Vinodata

Winemaking Industry Structure

3. The Winemaking Industry Structure

Ramón A. Rada M.

3.1 General Description

                It is important to point out that in spite of the country having a long tradition as a western–type wine producer, the Chilean wine industry is relatively free from intervention from the State and from nongovernmental organisations that group the different actors involved in the industry. Consequently there is a considerable difference between the Chilean wine industry and the organisation framework of other traditional wine producing countries. Thus, the local industry has 14,674 farms that grow grapes for wine. These producers can eventually reach the fruit market to sell their produce, or they may become vertically integrated into the subsequent stages of the value chain until they reach the final processed product, namely, wine.

It is possible to integrate the value chain through individual resources and investments or by hiring the services of companies that specialise in the diverse stages of the vertical integration. In this way, viticulturists have the option to use the services of some 453 cellars that can eventually offer winemaking and storage services for the market in general and for the processing of their own viticulture production. As mobile units can be hired to take care of bottling and labelling, investment in permanent filling equipment is unnecessary from the point of view of production processing, so that investment in equipment of this kind depends on the criteria of each individual company. Therefore, from the point of view of production of intermediate or end products, it is possible, given expertise in the wine business and in the management of financial capital to meet demand without having to invest in immovable assets. In this way, local producers can make top quality wine for the domestic and world markets and without having to have their own vineyards or winemaking facilities or bottling or labelling systems provided there is capital available. In Chile the specific technical expertise to develop this industry is abundant and its cost is relatively low.

The above situation makes the Chilean industry enormously flexible when it comes to adapting to market changes and at the same time sacrifices the rigid and controlled structure existing in other industries, which tends to make it more vulnerable. In other words, the industry has very little or no protection whatsoever and is very vulnerable to sudden short term changes, particularly in the case of small scale industries that live the paradox of great flexibility and extreme vulnerability. At the same time, this lack of traditional structure contributes to facilitate the consolidation processes that are more and more common and that orient the industry towards fewer but larger enterprises and towards the increase of boutique companies that have the financial capacity to aim for high value niche markets. This trend will continue, and will probably increase the share of fewer and larger companies in low and medium priced wines and of an increasing number of boutique producers for the niche markets and high-price wines. A significant majority of the latter have the support of international capitals and expertise, especially of French companies that have set up operations in Chile during the past 25 years.

The fact that there are no easily accessible official public records of wine grape producers and processors in Chile is significant. In general, the State requirements focus on the watching over of tariffs and taxes, to which there is no public access owing to the nature of the information itself. There is practically complete freedom in all the other aspects of the business. Paradoxically, the Chilean State played a relatively active role in the second half of the eighties and in the nineties, when it contributed significantly to the promotion of wine exports, thus facilitating the transformation of the industry. The large-scale companies made efficient use of this, acquiring a significant advantage, which today is translated into an increasing share in the international market.

The State has significantly reduced this support, so that the small industries that were in their initial stages of development had no access to such help and nowadays cannot avail them of it due to the change in policy: they have been left at the mercy of change and the trend towards consolidation. We could say that the Chilean State has been an active promoter of the concentration of the industry over the past 15 years. This situation undoubtedly favours the penetration of the Chilean wine industry into the international markets. Nonetheless, the information that the State gathers on the industry is very general and does not allow for an in-depth analysis of the sector as a whole. International demands generated by the existence of trade agreements are opening an increasing trend towards more and improved information, especially in terms of the demands regarding safety of products for human consumption, an externality that generates another type of associated information.

This situation of great freedom and few demands from the State, together with the fact that Chile has a relatively small economy, especially where the winemaking industry is concerned, allows for the industry to be concentrated in very few companies, a fact that has changed somewhat over the last decades with the growing incorporation of direct foreign investment and of investments associated with local capitals and expertise. In general, at present, access to the sector is limited to those with a strong financial backing.

In this sense, the absence of co-ordination in the Chilean industry is a weakness that has prevented the generation of integration strategies that allow for corporate efforts or for the pursuit of objectives that are very difficult or impossible to attain separately. With the exception of a few individual efforts of no great significance, this weakness is clearly seen in the practically total lack of distribution systems that serve the industry as a whole, so that it can face similar competitive systems. Thus, the Chilean industry is vulnerable to potential merger attempts on the part of large scale companies, some of which are larger than the entire Chilean wine industry taken as a whole. In part, the causes of this situation can be explained by the paradoxical fact that the industry’s lack of structure and its flexibility are, to a certain extent, the reasons for its success, and by the absence of a co-ordinating body, a role which the Chilean State could have taken over, but abandoned in the eighties.

It will be necessary to wait for this relatively new Chilean industry reborn in the eighties to show the long term results of the business model it has adopted, a model that is based precisely on the lack of co-ordination as a pivot of the industry, which results in its lack of structure.

3.2 The Viticulture System

                The viticulture system is the system in responsible for producing grapes for wine, pisco and table grapes. The Chilean viticulture system has a total of 194,456 hectares [1] of vineyards between the viticultural Regions of Atacama and Austral, with a total of 14,674 producers. Of this total area, 137,376 hectares are planted with vitis vinifera, to be used in wine production; 48,582 hectares are planted with fresh table grapes [2] and 8,499 hectares with grapes destined to pisco [3] production.

The Chilean viticulture system has considerable comparative and competitive advantages, the most important of which are:

3.2.1. The Cost of Farmland

In general, the cost of farmland is low in comparison with its cost in other wine producing countries. If the comparison is based on traditional European wine producing countries, the cost of agricultural land can be between 10 to 15 times lower than in traditional European countries, especially if this comparison involves the traditional wine producing areas of the south of France and the north of Spain and Italy. In fact, depending on a variety of factors, values per land hectare apt to be planted for wine grape growing range from USD 3,000 to USD 40,000. It is unusual to find land above or below these figures.

The Chilean farmland is enormously varied in terms of composition, structure and topographical features, which include very irregular land, with transverse valleys and mountainous riverbeds. The Andes Mountains affect the soil in the east of the Chilean territory, while the Coastal Range dominates the west; to this we must add the transversal valleys existing between these two mountain ranges, which give us an ample range of diversity. The entire territory is fragmented by rivers and watercourses, in addition to aquifers, to such an extent that Chile has been called a land with a crazy geography.

3.2.2. Plantation Costs

Comparatively speaking, plantation costs are also low, as is the case of agricultural labour costs. The low cost of vine plantations and maintenance of vineyards in Chile is favoured by the absence of philloxera, which is especially important when compared to the situation of vineyards in California. Plantation costs depend fundamentally on type of soil, preliminary soil treatment and plantation difficulty, together with the distance from the centres that supply labour and materials. Costs in general vary from USD 5,000 and USD 10,000 per hectare. It is unusual to find plantation costs lower or higher than the mentioned values.

On the other hand, wine grape producers can be divided into different segments: those who are in the business of selling wine grapes but do not make wine, those who let their farmland to others, those who grow grapes for the production of their own wines and combinations of these activities. Therefore there is an active market for wine grapes in which supply has become increasingly specialised in response to a demand that has become more sophisticated. The prices traded in the wine grape market vary according to season, oscillating however within a range that rarely falls below USD 0.17 per kilo for ordinary grapes and that can even reach USD 0.80 per kilo for high quality grapes and varieties that are in short supply among Chilean growers. We can estimate, however, that most of the transactions correspond to figures ranging between USD 0.30 and USD 0.50 per kilo. It is unusual to find prices above or below these ranges in the local wine grape market. Therefore these figures can be considered as an approximate access cost to the winemaking processes.

3.3 The Winemaking System

The winemaking system refers to the vine-growing system and extends to the processing of grapes for wine production. The Chilean winemaking system has a total of 453 cellars devoted to wine production between the regions of Coquimbo and Bio-Bio, with an overall storage and processing capacity of 1,793 million litres. The winemaking system is made up by companies devoted exclusively to processing grapes for winemaking purposes, companies that offer services and make their own wines and companies that are part of the value chain of larger-scale concerns that embrace the totality of the wine business and use their processing and storage capacities for the purposes of the larger system. Approximately 40% of the cellars provide grape processing services for winemaking, which in some cases includes bottling and labelling services; some provide these services exclusively and others treat them as an externality of their own processes. In general, vinification costs vary depending upon size, production scale and state of the art processes and range between USD 0.06 per kilo of grapes to USD 0.15 per kilo, which gives an approximate cost per litre of new wine ranging from USD 0.08 to USD 0.25 before storage and bottling. In general we can say that the total operating cost of a litre of wine up to the stage prior to storage and bottling fluctuates between USD 0.38 and USD 0.94 per litre. This is equivalent to between 0.32 to 0.79 Euros per litre depending on exchange rate fluctuations.

These costs compare very favourably with those of other wine producing areas [4]. The traditional allegation on the so called low prices of Chilean wines is related to the ignorance of the low wine production costs in Chile, on one hand. On the other hand, because of the acceptance of the international market that is possible to have quality wines at price levels unseen in the past. Meanwhile, this situation will not last in the long run; it is probable that costs will not grow up reaching European or North American levels but without a doubt they will grow. Yet, however, it is possible for new interested players to come in the Chilean wine industry to relative low cost levels.

Although Chilean viticulture presents noteworthy advantages, the vinification system presents the same, not always well-known, advantageous conditions as any other winemaking area. In fact, winemaking processes based on excellent grapes are common practice all over the world, and for this reason Chile is no exception and has conditions that are similar to those in any other wine producing country. Most international suppliers are present in the domestic markets offering state of the art products and services. Many companies have invested heavily in modern vinification technologies over the past decade, so that cellars can be differentiated and classified in three major categories according to the incorporation of advanced winemaking technologies.

3.3.1 Small and Medium sized traditional companies

These correspond to companies with a long tradition in wine production that have made considerable investments in viticulture but have made little or no investments in the area of the incorporation of advanced vinification technologies. These companies still keep wood and epoxical cement fermentation casks for treating wine and they devote their efforts to the production of ordinary and table wines. Some have installed pneumatic wine presses and stainless steel wine fermentation tanks and produce somewhat superior quality wines which enable them to reach higher prices and to export medium quality wines. This kind of company will tend to lose market importance or to suffer the transformations ruled by current trends.

3.3.2 Small and Medium size high tech companies

                These companies correspond to a relatively new trend resulting from planned investments and the incorporation of the best technologies available in the world today. These companies started to operate in the Chilean winemaking industry at the end of the eighties. They are an example of modernity in the industrial sector, and have as their aim the semiautomatic production of top quality wines applying state of the art administration processes. Most of these companies have started to operate with strong investments in the areas of top quality wine production in order to position themselves in the upmarket price ranges. One of the characteristics of these companies is an intensive investment in French and American oak casks together with cutting-edge winemaking processes. Another feature is the incorporation of iconic architectural features in both cellars and administration facilities. Although many of these have incorporated state of the art information technology for production control, administration and logistics, this area of modernisation is still significantly weak and investment has not reached the expected levels. There is a contrast between intensive in hard technologies with a scarcity of investment in information technologies, which might have its roots in the cultural aspects of the traditional winemaking industry. These companies have been called boutique winemakers.

3.3.3 Large-scale industrial companies

                These are companies that have a long wine production tradition in Chile and have applied technological and administrative changes in their viticulture and winemaking processes in order to respond to the world demand for the diversification of suppliers, generated in traditional wine import markets (especially in the United Kingdom) by the late eighties. In fact, these large corporations saw the opportunity to become leading actors in their field and launched the efforts that would transform them into the main producers in terms of volume and value in the Chilean industry. These companies are the most important producers and dominate the Chilean viticulture scene practically on their own. At the same time, they have led the transformation of the industry and have indirectly generated the emergence of high tech small and medium scale companies (called boutique vineyards).

Curiously enough, these companies replicate the phenomenon seen in boutique vineyards, because they also present a contrast between intensive investment in hard technologies in winemaking processes and vineyard administration together with relatively scarce investment in information technologies and the development of sophisticated administration systems. This weakness in information technologies (with few notable exceptions) can also be attributed to cultural aspects and to lack of knowledge and availability of industry-specific systems. The orientation of these companies is aimed at wines that satisfy the larger market segments, principally ordinary wines, table wines, premium and super premium wines. However, they produce all kind of wines including ultra premium and iconic wines that contribute to keep them in the larger volume market segments.