Victor Baeza, general manager of Calina winery in Talca, Chile, says the… (Chris Kraul / Los Angeles…)
Reporting from Talca, Chile — It's a perfect, sun-dappled morning here at the Calina vineyard in the heart of Chilean wine country, whose mild weather, leafy byways and idyllic mountain surroundings evoke the fabled wine regions of Northern California.
But there is trouble in the vineyard. This winery, founded in 1993 by Jackson Family Wines of Santa Rosa, Calif., is hurting along with the rest of Chile's export-oriented wine industry. The double whammy of a strong currency and the global financial crisis has squeezed the profits of vintners here.
Paradoxically, foreigners are drinking more Chilean wine that ever. Chile's wine shipments were up 17.6% last year to 696 million liters, according to the industry trade group Wines of Chile. That's slower growth than in years past, but it's stellar compared with that of California wineries, whose 2009 shipments declined by 4 million cases, the first drop in 16 years, according to industry consulting firm Gomberg, Fredrikson & Associates.
Chile's trouble is that cash-strapped consumers have traded down to cheaper vintages, spoiling the plans of the country's winemakers to move upmarket. Despite the increase in volume, Chile's 2009 export sales were flat at $1.4 billion, as vintners turned to bulk sales and discounting to move inventory. Meanwhile, wine-making countries including Argentina, Australia and South Africa are competing fiercely for a share of the low-end trade.
"It's been difficult for us . . . since the Chilean peso began to appreciate and our wine got more expensive in most of the 120 countries we export to," said Rene Merino, president of Wines of Chile. "Just as things were starting to get better, the crisis came, which flattened demand."
He said several wineries sold assets last year to survive and three filed for bankruptcy protection in 2008.
The pain is being felt at Concha y Toro, Chile's largest winemaker.
"Until 2002 or 2003, we were growing at a 10% annual average. But then we slowed down and we had to adjust," said Rafael Guilisasti, a member of the family that owns the firm.
Others, such as Calina, are faring better but still feeling the pain. Just a few years ago, Calina's exports were growing at a double-digit annual rate. But last year, sales at the 170-acre operation didn't budge from 2008, said Victor Baeza, general manager of the winery 120 miles south of Santiago, the capital.
"The blow wasn't so bad. But still it hurt," Baeza said, adding that even though his winery does not sell in bulk, other vintners are doing it to stay alive.
"The problem is, it's not the best Chilean wine that's going out on the market, and that concerns us."
Although wine was first introduced here two centuries ago by Spanish and Italian immigrants, Chile's export industry essentially started from scratch 20 years ago. Domestic consumption had fallen off dramatically. So the industry looked to foreign markets, helped by free-trade agreements that Chile would sign with 56 countries.
Blessed with ideal weather, good soil, low labor and land costs and plenty of water, the industry also embraced improved winemaking technology that boosted production.
Chile is now the No. 5 exporter behind France, Italy, Spain and Australia. About 250 Chilean wineries export their vintages.
In addition to Jackson, whose best-known U.S. label is Kendall-Jackson, foreign wine companies arriving here to plant vines included a dozen French vintners, including the two main Rothschild houses.
The French were drawn to Chile because, unlike in their native country, where vineyard expansion is tightly restricted by the appellation system, there was plenty of room to grow, said Bill Crowley, professor emeritus at Sonoma State University in Rohnert Park, Calif.
"French wineries moved to Chile in the 1990s much like French champagne producers like Chandon moved to California in the 1970s," Crowley said.
"They saw opportunity for growth where there was none in their native countries."
Although there is plenty of room in California for expansion, companies like Jackson Family Wines opened here because Chile is "well suited to varietal wines our company has a proven record with" and because Chile offers an export platform that expands "the reach of our sales opportunities," said Brian Hilliard, marketing vice president at Jackson.
But even as exports tripled over the 15 years through 2006, the Chileans were frustrated at their inability to "break out of the $10- to $20-per-bottle price point," Crowley said, and into higher-margin premium prices closer to $50 a bottle.
With unusual unity, the Chilean industry decided several years ago on a two-pronged strategy to achieve higher profit margins: Winemakers would curb supply by limiting acreage planted to the current 300,000 acres. And they would help fund a global campaign to burnish the image of Chilean wines.
The Chileans believed they had the goods to warrant higher prices, said Alejandro Hernandez, a Santiago vintner and oenology professor and a well-known wine writer.
"In independent blind taste tests with expert tasters in Berlin and London, Chilean wines do as well as Italian wines and French wines from the best chateaux," Hernandez said. "But moving upmarket requires marketing and improving the nation's image with better labeling and so on, and we are not expert at this."
So the wine industry here is in a holding pattern of sorts, hoping the currency weakens and that the global crisis lifts. There is no immediate sign of either happening.
"The outlook is complicated for us," Merino said. "But we're a tough industry; we've been around forever. And we are in permanent contact with the government to try to find a solution."
Kraul is a special correspondent.
Bloomberg News was used in compiling this report.