Times of change and challenge tend to inspire contradictory reactions: anxiety, excitement, confusion, clarity, defeatism and opportunism. Such is the jumble of emotions currently emerging from Chile's wineries as the country contemplates a period of profound change for its wine category in the UK market in 2008 and beyond.
Over the past half decade, Chilean wine has been experiencing a period of rapid growth in the UK, spurred on by a positive buzz from buyers, trade and consumers alike. Since 2003 it has increased its off-trade volume category share by around a third, from 5.9% to 7.7%, motoring past the likes of Spain in the process and slotting into sixth spot. Over the past year alone it has grown 15% by volume and 16% by value in the UK retail market.
The UK remains Chile's biggest customer. According to Wines of Chile figures for the overall market, in 2007 the UK took just under 9 million cases of Chilean wine, generating revenue of some US$212 million (FOB) - increases of 29% and 45%, respectively, over 2006 figures. Top brands Concha y Toro, Isla Negra and Viña Maipo have all put in sterling performances over the past year in the UK market, growing at 31%, 46% and 39% respectively, in the year to July 2008, according to Nielsen. (In OLN's Wine Report, published in July, the brands were ranked 11th, 15th and 43rd in the UK off-trade .)
So far so good, you might think, but therein lies the
problem. Thus far, it has been more or less business as usual for Chile, but circumstances have now changed, with the result that some tough decisions have to be made.
At its most basic level, the challenge and change facing Chile amounts to one simple but very significant factor: Chilean wine is getting more expensive. Although these are tough economic times for everyone, partly due to rising costs (energy, transport, dry goods, grapes, UK duty, among other things), Chile has been hit particularly hard not only by rising domestic inflation (currently at 8%) but also by an adverse exchange rate that has effectively seen over a third of total income wiped off winery balance sheets over the past few years.
While economies have been made in recent years, most Chilean wineries are now bowing to the inevitable and phasing in price hikes and reducing promotions. Though these have yet to have a major impact on the country's volume sales and average price in the UK market (see box), the shift is expected to be marked in the coming months. As Majestic buyer Matt Pym says: "We'd all like to have super-cheap Chilean wine to sell, but if it's not viable for them, it won't work: they have to make money. Ultimately, though, it will be a brake on the category."
But does Chile risk undermining its hard-fought reputation for delivering reliability and value for money if it starts to move out of the cheap-and-cheerful
bracket? Not according to René Merino, Vinos de Chile chairman and co-owner of the Limarí-based Casa Tamaya winery.
"I believe Chile has a huge opportunity in these times of economic turmoil," he asserts. "Good value is what will make Chile successful in the long term, because good value does not have to mean cheap. We can deliver good value all the way up to £25, and compete with Australia, USA and France at that level. We can reinvent ourselves."
The point is echoed by Cristián López, managing director of Concha y Toro UK, which is responsible for the top three Chilean brands in the UK market. "There are always tough times in business, but that's exactly the time to show your worth. We have kept up investment in recent years, constantly moving ahead of our comfort zone, to prepare for times like these."
Concha is currently launching two contrasting new initiatives. The first is a blush-style wine under the Frontera label (Cabernet Sauvignon at 26g/l residual sugar). "It's a growing market segment that Chile has not addressed before and allows us to compete with other major brands,"
Then there's Fine Wine, a collection of the group's icon wines, which includes Almaviva, Ocio and Don Melchor, in one portfolio. "We've long focused on the mid-range, but now it's time to move up, give consumers an option and compete with France, Australia and the rest. In a recession, Rolls Royce always sells. It's about education, diversification and premiumisation."
Reinvention , change , premiumisation. These words are by no means unique to the wish list of the Chileans -
and are bandied about with notable frequency by producers the world over. So why does Chile believe it is better poised than other wine nations to achieve this highly sought -after goal?
Wines of Chile UK has long been consistent in encouraging its wineries to attack the premium sector, and its head Michael Cox believes he has the answer.
"The early 1990s saw the last major UK recession and they were halcyon days for Australian wine . This is primarily because it was perceived as offering good value for money , even though the wines themselves weren't actually
that cheap. Chile currently has a great -value image and consequently now has the perfect opportunity to ram home its credentials for reliability and value at all levels, especially in the £5-£10 range. Ultimately, the message is: you can trade up or down with Chile but, either way, it won't let you down."
But will it not damage the Chilean category if prices stiffen and momentum is lost as a result? Cox is phlegmatic. "It's not the end of the world if we lose ground in volume terms. These are tough times for everyone, but it's not the time to sell your soul to the devil just to maintain market share. I'd far rather Chile works to get its average price up and spread its good -value image into more premium sectors."
Nonetheless, it's clear that major UK buyers are not prepared to put prices up simply to accommodate suppliers. Quite the opposite, in fact. Tesco product development manager James Griswood says: "For me, the current global economy says we should be focusing on helping people to economise and get best value, not trying to get people to spend more." Others criticise certain Chilean brands for having raised prices too abruptly.
So is there a danger Chile might shift its focus away from the UK given it has the lowest average purchase price of any of Chile's top 10 markets, and there are better margins to be made elsewhere? Not according to Gustavo Llona, managing director of Tabalí and Viña Leyda, who sees potential for premium growth as a major incentive despite the associated challenges.
"The UK is a tremendously important market for us. It's a demanding, dynamic, competitive market, which defines trends and acts as a reference for many other markets. It requires suppliers to be constantly on their toes and reinventing themselves on a professional level to keep satisfying the needs of the consumer. Most importantly, it increasingly offers opportunities for growth in the upper segments of the market, which suits specialists like Tabalí and Viña Leyda."
It's a viewpoint shared by José Manuel Ortega, whose O
Fournier wine operation is a newcomer to Chile. "The UK market is of tremendous importance to the O
Fournier group. I feel there is still growth in the market, especially for certain countries - at the expense of others like France and Australia. The only drawback is price pressure from buyers. Also, everyone wants to sell at a higher price, but it is not an easy task. It's all about quality - and then effective promotion. It's a long and costly effort."
One ongoing bone of contention with regard to the Chilean category is the issue of own-label. Some argue that the fact that around 27% of Chile's overall retail sales are own-label (£94 million out of £344 million) devalues the category. Others, such as Cox, see things differently. "I'm not too concerned about that, because these days the boundaries have blurred and own-label doesn't have to mean cheap. It can just as easily be premium - look at Tesco's Finest or Sainsbury's Taste the Difference - and this does generate good margins and a positive image for the country."
Either way, the coming months and years
are shaping up to be
a critical time for Chilean wine in the UK market. It could yet emerge from this period of adversity with much credit.
Chile's top brands
Concha y Toro +31%
Isla Negra +46%
Viña Maipo +39%
San Pedro +7%
Chileno (now Chilano) -5%
Cono Sur +1%
Canto de Flora -15%
Luis Felipe Edwards -55%
Source: Nielsen off-trade value sales year to July 12 2008
The buyers' views
James Griswood, product development manager, Tesco
"Chile is one of our best -performing categories and we significantly over-trade on it compared to other retailers. There's not much it isn't doing well at the moment. It has great strength in brands, with quality that really stands up against similarly priced brands anywhere else in the world. The flip-side of brands is own-label, where Chile really excels. Chilean producers seem to give as much focus on improving the ongoing quality of their own-label contracts as much as they do their brands. This is pretty unique on the global stage. Chile also has an embarrassment of riches when it comes to regional variation, and things will only get better on this front. The core backbone to Chile's success is that of value. Value at all levels. Long-term premiumisation is possible but must be done very slowly, and at the right time."
Matt Pym, Chilean buyer, Majestic
"Chile shouldn't get too hung up about ridding itself of the cheap and cheerful image - it's how many people get into wine in the first place. I don't see why Chile can't do it all; it's great to see a country really delivering from £3 to £50, like many Old World countries do. The quality at £6-£10 is clearly good enough and consumers can see that. Our pricier Chilean wines sell well - they have a clear stylistic progression and can be easier to sell than, for example, Australian wines at the same level. Sauvignon Blanc and Syrah are really impressive, and I can't get enough Chilean Pinot to sell. Prices are going up, so that will slow growth, but it's tough for everyone now. Even so, I've just made about 12 bold new listings after a recent trip - without taking many off."
Julie Buckley, Oddbins buyer
"Chile offers a great diversity of grape varieties at good value for money. It has worked hard at improving the quality of its wines and to break away from its reputation as a bulk wine producer. The Chilean wines that can be found in the Oddbins range are a reflection of this, with wines priced from £4.99 through to £20.99. It's
good to see a
number of boutique producers coming on stream, but we would like to see more choice at £5-£10. We have certainly seen substantial cost increases largely at entry
level. On a positive note this has allowed us to move away from more mainstream brands and source new and exciting replacements. The more variety we can offer the consumer the better it is for us. We are confident Chile will be able to maintain its current position, at least in terms of ranking, as it still continues to offer excellent value for money."
The independent's approach
Taurus Wines, Bramley
"Chile is all things to all people. It does a great job at the £5 level, but also has excellent diversity. Sauvignon Blanc, rosé and Pinot Noir work well with our female customers, while the Merlots and Cabernets have been around long enough not to scare the horses in more conservative circles. For the funky wine bars or people after new things, there's always Carmenère or Sauvignon Gris. And at top level there's also stuff to sell to big earners and collectors.
Education is a big part of selling Chile. Especially above £5, people need to understand why the wines are worth spending the extra money. Opening samples is often a big part of this. It's also important to think outside the box [Taurus has conducted Chilean tastings recently in conjunction with both trout fishing and a llama walk].
In 2007 my Chilean sales were 2.7% by value; in April I mailed a special Chile supplement and now sales are at 7.5%. There's no negative sentiment towards Chile, and Wines of Chile do a great job. I can see nothing but growth in the future for Chile. It's the new Australia."
Chile in figures
Chile's UK off-trade sales by value
Year to June 14 2008: £344 million
Year to June 16 2007: £297 million
Year to June 17 2006: £263 million
Chile's UK off-trade sales by volume
Year to June 14 2008: 67.1 million litres
Year to June 16 2007: 58.3 million litres
Year to June 17 2006: 51.9 million litres
Chile's average price per 75cl
Year to June 14 2008: £3.85
Year to June 16 2007: £3.82
Year to June 17 2006: £3.80