Chile and the downturn

 

The global financial crisis has paradoxically proven in many ways beneficial to Chile’s wine industry – at least so far. For the past five years, wine producers in Chile have struggled to turn a profit despite recording annual compound export sales growth of 11%. And the problem throughout has been the strength of the peso and the weakness of the dollar.

 

The country’s economy has been buoyant in recent years, boosted by strong sales of materials like copper to the emerging Asian economies and to China in particular.

However, the result has been a slump in the value of the dollar from CLP730 in late 2003 to CLP435 earlier this year. For a wine industry that mostly earns its income in dollars and pays its costs in pesos, that’s very bad news indeed. Bankruptcies and consolidation have inexorably followed.

 

But the rapid changes sweeping the global economy in 2008 have seen a cooling in demand for copper, plus a recent resurgence for the dollar, which by 27 November was worth nearly CLP660. Falling oil prices have also helped to ease the situation, but other input costs – raw materials, energy costs, general inflation – are still rising.

 

In the words of Wines of Chile president René Merino, the recovery of the dollar has given the industry “room to breathe”, and he remains mostly positive about the prospects for Chilean wine producers in the downturn. “We have seen a slow diminishing of orders for November and December, but not because of a lack of demand, but because of financial problems with our importers,” he says. Importers, he explains, are finding increasingly difficult to obtain credit to invest in new stock.

“But we’re also seeing a slight increase in demand for next year,” he adds. Merino’s belief is that consumers will trade down from more expensive Old World wines to better-value New World alternatives.

 

Nor does he see any contradiction between this trend and Chile’s current strategy to drive value over volume. Consumers used to paying (in the UK) £20 for a bottle of wine will happily switch to a Chilean alternative at £10-15, he argues.

 

Decelerating export growth in late 2008 may make Chile’s annual sales target of over $1.3bn difficult to reach, but for most wineries the recovery of the dollar – and its knock-on effect on profitability – will more than make up for that fact.