Concha y toro

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Concha y Toro
In February 2006, Rafael Guilisasti, vice-chairman of the board of Viña Concha y Toro SA, was
driving from the company’s Santiago headquarters to its winery in Pirque, approximately 17 miles
south, for a meeting with his brother Eduardo, the company’s CEO. As Rafael admired the tidy rows
of vines stretching on both sides of the road, ‘he reflected on the challenges facing thecompany.
Concha y Toro was Latin America’s largest wine exporter and among the world’s top ten wineries.
Yet, in the previous year, the firm’s operating profits had dropped 20.9%, while operating margins
had decreased from 16.1% to 12.4%. The profit reduction seemed to be due to pressure on sales prices
posed by an oversupply of wine in world markets as well as to the Chilean peso’s revaluationin
relation to the U.S. dollar. In Rafael’s view, some corrective action was needed—but what?
Chile occupied a narrow stretch of land located along the Pacific Ocean in Southwestern South
America. Extending approximately 2,650 miles north to south, its average width spanned less than
110 miles, yet its landscape ranged from arid desert in the North to forests, windswept glaciers, andfjords in the South. The majority of Chile’s 15 million people lived in the fertile valley that made up
the country’s center.1
Since the end of General Augusto Pinochet’s 16-year military dictatorship in 1990, successive
governments had maintained the pro-market reforms that Pinochet had instituted. Chile had an open
economy, with foreign trade accounting for 32% of its GDP, and had negotiatedfree-trade
agreements with the United States, the European Union, and Mercosur. The country was the world’s
largest exporter of copper, fruit, and farmed salmon and was an increasingly important player in the
global wine industry. In recent years, high demand for Chile’s export commodities—copper in
particular—coupled with a weak dollar had prompted a serious revaluation of the nationalcurrency.
Most economists interpreted these forces to be long-term and predicted that the peso would remain
strong for the foreseeable future. On August 15, 2003, one U.S. dollar traded for 724.20 Chilean pesos
(CLP$724.20); however, by November 11, 2006, the exchange rate had declined to CLP$526.0.
509-018 Concha y Toro
The Global Wine Industry
In 2006, wine production was geographicallyconcentrated, with three countries—France, Italy
and Spain—accounting for more than 50% of total world production (see Exhibit 1 for main wineproducing
countries). At the company level, however, the industry was quite fragmented: while the
top three players in the spirits and beer industry claimed 43% and 25% market share in 2006,
respectively, the top three wine-producing firms constituted only 7%of the market (see Exhibit 2).
Chile was among the so-called “New World” producers, together with the United States, Australia,
New Zealand, Argentina, and South Africa.2 As noted by Patricio Middleton, director of Chilevid, an
industry association, New World producers were not Chile’s primary competitors. Rather, “France,
Italy and Spain [were] the big guys to beat.” Since the early 1980s,New World producers had gained
share at the expense of the Old World producers and, to a lesser extent, other producers (see Exhibits
3 through 6).
The superiority of European wines ‘over those of New World producers had long been taken for
granted. That changed with what became known as the Paris Wine Tasting of 1976, or the
“Judgement of Paris.”3 That year, Paris-based British wine merchantSteven Spurrier organized a
blind tasting of California and French wines in honor of the bicentennial of the American Revolution.
The nine-taster jury included eight of France’s top wine-tasting experts. Surprisingly, the judges
could not distinguish California from French wines. Moreover, California wines won the contest in
the red and white wine categories.
Only one journalist attended...
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