The Wine Industry Recovers

Mother Nature’s fury was unleashed on Chilean wineries in the early morning of February 27 as the powerful earthquake ripped open stainless steel tanks full of fermenting grapes, ruptured barrels and smashed bottles in the country’s main wine producing regions.

“Our storage tanks collapsed and wine went everywhere, it was chaos,” recalls José Miguel Viu, Managing Director of the family-run Viu Manent vineyard in the Colchagua Valley, some 150km south of Santiago.

Like other vineyards in Colchagua, Viu Manent lost about 10% of its stock, or 450,000 liters, in the early hours of February 27, but it could have been worse – much worse.

“Thank God the quake didn’t happen a week later when our tanks would have been filled with wine from the harvest,” said Viu, adding most of the spillage was bulk wine from the 2009 vintage.

Chile’s annual grape harvest, or Vendimia in Spanish, begins in early March and grapes still on the vines were not shaken to the ground like apples and pears in the country’s fruit orchards.

But after a bumper 2009 harvest of around 1 billion liters there was plenty of unsold wine in tanks, barrels and bottles. Wines of Chile, the industry association, quantified the total loss of wine at approximately 125 million liters, or US$ 250 million, which represents a loss of 12.5% compared with the 2009 vintage.

Add to that US$ 55 million in damage to winemaking equipment and the total cost, excluding buildings and workers’ homes, was around US$305 million most of which was covered by insurance, said Rene Merino, president of Wines of Chile.

“There has been no impact whatsoever on exports, with our leftover 2009 stock and this year’s harvest we have all the wine we need to meet our commercial obligations,” said Merino.

Power was not restored to wineries for up to ten days and some workers were made homeless by the quake, but a week after the disaster grapes were being hand picked and pressed as normal.

“We really have to thank our workers who showed up to work despite damage, in many cases, to their own houses,” said Merino.

Viu Manent donated basic shelters, or mediaguas, to several families, while other wineries like Grupo Viña San Pedro Tarapacá matched workers’ contributions, collected donations and organized volunteers to help them rebuild their homes.

This year’s harvest is about 20% smaller than the 2009 vintage, which was bigger than average, but this is due to normal weather patterns in the spring and summer rather than the earthquake, said Merino.

Even after the earthquake and the smaller harvest, Chile has a stock of around 1.6 billion liters of wine, of which 900 million liters will be exported or consumed domestically. “There is no shortage of wine in the market,” assures Merino.

And that’s a good thing because demand for Chilean wine is rising. After sluggish sales in 2009 due to the affect of the global economic crisis, sales have picked up since December.

“May has been our best month ever in terms of sales and the domestic market has reactivated,” said Viu, noting that if sales continue to grow at the current pace, 2010 will be a record year for his winery.

Wine Exports

Although the earthquake closed ports and cut power supplies, exports in the 12 months to the end of March were up 27 percent in volume and 5 percent in value over the same period a year earlier.

Worldwide, the United States was Chile’s number one customer, buying 142 million liters of wine and champagne in 2009/10 worth US$242 million, which was nearly 44% more than the previous year. The United Kingdom came in second, putting away 115 million liters in the same period.

“The impact of the earthquake is not proving to be a major problem for Chile’s wine exporters in most major markets,” said Michael Cox, the UK Director at Wines of Chile.

However, the smaller harvest and the fact that some wine was lost in the earthquake will put pressure on supply and cause prices to rise this year, predicts Cox. Combined with exchange rate issues, especially the weakened Euro due to the European debt crisis, this means Chilean wine will be relatively more expensive for foreign consumers.

“Rising prices are good for producers and margins will improve, but it all depends on how these increases are accepted by major markets,” said Cox.

Chile has been steadily growing its share in key markets for the last five years. In the UK, for example, Chile’s market share has nearly doubled from 5% to 9.5% in six years.

At the London International Wine Fair held in May at the ExCeL exhibition and convention centre, the Wines of Chile stand, with representatives from 24 Chilean wineries, attracted over 13,000 visitors many of whom donated to an earthquake appeal that channels funds to the relief organization, Levantando Chile.

Chile has been in world headlines since the earthquake which has raised consumer awareness and led to an outpouring of support and positive feelings, noted Cox.

“Our customers want to help us get back on our feet and we expect that to translate into increased sales,” said Viu.

But retail prices will likely rise in the UK later this year because of the higher cost of Chilean wine and also because of planned tax increases in the UK that will affect all wine, not only from Chile.

“Chile’s image of value for money will be important to enable it to withstand these increases, but Chilean wineries must be pragmatic and temper their increases as much as possible,” said Cox.

The market could bear a 10 percent increase in prices but if the increase is closer to 20 percent or more “there could be a reaction,” he warned.

Prices of bulk wine will also rise in the domestic market due to the earthquake but wineries like Viu Manent will avoid passing this cost increase on to customers by increasing sales volumes instead.

“We can’t transfer the increase to our customers or risk losing competitiveness,” said Viu.

The good news for Chile is that its main competitors – Australia, South Africa, Argentina and New Zealand – are also facing price increases, either because of exchange rate issues or higher costs from smaller vintages.

Despite the challenging economic conditions, Cox expects Chile’s UK exports to continue to rise by at least 10 percent in volume and 15 percent in value in the next 12 months.

Exports to the rest of the EU should also rise as markets such as Denmark, Germany, and Scandinavia become more developed and less reliant on low-priced bulk wine, added Cox.

Sales in the UK and other markets including Asia should also benefit from Chilean winery Concha y Toro’s recent agreement to become an official sponsor of the football club Manchester United, one of the most watched teams in the world.

Knocked Sideways

Although most wineries have replenished their stock since the earthquake, it will take them longer to rebuild damaged tourism infrastructure.

Chile’s wine tourism business, while nowhere near the level of development of California’s Napa Valley, has been growing steadily in the last five years. Before the quake, around 300,000 tourists visited Chilean wineries annually generating income of US$3 million.

But that number will likely fall this year as wineries closed their doors to tourists early because of the quake, says Pablo Moll, CEO of Chilean nonprofit tourism promotion organization Turismo Chile.

Now that the harvest is over, wineries in the Colchagua Valley are turning their attention to the hotels, restaurants and shops that used to receive tourists during the spring and summer months, but now lie in ruins.

“The colonial houses and wine cellars which collapsed are important for the wine business but they are also part of our cultural heritage,” said Moll.

Viu Manent’s restaurant La Llaveria was destroyed by the quake, but it is being fixed up and the winery plans to open a second restaurant overlooking the vineyard in the spring.

“It’s true we will have to invest a lot in repairs and we will remain closed during the off-season, but it’s an opportunity to rebuild things better than before,” said Viu.

Further north in the Casablanca Valley, about 50km west of Santiago, the Veramonte winery also lost about 10% of its stock – mainly white wine in steel tanks – but its buildings remained standing.

“It’s amazing there was such little damage, fortunately the earthquake caught Chile with a good inventory and good capacity just before the harvest,” said Veramonte’s owner, the U.S.-based veteran Chilean winemaker Agustín Huneeus.

Despite the broken tanks, the harvest went ahead on schedule. “We have enough wine to meet our commercial obligations and there is no long-term impact on the export market,” said Huneeus.

Huneeus, who now lives in Napa Valley where his family owns the Quintessa winery, is no stranger to earthquakes. He began his career in the wine business at the age of 23 by purchasing a majority stake in Concha y Toro in 1960, the same year southern Chile was rocked by a 9.5 quake. Then after selling his stake and moving to California in the 1970s, he was shaken by the 1994 Northridge quake.

“I’d like to think good wine can only be produced in places where there are earthquakes,” he told bUSiness CHILE from his home in Napa.

Despite the damage caused by the quake, Huneeus is confident Chile’s wine tourism industry will rebound, the same way wine lovers returned to California. “We through tourists would stay away from Napa after the 1994 quake, but they returned immediately,” he said.

And that’s good news for Chile given the importance of tourism for the growth of the wine industry. “Wine tourism is a huge and important growth area for Chile and will play a key role in assisting the premium image and promoting interest in the domestic market,” said Wines of Chile’s Cox.

Plastic Fantastic

Given the magnitude of the earthquake, Chile’s wineries held up remarkably well structurally, but there are some changes they could make to protect themselves better in future quakes.

Half-filled steel storage tanks fixed to the floor or walls failed to withstand the strength of the quake as wine sloshed from side to side, but seismically designed storage tanks are too expensive for most wineries to afford.

A cheaper solution, says José Miguel Viu, is to use plastic storage bins which are tougher and more flexible than steel tanks or wood barrels.

“Plastic bins resisted the quake the best so we will be buying more of those as well as repairing our steel tanks,” he said.

Steel tanks can also be mounted in such a way as to make them more flexible in an earthquake. “Now we know what we should have done, this is a chance for us to learn and be more prepared next time,” said Huneeus.

And since winemaking and earthquakes seem to go together, in Chile as in California, being prepared for the worst is always a good policy.

But wineries also need to be prepared for better times, which is why wineries like Viu Manent are using the opportunity to renovate their buildings and prepare for the swarms of tourists that are sure to return next summer.

And with export markets like the UK and Asia growing thirstier for Chilean wine, including premium wines, there is plenty of room to grow. If there’s one thing Chilean winemakers have learned from the earthquake, it’s that the things that don’t kill you make you stronger.

Julian Dowling is the Editor of bUSiness CHILE

Note: See bUSiness CHILE’s upcoming July 2010 issue for a complete report on Concha y Toro’s sponsorship deal with Manchester United.

BOTTLED WINE – TOP 10  EXPORT DESTINATIONS

Accumulated 12 months

 

 

 

 

 

 

 

 

 

 

 

 

APRIL 2008 – MARCH 2009

 

 

APRIL 2009 – MARCH 2010

 

 

Variation % 2009/2010

 

 

CASES (9 LT)

US$

AVERAGE PRICE

CASES (9 LT)

US$

AVERAGE PRICE

CASES (9 LT)

US$

AVERAGE PRICE

COUNTRIES

(000s)

(000s)

US$/CASE

(000s)

(000s)

US$/CASE

 

 

 

UNITED STATES

6.969

197.414

28,33

7.428

203.627

27,41

6,6%

3,1%

-3,2%

UNITED KINGDOM

9.119

198.427

21,76

9.915

201.790

20,35

8,7%

1,7%

-6,5%

HOLLAND

2.132

61.937

29,05

2.507

70.479

28,11

17,6%

13,8%

-3,2%

CANADA

1.812

66.340

36,61

1.909

68.882

36,08

5,4%

3,8%

-1,4%

BRAZIL

1.902

49.619

26,08

2.528

64.556

25,54

32,9%

30,1%

-2,1%

JAPAN

1.600

45.927

28,70

2.001

52.398

26,18

25,1%

14,1%

-8,8%

DENMARK

1.343

48.241

35,93

1.310

44.780

34,17

-2,4%

-7,2%

-4,9%

IRELAND

1.364

46.654

34,19

1.314

41.246

31,39

-3,7%

-11,6%

-8,2%

GERMANY

1.381

40.525

29,34

1.426

39.613

27,78

3,3%

-2,3%

-5,3%

BELGIUM

889

31.419

35,33

825

26.966

32,68

-7,2%

-14,2%

-7,5%

  Subtotal

28.513

786.503

27,58

31.164

814.337

26,13

9,3%

3,5%

-5,3%

REST

11.820

356.532

30,16

12.038

346.840

28,81

1,8%

-2,7%

-4,5%

TOTAL

40.332

1.143.035

28,34

43.202

1.161.177

26,88

7,1%

1,6%

-5,2%

 

 

 

 

 

 

 

 

 

 

Source: Wines of Chile 2010

 

 

 

 

 

 

 

 

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