Concha y Toro business case

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9 - 509- 018

REV: J U NE 30 , 2 010

ROH I T D E SHPA NDÉ GU S T A V O HE RRE RO E Z EQ UI EL RE FIC C O

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 the company. 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 revaluation in relation to the U.S. dollar. In Rafael’s view, some corrective action was needed—but what?

Chile

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, and fjords 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 negotiated free-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 national currency. 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.

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Professor Rohit Deshpandé; Gustavo Herrero, Executive Director of the Latin American Research Center; and Senior Researcher Ezequiel Reficco prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2008, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

The Global Wine Industry

In 2006, wine production was geographically concentrated, with three countries—France, Italy and Spain—accounting for more than 50% of total world production (see Exhibit 1 for main wine- producing 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 merchant Steven 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 the event: George Taber, a Time magazine correspondent. His story turned out to have a major impact, marking the end of European winemaking tradition’s undisputed superiority and the coming of age of a new, more scientific approach to wine quality assessment. On the one hand, California’s wine industry took off, commanding ever-higher prices; on the other, French wineries were forced to innovate. The experience had been replicated periodically ever since, with California wines often coming out ahead of their French competitors. But despite these setbacks, the French still enjoyed a formidable position in the industry based on the strong quality of their wines and an enviable set of positive attributes associated with the country. As one journalist put it, “The French seem to have plenty going for them . . . Chic, classy, and the most romantic of people— this is the general perception one has of them. After all, they are the creators of Champagne and Chanel . . . The same goes for wine. We may not be connoisseurs, but there’s nothing like a glass of Veuve Clicquot to add class to wining and dining.”4

An aura of refinement and sophistication had special implications for a product like wine, whose quality attributes were opaque to most consumers.5 Positive country images led to what psychologists called the “Halo effect”: people’s expectations led them to choose wines based on their assumptions about product quality. For example, in 2005, Texas A&M University conducted an experiment in which a group of people was asked to taste and grade three wines labeled French, Californian, and Texan. Nearly all individuals picked the French wine as the best, the Californian second, and the Texan third, despite the fact that all three wines were the same Texas wine.6

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