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Chile’s Wine Industry Sandwiched By Rising Costs, Strong Peso

July 25, 2011

Slightly more than a year after a devastating earthquake rocked Chile and disrupted its wine industry, the country’s wine producers are facing another staunch challenge—the ongoing rise of the Chilean peso against the U.S. dollar and other major currencies. Currently trading around 462 pesos to the dollar, Chile’s currency has strengthened by 15% against the dollar since this time a year ago. Its appreciation, which is expected to continue, is squeezing profits, forcing price increases and undercutting Chilean wines’ competitiveness in the global market as they vie with those of other major exporters, notably fast-rising neighbor Argentina.

“The strength of the peso means we’re getting fewer and fewer pesos back in exchange for dollars, and meanwhile our costs for labor and materials like glass, labels, cartons and so on, which are indexed in pesos, are going up,” says Aurelio Montes, chairman and founding partner of premium producer Viña Montes. (Grape prices are also on the high side in Chile currently, but not skyrocketing as they are in neighboring Argentina.) “So we’re being sandwiched between declining income and rising costs. Profits are shrinking to dangerous levels.” Viña Montes sells around half a million cases globally and over 150,000 cases in the U.S., where its wines are handled by TGIC Importers and range from around $12 up to $100 a bottle.

“The appreciation of the peso against all relevant export currencies had a significant impact on our business in 2010, and the trend has continued over the first half of 2011,” Chilean giant Concha y Toro said in a statement issued to Shanken News Daily. “To put this in perspective, company revenues measured in U.S. dollars increased 12.5% in 2010; by contrast, revenues measured in Chilean pesos grew just 3.8%.” Concha y Toro’s net income was down 7.5% to 42 billion pesos ($91m) in 2010, and down 0.7% to 6.48 billion pesos ($14m) in 2011’s first quarter.

Concha y Toro expects its 2011 full-year earnings to be in line with last year’s, but that takes into account planned price increases of 8% to 10% on its portfolio. The company—which earlier this month unveiled a new U.S. distribution joint venture with longtime importer Banfi—sells 80% of its 3.1-million-case U.S. volume under its low-priced Frontera line (around $5 a bottle), but is now focusing on its higher-margin offerings such as Don Melchor as a way to mitigate the effects of the rising peso.

As well as a 7% price hike of its own in January, Viña Montes is looking for efficiencies in its business. “We’re trying to cut costs, but there’s a limit to that. As long as the dollar keeps on this path, the only solution is price increases. And of course that makes us less competitive,” Montes says. Montes, whose wines are exported at an average of $63 a case across its global markets—versus Chile’s average of $28 a case—also has some breathing room due to higher margins. But, “For wineries that sell at low prices, the pain is double what we’re experiencing,” he says. “I’m sure they’re losing money, and that has a limit as well.”

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