CASE: SM-266 DATE: 10/12/16 KINGSTON FAMILY VINEYARDS Nearly 20 years ago our family planted grapevines in the far hills of Chile’s Casablanca Valley. Our goal was to try to ensure that “the Farm” remain a valuable agricultural asset for generations to come. Today Kingston Family Vineyards is a successful international operation that produces and markets high-quality wines and grapes. We consider our Chilean-American family and our land to be our biggest assets. Today we find ourselves at a crossroads, one that feels as significant as that of my great-grandfather when he arrived in Chile almost a century ago. 1 —Courtney Kingston, Founder, Kingston Family Vineyards In 1998, Courtney Kingston persuaded her family to expand their ranch in Chile from dairy and cattle into wine. By March 2016, Kingston Family Vineyards had a strong international brand for its small-production wines and successfully sold the remaining top-tier grapes to other Chilean winemakers. But they faced key choices regarding focus and growth. As Courtney packed her bags for Chile to attend the annual meeting of the family business, she considered three diverging paths. One option was to increase production of their highly rated, handcrafted wines, which had established the vineyard’s reputation for quality, pursuing sufficient scale to turn a profit on the winery. Alternatively, the Kingstons could refocus on the vineyard, as they had originally planned, playing to their strengths in farming expertise and leveraging their primary asset – the land. A third possibility was to Invest in Chile’s burgeoning tourism market, and open a 1 Interview with Courtney Kingston, Kingston Family Vineyards, May 17, 2016. Subsequent quotations are from the author’s interviews unless otherwise indicated. Kaitlin Malloy and Professor Alyssa Rapp prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective management. 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Kingston Family Vineyards SM-266 p. 2 boutique hotel in Casablanca’s wine country. Courtney wondered how best to preserve the family’s land for the next generation while contributing to the greater Casablanca Valley community. HISTORY OF THE KINGSTON FAMILY BUSINESS Carl John Kingston moved to Chile in 1906 from the Upper Peninsula of Michigan in pursuit of copper and gold. In 1918 he arrived in the Casablanca Valley, 50 miles northwest of Santiago, with his wife Caroline and settled on a remote ranch that would become known to the family as “the Farm” (see Exhibit 1). C.J. and Caroline’s eldest son, John C. Kingston, returned to the United States as a young man to attend Harvard University, and upon graduation in 1935 returned to the Farm with his new wife, Janet. John and Janet raised five children in Casablanca. For three generations, the Kingston family focused primarily on the cattle and dairy businesses, becoming a major Chilean producer of high-quality milk and beef. Michael Kingston, John and Janet’s third child, left Chile to attend Princeton University, where he met and married his wife, Louise. They settled near Princeton, New Jersey, and raised their three children: Tim, David, and Courtney (see Exhibit 2). The third generation of Kingstons traveled during school vacations back to the Farm to be with family and maintained a strong connection to Chile and the Casablanca Valley. Courtney Kingston attended Princeton University and worked as a consultant at Deloitte in San Francisco before getting her MBA at the Stanford Graduate School of Business in 1997. While at Stanford, Courtney evaluated alternatives to diversify and secure a more solid footing for the Farm beyond the increasingly unattractive economics of the commodity dairy business. A Plan to Diversify: Wine Throughout the 1990s the price of raw milk in Chile declined steadily, putting pressure on the Farm’s operating margins (see Exhibit 3). They sold cattle for beef to cover short-term cash flow needs and developed additional revenue streams, including equipment rentals and forestry services for nearby farms. By the mid-1990s, the family was beginning to consider options for greater diversification that would leverage their land and farming expertise. At Deloitte, Courtney worked in the firm’s wine industry practice, and began to learn the ins and outs of the California wine business. The Chilean wine industry was then experiencing strong growth, and Kingston neighbors in the Casablanca Valley had recently planted Sauvignon Blanc and Chardonnay vines on the valley floor. Larger U.S.-based wineries like Seagram, Beringer, Robert Mondavi, and Kendall Jackson were expanding into Chile to meet growing global demand for their wine and to take advantage of the lower costs of land and labor abroad. Smaller, entrepreneurial “flying winemakers” explored smaller production ventures working two harvests a year in the northern and southern hemispheres, but the challenging nature of starting a business in a developing economy sent many American and European entrepreneurs back home. The Kingston Farm’s roots and connections in Chile and California put them in a strong position to grow grapes in Chile and market premium wines in the United States. It was clear to Courtney that they were in the best Kingston Family Vineyards SM-266 p. 3 position to enter the market as an independent vineyard. “We knew the old adage ‘You make a small fortune in wine by starting with a large one’ quite well,” she explained. “Our family had neither. Our background was in farming, not winemaking or sales and distribution. We decided to stick to what we knew best.” While most vineyards in Casablanca were planting warm climate white grapes in the flats of the valley, the Kingston property covered more mountainous areas on the western edge. Due to the terrain and interest in pursuing higher-quality, more unusual grapes than what Chile was typically know for, the Kingston family, with encouragement from consulting winemakers from California, decided to plant Pinot Noir and Syrah grapes. This was a bold choice given the association of Chile with the highly commoditized grapes used in the large-production, entrylevel wines commonly exported to the U.S. market. However, the Kingstons were interested in a niche play that might protect them from the volatility of the commodity markets. We were particularly interested in high-end grape growing, having dealt with the vagaries of commodity pricing for dairy and beef for the past two generations. We wanted to find a business that was stable and sustainable, and if we got it right, it could be something that could differentiate us and insulate us a bit from the inevitable booms and busts of Chile’s commodity export economy. At Stanford, Courtney wrote a business plan to develop the vineyard and began working with her father Michael and her older brother, Tim, to get the rest of the family on board. Extended family buy-in for the new venture was critical. Not only did they know the local agriculture market well, but they also gave the Kingstons their firm footing operationally in Chile. Some family was initially skeptical of the economics of independent vineyards due to large, vertically integrated wineries’ domination of the Chilean market. At the time, vineyard owners had no leverage and wineries were the market makers. But based on Courtney’s projections, the venture was attractive enough to explore seriously (see Exhibit 4). In the late 1990s, Chile was best known for producing large-production wines at low prices. The large players in the Chilean wine industry also created premium brands like Concha y Toro’s Don Melchor and Almaviva. Several large California-based wineries were also exploring opportunities to expand into Chile. Courtney initially explored a joint venture with a California winery to produce quality grapes for the label’s first expansion to Chile. The Kingstons negotiated a long-term partnership in which the California producer would provide the capital to establish the vineyard as well as expertise in vineyard management. The Kingstons would contribute the land and on-the-ground management. They planned to sell their grapes exclusively to their partner and ownership would be split 50/50. In final negotiations, the California winery pushed for a majority stake, and the Kingstons walked away rather than cede control of the Farm to outsiders. After that joint venture fell through, the Kingstons regrouped and decided to develop a vineyard independently, to maintain control of the land and to target local Chilean wineries as their customers. In 1997, the family decided to invest in establishing the 120-hectare vineyard over five years. The family’s goal was to grow high-quality grapes and sell them to local wine producers like Concha y Toro and San Pedro as inputs to their premium wines, Courtney recalled. Kingston Family Vineyards SM-266 p. 4 THE CHILEAN WINE INDUSTRY History of Wine in Chile Chile’s wine industry dated back to the 1500s, when the first Spanish settlers in the region brought vines from Europe. These settlers established early vineyards with cuttings from France and other parts of Europe, brought to Chile before the European phylloxera epidemic in the late 1800s.2 It was not until the 1990s, after the country had stabilized politically and undergone a period of economic reforms that the wine industry began to grow, modernize, and compete on a global stage.3 From 1992 to 2014 total production grew from 40 million cases to 140 million cases and the share of exports increased from 20 percent to 80 percent, definitively establishing the strong export focus of the Chilean wine industry (see Exhibit 5). During this time of global expansion, Chile developed a clear reputation with consumers in the United States and Europe for consistent, low-priced wines, particularly Cabernet Sauvignon and Sauvignon Blanc. The price per case for exported wines highlighted this trend. While in the 1990s and 2000s volume grew enormously, the price per case stayed quite low. In 2014 the average price per exported case was $20.76, which would imply a price per bottle in the United States of roughly $5 to $6 in retail stores. In 2016, while high-end Chilean wines of excellent quality definitely existed, premium Chilean wines struggled to overcome the brand and customer perception abroad that wines from Chile were affordable and drinkable, but unsophisticated. Chile exported its wines to more than 150 countries, but the U.S. was the largest destination and accounted for 18 percent of Chile’s wine exports by volume and 14 percent by value in 2014 (see Exhibit 6).4 Other important export destinations for Chile’s wines are the U.K., China, Japan, Germany and Canada. In the United States, Chilean wines represent 6.8 percent of the total value of wine imports after Italy, France, New Zealand, and Australia (see Exhibit 7). The focus on exports was so prevalent that most Chilean wines were bottled as “shiners,” the shiny bottles without labels, so that wineries could apply country-specific labels just prior to export. Chilean wine industry major players The Chilean wine industry was highly concentrated, with the top three players accounting for over 80 percent of production in 2009 (see Exhibit 8). Concha y Toro, the largest wine producer in Chile and all of Latin America, was established in 1883 and had grown to $957 million in sales and over 30 million cases in 2013, with a presence in 145 countries worldwide. Concha y Toro produced wines across a broad spectrum of prices—from its premium wines like Don Melchor and Almaviva to cheap bulk wines.5 Santa Rita, Chile’s second-largest producer, was 2 Asimov, Eric, “From Chile, History in a Bottle,” The New York Times, October 17, 2007. http://www.nytimes.com/2007/10/17/dining/reviews/17wine.html?_r=0 (October 1, 2016). 3 Zunino, Hugo Marcelo, “Global economy case study: How does wine reach the global market - Chile,” AAG Center for Global Geography Education. 4 “Chile Wine Annual: Chilean Wine Production 2015,” Global Agricultural Information Network, March 4, 2015. http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Wine%20Annual_Santiago_Chile_3-4-2015.pdf (October 1, 2016). 5 http://www.conchaytoro.com/concha-y-toro-holding/investors-corporate-profile/ (October 1, 2016). Kingston Family Vineyards SM-266 p. 5 owned by Grupo Claro, one of Chile’s major conglomerates.6 The third-largest player in Chile’s wine industry was Compania Cervercerias Unidas (CCU), a large beverage company that included a variety of wineries, breweries, soft drink brands, and other beverage companies. Through its 65 percent ownership stake in VSPT Group, a major wine group, CCU controlled the third-largest wine producer in Chile as well as the second-largest wine exporter. Major Chilean wineries owned by CCU include San Pedro, Tarapaca, Leyda, and Santa Helena.7 CCU was a publicly traded company but the majority of shares were owned by the Luksic family and Heineken.8 Escaping Chile’s Reputation for Low-end Wine Since the 1990s, Chile had developed a global reputation for “commercial value wines” that were predictable and drinkable. In the United States, this reputation came partly from the limited exposure of U.S. consumers, who generally encountered the wines from a few large producers. Critics of Chilean wine classified the wine industry as being “too industrial and fixated on volume,” producing wines that “had quality but lacked character,” according to one of Chile’s top wine writers, Patricio Tapa.9 Over the past decade, however, a small group of independent winemakers, including Kingston Family Vineyards, had sought to change that image by producing small-lot wines that were sophisticated, complex, and able to stand up to great wines from all over the world. (Movimiento de Viñateros Independientes, or MoVI, a trade organization that promotes Chilean independent winemakers, had become a voice for the growing number of small Chilean wineries.) But despite a growing community of high-end winemakers, it was an uphill battle to convince influencers in key markets abroad to buy in to high-end Chilean wines. Courtney Kingston recalled that when she first began marketing Kingston Family Vineyards wine in the United States, many sommeliers were strongly prejudiced against Chilean wines: [Many sommeliers] thought Chilean wines were ‘cheap and cheerful’ and didn’t want to taste our wines. I would often lead without specifying where the wines were from to overcome any preconceptions about Chile. ECONOMICS OF THE WINE VALUE CHAIN A bottle of wine sold at a restaurant or wine shop travels a convoluted road through a heavily regulated distribution chain from farmer to consumer. In the United States, the 21st Amendment to the Constitution repealed Prohibition and gave each state control over regulation of 6 Santa Rita Winery, “Historiy of Santa Rita Winery,” http://www.santarita.com/international/history/?f=1 (October 1, 2016). 7 VSPT Wine Group, “About Us,” http://www.vsptwinegroup.com/en/relacion-con-inversionistas/quienes-somos-2 (October 1, 2016). 8 Compania Cervecerias Unidas, “About Us,” http://ccuinvestor.com/bienvenidos-inversores/the-company/quienessomos/ (October 1, 2016). 9 Henao, Luis Andres, “New wave of bold organic winemakers is challenging Chile's industrial vineyard giants,” Fox News, February 18, 2014. http://www.foxnews.com/world/2014/02/18/new-wave-bold-organic-winemakers-ischallenging-chile-industrial-vineyard.html Kingston Family Vineyards SM-266 p. 6 production, distribution, and sales of wine and other alcoholic beverages. Most states adopted a three-tier distribution system designed to mitigate overly aggressive sales tactics common in the pre-prohibition era, ensure collection of tax revenues, increase state control and encourage moderation.10 The three-tier system of domestic producers/importers (Tier 1), distributors/wholesalers (Tier 2) and retailers/restauranteurs (Tier 3) introduced forced “double marginalization” into the wine value chain with mark-ups from both tier two and tier three driving up the cost to the final customer. A U.S. Supreme Court case, Granholm v. Beer Wholesalers of Michigan (2005), resulted in opening up of the supply chain for domestic wineries (Tier 1) only. 11 As a result, wineries with proper state-by-state permitting could now sell directly to consumers from a winery tasting room or through a wine club to end-consumers in 43 of 50 U.S. states.12 The main players in the wine value chain operated and interacted with one another within the framework of this three-tier system. Tier 1 of the Supply Chain: Growers, Wineries, and Importers Grape growers Wine grapes were grown either by the winery itself or by independent farmers who sold their grapes to wineries through both long-term contracts and spot markets. In the United States, the average price per ton of wine grapes was $767 in 2014.13 However, the price that growers received for their grapes varied dramatically based on region, varietal, planting, growing and harvesting techniques, yield, and the reputation of the grower. In California in 2015, the average price per ton of grapes was as low as $296/ton—and as high as $4,336/ton in the Napa Valley (see Exhibit 9). The value of the land, initial capital outlays to establish the vineyard, labor costs, labor intensity of farming technique, and yield were the key cost drivers. Cost of establishing a vineyard To establish a new vineyard required clearing and preparing the land; installing stakes, trellises, and irrigation systems; planting the initial vines; and training and pruning the vines as they grew to establish the vineyard structure. Most vineyards took two or three years before they could produce a useable harvest, with full target yield only achieved after approximately five years. In California, the first-year cost to establish a vineyard, excluding the cost of the land, could vary from about $5,000/acre to over $30,000/acre.14 Planting, growing, and harvesting decisions Key decisions related to planting, growing, and harvesting techniques determined a vineyard’s operating costs. Primary vineyard activities like pruning, thinning and harvesting could be done 10 Associated Beverage Distributors of Nebraska, “Three-tier system,” http://www.abdne.org/resources/the-threetier-system/ (May 4, 2016). 11 James Thornton, American Wine Economics (University of California Press, 2013) pp. 125-139. 12 The Wine Institute, http://wineinstitute.shipcompliant.com/Home.aspx?SaleTypeID=1 (June 24, 2016). 13 National grape and wine initiative, “U.S. Grape Industry Stats” http://www.ngwi.org/us-grape-industrystats_220.html (May 4, 2016). 14 U.C. Davis Cost and Return Studies. http://coststudies.ucdavis.edu/en/current/ (May 5, 2016). Kingston Family Vineyards SM-266 p. 7 in either a manual, labor-intensive way or using technology like a mechanical harvester to reduce costs. Vineyard density, the number of vines planted per acre, drove both quality and cost. Many growers believed that high-density vineyards produced higher-quality grapes because the vines had to compete for resources and were stressed more, creating superior taste. However, high-density vineyards generally were more expensive to establish and cultivate due to a higher number of vines and narrow rows, which required more expensive manual production methods. A high-density vineyard with as many as 2,700 vines per acre could cost 60 percent more to operate than a low-density vineyard with approximately 900 vines per acre. In addition to the density of the vineyard, adopting sustainable, organic, or biodynamic farming could add to the cost of operating the vineyard.15 Yield Many growers believed the yield of a vineyard, measured in tons per acre, correlated negatively to the quality of the grapes. In France these beliefs were codified in laws that limited the maximum yield for high-quality red wine to 3.7 tons per acre. Most ultra-premium California wines were made from grapes with yields between two and five tons/acre, while grapes for lower-end bulk wines might exceed 10 tons/acre.16 Kingston Family Vineyard’s yield varied, but averaged 8.7 tons/hectare from 2012-2016 (excluding 2014, when the crop was severely affected by a bad frost), placing their yield between extremely high-end California wines and the predominantly bulk wines in Chile. Wineries Wineries, the producers in the three-tier distribution system, produced their wines either from their own estate-grown grapes or from grapes purchased directly from independent growers. Most wineries would arrange their grape purchases through long-term contracts with growers. For high-end wines, the winery often would be intimately involved with the grower in establishing the yield and vineyard management practices, including growing and harvesting techniques. Some contracts also specified penalties or bonuses for achieving specific grape quality measures. While some contracts could be as short as one year, the majority of growing contracts covered 3- to 10-year periods.17 Wineries generally sold to distributors at approximately 50 percent gross margin in order to achieve profitability.18 Importers In addition to domestic producers, importers also made up the top tier of the three-tier distribution system in the United States. Licensed importers could import wine produced outside the United States and sell it to distributors just as a winery would. 15 Thornton, op. cit., pp. 63-64. Ibid., p. 62. 17 Ibid., pp. 72-76. 18 Wine Curators. http://www.thewinecurators.com/blend/PWCblend0309.shtml#DYK (October 1, 2016). 16 Kingston Family Vineyards SM-266 p. 8 Tier 2 of the Supply Chain: Distributors In the United States, the second tier of the three-tier distribution system represented distributors (also called wholesalers). All wine sold by “on-premise” (restaurant) and “off-premise” (retail) accounts came through a wholesaler. Importers and wholesalers typically marked up wines 30 percent from the winery’s wholesale price.19 Some states, including California, allowed a company to be licensed as both an importer (license type 09) and a wholesaler (license type 17), enabling a single entity to import and distribute wine to licensed on- and off-premise accounts in that state.20 Tier 3 of the Supply Chain: Retailers Wine retailers fell into two categories in the United States: “off-premise” accounts (where consumers purchasing the product and took it “off the premises” to consume) such as liquor and grocery stores or specialty wine shops or chains, and “on-premise” accounts like bars and restaurants—where wine purchases were consumed on the premises. Off-premise accounts generally marked up wine by about 50 percent. So if a bottle of wine cost $10 from a wholesaler, the retailer would charge $15. However, the price the consumer saw varied based on state laws and excise taxes as well as the size of the retailer, reflecting the fact that large retailers could secure bulk discounts and sell the same bottle at a lower price than smaller wine shops. On-premise accounts tended to mark up a wine on the wine list by three times the amount the wholesale price paid by the retailer. 21 Wines by the glass were generally priced at the wholesale cost of the bottle. Thus a restaurant would buy a bottle from a wholesaler at $9 per bottle, then generate $45 in revenues based upon the assumption of $9/glass pricing and an estimated 5 glasses of wine per bottle.22 See Exhibit 10 for the mark-up structure of the typical wine value chain. THE DEVELOPMENT OF KINGSTON FAMILY VINEYARDS Establishing the vineyard: 1998 Kingston Family Vineyards planted their first 20 hectares of grapevines in 1998, expanding to 60 hectares in 1999 with 33 percent Pinot Noir, 22 percent Chardonnay, 16 percent Merlot, 10 percent Cabernet Sauvignon, and the remainder Syrah, Sauvignon Blanc, and Carmenere. In October 2000, Courtney, who had been working in technology in the Bay Area since graduating from the GSB in 1997, decided to make the leap to work on the vineyard project full time in advance of the first harvest. Exhibit 11 shows the layout and topography of the vineyards. 19 20 Thornton, op.cit., p. 125. North Bay Biz, “The ABCs of alcohol licenses.” http://www.northbaybiz.com/Monthly_Features/bizTips/The_ABCs_of_Alcohol_Licenses.php (May 5th, 2016). 21 Gretchen Roberts, “The Lowdown on Restaurant Markups” Wine Enthusiast, May 7, 2010, http://www.winemag.com/2010/05/07/the-lowdown-on-restaurant-markups/ (October 3, 2016). 22 “Overview of the U.S. Wine Industry 3-Tier Sales Channel.” http://www.marketingwine.com/industry_overview.htm (October 3, 2016). Kingston Family Vineyards SM-266 p. 9 In 2001 Kingston Family Vineyards harvested its first grapes. While the quality of the grapes was high and seemed to validate Kingston Family Vineyards’ bet to grow cool climate reds in Chile, the commercial results were disappointing. Few wineries were willing to pay premium prices for Kingston Family Vineyards grapes and their Pinot Noir grapes sold for only $0.55/kilo, more than 20 percent under the projected price of $0.70/kilo. As they continued to plant new vines, the Kingstons employed several strategies to increase the demand for their grapes and in effect create the market for premium cool climate reds. Courtney introduced consulting winemakers from Burgundy and California to winery clients in Chile to advise on producing Pinot Noir. Kingston Family Vineyards started a fellowship program to send young Chilean winemakers to work the harvest at California wineries and learn from top Pinot Noir winemakers. But without a bottle of wine as proof of concept, the grape prices continued to be lower than expected. Making the bottle to build the brand: 2002 In 2002, due to the limited success marketing their grapes at the price that the quality seemed to merit, Courtney began drafting a related business plan to produce a small amount of wine to prove the quality and build a brand for the vineyard. She explained: We realized the only way to create the market for our premium grapes was to lead it. If we could figure out how to make world-class wine from our vineyard and show the success in a bottle, we could control our own destiny. Before making our own wine, we were stuck given the small size of our vineyard vs. the scale of Chile’s industrial production. We struggled to set ourselves apart. In the 1990s when Courtney was building her first business plan for the vineyard she had met Byron Kosuge, a well-respected California winemaker specializing in Pinot Noir and Syrah who at the time was the winemaker at Saintsbury in Napa. In 2002 she reconnected with Kosuge, who had recently left Saintsbury to make his own wines and consult. Courtney shared with him her idea to grow Kingston Family Vineyards. On a handshake, they agreed to a barter deal: Kosuge would come to Chile and give Kingston Family Vineyards his professional opinion on the potential for making wine, in exchange for Courtney’s help with the business plan for his nascent wine label. Kosuge visited the Farm and was impressed with the vineyard establishment and with wines that other winemakers had produced with Kingston Family Vineyards grapes, and he agreed to work with the Kingstons to produce their first wine under their own label. In 2003 they produced 450 cases in a rented space and released the wine in 2005. After three vintages in a rented facility, they realized their quality was compromised by the lack of control over the rented space. The original business plan did not have them investing in a winery until 5 to 8 years in the market, but with the 2006 vintage the Kingstons invested in building their own winemaking facility adjacent to the vineyard, with capacity of up to 10,000 cases. Again leveraging her one foot in Chile and the other foot in the United States, Courtney established a U.S.-based import business and began applying for the necessary licenses to import and distribute the wines to U.S. customers. Courtney secured a 091720 license from the California Alcoholic Beverage Control. This license allowed Kingston Family Vineyards to Kingston Family Vineyards SM-266 p. 10 import their wines from Chile (the “09” segment of the license), sell them wholesale to California retailers (17) and sell directly to consumers in California and 14 others states to fulfill a wine club (20).23 Courtney’s vision was to market the wines directly to sommeliers and other influencers in the United States to build the brand and prove to Chilean winemakers that Kingston Family Vineyards grapes could stand up to high-end wines from around the world. There was an uphill battle against the strong bias against Chilean wines. Courtney leveraged Byron’s reputation as a talented winemaker and appealed to sommeliers’ intellectual curiosity about a California winemaker’s “Chilean project.” After months of pounding the pavement and a healthy dose of rejection, Courtney made two big breakthroughs with Raj Parr, the sommelier of San Francisco’s Michael Mina and Daniel Johnnes at Jean George in New York, successfully adding Kingston Family Vineyards wines to the by-the-glass lists at these two high-profile restaurants. Courtney marketed her wines directly to restaurant clients and then worked backward to identify their distributors and began establishing relationships to sell Kingston Family Vineyards wine throughout the United States. Courtney also succeeded in gaining the attention of the American wine press. In October 2004, Kingston Family Vineyards had a profile in Wine Spectator’s “New Wines, New Faces” section.24 In 2005 Wine Enthusiast named Kingston Family Vineyards “Sommelier’s New Chilean Favorite” describing the Kingston Family Vineyards’ Pinot Noirs as “crisp, elegant, firm and real in personality, the best Pinot Noirs I’ve tried from Chile.”25 The warm reception of Kingston Family Vineyards wines in the U.S. wine press and by high-profile sommeliers succeeded in increasing the value of Kingston Family Vineyards grapes in Chile as well. In 2004 Kingston Family Vineyards grapes sold for an average of $0.85 per kilo. After the release and promotion of the wine, the price per kilo increased, reaching a high of $1.37/kilo in 2008 before prices began to fall again after the financial crisis of 2009 (see Exhibit 12). The increase in price saw Kingston Family Vineyards emerge as a leader in the Casablanca Valley in terms of the value of their grapes, which earned a 30 percent premium over other regional producers on their Chardonnay and Sauvignon Blanc grapes in 2016 and a 100 percent premium on Pinot Noir (see Exhibit 13). In 2003 with Kingston Family Vineyards’ first vintage, Courtney also launched the Old Corral wine club to allow direct-to-consumer sales in select markets in the United States. The economics of the direct-to-consumer channel were very attractive, with margins of up to 67 percent—largely because this sales approach circumvented the double marginalization of the three-tier distribution system. However, it was also a high-touch selling model that required more time and investment in customer relationships. Direct U.S. sales through the wine club grew slowly but steadily through 2010. Courtney promoted the Old Corral club through social media, using the compelling bicultural family story along with the uniqueness of the wines. 23 “Wine retailers can only ship to 14 states,” www.shipcompliant.com (June 24, 2016). “New Wines, New Faces: Kingston Family Vineyards,” Wine Spectator, October, 31, 2004, http://www.winespectator.com/magazine/show/id/10751 (October 3, 2016). 25 “Chile’s Fresh Faces,” Wine Enthusiast, November 1, 2005, http://www.winemag.com/2005/11/01/chiles-freshfaces/ (October 3, 2016). 24 Kingston Family Vineyards SM-266 p. 11 Sales through the distributor channel had lower margins, but were also lower touch, requiring less time to manage. Exhibits 14 and 15 show the economics of both the winery and the import business. The winery sold approximately 5 percent of its production locally in Chile and 95 percent to its U.S. importer. Local sales in Chile were predominantly cellar door sales as well as a very small amount of distribution to local high-end restaurants. Stumbling into the tourism business: 2011 Wine tourism in Chile had begun to flourish in the early 2000s, but the Kingstons had remained focused on growing grapes and making wine. However, as Courtney recalls, in 2011 the tourism business came to them: It happened to us. Dad and I were sitting in the dining room at the casa patronal and somebody was in the garden. Dad said “do we know them?” They had read about us, and they were in Chile, and they found the house. In 2012 Kingston Family Vineyards began offering wine tastings and tours. In 2015, they hosted more than 3,400 visitors and became a top-rated “Thing to Do” in Casablanca on TripAdvisor (see Exhibit 16). While they did generate some sales in Chile, hosting visitors served one key function: to build the brand and drive U.S. sales and wine club memberships. The wine tastings were priced to essentially break even. The number of visitors coming to the tasting room had grown strongly since it opened in 2012; however, the average purchase value of $45 was still quite low compared to U.S. tasting rooms, where the average was $102 (see Exhibit 17). Kingston Family Vineyards’ 2.3 percent conversion rate to wine club members was also low compared to more mature wine regions like Napa Valley, where conversion rates were approximately 11 percent in 2015.26 While conversion rates were lower than desired, Kingston Family Vineyards did find that opening of the winery to visits did help direct sales in United States take off, with direct sales reaching over 50 percent of total U.S. sales in 2015 (see Exhibit 18). NEXT STEPS FOR KINGSTON FAMILY VINEYARDS: REVISING THE BUSINESS PLAN While the grape growing business was operating profitably and the winery had effectively built a strong brand both in Chile and abroad, in 2016 Courtney and her family had to determine how to grow both businesses more profitably and capitalize on market trends. The Kingston family was aligned on their desire to preserve the cherished family land and to make it a valuable, productive asset in the community. However, it was becoming increasingly clear that to do this they needed to scale and grow the business enough to hire a professional manager to run the business. Exhibit 19 shows the financial performance of each part of the business from 2012 to 2015. Several elements of the business seemed to warrant further analysis. These included the following: 26 “Best Practices Drive Continued Wine Club Growth,” Wine Business Monthly, July 2016. Kingston Family Vineyards SM-266 p. 12 Going organic While the success of the wine brand in the United States had driven up prices for Kingston Family Vineyards grapes, margins in recent years had begun to erode (see Exhibit 12). Courtney and Byron believed that to increase the quality and price for the grapes, they needed to go organic. They had been leaders in the movement to grow high-end, cool climate reds in Casablanca and while organic grape growing was still somewhat unusual in Chile, they believed that this was an opportunity to lead the market again and to increase the value of their grapes. However, other family members were more cost conscious and doubted whether the cost of going organic would really be justified by higher grape prices. The future of the winery In 2003 the Kingston Family Vineyards’ vision had been to make a small amount of wine to serve as a proof of concept for its grapes. This had been a successful strategy and production had grown from just 450 cases in 2003 to nearly 3,000 cases in 2016. However, the winery was operating at a loss and it was time to take stock and establish a strategy for going forward. The Kingstons could continue to operate the winery at current levels, focusing on trying to cut costs, and accepting small losses as a marketing cost for the grapes. Alternatively, they could invest in expanding production to try to achieve sufficient scale to operate profitably. According to winemaker Byron Kosuge, the existing infrastructure would allow Kingston Family Vineyards to expand to 7,000 or 8,000 cases of production with minimal investment or modifications to equipment. And the facility was built to allow for the possibility of additional modules that could add capacity up to 30,000 cases. Kosuge explained: If you could produce 8,000 to10,000 cases a year, you could make some money at it. Less than that, it’s hard to make the numbers work. But if you could sell the majority of your production direct-to-consumer and at a higher margin, the case volume needed for profitability might be smaller. The inflection point for highquality winemaking comes around 20,000 to 25,000 cases. At that level it becomes operationally very difficult to run as small winery with a winemaker who is very involved in production. Larger than that, the structure of the production side has to change and it can be difficult to make that jump while maintaining quality. 27 Courtney’s successful efforts in branding and marketing and increasing direct-toconsumer demand in the United States seemed to indicate that there would be demand for increased production of their wines. Investing in tourism and a hotel Another area for potential growth was to commit to an aggressive campaign to market wine tourism as a key part of the business, and to pursue a potential joint venture with a boutique hotel 27 Interview with Byron Kosuge, May 23, 2016. Subsequent quotations are from the author’s interviews unless otherwise indicated. Kingston Family Vineyards SM-266 p. 13 operator to open a small, high-end hotel on the property. The increase in visitors would certainly help drive demand for Kingston Family Vineyards wine, the family believed. In 2015, a well-regarded Latin American chain of small, luxury hotels approached Courtney. The chain was interested in leasing land from the Kingstons to build a property next to the winery with approximately 50 rooms. While the hotelier would contribute the capital to develop and operate the hotel, Kingston Family Vineyards would have to invest US$2 million to build a larger tasting facility next to the winery to accommodate the increase in visitors. This opportunity could allow Kingston Family Vineyards to further leverage their main asset, their land, while at the same time driving increased demand for their wines both in Chile and in the United States. The increase in visitors would not only drive additional revenue from the tasting room and onsite purchases, but ideally drive much higher direct sales, both subscriptions to the wine club and one-time sales in the United States, which was the highest margin channel for Kingston Family Vineyards wines. Thus the Kingston family had a big decision to make. What was their next step, and how could they best preserve their land and get their finances on more stable footing? Kingston Family Vineyards SM-266 p. 14 DISCUSSION QUESTIONS 1. Where should Kingston Family Vineyards concentrate their efforts to grow the business in the long term? 2. What are the risks and advantages of maintaining a foothold in several parts of the value and supply chain? 3. Should Kingston Family Vineyards invest in building out their wine tourism capability and facilities? 4. Should Kingston Family Vineyards keep the winery as is, increase production, or close the winery since they had proven their reputation for high-quality grapes? p. 15 Kingston Family Vineyards SM-266 Exhibit 1 Map of Chilean Wine Regions Source: Wines of Chile, August 8, 2016, http://www.winesofchile.org/en/regions-and-vineyards Kingston Family Vineyards SM-266 Exhibit 1 (continued) Map of Casablanca Valley and Kingston Family Vineyards Source: Kingston Family Vineyards. p. 16 p. 17 Kingston Family Vineyards SM-266 Exhibit 2 Kingston Family Tree Source: Kingston Family Vineyards. p. 18 Kingston Family Vineyards SM-266 Exhibit 3 Economics of Kingston Family Farm 1994-2003 Source: Kingston Family Vineyards. p. 19 Kingston Family Vineyards SM-266 Exhibit 4 Pro Forma Analysis for Vineyard Business Plan Assumptions Vineyard yields Cash Flow 1998 1999 2000 2001 Yield (metric tons) Acres 4.45 11 Ha planted (this year) 20 40 20 40 Yield (short tons) 4.91 12.13 Total hectares planted 20 60 80 $0.70 $0.70 Production (tons) $3,117 $7,700 $/Kilo (USD) $USD Hectares Acres/ha 2.47 Revenue Taxes 15% COGS Vineyard establishment 2002 2003 2004 2005 2006 2007 + 120 120 120 120 120 120 120 66 264 517 858 1111 1254 1320 46,200 184,800 361,900 600,600 777,700 877,800 924,000 58,767 122,219 210,826 318,995 302,060 300,576 300,000 300,000 300,000 Operating Income 0 -58,767 -122,219 -164,626 -134,195 59,840 300,024 477,700 577,800 624,000 30% Taxes 0 0 0 0 0 0 0 -71,655 -86,670 -93,600 70% Net Income 0 -58,767 -122,219 -164,626 -134,195 59,840 300,024 406,045 491,130 530,400 Loss Carry Forward 0 -58,767 -180,986 -345,612 -479,807 -419,967 -119,943 0 0 0 -220,000 -440,000 -220,000 -440,000 0 0 0 0 0 0 Investment for cashflow needs 0 -58,767 -122,219 -164,626 -134,195 0 0 0 0 0 Dividends 0 0 0 0 0 59,840 300,024 406,045 491,130 530,400 Total -220,000 -498,767 -342,219 -604,626 -134,195 59,840 300,024 406,045 491,130 530,400 IRR 16% Cost (USD) $4,453 % Sta. Sara % Investors $11,000 Annual maintenance cost Year 1 $1,190 $2,938 Year 2 $1,030 $2,544 Year 3 $1,018 $2,514 IRR Analysis Year 4 and onward $1,012 $2,500 Investment for planting Note: These numbers were pro formas and do not represent actual planting schedules and financial results. Source: Kingston Family Vineyards. p. 20 Kingston Family Vineyards SM-266 Exhibit 5 Chilean Wine Industry Production and Exports (1992-2014) 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2013 2014 Area Planted (000s Ha) 62 53 56 75 104 109 112 115 118 117 129 129 129 Production ('000s Cases) 41,111 45,667 53,444 60,778 75,444 63,778 72,778 93,889 96,556 101,667 139,444 142,444 111,444 Exports ('000s Cases) 8,222 12,333 20,556 27,889 30,667 39,556 52,667 57,778 65,667 81,444 83,000 98,333 88,667 % Exports 20% 27% 38% 46% 41% 62% 72% 62% 68% 80% 60% 69% 80% Source: Global Agricultural Information Network, Chile Wine Annual Report 2015 Exports Export Price/ (000 USD) Case (USD) $119,000 $14.47 $143,000 $11.59 $294,000 $14.30 $540,000 $19.36 $585,000 $19.08 $610,000 $15.42 $845,000 $16.04 $965,000 $16.70 $1,384,000 $21.08 $1,554,000 $19.08 $1,808,000 $21.78 $1,897,000 $19.29 $1,841,000 $20.76 p. 21 Kingston Family Vineyards SM-266 Exhibit 6 Destination of Chilean Wine Exports by Volume and Value (2012-2014) United States U.K. China Japan Germany Canada Netherlands Brazil Denmark Other Total Chilean Wine Exports by Country - Volume (000s liters) 2012 2013 2014 156,032 152,036 147,441 101,744 111,708 104,274 64,091 83,079 88,274 48,478 61,532 67,049 34,785 58,368 44,009 24,066 31,419 40,225 34,338 35,185 37,094 31,107 28,764 34,423 20,967 24,546 23,037 237,441 298,606 211,996 753,049 885,243 797,822 2014% 18% 13% 11% 8% 6% 5% 5% 4% 3% 27% 100% United States U.K. China Japan Germany Canada Netherlands Brazil Denmark Other Total Chilean Wine Exports by Country - Value (000s USD) 2012 2013 2014 $300,599 $287,234 $262,225 $228,072 $237,929 $228,867 $144,808 $149,824 $148,825 $127,190 $156,547 $157,453 $63,256 $78,023 $70,206 $93,129 $92,181 $94,581 $95,289 $97,599 $105,907 $95,252 $93,305 $110,738 $52,911 $59,009 $59,316 $607,248 $644,870 $602,871 $1,807,754 $1,896,521 $1,840,989 2014% 14% 12% 8% 9% 4% 5% 6% 6% 3% 33% 100% Source: ODEPA (Chilean Ministry of Agriculture) p. 22 Kingston Family Vineyards SM-266 Exhibit 7 Share of U.S. Wine Imports by Country (2015) Source: DISCUS. "Wine Import Value Share of The United States in 2015, by Country of Origin*." Statista - The Statistics Portal. Statista. December 2015. Web. 5 Oct 2016. https://www-statistacom.ezproxy.stanford.edu/statistics/233681/value-of-the-leading-6-wine-import-countries-to-the-us/. * Import value shares are based on internal calculations. Includes still and table wines. Exhibit 8 Concentration in the Chilean Wine Industry (2009) Largest Firms Concha y Toro1 Santa Rita2 Compania Cervecerias Unidas3 Total Market Share of top 3 1. 2. 3. Market Share 31% 29% 21% 81% Concha y Toro is a publicly traded company based in Chile with operations throughout the world. Brands include Concha y Toro, Don Melchor, Casillero del Diablo, Cono Sur, and Viña Maipo, among others. Santa Rita owns many different wineries and labels and is part of the Claro Group. Brands include Viña Carmen, Terra Andina, Nativas, among others. Parent of wineries including San Pedro, Leyenda and Tarapaca, among others Source: Anderson, Kym and Signe Nelgen, Global Wine Markets 1961-2009: A statistical compendium (University of Adelaide Press, 2009). p. 23 Kingston Family Vineyards SM-266 Exhibit 9 Price/ton of California Grapes by Region and Varietal (2015) vs. Kingston Family Vineyards (2016) 4: Napa $2,592 Sauvignon Blanc $2,012 3: Sonoma and Marin 7: Monterey and San Benito 11: San Joaquin & Sacramento 13: Madera, Fresno, Inyo Kingston Family Vineyards $2,085 $1,611 $1,267 District* $3,135 Cabernet Sauvignon $3,390 $6,289 $3,525 $1,717 $2,711 $2,724 $1,074 $1,807 $1,075 $1,354 $1,235 $470 $497 $654 $548 $720 $656 $363 $306 $443 $347 $285 $381 $1,075 $845 $1,015 Chardonnay Pinot Noir $2,713 Merlot Zinfandel *District descriptions have been abbreviated. Full district information available at https://www.nass.usda.gov/Statistics_by_State/California/Publications/Grape_Crush/Final/index.php (October 2, 2015). Sources: United States Department of Agriculture, National Agricultural Statics Service, “Grape Crush Report 2015.”, Kingston Family Vineyards. Exhibit 10 Illustrative Economics of a $20 Bottle of Imported Wine Value Chain Gross Margin Price to Consumer = $20 Consumer 100% $6.65 Retailer 33% $4.49 Wholesaler 33% 40% $3.03 Importer 33% 20% $3.44 Winery 55% $2.85 Vineyard 40% 80% 60% 0% % of final price Source: Kingston Family Vineyards. DTC channel for importer margin = 63% Kingston Family Vineyards SM-266 Exhibit 11 Kingston Family Vineyards Aerial Photograph Source: Kingston Family Vineyards p. 24 p. 25 Kingston Family Vineyards SM-266 Exhibit 12 Kingston Family Vineyards Historic Grape Prices and Yields (2004 – 2016) Price/kilo $1.60 1,400k $1.40 1,200k $1.20 1,000k USD/kilo $1.00 800k $0.80 600k $0.60 400k $0.40 200k $0.20 $0.00 0k 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2003 - KFV begins production Total Harvest (kilos)* Harvest (kilos) 2005 - First vintage released 2016 2009 - CA wineries start cutting prices in economic downturn 2004 - Movie Sideways released - beginning of Pinot Noir craze 2016 – KFV decides to go organic 2014 – Intense frost in Chile hurts grape crop *Approximately 10 percent of Kingston Family Vineyards total harvest is used in Kingston Family Vineyards wines; the remainder is sold to other wineries. Source: Kingston Family Vineyards. Exhibit 13 Grape Prices Kingston Family Vineyards and Casablanca Regional Average (2016) Chardonnay Kingston Family Vineyards average price (USD/kilo) Other Casablanca producers (USD/kilo) % KFV premium Sauvignon Blanc Pinot Noir $1.08 $0.84 $1.01 $0.82 32% $0.64 30% $0.49 105% p. 26 Kingston Family Vineyards SM-266 Source: Kingston Family Vineyards. Exhibit 14 Winery Financials (2012-2015) Total Cases Produced Exchange Rate (CHP/USD) Wine Revenue COGS Operating Income % Margin Tourism Revenue COGS Operating Income % Margin Expenses* SG&A and other Other revenue Total Winery Revenue COGS & Expenses Operating Income % Margin 2012 2,976 $486.50 2013 2,497 $497.00 2014 1,653 $570.01 2015 1,998 $654.25 $196,106 ($166,049) $30,057 15% $323,817 ($281,237) $42,580 13% $278,712 ($226,133) $52,579 19% $284,227 ($213,032) $71,195 25% $12,477 ($6,962) $5,515 44% $36,009 ($31,235) $4,774 13% $73,265 ($72,447) $818 1% $103,749 ($104,023) ($274) 0% ($86,331) $22,194 ($85,402) $42,276 ($83,797) $58,198 ($83,135) $23,393 $230,778 ($259,342) ($28,565) (12.4%) $402,102 ($397,874) $4,228 1.1% $410,175 ($382,377) $27,798 6.8% $411,369 ($400,190) $11,179 2.7% *In 2013 Chile suffered a record frost, damaging 2014 grape crops and winery production throughout the country. Source: Kingston Family Vineyards. p. 27 Kingston Family Vineyards SM-266 Exhibit 15 Import Financials (2004-2015) 2004 Cases Sales Retail Wholesale Total Sales Adjustments & other 1,800 2005 2,985 2006 3,575 2007 3,925 2008 5,065 2009 4,690 2010 3,443 2011 3,090 2012 2,976 2013 2,497 2014 1,653 2015 1,998 $23,128 $21,450 $44,578 $2,816 $67,711 $61,042 $128,753 $10,018 $56,639 $169,970 $226,609 $6,900 $69,911 $319,992 $389,903 $9,746 $70,561 $307,816 $378,376 $8,585 $71,862 $265,415 $337,276 $8,652 $111,508 $439,870 $551,378 $5,765 $147,624 $397,948 $545,572 $5,715 $111,887 $341,165 $453,052 $4,617 $135,050 $270,339 $405,389 $4,217 $191,829 $205,858 $397,687 $4,153 $197,586 $143,588 $341,174 $3,563 Total Income $47,394 $138,770 $233,510 $399,649 $386,961 $345,928 $557,143 $551,287 $457,669 $409,606 $401,840 $344,738 Cost of Goods Sold $62,101 $75,232 $134,852 $188,814 $223,684 $203,435 $384,940 $351,750 $285,769 $262,650 $261,851 $224,753 ($14,707) $63,538 $98,658 $210,835 $163,277 $142,493 $172,203 $199,537 $171,900 $146,956 $139,989 $119,985 -33% 49% 44% 54% 43% 42% 31% 37% 38% 36% 35% 35% Expenses Freight out* Insurance & Other Inv. Write Down Sales Agents SG&A Storage Taxes $0 $77 $0 $0 $165,716 $469 $0 $0 $0 $0 $0 $209,007 $1,635 $800 $17,371 $6,698 $0 $0 $193,936 $802 $1,008 $26,646 $1,299 $42,295 $0 $266,392 $3,503 $1,107 $25,132 $0 $0 $10,456 $229,862 $4,092 $1,840 $21,336 $0 $0 $11,619 $151,886 $5,519 $2,679 $25,867 $801 $0 $12,034 $152,454 $4,686 $1,692 $27,637 $856 $0 $12,858 $162,884 $5,007 $1,808 $23,445 $726 $0 $10,907 $138,177 $4,247 $1,534 $20,636 $639 $0 $9,601 $121,625 $3,738 $1,350 $19,872 $616 $0 $9,245 $117,121 $3,600 $1,300 $16,678 $517 $0 $7,759 $98,294 $3,021 $1,091 Total Expenses $166,262 $211,442 $219,814 $341,241 $271,383 $193,038 $197,535 $211,050 $179,036 $157,590 $151,755 $127,360 Net Op. Income ($180,969) ($147,904) ($121,156) ($130,407) ($108,106) ($50,545) ($25,332) ($11,513) ($7,136) ($10,634) ($11,766) ($7,375) Other Income Net Income ($5,829) ($186,798) ($2,990) ($150,894) ($1,775) ($122,931) ($1,775) ($132,182) ($3,904) ($112,009) $13,740 ($36,805) $19,612 ($5,720) $12,902 $1,389 $10,154 $3,018 $10,376 ($258) $9,045 ($2,721) $8,436 $1,061 Gross Profit GP % *Costs of offering free shipping on cases – both purchased at the winery for delivery in United States and for online wine club sales. Source: Kingston Family Vineyards. p. 28 Kingston Family Vineyards SM-266 Exhibit 16 TripAdvisor Rating of Kingston Family Vineyards Note: In 2016 TripAdvisor changed their algorithm to increase the weight given to number of reviews versus quality, moving Kingston Family Vineyards to 3rd place due to smaller volume of visitors. Source: TripAdvisor, June 2015. Exhibit 17 Kingston Family Vineyards Tasting Room Visitors and Sales (2013-2015) Visitors 2013 2014 2015 863 2,449 3,406 Paid Visitors 591 2,135 2,825 Wine Club Sign-ups 17 43 77 Conversion Rate* 1.97% 1.76% 2.26% Purchases $11,380 $27,361 $76,447 *Note: Conversion rate measure the number of wine club sign-ups for visitors. Kingston Family Vineyards also offers free shipping on purchase at the winery of a case to anywhere in the U.S., which is not encompassed in the conversion rate. Source: Kingston Family Vineyards. p. 29 Kingston Family Vineyards SM-266 Exhibit 18 Wine Club Sales and Winery Visits Direct (Retail) Sales Total Visits 4000 3500 $250,000 3000 $200,000 2500 $150,000 2000 1500 $100,000 1000 $50,000 500 $0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Kingston Family Vineyards. Winery Visitors U.S. Direct Retail Sales ($US) $300,000 p. 30 Kingston Family Vineyards SM-266 Exhibit 19 Kingston Family Vineyards Vineyard, Winery and Import Business Overview (2012-2015) Vineyard* (Chile) Revenue COGS Gross Profit Expenses** Operating Income Net Margin % 2012 $486.5 $1,417,161 ($770,715) $646,446 ($283,432) $363,014 26% 2013 $497 $1,463,591 ($874,025) $589,566 ($292,718) $296,848 20% 2014 $570.01 $735,077 ($650,487) $84,590 ($147,015) ($62,425) (8%) 2015 $654.25 $1,141,758 ($690,957) $450,801 ($228,352) $222,449 19% Winery (Chile) Revenue COGS Gross Profit Expenses** Operating Income Net Margin % $230,778 ($173,011) $57,766 ($86,331) ($28,565) (12%) $402,102 ($312,472) $89,630 ($85,402) $4,228 1% $410,175 ($298,580) $111,595 ($83,797) $27,798 7% $411,369 ($317,055) $94,314 ($83,135) $11,179 3% Import Business (US) Revenue COGS Gross Profit Expenses Operating Income Net Margin % $467,823 ($285,769) $182,054 ($179,036) $3,018 0.65% $419,982 ($262,650) $157,332 ($157,590) ($258) (.06%) $410,885 ($261,851) $149,034 ($151,755) ($2,721) (.66%) $353,174 ($224,753) $128,421 ($127,360) $1,061 0.30% Total Revenue COGS Gross Profit Expenses Operating Income Net Margin % $2,115,761 ($1,229,495) $886,266 ($548,799) $337,467 16% $2,285,675 ($1,449,147) $836,528 ($535,710) $300,818 13% $1,556,137 ($1,210,918) $345,219 ($382,567) ($37,348) (2%) $1,906,301 ($1,232,765) $673,536 ($438,846) $234,690 12% Exchange Rate (CHP/USD) *In 2013 Chile suffered a record frost that damaged grape crops and winery production throughout the country in 2014 **Excluding depreciation. Source: Kingston Family Vineyards. The Chilean wine industry: new international strategies for 2020 Christian Felzensztein Christian Felzensztein is a Professor of International Marketing in the School of Business at Universidad Adolfo Ibanez, Santiago, Chile. 1. Introduction The Chilean wine industry has undergone numerous and profound transformations over the past 30 years – its quality revolution led by the complete technological renovation during the 1980s, the export boom of the 1990s, and the new terroir developments during the 2000 decade. This transformation has allowed a new generation of talented viticulturists and winemakers to capitalize on Chile’s viticultural paradise and to produce World Class Wines of unique character and personality. Chile is the world’s eighth largest wine producer and the fifth largest exporter, reaching a market share of 8 per cent by volume of the global international wine market at the close of 2010. However, and most importantly, Chile exports 70 per cent of its wine production, making it the world’s most globalized wine industry, with great flexibility, innovation and a long-term commitment to quality and service second to none. With 150 destination countries and 1.5 billion consumers per year, Chilean wines are positioned as the country’s most emblematic and best known world ambassador. Despite this undeniable success, Chilean wines face very high levels of competition in the different world markets from many appellations and brands, and its average prices are substantially lower than those of its competitors. As a consequence, the industry’s present profitability levels are low, and there is an urgent need to elevate the premium positioning and average prices to achieve a sustainable return in the long term. Making decisive progress toward positioning Chile as a world-class appellation for the production of premium and superior wines, gaining additional image and value is the only possible response to the competitive challenges the industry face today. This is a key requirement for the health and long-term sustainability of Wines of Chile. This study is part of the www. clusterinnovation.com research network (SOC30), Conicyt Research Council, Chile. Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The author/s may have disguised names; financial and other recognizable information to protect confidentiality. DOI 10.1108/20450621111115578 The Chilean wine industry is preparing a new strategic plan and international marketing strategy for 2020 aiming guidelines for a vigorous ten-year course of international development and defines the industry’s vision, mission, positioning, strategic objectives, opportunities and plans of action with a new strategic marketing perspective. The industry is willing to developed the plan in conjunction with the wineries and key industry members, and with the conviction that this new strategy should advance toward a more significant participation in the world’s premium wine segment. Aiming to develop this new strategic plan and international marketing strategy, the trade association Wines of Chile, is hiring a new consultancy company, and you are part of this team. 2. Objectives Wines of Chile trade association has set the objective of becoming the number one producer of premium, sustainable, and diverse wines of the New World by 2020, increasing the value of bottled wine exports over the course of the decade to US$3 billion. This is based on VOL. 1 NO. 1 2011, pp. 1-12, Q Emerald Group Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1 the opportunities and capacities explained and sustained by the historic growth of Chile’s wine exports. The industry want to play a key role in Chile’s progress, being convinced of the enormous potential of Chile’s wine industry, its importance at the global level as a world-class producer, and its multiplying effect on the image of Chile. Over the past decade, wine has become the major ambassador of Chile in the minds of foreign consumers – as is reflected in the latest studies conducted by the Fundación Imagen de Chile as well as studies conducted by Felzensztein et al. (2004) and Felzensztein and Dinnie (2005) – regarding the perception and knowledge of the country in its principal markets of interest. Wine adds positive and valuable characteristics to the country image and facilitates the export of new products. The Wines of Chile trade association is confident that this new strategic plan will serve the wine industry and the government’s promotional and development bodies to work together toward achieving the objectives, strategies and commitments set forth, aligning the efforts to ensure effectiveness. Your aim as a consultant is to build this marketing strategy for the Chilean wine industry. 3. Global consumption The world consumes approximately 236 million hectoliters of wine each year. After eight years of growth, this level fell in 2008 and 2009 as a result of the world economic crisis. The European Union decreased its demand, which was partially compensated by an increase in demand from North America and Asia (Table I). Although the primary wine-consuming countries are France, the USA, Italy and Germany, the market trend has been toward a decreasing consumption in the large Western European producing countries and an increasing consumption in new consumer countries in Asia and Latin America, which still have a very low per capita consumption rate. Surface area planted to vine Although the world’s overall surface area planted to vine tends to be constant, it has decreased by 0.8 per cent in the past four years, primarily due to the vineyards that have been pulled up and subsidized conversions in the European Union in the face of falling prices, over-production and the impoverishment of the sector. As a result, Spain, France and Italy, the three countries with the largest plantations in the world, have reduced the number of hectares planted. The primary parties involved are European countries that represent nearly Table I World wine consumption total and per capita Country France USA Italy Germany UK Spain Russia Argentina Chinaa Australia Portugal The Netherlands South Africa Others Total Thousand HL LT/Per capita 30 27 25 20 13 11 11 10 9 5 5 3 3 65 237 47 9 42 25 21 28 8 25 1 24 43 21 7 Note: aAssume a 13 per cent growth over the 2008 figure (available at: www.topwinechina.com); 2009 estimate Source: International Organization of Vine and Wine (2010, available at: www.oiv.org) j j PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011 58.4 per cent of the world’s vineyards, particularly Spain, France and Italy. Non-European countries include the USA and China. Production The world’s wine production fell in 2009 to volumes similar to those produced in 2008: 266 million hectoliters, a relatively low level of production and similar to that of 2001, 2003, 2007 and 2008. More than 70 per cent came from European countries, primarily France, Italy and Spain. In the New World, the USA, Argentina, Australia, South Africa and Chile predominate (Table II). Exports Worldwide wine sales presented an increasing trend prior to 2009, when it reached 86.1 million hectoliters. Total volume exported (73.5 per cent) is from European countries such as France, Italy and Spain (Table III). 4. Chile’s national wine industry In accordance with figures produced by Chile’s Agricultural and Livestock Service (SAG, www.sag.gob.cl), the country has approximately 121,000 hectares of viniferous vines Table II World wine production Country TH HL Italy France Spain USA Argentina Australia Chile South Africa Germany China Portugal New Zealand Others Total 48 46 33 21 12 12 10 10 9 8 6 2 51 266 Note: Thousands of HL, 2009 estimate Source: International Organizational of Vine and Wine (2010, available at: www.oiv.org) Table III Primary wine exporting countries Country Thousands of HL Italy Spain France Australia Chile Germany USA South Africa Argentina Portugal New Zealand Others Total 19 14 13 8 7 4 4 4 3 2 1 8 86 Note: Thousand of HL, 2008 Source: International Organizational of Vine and Wine (2010, available at: www.oiv.org) j j VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3 planted (2007-2008 registry), and the 2009 production is estimated to be 1.009 billion liters of wine. Exports in the same period reached 694 million liters and US$1.381 billion. Red varieties comprise 73 per cent of the varieties produced and 27 per cent are white. Of the red, 63 per cent are those of high demand (Cabernet Sauvignon, Merlot and Syrah). In white grapes, 66 per cent of the surface area planted corresponds to Sauvignon Blanc and Chardonnay. The primary export markets in terms of volume are the UK, the USA, Germany, and Canada, which together represent 50 per cent of the total exports and 34 per cent of the target markets, including the internal market. As can be observed in Figure 1, most of the decrease in the share of sales in the internal market has been diverted toward new markets rather than to existing markets. In contrast with the Australian industry, Chile has reduced its concentration. 5. Competition The USA The USA is the world’s fourth largest producer and the sixth largest exporter. Its industry depends primarily on California, which is responsible for 90 per cent of the production. New York, Washington, Oregon, New Jersey and Virginia make up the remaining percentage. The industry tended to increase the participation of red varietals in the total surface area planted from 51 per cent in 1995 to 61 per cent in 2009. With respect to specific white varietals, Chardonnay has increased dramatically since 1995. Varietals of lesser consumption on the world level such as Chenin Blanc and Pinot Gris have decreased their market share. In red varietals, those of greatest consumption worldwide such as Cabernet Sauvignon, Syrah and Merlot increased their share. The internal market continues to be the primary destination for American production, although it has decreased in importance. The industry’s primary export destinations are the European Union, Canada, Japan and Hong Kong (Figure 2). Australia The average annual production of the world’s seventh largest producer over the past for years is 1.4 million liters. There is an upward trend in hectares planted and therefore in wine production, which is reflected in a greater volume of exports. With respect to varieties planted, 58 per cent are red varietals and 42 per cent are white. Among the reds, 82 per cent are those in high demand (Syrah, Cabernet Sauvignon and Merlot). Chardonnay is the primary white variety and presents an interesting demand in all markets (Figure 3). Figure 1 Target markets 2000 Others 22% Target markets 2009 Internal market 46% Internal market 31% Others 28% Denmark 3% Germany 3% Canada 6% UK 9% USA 11% Brazil 2% Denmark 3% The Netherlands 3% Germany 5% Canada 4% USA 13% UK 11% Source: Prepared based on information from SAG (www.sag.gob.cl) and Wines of Chile j j PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011 Figure 2 Target markets 2000 Target markets 2009 Canada 2% Others 5% UK 2% European Union 9% Canada 3% Japan 1% Others 1% Internal market 91% Internal market 86% Source: Wine Institute (2010, available at: www.wineinstitute.org) Figure 3 Target markets 1999-2000 Others 10% Canada 2% New Zealand 3% USA 7% UK 20% Target markets 2008-2009 Internal market 58% Others 16% Internal market 36% New Zealand 2% Canada 4% USA 20% UK 22% Source: AWEC (2009, available at: www.wineaustrlia.com) South Africa South Africa currently has approximately 101,000 hectares planted to wine grapes. It has 3.8 per cent of the world’s production, putting it in eighth place on the world scale. Grapes destined for white wines constitute 56 per cent of the total planted, and Chenin Blanc leads with 19 per cent. Red varieties make up 44 per cent of the total; Cabernet Sauvignon represents 13 per cent. Owing to the shortage of white wine, they have increased the plantations of Chenin Blanc, Sauvignon Blanc and Chardonnay. Most of South Africa’s production is consumed in the internal market. The majority of the remaining share goes to the UK and Germany, which together receive 47 per cent of the total exports. Other markets such as Switzerland and The Netherlands follow to a lesser degree. It is noteworthy that although the USA currently represents 4 per cent, its participation has been increasing (Figure 4). New Zealand New Zealand’s wine industry has doubled its plantations in just six years. Its wine production has increased even more, and the industry has shown a strong development in exports with an average annual growth rate of 33 per cent in the past five years. In recent years there has been a decrease in the relative importance of Chardonnay with respect to Sauvignon Blanc and the increase in importance of Pinot Noir over Cabernet Sauvignon. New Zealand’s primary export markets for 2009 were Australia and the UK. It is important to note the evolution of sales to foreign markets, which currently represent 70 per cent of total sales, as opposed to the 34 per cent that it represented in 2000. It is also j j VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5 Figure 4 Target markets 2004 Others 17% Target markets 2009 Internal consumption 47% Internal consumption 45% Others 17% USA 2% Denmark 2% Russia 2% Angola 3% Sweden 5% Sweden 4% The Netherlands 4% The Netherlands 4% Germany 9% Germany 9% UK 14% UK 17% Source: Available at: www.sawis.co.za, 2009 – OEMV 2010 (www.oemv.es) interesting to note that Australia, the UK, and the USA reach 12, 12, and 7 per cent, respectively (Figure 5). Argentina With 211,261 hectares of vineyards, Argentina is the fifth largest wine producer. It exported 283 million liters in 2009, which represents an increase of 32 per cent over world’s 2008. Argentina has consistently increased its plantations of red varietals, which have increased by 150 per cent in 18 years, and in 2008 red varieties were double the number of whites. Hectares planted to white varieties decreased by 21 per cent during the same time frame. It is important to note the relevance of rosé wines in the Argentine industry. Malbec continues to be the most planted varietal (25 per cent of all reds), although Cabernet Sauvignon and Syrah have also increased significantly (18 and 13 per cent, respectively). Among the white varietals, Chardonnay has experienced the greatest growth. The internal market continues to be the primary destination for Argentine production and represented 79 per cent of the volume sold in 2009. The remaining 21 per cent is exported, in order of volume, primarily to the USA, Paraguay, Russia, the UK, Canada, Brazil and South Africa. The most important markets in terms of value are the USA, the UK, Canada, Brazil, the Netherlands and Denmark (Figure 6). France France continues to be the leading producer and consumer of wine worldwide. The following table shows a summary of the primary French figures. Figure 7 shows the importance of the different destination countries for French exports. Figure 5 Target markets 2009 Target markets 2000 Others 19% Internal market 30% Others 37% Canada 1% USA 2% UK 10% Internal market 66% Australia 2% Canada 2% USA 7% Source: Available at: www.nzwine.com (2009) j j PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011 UK 12% Australia 12% Figure 6 Target markets 2004 Target markets 2009 Others 10% Others 10% UK 2% Russia 2% Paraguay 2% USA 2% Brazil 1% UK 1% Russia 2% Paraguay 2% Canada 2% USA 6% Internal consumption 79% Internal consumption 82% Source: National Vitivinicultural Institute (2009, available at: www.inv.gov.ar) Figure 7 Others 26% UK 21% Germany 10% Switzerland 5% Canada 4% Belgium 11% Japan 6% Russia 1% The Netherlands 5% USA 11% Source: Wines of Chile (2010) based on information from national generic offices Italy Italy has a long tradition in the wine industry, and it reaffirmed its international importance in 2009 by maintaining second place in production, exports, and consumption after France. Italy’s commercial balance in the wine industry is historically positive. Despite the success of its exports, however, it has also registered a significant increase in wine imports in recent years. Although it has a minor influence in the overall commercial balance, it makes Italy one of the largest importers in the world. It is interesting to note that Italian wine production has 470 appellations (denominations of origin), 316 of which are D.O.C., 35 D.O.C.G., and 119 I.G.T. There are 650,000 wine companies, 25,000 bottlers and 678,868 hectares planted to vine. 50 per cent of the Italian wine production is controlled by cooperatives. Its 2009 production was close to 46 million hectoliters, which is considerably lower than the average of the past five years. With respect to the regions, 60 per cent of the production is concentrated in four of the 15 producing regions: Veneto (17.33 per cent), Emilia Romagna (14.97 per cent), Apulia (13.26 per cent) and Sicily (12.49 per cent). Italy’s internal market continues to be the primary destination for national wine production, and the primary target markets by volume are Germany, the UK, and the USA. The following table shows the primary figures of the Italian industry (Figure 8). j j VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7 Figure 8 Target markets 2004 Target markets 2009 Internal consumption 61% Internal Others 16% consumption 67% Others 12% USA 5% UK 4% USA 5% UK 5% Germany 12% Germany 13% Source: Global Trade Atlas (2010) Spain Although Spain has more areas planted to vine than any other country, it is the third largest producer with an average annual production of 41.6 million hectoliters over the past five years. There is a downward trend in plantations, while both export volume and value have increased (except in 2009, due to the global economic crisis). Germany continues to be Spain’s primary export destination, with a value of US$407 million. The UK follows with 15 per cent and the USA with 10 per cent, while France, the Netherlands and Switzerland are also relevant markets. Summary of the evolution of the Chilean wine industry in the global context (Table IV) Table IV Evolution of exports France 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Growth Rate 1990-1999 2000-2009 (%) Bordeaux Burgundy Italy 1,554 1,502 1,425 1,383 1,472 1,515 1,370 1,251 220 202 178 172 182 193 179 155 69 64 60 64 70 79 66 56 1,764 1,586 1,579 1,328 1,427 1,609 1,830 1,883 1,751 1,900 23 25 22 1 Spain Australia Chile USA South Africa New Zealand Argentina 675 720 973 1,150 972 902 1,054 1,037 1,281 1,469 1,450 1,434 1,558 1,690 1,440 39 38 54 79 103 125 114 130 154 192 216 285 338 418 519 584 670 722 787 715 752 28 43 65 74 87 110 129 184 216 231 234 267 311 349 395 468 418 474 610 589 694 83 110 125 147 132 133 147 180 227 272 291 294 304 282 349 461 388 405 455 491 418 110 117 128 141 177 217 238 268 281 272 313 412 430 4 4 6 7 9 8 8 11 13 15 17 19 19 23 27 31 51 58 76 89 113 45 28 23 25 23 197 112 120 109 88 84 88 123 185 155 215 293 360 414 283 11 5 20 14 25 12 14 5 8 13 16 22 72 16 Note: For those countries for which there is no available data, the average is calculated based on available years Source: Wines of Chile (2010) based on information from national generic offices j j PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011 6. Consumers Wine consumers The Chilean industry’s primary target markets are the USA, the UK and Canada. The main consumer-level trends in those markets are: B A change in consumer habits. The new consumers are intelligent, they seek good value, and spend more time socializing at home, especially as a result of the global economic crisis. They are trading down for personal consumption, but trading up with friends and family. For example, 53 per cent of the consumers in the USA are dining at home more often. Television food channels and food-related blogs are increasing in popularity. Once the crisis has passed, we can expect that these consumers will return to higher priced wines, although they will not reach the same levels they did in the late 1990s and early 2000s. B A new segment has appeared. The ‘‘Millennials’’ are consumers from 21 to 29 years of age and represent 70 million consumers in the USA alone. 40 per cent of the wine they drink is imported. They learn and communicate on-line. These new consumers drive the new trends. B Consumers have greater access to a broader range of wines through new products and distribution channels, such as on-line sales. B Consumers are increasingly more sophisticated and informed. They seek out natural, sustainable and organic products. B New trends lean toward wines with lower alcohol levels and a greater consumption of White and rosé wines. B Social networks (Facebook, Twitter and blogs) are increasingly important and allow low-cost, high-frequency communication with bloggers and consumers around the world. Image of Chile in target consumer market The most relevant variables for mass consumers of the most important markets for the industry are varietal, promotions, recommendations and origin (country or region) (Tables V and VI). Consumers in the USA and the UK have a low affinity with Chile, which is not true of Australia, New Zealand, Italy and France. This is consistent several country image studies that conclude that Chile has a neutral or nil image among international consumers at the mass level. This implies that for mass consumers, Chilean wine is a product of unknown origin. Although higher-income and more frequent wine consumers from the USA drink Chilean wines, they have a low affinity with the country. The cases of Italy and Australia stand out in Table V Relevant variables at time of wine purchase Important or very important (%) UK USA Variety Promotional offer Recommendation of friends of family Country of origin Region of origin Recognized brand Alcohol level Recommendation from store personnel Bottle appearance of label design Medal or Award 79 65 63 60 57 54 33 29 26 21 73 51 71 47 47 69 33 52 33 21 Source: Vinitrac (2009) j j VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9 Table VI Country affinity Positive or very positive responses (%) USA UK Australia Italy New Zealand Spain USA Germany France Portugal Argentina Chile South Africa 73 71 61 56 nd 49 46 43 32 29 21 78 66 70 62 47 38 56 47 28 35 39 Note: With people, culture, or other Source: Vinitrac (2009) that there is coherence between the positive perception of the country and regular consumption of wines from those regions. Figure 9 shows these country image trends. 7. Economic importance of the industry One of the Chilean government’s current policies aims to convert Chile into one of the world’s top ten exporters of food products over the course of the next ten years. The wine industry is doing its part to achieve this goal, as Chile is now the fifth largest wine exporting country on the globe. In recent decades Chile’s food and agriculture sector has been deploying a successful strategy of internationalization, which has become a pillar of the agro-export basket and of the country’s economic development. Our fruits and vegetables, wine, seeds, and agricultural and forestry products reach hundreds of countries around the world and provide employment to more than 800,000 people. Figure 9 Relationships between views about named country and wine frequency of consumption Percentage of answering "I drink named country once a month or more" 30 25 There is a significant and moderate relationship y = 0.376x – 0.041 R2 = 0.547 Italy Australia France 20 15 Germany Spain 10 Chile New Zealand Argentina SA 5 Portugal 0 10 20 30 40 50 60 70 80 Percentage of answering "I have positive-or very positive" views about named country Source: Vinitrac® US, December 2007; base = US regular wine drinkers, n = 2,015 j j PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011 Wine exports make up 2.6 per cent of Chile’s total exports and 14 per cent of exports in the forestry-agriculture-livestock sector (2,009 figures). The sector has more than 260 companies with annual exports greater than US$50,000, 21 per cent of which export more than 100,000 UF (approx. US$4.2 million) per year. This means that the majority – 79 per cent – of Chile’s wine exporters are small- and medium-sized companies. Chile produces an average of 887 million liters of wine per year, 70 per cent of which is for export markets, which have grown steadily in value by 11 per cent per year. These exports are sent to 150 countries, with the USA, the UK, and Canada being the most important markets. From a domestic perspective, the wine industry operates in several regions of the country, from the Coquimbo Region in the north to the Araucanı́a Region in the south. The Maule and O’Higgins regions have the greatest concentration of area planted to vine (53.4 per cent), although the Metropolitan, Valparaı́so and Biobı́o regions also have a significant amount. The industry’s continuous development and geographic diversification have attracted both domestic and foreign investment to historically less-developed zones such as the Maule Region, which had previously been overlooked as an area worthy of investment. This development has also benefited the many agents involved in the value chain, including suppliers of materials, technology and complementary services, and particularly the large number of grape growers, most of whom are small producers. At the same time, the wine industry continues to be a major source of tax revenue for the government through the Alcohol Law (ILA). Over the past five years (2005-2009), the Wine ILA accounted for an average of 0.21 per cent of the country’s total tax revenue. In 2009 alone, the wine ILA generated tax revenues of US$58 million. Recent research conducted by Felzensztein et al. (2011) studied the factors that influence the development of inter-firm cooperation in marketing in the Chilen wine industry. The results confirmed that location is an important aspect that determines the quality and features of the product and its resulting appeal to foreign markets. It seems that location benefits associated with collaboration and access to information and technologies are rarely considered compared to the specific benefits associated with terroir. Results also provide evidence of a focus of co-operation with firms that are located close to the focal firm, and mainly with those directly involved in its value chain. Emphasis of firms co-operating in marketing activities designed to attract new customers and to strengthen the relationship with them were found relevant. Finally, the emerging wine tourism industry is opening up a new area of business that has great potential, as it offers high-quality employment that not only diversifies risks and sources of revenue, but also fosters more comprehensive and sustainable development in the regions and communities in which these services are located. 8. The wine industry’s contribution to developing the country image More than other Chilean products, wine reaches millions of homes and consumers around the world with a well-identified country brand that associates the name ‘‘Chile’’ with quality and diversity. This makes the brand a unique vehicle for positioning the country’s image, which is considered one of the nation’s strategic assets and also facilitates the introduction of new products and services. In 2009, Chile exported 42 million cases of wine, the equivalent of 510 million bottles. From a conservative perspective, each bottle is seen by at least three people, which means that the Brand Chile reaches 1.5 billion people each year. Assuming a moderate cost of US$0.852, which is the average cost per contact on the Internet in the USA, the value of this impact is US$1.275 billion per year. Developing the ‘‘Wine of Chile’’ category in key International markets will improve and expand Chile’s position in the minds of consumers. Positioning Chile as a country that produces high-quality wines will reinforce the country’s positive attributes such as good agricultural practices, high-quality cuisine, attractiveness as a tourist destination, a country with its own identity and traditions, a good quality of life, and a sociable people who know how to enjoy themselves and make the most of special occasions, among other qualities. j j VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 11 9. What is next? The wine industry is one of the pillars of Chilean agriculture and of the country as a whole. In addition to its importance for exports and investment, its impact on employment, personal and professional development, the country image and in facilitating new Chilean exports make it one of the most emblematic sectors in the nacional economy. Keywords: Wines, Viticulture, International marketing, Marketing, Marketing strategy Notwithstanding the above, the wine industry suffers from low rates of return compared to other productive sectors, despite having an attractive growth potential. Further development of the sector will depend on raising Chile’s position as a country of origin for premium wines, and this task will require commitment and support from both the public and private sectors and, once achieved, will benefit the country as a whole. Now it is time to set up sound international marketing strategy aiming to achieve the above goals. References Felzensztein, C. and Dinnie, K. (2005), ‘‘The effects of country origin on UK consumers perception of imported wine’’, Journal of Food Products Marketing, Vol. 11 No. 4, pp. 109-17. Felzensztein, C., Hibbert, S. and Vong, G. (2004), ‘‘Is the country of origin the fifth element in the marketing mix of imported wine’’, Journal of Food Products Marketing, Vol. 10 No. 4, pp. 73-84. Felzensztein, C., Echecopar, G. and Deans, K. (2011), ‘‘Marketing strategy, innovation and externalities: the case of the Chilean wine cluster’’, Journal of Business & Industrial Marketing (forthcoming). Wines of Chile (2010), Several industry reports. Corresponding author Christian Felzensztein can be contacted at: c.felzensztein@uai.cl j j PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
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