Room to Grow for Chilean Wine

By Jamie Thalman ‘10

Over a year ago, I came across an article about the resurgence of a once thought to be extinct type of grape used to produce a unique wine, now grown exclusively in Chile. I knew nothing of wine, but the article sparked an interest. As summer approached, my close friend and fellow Oxy student, Gene Shtark, and I entertained possible summer research projects that would take us abroad. We settled on Chile – specifically, Chilean wine.

After preliminary research, we discovered that the Chilean wine industry had experienced an era of unprecedented growth that ended over seven years ago. While exports have since excelled, Chilean wine producers have seen increasing competition from Australia, South Africa and Argentina. Australia just recently surpassed Chile in exports to the United States. We saw an opportunity to learn a great deal about challenges Chilean wine makers face. After gaining support from Oxy’s Undergraduate Research Center and Economics Department, it became clear we were going to Chile. Not long after we secured our project, another Oxy student, Brendan Rakphongphairoj, joined Gene and I in executing our research.

To explain Chile’s relative wine export stagnation and understand competing strategies to stimulate growth, we conducted interviews with representatives from Universidad Catolica, Wines of Chile, Kingston Family Vineyards, Concha y Toro, Santa Rita, Viña Mar and Indomita. Studies suggested that a majority of Chilean wine makers lacked cutting edge production techniques while few major producers sequestered modern production technologies and distribution networks. Reports suggested poor vineyard communication and collaboration coupled with insufficient investment partially explained the slow growth in the industry. Based on interviews conducted and observations made of wine producers and their constituents, wine production techniques, vineyard collaboration and inadequate levels of investment do not fully explain the relative sluggish growth of wine exports.

Viña Mar, a recently established vineyard in Casablanca Valley utilizes closed fermentation tanks and advanced grape presses in the production of their Cabernet Sauvignons, Merlots and Carmeneres. Instead, Gene, Brendan and I argue that the relative stagnation of Chilean wine exports can be attributed to the appreciation of the Chilean Peso to the US Dollar, overemphasized production of red wine, challenges faced in global distribution and international market penetration, lack of wine differentiation and inadequate support of and from strategic organizations.

The appreciation of the Chilean Peso relative to the US Dollar partially explains the relative slow growth of wine exports. With wine bought in the currency of the importing nation, Chilean winemakers and exporters are exposed to fluctuations in exchange rates of Pesos and currencies of import as they exchange the payments for Pesos. Of all wine exported, 17% is sent to the United States, leaving wine-producers vulnerable to Peso-Dollar exchange rates. At the end of 2003, 1 US Dollar bought 700 Chilean Pesos, however, by March 2008 1 US Dollar could be exchanged for only 450 Pesos – a 29% appreciation in the value of the Peso relative to the Dollar.

Chilean wine sold in US markets has decreased in value significantly over the past four years as winemakers and exporters receive fewer Pesos for their wine selling at unchanged US prices. Unable to raise the price of wine without experiencing lower levels of demand, all costs become relative with the appreciating Peso. Edmundo Bordeu of Catolica Universidad explained that many smaller wineries have not been able to endure the exchange rate as it stands and cover costs. He has witnessed wineries either exit the market or merge with the few largest producers. Since March of 2008 the Peso has depreciated 22% to over 500, suggesting profitability may improve for exporting wineries. Exchange rates, however, do not fully explain the export stagnation.

The historically overemphasized production of Chilean red wine also helps explain the export stagnation. Red varieties constitute 80% of all Destination of Origin Chilean wine produced at over 480 million liters (SAG). Consumption of red versus white wine in target export markets such as United Kingdom, Germany or United States is basically evenly divided. Chilean wineries have not yet adjusted production to match consumer preferences and their production potential. In neglecting to expand production of white wines, Chilean producers are not well represented in half of wines consumed. Conversely, Australia produces wines in accordance with consumption patterns and has experienced unparalleled export growth. Bordeu and Jennifer Rix of Kingston Family Vineyards suggest Chile still has great potential to produce a variety of white wines. Kingston Family Vineyards are slowly expanding growth of high quality, expensive grapes for white wine production in Casablanca Valley. With the emergence of untapped regions positioned to grow grapes for white wine, Chile could match consumer preferences and stimulate export growth. The recent establishment of vineyards such as Viña Mar and Indomita in Casablanca Valley reflect a movement toward greater white wine production.

Furthermore, barriers surrounding entry into international markets prevent many wineries from capturing market share abroad. When looking at the United States, each state has unique rules and regulations regarding wine production and sales. In order to meet such rules and regulations, Chilean wines must be produced, bottled and labeled to meet specific state requirements. In looking to export to the United States, vineyards are forced to target and establish distribution in certain states. While on the export side, wineries face difficulties establishing distribution in the US. From the perspective of US distribution Forbes said that to adopt a Chilean wine for distribution, another wine already carried would have to be dropped. As retailers and distributors operate at full capacity, Chilean wineries wishing to enter US markets would have to provide incentives beyond their product, such as advertising or retail display pieces. With the initial establishment of Chilean wines in these US markets, it becomes increasingly difficult and costly to capture a greater share of distribution. Only firms with substantial resources such as Los Vascos, Concha y Toro and Santa Rita have been able to establish extensive distribution networks. As of 2007, Concha y Toro’s brands represented well over 40% of all Chilean wines sold in the US. Rix explained that to establish Kingston Family Vineyards’ export network, a member of the vineyard attained a US importing and distribution licenses and started importing to California’s Bay Area herself, selling directly to retailers. Smaller vineyards have been forced to work outside of the conventional methods of distribution.

In addition to the challenges faced with market penetration, a lack of wine specialization has hampered the demand and appeal of Chilean wine. Chilean vineyards produced a vide variety of wines such Cabernet Sauvignon, Merlot, Syrah, Pinot Noir, Sauvignon Blanc, Chardonnay and Viognier. Previously, many consumers turned to producers that specialized in such varieties from France, Italy or Australia. Without a uniquely Chilean variety of wine, producers entered markets as a low price alternative to high-end French or Italian and even Australian brands. As greatest growth prospects currently exist in middle and higher priced wines, Chilean wines would not be well positioned to experience such growth. However in 1998, tests were conducted on what was previously believed to be Chilean Merlot. After further investigation the Merlot was in fact found to be Carmenere, a variety of wine once grown in France and the Americas but thought extinct after the phylloxera infestation. Since this development, Carmenere has been identified as a uniquely Chilean variety. All wineries consulted in this research displayed their production of Carmenere as a source of pride. Production of Carmenere has expanded since 1998 to now constitute 10% of all wine produced in Chile and could be a major area of growth. As the profile and production of Carmenere develop, it may provide Chile with the specialization and comparative advantage it lacked.

Without a mandatory support system and a lack of brand specific advertising, Wines of Chile may experience a “free-rider” problem where wineries experience the benefits of the organization’s efforts without contributing to its success. Bouiey did not see this as a potential problem and argued that with time his organization could effect export growth. He went on to explain that Wines of Chile is currently targeting the United States as the greatest market to infiltrate. They plan to open a New York City office in 2010 to better coordinate strategic operations. Further they hope to establish an association of quality for Chilean wine in most price ranges above $12 a bottle. He described Chilean wine as not only the best value, but in some cases the best quality as well. The organization hopes to demonstrate this development with blind taste-tests in Los Angeles, Boston, New York and other major US cities. With increased support from participating wineries and the Chilean government, Wines of Chile stands to establish a superior value for Chilean wines. With their brand ambiguous approach, garnering individual winery support may prove to be a great challenge.

Chilean wine producers no longer face problems related to inferior production techniques or lack of adequate investment. Instead they are now experiencing challenges related to further establishment in markets. Coupled with vulnerability related to exchange rate volatility, wine producers’ profitability is partially beyond their control. While Chilean wine makers face increasing competition from Australia, South Africa and Argentina, with sophisticated methods of production, Chilean brands are now able to compete with their French and Italian counterparts. Wine producers are now working to build their brand presence with strategies such as the promotions Concha y Toro has launched to build its winery as a tourist destination. As wineries and organizations such as Wines of Chile focus on the advancement of Chilean wines, demand for higher priced Chilean wines could provide the industry with substantial growth prospects. Gene, Brendan and I learned a great deal not only about the Chilean wine industry, as this article reflects, but we also learned valuable lessons regarding research methods and travelling abroad.

Jamie Thalman is a junior Diplomacy and World Affairs major. He can be reached at jthalman@oxy.edu.

 

More Than Fetching Coffee

By Jason Knudson ‘08

The second semester of my senior year was one of the most challenging and exciting times in my life. I was working on two senior theses but I was also attempting to figure out my life after graduation. I had applied to various internships in Washington, D.C. but the Korea Economic Institute was on the top of my list for many reasons.

In the summer of 2006, I attended the Japan America Student Conference (JASC). JASC brings together a large group of American and Japanese political and economic scholars for a month long academic conference either in Japan or the United States. At the 2006 JASC, which was held in the Untied States, we had the opportunity to visit the Korea Economic Institute and hear a talk from the President of the Korea Economic Institute, Charles L. (Jack) Pritchard—former ambassador and special envoy for negotiations with the Democratic People’s Republic of Korea. I was overwhelmingly impressed with the organization and Ambassador Pritchard.  I decided to work hard my senior year to be chosen as an intern at the Korea Economic Institute. 

I graduated Occidental College in May 2008 as a double major in Diplomacy and World Affairs and Asian Studies. I had taken a wide variety of courses from Comparative Politics to Japanophila. Yet I never had the opportunity to take a course on northeast Asia. After the first week at the Korea Economic Institute, I was able to immerse myself within an institution that works to improve the foundation of United States-Korea relations. The office at the Korea Economic Institute is quite small, including nine full-time staff and three interns, compared to other think tanks such as the Heritage Foundation, the Brookings Institution or the Center for Institutional and Strategic Studies (CISS). Because it is small, however, the institute can act more cohesively as every staff member, including interns, attends an office meeting every Monday to discuss policy, politics and each member’s agenda for the week. This enabled me to be introduced to the comprehensive work that the institute is involved in my first day on the job.    

The Institute was established in 1982 as a South Korean government sponsored public policy institute. The institute originally focused on the most important issue at the time for the United States-South Korean alliance—the economy. However, as South Korea became a more prominent member of the international community during the 1980s and 1990s, the Korea Economic Institute began to expand to become a comprehensive institute that explores issues ranging from international security to free-trade negotiations.

As an intern at the Korea Economic Institute, I was given many important duties and responsibilities. As a public policy institute, members of the office were required to attend any and all events that pertained to issues that could be important for the South Korean government. After attending an event, we were required to write a follow up report for the South Korean embassy in Washington, D.C. and the Korea Institute for International Economic Policy (KIIEP). Throughout the nine weeks of my internship, I attended sixteen different hearings, talks and programs at various think tanks, academic forums and senate committees. I attended a talk by Ambassador Nabil Fahmy, former editor-in-chief of the Economist Bill Emmott, Professor Jagdish Bhagwati and Speaker of the House of Taiwan Wang Jin-pyng. I went to a hearing of the Senate Foreign Relations Committee in which Joe Biden, Richard Lugar and John Kerry discussed the growing militarization of U.S. foreign policy and a hearing of the Finance Committee in which former U.S. trade representatives discussed free-trade agreements. For each program, I was responsible to write up the report, have it edited and send out the final copy.

Each one of the speakers that I mentioned gave talks related to issues that indirectly pertained to South Korea. However, one day during the summer, I had the opportunity to experience real United States-Korea diplomacy being constructed. On July 1, I received insider information that Ambassador Christopher Hill was going to be giving an update on the six-party talks at CSIS. For those of you who are reading this and wondering why I am making a big deal of Christopher Hill. He is the Ambassador representing the United States at the table of the six-party talks between the United States, China, Russia, Japan, South Korea, and North Korea. I attended his talk with Ambassador Pritchard in a room packed with video cameras, journalists, and prominent policy makers. He discussed the recent agreements with North Korea, which included the United States taking North Korea off the state sponsor of terrorism list in return for a declaration of all of North Korea’s nuclear programs, and the future of six-party talk process. Following his speech, I attended another program on the North Korean issue which hosted my boss Ambassador Pritchard, Dr. Robert L. Gallucci, former lead Ambassador responsible for the 1994 Agreed Framework; and Bruce Klingner, Senior Research Fellow for the Northeast Asia and Asian Studies Center at the Heritage Foundation. The panel discussed many different facets of the North Korean nuclear crisis and provided innovative recommendations to improve our nation’s security.

The relationship between the United States and Korea impact international security and developing tangible ideas to better those relationships is essential for a more secure and peaceful international environment. I felt like a part of that development of ideas during that program and throughout the entire summer at the Korea Economic Institute.

During a summer in which North Korea destroyed its cooling tower at its nuclear facility at Pyongyang and South Korea citizens vehemently protested their government’s decision to allow U.S. beef imports interning at the Korea Economic Institute was both exciting as well as professionally and academically challenging. I took a lot out of my experience in Washington and I encourage those who are interested in U.S.-East Asia relations to research the Korea Economic Institute.

If you are interested in interning for the Korea Economic Institute you can reach Jason at jknudson21@gmail.com or visit the internship website at http://www.keia.org/internships.php.