On December 15, the industry association Wines of Chile announced its 2020 Strategic Plan, which is designed to double the value of Chile’s wine exports in the next decade to US$3 billion. The ambitious plan aims to make Chile into the number one wine exporter in the New World ahead of Australia, South Africa, New Zealand and Argentina. But it will take more than just producing good wines at a decent price. Faced with increasing competition, Wines of Chile aims to promote its image with an international campaign highlighting the natural qualities of Chilean wines. But Chile’s image as a producer of good value wines is at risk due to recent price increases.

bUSiness CHILE spoke to Rene Merino, the president of Wines of Chile, about the state of the wine industry nearly one year after the earthquake that toppled tanks and wiped out 10% of the industry’s stock.

How has the wine industry recovered since the earthquake?

As I said in June, the impact has been relatively minor and we’ve been able to meet all our international commitments. However, we have seen an increase in the price of bulk wine because wineries that lost wine in the quake had to buy wine in the market to cover their contracts, but prices should return to levels similar to before the earthquake.

The price of bottled wine has also increased this year, why?

Prices of bottled wine should keep rising in 2011 in Chile and abroad, but this has nothing to do with the earthquake. The weak dollar means margins are extremely tight, and one of the ways to increase margins is to increase the price.

Is the market in Chile becoming more concentrated?

There has always been concentration and it will probably continue in the future. The top three wineries in Chile [Concha y Toro, Santa Rita and San Pedro] control 80% of the market. As I mentioned, the low exchange rate and higher costs makes margins extremely tight which has made it harder for smaller wineries to survive and made them more susceptible to being bought by larger wineries. Could this trend continue in 2011? You bet.

What can wineries do to mitigate the exchange rate’s impact?

We can reduce costs and increase prices. Prices will increase in 2011, as I said, but reducing costs is hard because the industry is already very efficient. The only relief we can get is through higher prices.

But doesn’t that affect the competitiveness of exports?

We believe there is space to raise prices without affecting the demand in international markets. We don’t think there will be a strong drop in demand due to the price increases, which we expect will average around 10%.

Chile’s most expensive wines, over US$25 a bottle retail, have suffered since the international economic crisis and this demand has not recovered fully, but we think demand will improve in 2011.

What are the emerging markets for Chilean wine?

China is becoming increasingly important for exports and this market will grow strongly in the coming years due to its size. While consumption is low, a small increase in per capita consumption generates a big increase in overall volumes. Brazil is also a growing market and we maintain the traditional markets like Canada, the U.S. and England.

Does the 2020 Strategic Plan represent a change in the way Chilean wine is promoted?

There is a change because some markets, like Scandinavia, are becoming less important, while new markets like Asia are now very important. Today we are the second exporter in the New World, in terms of volume and value, after Australia, but we aim to move ahead of Australia by 2020.

Where will Wines of Chile’s resources come from?

They are shared: 65% are private and 35% are from the state [through ProChile, CORFO and Fundación Imagen de Chile]. This is a lower proportion than most of our competitors that receive more resources from the state. In Australia it’s 50:50, in Spain the state provides 70% and France 80%. It’s a handicap for us. [Note: Wines of Chile spent US$6 million on promotion in 2009 and around US$7.5 million in 2010]

Are you worried about competition from Argentinian wine?

No, we knew Argentina would start exporting more and you have to remember that a number of wineries are owned by Chilean companies so we are not worried. Argentina has done a good job promoting its wine in the United States this year, but most of Argentina’s exports are Malbec which we believe is a passing trend that won’t last forever. Chile is better positioned in this market than Argentina due to the diversity of its exports.

And how is the U.S. market for Chilean wine?

Demand for Chilean wine is good. We expect to increase exports 5% by volume this year, which is not a great result but we are growing although not at the same rate as the rest of the world. Our Wines of Chile office in New York is working hard and we are optimistic about 2011.

There doesn’t seem to be much U.S. investment in Chile’s wine industry…

North American investment in the wine industry is not very big in any country except maybe Australia. [The world’s biggest wine producer] Constellation has a foot in Chile through [the local winery] Veramonte but the situation is very similar to Argentina, whereas investment is greater in Australia probably due to cultural reasons.

Are you worried about demand in the domestic market?

According to the information we have from the large wineries, per capita consumption in Chile has remained steady in the last few years. We’re not happy with this, we would prefer demand to increase, and we are planning various activities in the local market next year to promote consumption.

The Chilean market is small with relatively low purchasing power so it’s not attractive for small wineries that would rather focus on exports, but it is attractive for the big wineries that can manage large volumes at low cost.

What is the outlook for 2011?

The outlook is good in terms of sales but bad in terms of results. Chile does not have a problem selling wine, there is enough demand in the world and enough wine to meet that demand. But our margins are bad because of the exchange rate: 70% of our income is in dollars and 90% of our costs are in pesos. The earthquake wasn’t a big problem for us, the problem today is the exchange rate – anything below 500 pesos means a bad year.

Julian Dowling is Editor of bUSiness CHILE