Chilean Powerhouse

Concha y Toro is topping the ratings charts and may soon be the number one-selling import wine in the United States.

Even for a business like wine, with products that are supposed to improve with age, it’s hard not to marvel at what a difference 10 years have meant to Concha y Toro’s fortunes. A decade ago, Americans still considered the Chilean winery synonymous with economy-size magnums of simple Cabernet served at off-Broadway cast parties and East Village gallery openings. The image was about the same in Chile, where Concha y Toro ran all its business from its headquarters in a seedy, working-class district of Santiago–just the neighborhood for the nation’s viño popular.


Nowadays, Concha y Toro conducts its export operations and receives honored guests in a far tonier setting, 20 miles south of the capital at the original mansion of its founding family. The beautifully restored, white-columned house and its 50 rolling acres of landscaped gardens are surrounded by some of the company’s best vineyards.

But pretensions of grandeur may be warranted. Concha y Toro wines have steadily progressed in quality, as measured in Wine Spectator blind tastings. Two Concha y Toro products were in the top seven red wines from Chile reviewed by senior editor Thomas Matthews last summer, and even better things may be

in store. The company kicked off this year by signing a joint-venture agreement with Château Mouton-Rothschild of Bordeaux to produce what Concha y Toro’s export manager, Rafael Guilisasti, predicts will be “the first, really great Chilean wine–a Cabernet with a finesse and complexity that haven’t yet been achieved in this country.”

So maybe collectors aren’t yet stocking up on Concha y Toro. But there is no disguising the enthusiasm among financial types. The company is the only Chilean vintner listed on the New York Stock Exchange, where its American Depository Receipts (ADRs) have been available since 1994. Meanwhile, in Chile, Concha y Toro outperformed the local bourse by a whopping 50 percent last year.

It’s easy to see what has investors so excited. Concha y Toro is the largest Chilean producer and exporter of wines. Last year, it recorded $114 million in sales, a 33 percent leap over 1995. More than half of revenues come from exports, and that share is increasing. Even with wine consumption slackening among Americans in the early part of the 1990s (mostly because of slumping jug wine sales), Concha y Toro sales in the United States–by far its largest export market–have been racing ahead through the decade. Last year, Concha y Toro sold 1.7 million cases in the United States, a 65 percent jump over 1995. Projected sales in 1997 are showing another 34 percent rise.

In terms of bottles sold, “Riunite is still number one in exports to the U.S. and we’re number two,” notes Guilisasti. “But it’s reasonable to aim at surpassing them within two years.” Harry Mariani, president of Banfi Vintners, which distributes both Riunite and Concha y Toro in the United States, says Guilisasti is being too cautious. “Concha y Toro will overtake Riunite next year,” he asserts.

Besides being a modern business success story, Concha y Toro has long been a mirror of Chile’s history. Wine and blue blood have mingled freely here. While in neighboring Argentina the mark of high caste was a huge cattle estate, or estancia, in Chile to be an aristocrat meant owning a vineyard. Even today, upper-crust Chileans are sometimes teased for having nombres viñosos–family names that appear on wine labels. Errazuriz, Undurraga and Cousiño come to mind.

The Concha y Toro family was the archetype. With Spanish colonial titles of nobility and family fortunes in agriculture and mining, Don Melchor de Concha y Toro and his wife, Doña Emiliana Subercaseux, became leaders of the late 19th century wine boom. They hired French enologists to transplant Bordeaux vines and a French architect and landscaper to design their manor and its gardens. Not that the Concha y Toros, or the Undurragas, Cousiños and the other viñosos, were the least bit interested in exporting to Europe. After all, their wines, which rarely rose above mediocrity, were sold in a domestic market firmly protected from foreign competition.

This cozy world was turned topsy-turvy during the socialist era of President Salvador Allende (1970-1973). During this time, several of the best-known vintners fell under state control, including Concha y Toro, where an intervenor was appointed by the government allegedly to cope with labor strife. Eduardo Guilisasti, who had already bought out the Concha y Toro family to become the winery’s largest shareholder, convinced other investors to sell their stock to him rather than to the Allende government. But this was a time when politics often set family members against each other. The older Guilisasti was being undermined by his own son, Rafael, who was a leader of a radical university student faction pushing for the expropriation of large rural expanses such as Concha y Toro’s vineyards.

Fortunately, the government-appointed intervenor turned out to be an enophile who protected the vineyards and wineries from radicals and kept Concha y Toro reasonably productive and well-maintained. As a result, Concha y Toro emerged from the Allende era in far better shape than did other vintners.

The early years of the dictatorship of General Augusto Pinochet during the 1970s brought about an economic recession that forced some of the biggest wine families to sell their businesses. Squeezed by rising debts and lower sales, vintners such as Tarapacá, San Pedro and Santa Carolina ceased being family enterprises. Others went bankrupt and closed down. Those who survived began to look to markets abroad for the first time.

Here again, Concha y Toro led the way. Realizing that foreigners wouldn’t tolerate the tired, oxidized taste of Chilean wines, Concha y Toro invested heavily in new oak vats and stainless steel tanks. The vintner quickly established a reputation for a good quality/price ratio. To help with the sales push overseas, Eduardo Guilisasti brought into the company both his older son and namesake, Eduardo (now the general manager), and the wayward younger sibling, Rafael.

“Oh, please, you’re not going to bring up my university days again!” says Rafael, now 45, holding his head in mock despair. But asked whether he doesn’t in fact feel the same pride in his youthful political activism that American radicals of the ’60s often exhibit nowadays, Rafael turns serious. “In the U.S., there was never the violence we experienced in Chile,” he says. “The wounds are still very fresh here, and so yes, I do feel uncomfortable recalling my role in those years.”

The brothers have clearly contrasting personalities, though by all accounts they get along well. Eduardo is voluble, warm and seemingly at ease with outsiders. Rafael is more brooding, formal and standoffish. When they appear together at a public function or business lunch, Rafael tends to defer to his brother on queries about Concha y Toro.

Eduardo the father, now in his late 70s, holds the title of chairman of the board and acts the role. He leaves day-to-day management and any dealings with journalists entirely in his sons’ hands. He confines his public appearances mostly to photo opportunities–like the beaming side by side with Baroness Philippine de Rothschild after the signing of their joint-venture agreement. But the elder Eduardo deserves to rest on his laurels. He oversaw the transition of Concha y Toro through its most difficult moments a generation ago, and then launched the company on its more recent path to prosperity.

During the 1980s, Chilean wines had little trouble carving out large shares of the lower end of the American and European markets. But with the emergence of low-priced competitors in Eastern Europe and Australia, it became obvious to Chilean producers that they would have to gradually move an increasing percentage of their wines into higher market niches. And this would require more capital.

Chilean vintners pursued a variety of options to raise more money. Santa Rita, Concha y Toro’s main competitor, was bought out by a large, deep-pocketed Chilean conglomerate. Los Vascos and Errazuriz Panquehue sought joint ventures with foreign partners–the former with Château Lafite Rothschild, the latter with California’s Franciscan Vineyards.

Concha y Toro took a more daring plunge into this brave new capitalist world by raising $53 million from the sale of its ADRs on the New York Stock Exchange in 1994. The money was used to expand vineyard acreage, to hire new enologists from California and France, and to modernize and increase production by installing even more stainless steel tanks and oak vats.

The ADR issue has still left the Guilisasti family with a commanding 39.1 percent of company stock. But with so many shares in the hands of mutual funds, private pension funds and other institutional investors, Concha y Toro is under constant pressure by outsiders to show good earnings year after year. “It helps them to focus,” says William McKone, an ING Barings analyst in Santiago, who follows Concha y Toro closely. “And thus far, their management team has demonstrated very good vision.”

For example, since 1990, Concha y Toro has tripled its vineyards to 5,200 acres. It’s unlikely that company managers could have known the phylloxera epidemic in California would send vintners there scurrying down to Chile to buy up acreage and harvests that would cause a spike in the prices of land and grapes. Nonetheless, Concha y Toro executives figured that by amassing more vineyard acreage they could press an important competitive edge over their California rivals. “Labor costs are still lower here, but they are rising because mechanization is playing an ever larger role in this business,” says Rafael Guilisasti. “Our investments in technology have also closed the gap between us and the Californians. But there is one absolutely clear advantage we enjoy–and that’s land cost.”

A recent ING Barings report comparing Concha y Toro with the Robert Mondavi Corp. is instructive in this respect. While the two vintners are similar in terms of planted acreage and product-mix variety, Mondavi spends more than 2.5 times as much per acre in the Napa Valley than Concha y Toro spends on the same amount of land in Chile’s Maipo Valley. This is the main reason that Concha y Toro can sell a $9 premium wine offering nearly the same quality as a $14 Mondavi wine. Of the two companies, ING Barings concludes, “Concha y Toro has superior earnings growth prospects.”

Besides accruing more land, Concha y Toro management demonstrated a certain prescience by gambling on the appeal of Merlot some years ago. “We caught the trend early enough to fully take advantage of the boom,” says José Mingo, Concha y Toro’s marketing director and Rafael Giulisasti’s brother-in-law.

Concha y Toro has also seized every opportunity to enter higher niches in the global market. Rafael Guilisasti insists that this strategy is just as valid in Chile, which still accounts for close to half the company’s sales.

Concha y Toro’s recently introduced Trio wines–50,000 cases of Cabernet Sauvignon, Merlot and Chardonnay shipped last year–provide some insights into how the company is pursuing more upscale markets. In the past, Concha y Toro would develop a wine and, after determining its quality, would place it in a market niche. “This was the case, for example, with Don Melchor,” says Mingo, referring to Concha y Toro’s priciest ($20-plus) brand. “We decided to produce a really good Cabernet and then worry about what segment of the market would buy it.”

In the case of Trio, the company determined through market research that a lucrative niche existed, especially in the United States, for Chardonnays, Merlots and Cabernet Sauvignons priced at $8 to $10 a bottle. And only then did Concha y Toro go about developing the wines. “Our marketing approach was also different,” says Mingo. “We wanted a distinctive bottle and an easy-to-remember name.” The bottle’s flat-lipped, svelte shape, the marketing director candidly concedes, was copied from Mondavi. And “Trio” was a lot easier to pronounce in English than Don Melchor, Marqués de Casa Concha, and Casillero del Diablo–other, earlier upscale Concha y Toro wines.

Are there any clouds on Concha y Toro’s horizon? The only admonitions one is likely to hear come from enologists, and even then, they sound more finicky than anxious. “I’ve been in Chile for five years,” says Gaetane Carron, a French-born enologist for Franciscan (and previously for Concha y Toro). “Right now, irresistible, uncontrolled growth is the problem for Concha y Toro and the whole Chilean wine industry. I’d like to see us step back and pause. We don’t know enough about our vineyards, what should be grown where, what are the right clones and varietals for a particular location.”

Fitting the right grape varieties into Chile’s expanding wine regions isn’t nearly enough, according to some experts. “More attention must be paid to the microclimates and soil acidity of specific plots within a region,” says Ignacio Recabarren, one of Chile’s leading enologists and the man hired by Concha y Toro to develop its Trio wines.

“This is especially a challenge for our white wines,” Recabarren says. “They have gotten a lot better. But we still have a long way to go with our Sauvignon Blanc, for example.”

Among Concha y Toro managers, the chief worry is an increasingly adverse foreign exchange rate. For more than five years now, the Chilean peso has continually strengthened against the dollar, thanks to the favorable trade balance and a torrent of foreign investment into Chile. “Obviously, we can’t pass on the burden of a higher exchange rate to our foreign customers,” says Rafael Guilisasti. “The only alternative is to cut our costs. But let’s admit that it has forced us to become more efficient.”

Executives at Banfi, Concha y Toro’s distributors in the United States, sound even more sanguine about the Chilean vintner’s growth prospects. “I suppose they could miscalculate and price themselves out of the market by raising prices too quickly,” says Mariani, Banfi’s president. “But that’s not likely to happen. Other than that … well, it would take a natural disaster to hold them back.”