Ten wines in the table are made by one of the top ten

exporters or an associated company. Six are made by a foreign investor or with

significant foreign participation. Two (Almaviva and Altair) are made by a top ten

exporter in partnership with a foreign investor. The remaining wines in Table 1, all

14 of them, are made by small or medium-size companies, with little or no foreign


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involvement. It is not necessary to be a giant, or foreign, to make these expensive

and highly innovative wines. At least one of these producers (Antiyal) is a garage

winery. Several of them exported less than USD 1 million in 2004.

Another exciting form of innovation in Chilean wine refers to the rediscovery

and rehabilitation of the pais grape variety. The pais grape was taken to Chile by the

Spanish Conquistadoresin the XVI century. Connoisseurs have always considered

it of inferior quality, especially after Chilean wine producers started importing the

traditional French varieties (cabernet sauvignon, merlot, sauvignon blanc,

chardonnay) in the XIX century. However, in recent years the French winemaker

Louis-Antoine Luyt has started using pais, on its own or in blends, to make modern

wines in Cauquenes, in the coastal end of the Maule Valley, about 300 kilometres

south of Chiles capital city Santiago. These pais-based Luyt wines have been very

favourably reviewed (Tapia, 2011). The Spanish winemaker and entrepreneur

Miguel Torres, who started innovation in wine in Chile back in 1979, is also using the

pais variety to make a new sparkling rose wine.

II.3.The winemaker or oenologist

Although sometimes a good wine can be made by accident, this would be an

exception, not the rule. Typically, good wines are made deliberately, by people who

know what they are doing. In Chile, practically every good wine is made by a

qualified winemaker or oenologist, who has a university degree, a postgraduate

qualification and work experience abroad (sometimes in both Europe and New World

wine producing countries), and who has passed a professional association

examination. Winemakers are knowledge workers. However, until recently some

Chilean wineries were reluctant to admit that their winemakers were playing that


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essential role. Traditionally, relations between management and labour in Chilean

agriculture have been paternalistic or authoritarian (Del Pozo, 1998). The

winemaker was often seen as no different from other rural workers. In the 1980s

and 1990s, relations between some wineries and their oenologists deteriorated. As

wine production increased, so did the demand for winemakers. About 600

oenologists were active in Chile, with some foreign and Chilean professionals

entering and leaving the country every year, and a new cohort of less than 50

graduating from several universities. Most oenologists were young. Many were

women. Some wineries failed to increase their oenologists wages to the equilibrium

rates. Refusing to admit the essential contribution made by the winemaker was also

part of this negative attitude. Admitting this contribution publicly would have made

the oenologist more attractive to other potential employers. Unhappy winemakers

responded by changing jobs more often (Echecopar et al, 2004; Hojman, 2006a;

Richards, 2006; Ross, 2006). Some of the most experienced and senior

winemakers became consultants or independent entrepreneurs.

Other wineries felt compelled to agree explicitly, at the time of hiring a

winemaker, to allow him or her to make his or her own wine, using own resources or

resources from a third party, in parallel to working as an employee for the winery.

The most dynamic and enlightened Chilean wineries often did everything they could

to give their oenologists the best development opportunities. But other wineries went

as far as portraying their own winemakers as the enemy, as the following real-life

statements suggest:

Let us give the consumer what he wants to drink, not what our oenologist

knows how to make (www.vendimia.cl).


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I have been hired to make sure that every square metre of our plantations

contributes as much as possible to profits, rather than using it according to what our

winemaker thinks will give the best quality (Drysdale, 2006).

No matter how good you are, in this company the only way of being promoted

is to marry the owners daughter (www.vendimia.cl).

The picture is further complicated by three other factors (Hojman, 2006a).

First, a good winemaker naturally wishes to make wine as good as he or she

possibly could. This is part of a knowledge workers lifelong learning and

professional development. But some employers may prefer to compromise on

quality in order to increase profits. Second, a winemaker working in a local job

would naturally talk to his or her neighbour, who happens to be another winemaker

working for another firm. Informal chats may lead to knowledge exchanges, which

the two oenologists welcome but the respective employers may interpret as lack of

loyalty and disclosing company secrets. Third, many wineries may not be large

enough to be able to offer their winemakers the experience of working with as many

different soils, climates, grape varieties, production methods and techniques, and

colleagues, as the oenologist would wish for purposes of professional development.

This forces the winemaker to change jobs from time to time, again exposing himself

or herself to suspicions of disloyalty and revealing corporate secrets. Only a very

large winery, with diversified production activities in every region, would be immune

to this difficulty. Not all of these problems are unique to Chile (Beverland and

Lockshin, 2001), but they may be more serious for some wineries in Chile for

historical and cultural reasons (Del Pozo, 1998; Hojman, 2002, 2006b). Empirical

evidence suggests that better motivated winemakers may make positive

contributions, both to Chilean award performance at international competitions, and


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to export growth (Hojman, 2007). Of the three wineries portrayed by Drysdale

(2006) in her article on harmony between viticulturalist and oenologist, in only one,

market leader Concha y Toro, has this relationship evolved harmoniously. The

second winery lost its winemaker, who now works for another winery which allows

him to make his own wine in parallel to his daytime job as winery employee (Tapia,

2011). The third winery went through a boardroom coup in which its founder family

lost control (www.vendimia.cl).

III.The international marketing and distribution challenges

III.1.Market concentration

It is not clear whether the current level of concentration in Chilean wine

exports represents a particular type of equilibrium, or whether it is moving in any

particular direction. Over the long term, the top exporters may have been losing

ground. In 1980, 15 wineries were exporting 91 percent of the total (Echecopar et al,

2004). In 2003-2004, the top 15 wineries were exporting only 64 percent of the total

(bottled wine only, see Tables 2 and 3). A slight increase in concentration may have

taken place between 2003 and 2009 (see Table 2). However, the increase in export

market share of the top ten exporters (from 50 to 52 percent) is entirely due to the

growth in market share of the export market leader, Concha y Toro (from 19 to 21

percent). This suggests that, as a group, the top eight exporters (excluding both

Concha y Toro and Maipo, for which 2003 data are not available) possibly did not

enjoy or benefit from any scale economies in their exports, or in their international

marketing and distribution, as compared with the rest of exporters. The

improvement in Concha y Toros market share could be caused entirely by more

successful marketing techniques (see Table 4). Of course, the same would apply to


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the rather substantial redistribution of market shares among the rest of the top ten

during the 2003-2009 period. Ventisquero, LF Edwards, Cono Sur, Montes and

Concha y Toro, in that order, increased their market shares at the expense of the

rest of the top ten (or nine if we leave Maipo out).

No discontinuity seems to be present between the top ten and, say, the

following ten, or the following twenty, thirty, or anything else. The differences in

export value between any winery and the next one in the ranking are small and

smooth (Vial, 2005). This continuity only breaks down at the very top of the table,

between positions one and two (or three) and to a lesser extent between positions

two (or three) and four, and between four and five. After that the ranking is very

smooth (see Tables 2 and 3). Positions 11 to 19 are presented in Table 3.

Comparisons between these tables must be careful, since growth in Table 2 refers to

the six-year period 2003-2009, whereas growth in Table 3 refers to the four-year

period 2003-2007. Among wineries in Table 3, both Lapostolle and Montgras grew

at faster rates than Montes in Table 2 (and faster than all the others which were

growing more slowly than Montes). For some aspects of individual winery identity

and international marketing initiatives by individual wineries, and their possible

effects, see Tables 4 and 5.

III.2.Participation in international wine competitions

Regardless of how good a wine may be, quality by itself is useless in the

absence of international recognition. This is one of the reasons why wineries

participate in prestigious international competitions (Beverland and Lockshin, 2001;

Orth and Krska, 2002). Participation by Chilean wineries is expensive. Sometimes it

may cost a winery as much as USD 20,000 (www.vendimia.cl). Who wins awards


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and why, or how, needs a complex explanation. An econometric study of the

determinants of award winning by Chilean wineries in Londons 2005 International

Wine Challenge (IWC) identified four statistically significant explanatory variables

(Hojman, 2007). They are human capital, wine exports, the number of regions of

production (or geographical range), and domestic presence (the product of

multiplying average domestic quality, by the number of wines in the domestic

market). The impacts of both human capital and wine exports are positive as

expected. However, the impact of the geographical production range is negative,

and that of domestic presence is non-monotonic, negative for low values of the

independent variable, and positive for high values. Chilean wineries may have been

trying to produce in far too many different geographical regions, possibly in order to

take advantage of some scale or scope economies, but this may have damaged

quality and therefore their award-winning abilities. The non-monotonic relationship

between domestic presence and IWC award winning suggests that, for many

Chilean wineries, domestic growth may generate path dependencies and

management inertias which may eventually affect quality and international

performance negatively.

In the 2009 IWC, 14 Chilean wineries won 17 gold medals for their red wines.

Only four of these firms were among the top ten exporters. A small company size is

no obstacle to win gold at the IWC. On the contrary (and everything else being the

same), maybe it helps. One of the gold winners at the IWC 2009, Botalcura, is

remarkable in several ways. It is very small, exporting only slightly over USD 1

million. Its winemaker is both French and a co-owner, making Botalcura a good

example of French winemaking skills in Chile, and a joint venture between local and

foreign owners. This kind of competition results tends to repeat itself year after year.


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For example, in the IWC 2010, out of 22 gold-winning Chilean wines (both red and

white), 12 had been made by the top ten exporters or their associate and subsidiary

companies. Then in the IWC 2011, 12 gold medals were won by 12 Chilean red

wines, of which only four had been made by one of the top ten exporters or related

companies.

At least part of the problem of high costs to wineries associated with

participating in prestigious international competitions around the world has been

successfully addressed by the introduction of the Annual Wines of Chile Awards in

2004. This competition takes place in Chile, but the judges, who are different every

year, are selected among the most famous and respected wine experts

internationally. The show is organised by Wines of Chile, the trade association

formed by the most important Chilean wineries, about ninety of them, and it is

possibly one of its most successful initiatives ever. Almost inevitably the visiting

judges become enthusiastic advocates and ambassadors for Chilean wine.

Interestingly, this competition has highlighted examples of top quality and exciting

innovation which would otherwise have remained unknown. Some examples are the

Bravado (also known as Garcia Schwaderer) garage wines, or the Falernia / Mayu

wine production activities in the Elqui Valley in the north of the country, or the

organic and biodynamic blend Coyam from Emiliana (see Table 5).

There is no doubt that award winning is in many ways good for the winners

international prestige and exports. However, some negative effects may also be

present. For example, if a winery which had won an award last year fails to win it

again this year, some potential distributors or consumers may jump to the conclusion

that quality has fallen (for some econometric evidence of this belief, see Hojman,

2007). Or, as a result of winning, demand may increase much more than the


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winerys output. Or the winery may find itself attached or married to distributors

which may be acceptable for as long as no prizes are won, but which unfortunately

do not have the superior logistic or managerial abilities to deal with the award-

generated higher demand. In the UKs DecanterWorld Wine Awards 2010, the

international trophy for the best sauvignon blanc under GBP 10 was won by Chiles

Mayu (Mayu Sauvignon Blanc 2009 Elqui) . This wine was, according to the

Decanterjudges, one of the two best sauvignon blancs in the world, and the best

among inexpensive ones (incidentally, the other winner, as the best sauvignon blanc

over GBP 10, was also Chilean and also from a small producer, Casa Marin

Sauvignon Blanc Cipreses Vineyard 2009 San Antonio). But the competition

organisers were unable to give the details of Mayus UK distributor, because at that

time the winery did not have one (it has got one now). Thus, so many things may go

wrong that it possibly makes sense to talk of a winners curse.

III.3.Supermarkets and other international distribution channels

A central concern for a potential Chilean wine exporter is how to get its wine

sold by the large supermarket chains in the consumer countries. How to get your

wine on those shelves? Some important conditions for selection by a supermarket

chain are a good quality to price ratio (value for money), and being able to

guarantee supply continuity, by delivering large volumes of consistent quality all year

round (Tipples, 2008; Macchiavello, 2010). A winery must also be prepared to be

flexible on prices, meaning be ready to drop them and meet the following profit

squeeze itself. The supermarket chain wants to be able to offer half-price deals,

three bottles for the price of two, a free bottle as a reward for buying something else,

etc. The winery may also be expected to be prepared to bottle its wine under the

supermarkets own label, and be willing to participate in supermarket-organised fairs


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and other events. It also helps the winery to have a wide range of wines, so that the

supermarket chain has to deal with only one agency, office or person, rather than

with one for each grape variety, brand, region of origin, or price. Other

considerations include cork quality (how many angry customers bring their opened

bottles back?), shelf life (if the wine is selling slowly, how long before its quality starts

deteriorating?), accessibility (just give us a ring anytime, and reverse the charges),

or respect for the consumer (this wine is faulty, but let us bottle it anyway).

A, one of the largest supermarket chains in the UK, sells Chilean wine from

seven firms, six of which are among the top ten exporters, including newcomers

Ventisquero and LF Edwards (the range is marginally larger for online sales). The

only Chilean wines in supermarkets A which are not from the top ten are Corporas.

The situation in supermarkets B is not exactly the same, but very similar.

Concentration on the top ten exporters is lower in supermarket chain C, which sells

wine from five out of the top ten, and also wine from six other producers, Casa Silva,

Cousino Macul, Mayu, Montgras, Morande and Valdivieso. Very much the same

applies to D, a British department store, which sells Chilean wine from three of the

top ten or their subsidiaries and partner companies, plus wines from other producers

such as De Martino, Geo, Haras de Pirque, La Rosa, and Morande. The British wine

and spirits chain E sells Chilean wines from most of the top ten exporters, and about

ten smaller producers including Casa Marin, De Martino, Koyle, Lapostolle, Matetic,

Mayu, Perez Cruz, Undurraga, Valdivieso and Viu Manent. F, a high quality mail-

order British wine club, sells Chilean wines from three of the top ten exporters or

their subsidiary companies, and wines from five other Chilean firms: De Martino, Los

Vascos, Undurraga, Valdivieso and Villard. Among the wineries mentioned in this

paragraph (and in addition to Ventisquero and LF Edwards which are in the top ten),


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Corpora, Lapostolle, Montgras, Los Vascos and Undurraga were among the top 20

exporters in 2007. The rest were smaller.

All these British retailers, from A to F, rely very heavily on the top ten Chilean

exporters. Moreover, given the large roles played both by the British market in

Chilean wine exports, and by A in wine sales in the UK, it is possible that the

selection by A of Ventisquero and LF Edwards as suppliers of Chilean wine may

have been instrumental in these two wineries having joined the top ten by 2009 (see

Table 2). It is also reasonable to expect that, for as long as A retains them as

suppliers, their position among the top ten will not be under threat. Many other

Chilean wineries were exporting similar amounts in 2003 or 2004 (see the Tables),

but they failed to increase their exports at rates as fast as the incredibly fast rates

shown by Ventisquero and LF Edwards. On the other hand, there is no guarantee

that being a top ten exporter makes a winery more profitable. It is perfectly possible

that other wineries, applying different business models and strategies, may be more

profitable than at least some of the top ten exporters, even if they export less.

Market concentration favouring the top ten is much smaller in other European

countries. In Finland, for example, consumers can only buy their wines from Alko,

the wine retailing government agency. In 2010, Alko sold Chilean wines from 23

mostly small and medium-size wineries, in addition to wines from all ten top

exporters (see Table 6). Some of these wineries are of reasonably large size, but

others seem to be far too small to be able to either guarantee stable supplies of

consistent quality, or offer the sort of dramatic price reductions and other assurances

and advantages that British retailers rely on. Possibly Alko stores wines from these

small or very small Chilean wineries, in order to offer sufficient diversity to its

customers, but this is unlikely to be conventionally profitable. Also, a question


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remains as to why these wineries were chosen, as opposed to others which were

not. The most likely answer is that Alko buyers made their choices on taste,

perceived quality and value for money grounds, as opposed to being influenced

excessively by the marketing efforts of Chilean producers. Interestingly, innovation

was not a key selection criterion. Only five of these 23 mostly small and medium-

size exporters are listed in Table 1 among wineries making highly innovative and

expensive (USD 50 plus a bottle) carmenere-based wines. They are Casa Silva,

Chateau Los Boldos, La Rosa, Morande and Undurraga.

III.4.Wine tourism, organic wine, externalities

A particular form of international marketing which is only possible for some

Chilean wineries is the use of wine tourism as relationship marketing (Hojman and

Hunter-Jones, forthcoming). This requires not only very good quality winemaking,

international recognition and a strong international distribution network, but also

exceptional tourist facilities at the winery itself. The best example is likely to be

Lapostolle (Politzer, 2005; www.vendimia.cl), located in Apalta in the Colchagua

Valley (the US magazine Wine Enthusiasts Wine Region of the Year in 2005), and

makers of Clos Apalta (the 2005 one was the US magazine Wine Spectators Wine

of the Year in 2008). Clos Apalta retails at about USD 75 per bottle in international

markets. Lapostolles reasoning is that anyone who likes Clos Apalta so much to

pay USD 75 per bottle (60,000 bottles are sold around the world every year), is likely

to wish to visit the Apalta winery, if he or she happens to be in Chile. That consumer

is likely to expect top quality tourist facilities. Accordingly, Lapostolle built such

facilities in 2006, not to make money out of them, but with the explicit aim of raising

the companys profile and help with the sale of its wine around the world. Inspired by

Lapostolle, other Chilean wineries are successfully trying to adapt this wine-tourism-


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as-relationship-marketing model to their own specific characteristics. On the other

hand, some Chilean wineries with poor records of quality production, international

recognition or effective international distribution are also trying wine tourism, but, in

the absence of other measures, this is unlikely to help the winery to survive. In most

regions and individual cases, application of the wine-tourism-as-survival model

would need to be heavily subsidised, and possibly it would be expensive, inefficient,

and alien to Chiles political economy and culture (Hojman, 2002, 2006b).

Just a few years ago, organic production was looked at with suspicion by

many consumers. Non-organic produce was preferred because it was thought that

organic production required quality sacrifices. Some Chilean wineries which used

organic methods would not tell anyone about it (Cederberg et al, 2009). Today the

picture may be precisely the opposite. International opinion is increasingly

concerned with the environment, and international demand for wine has been

affected accordingly. Going organic and biodynamic may be now potentially the

most profitable option for many wineries (Rose, 2011). These methods have already

been pioneered in Chile by expert winemakers such as Alvaro Espinoza in wineries

including Antiyal and Emiliana, with extremely good results (see Table 5). Chile may

have very favourable conditions to introduce organic and biodynamic winemaking.

Two questions that remain to be addressed are, first, do the top Chilean wine

exporters generate international marketing externalities for the rest of Chilean wine

exporters or potential exporters, and, second, if yes, are these externalities positive

or negative? (Macchiavello, 2010). For example, if a European consumer buys a

bottle of Concha y Toro for the first time, and likes it, is he or she more likely to buy

Concha y Toro again the next time, or to try another Chilean wine? What about his

or her third, fourth, etc, purchases? Should a smaller Chilean exporter which is


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trying to sell its wine for the first time in a European market in which Concha y Toro

is already present, see Concha y Toro as an informal strategic partner, or as the

competition?

IV.Back to the domestic market?

The role played by the Chilean domestic market in the process of

internationalisation of Chilean wine deserves a separate discussion. In other wine

producing countries, strong domestic demand represented a powerful incentive to

production. In New Zealand during the early stages of development of the quality

wine industry, before they went searching for new markets abroad, wine producers

could sell at home, without any difficulty, as much wine as they were able to make

(Beverland and Lindgren, 2004). In Chile it was very different. For many decades

during the XX century, both production and domestic consumption of wine had been

falling (Del Pozo, 1998). Production was officially discouraged by successive

governments, as wine was associated with alcoholism. Consumers increasingly

tended to prefer beer or soft drinks to wine. Domestic consumption of wine fell from

about 60 litres per capita in the 1960s, to 15 litres in the 1990s (Echecopar et al,

2004).

When the renaissance of Chilean wine started in the 1980s and 1990s, its

dynamism came almost entirely from exports. Many new producers could only

survive by selling abroad (they were forced to be born globals). This was precisely

the opposite from what had happened in New Zealand. However, strong domestic

demand may now be presenting itself, for the first time, as a source of Chilean

quality wine growth. As the economy expands, families disposable incomes also

grow. Moreover, a key characteristic of Chilean national culture is that consumers


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are notorious for following foreign fashions (Hojman, 2002, 2006b). Chileans may

now be prepared to consume Chilean wine, because they see that foreigners like it.

That there seems to be huge potential in the domestic market is confirmed by

booming wine sales from local specialist shops in Chilean cities, and by the activities

of the Readers Club of the Santiago daily newspaper El Mercurio, which acts as a

exclusive wine club for its members. In 2001, only four wines in the domestic market

were priced at USD 50-55 or more per bottle. By 2008, 24 wines in the domestic

market were priced at USD 70-75 or more. Just two years later, the number had

increased to at least 35 wines (Descorchados, several numbers; Guia de Vinos de

Chile, several numbers).

A healthy domestic market could help Chilean wine producers deal much

better with any problems in international markets in the future. However, not all

wineries would benefit equally. There would be sharp differences among wineries in

terms of individual domestic performance, in the same way as there are important

differences today in their individual results abroad.

V.Conclusions

The globalisation strategies of all the successful Chilean wine exporters

included quality production, international recognition, and effective international

distribution. During the first decade of the XXI century, the five most successful

exporters, according to export growth rate, were Ventisquero, LF Edwards, Cono

Sur, Lapostolle and Montgras, in that order (among the top twenty exporters, and not

considering three producers for which no data were available). There are interesting

differences among these five export leaders. Each of them did it its own way. Four

of them (out of five) are relative newcomers, having been established in 1998, 1976,


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1993, 1994, and 1992, respectively. Ventisquero and LF Edwards went for the

opportunity of being sold by the large supermarket chains, department stores and

wine clubs in the UK, and took advantage of this opportunity. Cono Sur used

organic production, bottling under distributors and other labels, new grape varieties,

and the prestige and silver bullet effects associated to its own brand and top wine

(Ocio Pinot Noir, considered by many the best pinot noir in Chile) and, as Concha y

Toros younger sister company, to wines such as the famous Don Melchor.

Lapostolles Clos Apalta, made with help from flying consultant Michel Rolland, was

already very popular with the specialist press long before the Clos Apalta 2005 was

made Wine of the Year by the US magazine Wine Spectatorin 2008, and

Lapostolle itself was made New World Winery of the Year by the US magazine

Wine Enthusiastthe same year. Montgras was the subject of a Harvard Business

School case study in 2002, the only medium-size Chilean winery ever distinguished

in this way. Possibly a number of aspects, such as owners trajectories and award

record, made Montgras particularly attractive to the Harvard authors. But on the

other hand it is also most likely that the case study itself marked Montgras and

affected positively its future development.

The success of these five companies (and of many other Chilean wineries),

comes a whole generation after the Spanish wine entrepreneur Miguel Torres went

to Curico (in 1979) and started his now legendary, and by Chilean standards

revolutionary, innovations in wine production. Success in the XXI century would not

have happened without Torres. But then, it would not have happened without many

other visionary winemakers and entrepreneurs. In that sense, Chilean wineries and

winemakers today are standing on the shoulders of giants. It is impossible to name

all of them, or to rank them. The success of Chilean wine is the success of


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individuals or individual wineries, many of them small. It is a triumph of

entrepreneurship, quite a lot of it small scale entrepreneurship. There was no heavy

handed planning and intervention, either from a central government bureaucracy or

from local or regional producer associations, with their possibly inevitable sequels of

inefficiency, waste, and accommodation of vested interests. Possibly it was good for

the Chilean wine industry that there was no forced imposition of a Chile brand, or of

artificial regional or valley identities (which at some stage some observers and

opinion formers had advocated).

How to explain those winery performances which were less successful, or

indeed failures? The explanation is different according to winery size. Failure may

have been inevitable for some of the very small wineries. They may have not had

critical mass, or sufficient financial support to buy the best resources or hire the best

oenologists, or to buy time while waiting for their wines to win important awards, or to

reach an acceptable deal with a good international distribution network

(Macchiavello, 2010). But the situation is completely different for large wineries,

especially those with plenty of financial resources. Failure here is explained by

either bad luck or bad management, inability to see or unwillingness to face

fundamental changes in the domestic industry and the international market, and

arrogance. The most glaring example is possibly their cavalier treatment of their

own oenologists.

Success for any Chilean winery requires quality production, international

recognition, and effective international distribution. Good quality production is the

easiest part. There is no shortage of potential investors, Chilean or foreign, with

USD 3 million or more to spend, and there is no shortage of good winemakers, again

Chilean or foreign, who would be tempted to accept this new challenge. Once these


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objectives of quality production and international recognition and distribution have

been achieved, the next stage is to aim for further quality improvement, and sort out

international recognition and distribution once again. Progress along these lines

means higher prices and the possibility of top quality wine tourism. Another

dimension of success is to start production abroad, typically in Argentina. Montes

and Concha y Toro are already also producing in California.

Prospects for the future seem to be much better for quality production, than

for international recognition and distribution. Exports are more difficult than

production. Innovation in production will continue. More foreign investment will

reach Chile and there will be more oenologists. Wineries and winemakers will keep

getting better and better. Matches between grape varieties and local conditions will

keep improving. Diversity will increase. Chile may, and possibly will, keep improving

the quality of its wines all the time, for a very long time, without any major problems.

The big questions for the foreseeable future are not about production. The big

questions are, first, how to make potential consumers all around the world aware that

your wine is both good and good value, and second, how to make sure that, once

they have learned that, there is a place nearby where they can buy it.


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Echecopar G, Fetters M and McDermott T (2004), Entrepreneurship, an engine for

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Hojman DE (2007), Who benefits from the knowledge of oenologists? Market failure

in the market for winemaking experts when wine exports are booming, KMPro

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Hojman DE and Hunter-Jones P (forthcoming), Wine tourism: Chilean wine regions

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market for Chilean wines in the UK, Warwick University.

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Politzer P (2005), Chile: De que Estamos Hablando?, Santiago, Sudamericana.

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Richards P (2006), The Wines of Chile, London, Mitchell Beazley.

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Table 1

Carmenere-related innovation: new carmenere-based luxury wines (USD 50

plus per bottle), blend or 100 percent varietal, 2011

Winery (bottledexports 2004, USDmillion)

Wine Blend (B) orall carmenere(C)

Almaviva (1.9) Almaviva 2008 Puente Alto B (various)Altair na Altair 2006 Cachapoal B (syrah)Antiyal (0.1) Antiyal 2008 Maipo B (various)Antiyal Antiyal 2008 Paine CLapostolle (11.3) Borobo 2007 Rapel B (various)Lapostolle Clos Apalta 2008 Colchagua B (various)Casa Silva (4.0) Microterroir Los Lingues 2006 Colchagua CCh Los Boldos (2.6) Amalia 2008 Cachapoal B (various)Concha y Toro (145.7) Carmin 2007 Peumo CEl Principal (0.2) El Principal 2006 Pirque B (cab sauv)Errazuriz (20.2) The Blend 2008 Aconcagua B (various)Errazuriz KAI 2008 Aconcagua B (various)H Araucano na Alka 2007 Lolol CLa Rosa (10.0) Ossa 6th Generation 2005 Cachapoal B (various)Montes (17.0) Purple Angel 2006 Colchagua B (p verdot)Morande (4.4) House of Morande 2006 Maipo B (various)Neyen na Espiritu de Apalta 2007 Colchagua B (cab sauv)

Pargua (0.1) Pargua 2006 Maipo B (various)Perez Cruz (0.7) Liguai 2007 Maipo B (various)Perez Cruz Quelen 2006 Maipo B (various)Santa Carolina (20.5) Herencia 2007 Peumo CSanta Rita (46.4) Pehuen 2007 Colchagua CSena (1.5) Sena 2007 Aconcagua B (various)Terra Andina na Suyai 2007 Colchagua B (various)Undurraga (20.7) Altazor 2007 Maipo B (various)Via (3.2) Chilcas Las Almas 2009 Maule B (c franc)V Puertas na Parnaso 2005 Curico B (various)

Viu Manent (3.0) El Incidente 2007 Colchagua C

na: not available.

Sources: Sanchez et al (2010), Decanter(2011), Tapia (2011), winery websites.


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Table 2

Chiles top ten wine exporters, 2009, and evolution since 2003

Company Exports,2003, millionUSD

Exports,2009, millionUSD

Growth rate2003-2009,percent

Growth 2003-2009, millionUSD

Concha y Toro 110.0 246.0 124 % 136.0Cono Sur 23.2 75.4 225 % 52.2S Pedro Tarapaca 68.4 73.3 7 % 4.9Santa Rita 37.7 49.9 32 % 12.2Montes 13.7 32.1 134 % 18.4Santa Carolina 17.2 31.4 83 % 14.2

Ventisquero 3.2 31.1 772 % 27.9Maipo na 30.8Errazuriz 16.1 30.1 87 % 14.0LF Edwards 4.4 27.6 427 % 23.2

Top ten 293.9 a 627.7 103 % a 303.0 a

Total 589.8 1151.6 95 % 561.8

CyT / Total 19 % 21 %

Top ten / Total 50 % a 52 % a

Notes:

Bottled wine only, FOB. Both Cono Sur and Maipo are part of the Concha y Toro

group.

na: not available

a: nine firms only. In the absence of 2003 data, Maipo (which exported USD 5.3

million in 2004) is not included in this calculation.

Source: Authors calculation from www.vendimia.cl.


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Table 3

Wine exporter ranking, continued: positions 11 to 19, 2007, and evolution

since 2003

Company Exports,2003, millionUSD

Exports,2007, millionUSD

Growth rate2003-2007,percent

Growth rate2003-2007,million USD

Undurraga 16.3 22.2 36 % 5.9Via na 21.8Santa Helena 16.3 20.1 23 % 3.8Carmen 15.1 19.3 28 % 4.2Emiliana 15.3 18.1 18 % 2.8

Montgras 8.6 16.6 93 % 8.0Corpora na 16.4Los Vascos 9.7 16.2 67 % 6.5Lapostolle 7.1 14.9 110 % 7.8

Subtotal 11-19 a 88.4 127.4 44 % 39Total 589.811-19 / Total 15 %

Notes:

Bottled wine only, FOB. Santa Helena, Carmen and Emiliana are, respectively,

member companies of the San Pedro, Santa Rita, and Concha y Toro groups.

Growth in the last two columns refers to the four-year period 2003-2007. This should

be borne in mind for comparison purposes with Table 2, in which growth refers to the

six-year period 2003-2009.

na: not available.

a: seven firms only. Via and Corpora are not included.

Source: Authors calculation from ChileVid A.G.


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Table 4

The top ten exporters in 2009: some examples of special international

marketing efforts, and possible effects

Company Specific marketing activities and some possible results

Concha y Toro The largest Chilean exporter (Deshpande et al, 2010). Silver bulletapproach (van Agtmael, 2007), joint makers of Almaviva inpartnership with Mouton-Rothschild, huge range, excellentinternational distribution network, sponsorship of ManchesterUnited football club. They aim to hire the best winemakers, andkeep them. Their top wine Don Melchor has been twicedistinguished by the Wine Spectatormagazine as the best in Chile

and among the best in the world. UK distribution (via Marks andSpencer) of FairTrade wine Canelo, made by small producersformerly from Cooperative Los Robles. Selling of some wineslinked to environment campaigns. Also producing in Argentina andbuying large Californian wine company Fetzer

Cono Sur Pioneers in new varieties (pinot noir, riesling) and new regions (Bio-Bio), organic. Young and talented winemaking team. Widelyavailable in the UK, sometimes under the distributors own label.This company is part of the Concha y Toro group

Errazuriz Organising since 2004 blind tastings of its own top wines (retailingat USD 100 or more per bottle) against French, Tuscan andCalifornian icons such as Haut-Brion, Lafite-Rothschild, Sassicaia,Opus One and Stags Leap (Richards, 2006; Spurrier, 2010)

LF Edwards Successful at getting its wines stored by Marks and Spencer,leading supermarket chains (Asda, Tesco) and leading mail orderfirms (Sunday Times Wine Club). No distinctive consumermarketing approach, which suggest a particularly effectivebusiness-to-business focus

Montes Founder Aurelio Montes was possibly the first oenologist to start hisown winery (in 1988, now among the top ten Chilean wineexporters), mostly for exports, and make it a big success.

Uncompromising search for quality, its top wines retail at USD 100plus. Pioneer in production techniques, regions, and export effort.Often present in both supermarket (Tesco) and fine wine (Londonand other Europe) events, but not in every prestigious internationalcompetition. Also producing in Argentina and California

Ventisquero Spectacularly fast growth, founded in 1998, already among the topten Chilean wine exporters, export growth of over 700% between2003 and 2009, available at Tesco and Sainsburys among others.Seems to have very good industrial relations, or at least there is noevidence of winemaker-company conflicts. Gold winner in LondonsInternational Wine Challenge 2011


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Table 5

Small and medium-size wineries: some examples of special international

marketing efforts, and possible effects

Company Specific marketing activities and some possible results

Bravado Husband-and-wife team, very small operation, new (established2009), winners of best sauvignon blanc and best value white in theSeventh Wines of Chile Awards (2010). Sales in the UK by highlyinnovative internet retailer Naked Wines

Casa Silva Old (established 1892) medium-size company, highly publiciseduniversity-supported small-plot (micro-terroir) research. Typicallyparticipating in international competitions with a very large range of

wines. Seven of their wines, all from the Colchagua Valley, wererecommended by Decanters Chilean cabernet sauvignon tasting inNovember 2010. Gold winner in Londons International WineChallenge 2011. Wine tourism as relationship marketing (Hojmanand Hunter-Jones, forthcoming). Sold in the UK by Waitrosesupermarkets among others

De Martino Medium-size company, exporting USD 3.8 million in 2004.Discovering and re-developing lost, sometimes abandoned oldvineyards, each with its own, field-specific mix of grape varieties,and creating unique, field-specific new blends (example: Limavidain Maule Valley, planted in 1945, 60% malbec, 30% carmenere,10% others). Sold by Marks and Spencer, Majestic and the WineSociety in the UK

Emiliana Pioneers and largest producers in Chile of organic andbiodynamically-made wines (Cederberg et al, 2009; Rose, 2011).Red blend Coyam won top prize in Wines of Chile Awards. Goldwinner in Londons International Wine Challenge 2011. Thiscompany is also part of the Concha y Toro group

Falernia /Mayu

Small operation, exporting USD 1.0 million in 2004. Pioneers ofwine production in the Elqui Valley, in the northern Coquimboregion, 500 kilometres north of Santiago. Winners at the Second

and Third (2005 and 2006) Wines of Chile Awards and highlyrecommended by many experts. Gold winner in LondonsInternational Wine Challenge 2011. Available at Asda / WalMart,Waitrose and Majestic in the UK

Lapostolle Leaders in Chile of wine tourism as long-distance relationshipmarketing (Hojman and Hunter-Jones, forthcoming). Their ClosApalta (the 2005 was Wine Spectators Wine of the Year 2008)retails at about USD 75 per bottle in the UK, and at least twice asmuch in Chile


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Table 6

Chilean wines sold by Alko in Finland in 2010, small and medium-size wineries

(not among the top ten exporters in 2009)

Winery Exports, 2004, millionUSD a

Luxury carmenere?b

Aresti 2.6BPDR 4.1Carta Vieja 9.1Casa Silva YesCasas del Toqui 2.1Chateau Los Boldos Yes

CorporaCousino Macul 6.1De MartinoEmilianaIndomita 0.3La PancoraLa Ronciere 1.1La Rosa YesMateticMiguel Torres 7.9

MontgrasMorande YesPedro Felix de AguirreSagrada Familia 0.4San EstebanUndurraga YesValdivieso

Notes

a: Only if not in previous tables. Bottled wines only.

b: Making expensive (USD 50 plus per bottle) and highly innovative carmenere-

based wines, and therefore mentioned before in Table 1.

Sources: Vial, 2005; Alko, 2010.

Documents

Chillian Wine Export