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At present, Chilean wineries appear more focussed on improving pricing than on growing volumes, and this seems appropriate. In Rabobank’s view, the Chilean wine industry must continue to focus on developing initiatives that are likely to provide increased support for pricing; investing in brand building (particularly higher priced brands), developing improved distribution channels and routes to market, expanding into markets with better pricing opportunities, diversifying into higher valued varietals and appellations and improving wine quality.
Total wine production
Much of the growth in Chile’s wine production and exports over the past decade was fuelled by vineyard expansion in the 1990s. The ongoing growth in production is not surprising, given that it generally takes six years or more for a newly planted vineyard to reach full productivity. However, since 2000, Chile’s vineyard area has grown at a CAGR of less than 1.5 percent. This suggests that Chile’s total wine production should eventually reach roughly this same rate of growth.
In November 2010, Vinos de Chile published its ’Strategic Plan 2020’, analysing Chile’s positioning in the world wine market and establishing goals for volume and pricing growth for the next 10 years. Attaining the goals established will require considerable effort from Chilean wineries, but the recent experiences of Australia and other New World wine producers have shown that efforts to grow volumes will often conflict with efforts to grow pricing. The Chilean wine industry should give priority to pricing and only focus on growing volumes once real pricing growth has been achieved.
Plan 2020 projects an average annual price increase of 3 percent for Chilean bottled wines over the next 10 years. Growth in annual price increases varies, but a cursory analysis suggests that the 3 percent growth projection may be optimistic though not unattainable. Measured in United States (US) dollars, pricing for Chilean bottled wine exports has grown at a 2 percent CAGR from 2001 to 2010. This includes an 8 percent decline in pricing for bottled wines in 2009, which was an exceptionally difficult year for the wine industry. Excluding 2009, pricing grew approximately 3 percent annually during that period, indicating that the projected 3 percent growth rate in pricing may be attainable.
Challenges
The issue of fluctuating currencies highlights a critical issue for the Chilean wine industry. Chile is a relatively well-diversified exporter, with production destined for a wide range of markets. However, the US and the United Kingdom (UK) are by far Chile’s largest markets, and both are facing economic hurdles that are unlikely to be resolved in the near future. These challenges will likely keep downward pressure on their currencies relative to the Chilean peso for several years. So a 3 percent CAGR in average pricing may be feasible, but may not reflect improving returns in the industry. It may be better to target more moderate pricing growth but to measure that growth in Chilean pesos.
Factors supporting prices
The soft economies in the US and the UK and the strength of the Chilean peso will likely create pricing headwind in the coming years, but there are several factors that are expected to play a supportive role for Chilean wine prices. These include expansion into more attractive export markets, the improving global supply/demand balance, the Chilean government’s commitment to building Chile’s country image and production diversification into new micro climates and varietals.
As these economies continue to grow and import more wine, they should provide additional support for Chilean wine-pricing. In addition to the expansion into more attractive export markets, Chilean wine prices could see support from the improving supply/demand balance in the global wine industry.
Excess wine supply in the global markets created an adverse pricing environment for wine suppliers around the world, but consumption has been improving from the lows of 2009, and many major production regions have seen relatively small harvests in recent years. As excess inventories are reduced, pressure to discount wines appears to be easing. If these trends continue, they should eventually provide a foundation for improved pricing of Chilean wine exports.
A further source of support for improving Chilean wine-pricing will be support from Wines of Chile in building the country’s image in export markets. Plan 2020 rightly recognises the importance of improving Chile’s country image as a basis for improving prices and sets out a plan to invest a limited amount in improving Chile’s image among consumers in key markets.
Finally, Chilean wineries have been diversifying wine production into new micro climates and new varietals in order to expand their range of highquality wines. Varietals such as Carménère and Pinot Noir have seen significant growth in new plantings over the past decade, with vineyard area growing nearly 50 percent between 2000 and 2007.
