Global Wine Industry

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Wine Industry

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  • How small





  • The Global Wine Industry;

    How small Chilean Wineries should compete Allard van Tienhoven MSc Admiralengracht 36 1057 EZ Amsterdam +31-6-52366599 CEDLA Centre for Latin American Research and Documentation Keizersgracht 395-397 1016 EK Amsterdam +31-20-5253498 Amsterdam, January 16, 2008

  • CHilean wine regions

  • Foreword

    I would like to take this opportunity to thank a few people without whom I would never have

    been able to write this paper. First of all, Mr. Andr Luteijn, co-owner of Via Alempu, who

    gave me the unique opportunity to come to Chile and do my research at Via Alempu,

    offering me a first hand experience on what goes on at a Chilean Winery. These day-to-day

    experiences at the Winery, as well as Mr. Luteijns contacts in the Chilean Wine Business

    have been indispensable for this paper.

    I would also like to thank all the people at Alempu for making me feel welcome and

    for their support and patience. Marcelo Riquelme, Marketing Manager, and Marcela Trujillo,

    Financial Manager, in particular, deserve my gratitude for opening their homes and hearts.

    Marcelos marketing knowledge and his views on the wine business have been extremely

    helpful. I would also like to thank Mr. Serge Candelon, oenologist and CEO at Alempu and

    Mr. Patricio Leyton.

    Furthermore, I am deeply indebted to all the experts who were willing to be

    interviewed or answer my questionnaires: Mrs. Jmena Castillo Snchez and Mrs. Maria De

    los Angeles Arraztio of ProChile; Mr. Eugenio Eben of Via Aresti, Mr. Pedro Hiribarren of

    Via J. Bouchon and Director of Business Association ChileVid; Mr. Pedro Grand of Via

    Montes and his friend Luis Simian, wine maker in Australia; Mr. Fransisco Korta of Via

    Korta; Mr. Willem Wagner, ex-president Rabobank Chile, Mr. Cees van Casteren, wine

    consultant and wine writer; and Mr. Patrick Valette, wine maker and wine consultant.

    I also owe a big word of thanks to Mr. Hernn Cortes, who introduced me to Mr.

    Riquelme and Via Alempu. Last but not least, I would like to thank my professor Mr. Dr.

    Pitou van Dijck for all his advice and support over these past months.

    Allard van Tienhoven Msc.

    Amsterdam, January 16, 2008

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    Table of Contents

    1. Introduction p. 4 2. The World Wine Market p. 6

    2.1. The Art of Making Wine p. 6

    2.2. The World Wine Industry p. 7

    2.2.1. Production p. 8

    2.2.2. Consumption p. 12

    2.2.3. Exports p. 14

    2.2.4. Australia p. 17

    2.3. Conclusion p. 19

    3. The Chilean Wine Industry p. 20

    3.1. History and Foreign Investment p. 20

    3.2. Geography and Climate p. 22

    3.3. Planted Surface p. 23

    3.4. Production p. 24

    3.5. Consumption p. 26

    3.6. Exports p. 26

    3.7. Technology and Innovation p. 34

    3.8. Government Support and Business Associations p. 35

    3.9. Regional Structure p. 37

    3.10. Industry Structure p. 39

    3.11. Advantages of Chile p. 43

    3.12. Disadvantages of Chile p. 44

    3.13. Conclusion p. 47

    4. Theoretical Basis p. 49 4.1 Strategy p. 49

    4.1.1. The Outside-In approach to Strategy p. 50

    4.1.2. The Inside-Out approach to Strategy p. 53

    4.1.3. Other views on Strategy p. 54

    4.2. Marketing p. 56

    4.2.1. Market Segmentation p. 59

    4.2.2. The Marketing Mix p. 62

    4.3. Branding p. 65

    4.3.1. Brand Equity p. 66

    4.3.2. Brand Loyalty p. 70

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    4.3.3. Brand Name p. 70

    4.3.4. Branding in the Wine Business p. 72

    4.3.5. Branding and Marketing Trends p. 75

    4.4. Conclusion p. 75

    5. The Small Chilean Wineries p. 77 5.1. Main Problems and Threats p. 78

    5.1.1. Lack of Capital and Marketing & Branding Focus p. 78

    5.1.2. Lack of Cooperation p. 80

    5.1.3. Finding the Right Distributor p. 82

    5.2. Targeting Higher Price Segments p. 83

    5.3. Conclusion p. 84

    6. Conclusion p. 86 Appendix 1: Interviews p. 89 Appendix 2: Questionnaires p. 118 Bibliography p. 126

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    1. Introduction

    Since the late 1970s the world wine market has witnessed some important shifts. The so-

    called New World has acquired a substantial share of the market, mainly under influence of

    branded wines from Australia and the US, but countries such as Chile, New Zealand,

    Argentina and South Africa have also increased their market share. This has threatened the

    age old comfortable positions held by the established wine producing nations of the so-called

    Old World; France, Italy, Spain, Germany, and to a lesser extent Portugal.

    The rise of the New World has caused a few important changes, beginning with an

    increasing level of production leading to a much wider range of different wines on offer,

    which in turn has led to consumer confusion. Consumption levels have been substantially

    below production levels, causing excess supply and increased competition among producers.

    Because of, or perhaps in part due to the above, New World nations -especially Australia

    and the US- have rightfully recognized the importance of marketing and branding. However,

    increased competition has also strengthened the position of ever larger- distributors,

    importers and supermarkets vis--vis producers.

    Although Chile is part of this group of New World countries, it is very different from

    some of the other New World producers. Where the New World nations are generally

    renowned for their use of marketing and branding, this is not the case for Chile. The

    countrys major problem is considered to be its lack of country image; not only considering

    wine, but for every product it exports1. Furthermore, Chiles wine industry has a strong

    competitive position compared to other major wine exporting nations, with certain distinct

    advantages and disadvantages.

    Within this environment, -both the world market and within the Chilean industry

    setting- there are a number of smaller Chilean wineries which are mainly focused on higher

    quality exports for their survival. Many of these are struggling however, and the aim of this

    paper is therefore to investigate why they are struggling, how this might be connected to the

    lack of country image, or Brand Chile, and how these companies could become more

    successful. The central question of this thesis is:

    What are the effects of country image on the performance of smaller Chilean Wineries and

    what strategies could these wineries pursue in order to become more successful on the

    export market? 1 Except perhaps copper, Chiles number 1 export product.

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    This paper is divided into four parts. First of all, a macro view of the world wine market and

    its main players shall be given, especially in relation to Chile. Then, the Chilean wine sector

    shall be thoroughly discussed, including its main advantages and disadvantages versus

    other important exporting nations. The findings of these shall be applied to a theoretical

    chapter on business strategy, marketing and branding aimed at the wine business. The final

    part of the paper will look at the case of the small Chilean wineries and their position in both

    the Chilean wine industry, as well as on the world wine market. Through the use of

    interviews and questionnaires I hope to have sufficiently identified the main threats to, and

    weaknesses of these wineries, as well as offer some possibilities to improve their strategies

    in order to become more successful, especially in relation to a country image.

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    2. The World Wine Market

    This chapter aims to analyse the world wine market. The first paragraph offers a short

    description of the product wine, followed by a paragraph consisting of a thorough

    investigation of the global wine industry, including its main players in terms of production,

    exports and consumption, and their relation to Chile.

    2.1. The Art of Making Wine

    The art of making wine is estimated to be over 6000 years old. It is unclear where wine

    making was first discovered, but the most probable locations are thought to be Mesopotamia,

    the Middle East or the Caucasus. Wine was then introduced to Egypt, Greece, Spain (by

    2500 B.C.), Southern Italy and Sicily by the seafaring Greeks and Phoenicians. The Romans

    brought wine to France around 600 B.C., from which it spread further north in the first and

    second century B.C (Anderson et al, 2003). It should be noted that the wine drunk in those

    days was in no way comparable to what is considered wine nowadays. It wasnt until the end

    of the 18th century, when the glass bottle was introduced, that wine could be properly

    preserved (Terheijden, 2005).

    The process of making wine can be divided into two important parts: viticulture and

    vinification. Basically, viticulture means everything that goes on in the vineyard and

    vinification is what goes on in the wine cellar (Domin, 2003). An im