GWYNNE 2008 the Geographical Journal

The Geographical Journal

, Vol.

174

, No. 2, June 2008, pp. 97–108

Geographical Journal

Vol. 174 No. 2, pp. 97–108, 20080016-7398/07/0002-0001/$00.20/0 © 2008 The Author(s). Journal compilation © 2008 The Royal Geographical Society

Blackwell Publishing Ltd

UK retail concentration, Chilean wine producers and value chains

ROBERT N GWYNNE

School of Geography, Earth and Environmental Sciences, University of Birmingham, Edgbaston, Birmingham B15 2TT

E-mail: [email protected] paper was accepted for publication in March 2008

This paper seeks to examine how value chains impinge upon firms within the Chileanwine sector. The value chain analysis will further link the production and export of winein Chile with the import and retailing of this wine in one key core economy market,namely that of the UK. The analysis is divided into three sections. First, the politicaleconomy of value chains in agro-industry is discussed, particularly in relation to thedistinction between network or quasi-hierarchical relationships. Then the paperexamines the theme of retail concentration in the UK and the impacts that this has onglobal value chains which incorporate Chilean wine firms. The focus then moves tovalue chains and the nature of upgrading within Chilean wine firms by examining thestrategic example of the lead firm and firm upgrading as a response to demands of UKretailers and through the flying winemaker model. Broad conclusions on the comparativenature of value chains and the scramble for value within them are finally made.

KEY WORDS

: Chile, value chains, retail concentration, firms, wine, upgrading

Introduction

M

cMichael (1996) argued that the events ofthe 1980s and early 1990s in the SovietUnion, Eastern Europe, Latin America and

East Asia were of such import that ‘the developmentproject’, evident since post-Second World Warreconstruction, gave way to ‘the globalisation project’.Gwynne

et al.

(2003) saw this as coinciding withthe abandonment of import-substituting or state-ledindustrialisation schemes in favour of more export-oriented strategies amongst what they termed thecountries of the global semi-periphery.

These notable policy shifts initiated changingrelations between countries of the global semi-periphery and the core economies. Academicsrequired new concepts to investigate the economicprocesses behind these changing relations. Onesignificant conceptual contribution was that of theglobal commodity chain (GCC) and the first substantialtreatment of commodity chains appeared in 1994(Gereffi

et al.

1994). As Gereffi

et al.

(2001, 1) noted,an important part of global trade is now conductedwithin transnational enterprises or through systemsof governance that link firms together in a variety

of sourcing and contracting arrangements. The keytheme is that global trade cannot be understoodmerely as the result of arms-length and market-basedtransactions. Global trade is increasingly beingorganised through ever more complex inter-firmand intra-firm relationships and contracts (Gwynne2008).

Bair (2005) sees the GCC concept as primarilyemanating from work on world systems theory.Others have argued that the origins of the conceptof the global commodity chain lie in dependencytheory (Gibbon 2001). ‘Global value chain’ (GVC)is now another commonly used term used withinthe social sciences for those studies that investigatehow firms link producers and producing spaceswith consumers and consuming spaces at thescale of international trade in goods and services(Humphrey 2006). According to Bair (2005), thereare significant differences between the GCC andGVC approaches, with the latter more closely relatedto international business studies, the meso-levelof sectoral dynamics and the micro-level of firmupgrading.

However, GVC analysis uses much of the spatialcategories inherited or adapted from world systems

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Chilean wine producers and value chains


Vol. 174 No. 2, pp. 97–108, 2008© 2008 The Author(s). Journal compilation © 2008 The Royal Geographical Society

and dependency theories. Gibbon (2001, 346) arguesthat ‘chain coordination is still typically directedfrom northern countries, since it is usually associatedwith those links (or “nodes”) in a chain which haveparticularly high barriers to entry, and becauseinternational income distribution remains extremelyuneven’. Gwynne

et al.

(2003, 18) attempted torevise the world systems framework by dividing theworld into core, semi-periphery and periphery withthe semi-periphery category being determined bywhether key global economic actors perceivedcountries as constituting emerging markets. Thisarticle will pursue the Gwynne

et al.

approach byreferring to countries as being part of the core,semi-periphery or periphery in terms of value chainanalysis.

This paper seeks to examine how value chainsimpinge upon firms within an agro-industrial sectorof one Latin American country in the semi-periphery,namely Chile. The sector chosen for analysis in thispaper is that of wine in Chile, notable for considerableexport growth over the past two decades (Gwynne2006). Value chain analysis will link the productionand export of wine in Chile with the import andretailing of this wine in one key core economymarket, namely that of the UK. The empirical focusin this analysis will concern the scramble for valuealong the chain. As Sturgeon (2001, 9) argued,studies of industry value chains reveal the concreteactors at the global scale as well as the linkagesthat bind them into a larger whole. Themes ofgovernance, or the non-market coordination ofeconomic activity between firms, can be exploredin particular.

The Chilean wine sector has developed animpressive export record over recent years. In thelast year of the Pinochet dictatorship 1989, Chileanwine exports were a meagre US$35.4 million(Banco Central de Chile 1990); by 2006 they hadreached virtually US$1 billion (Banco Central deChile 2007). The Chilean wine sector has becomecompletely restructured as a result. In the early1990s, Chile was producing around 300 millionlitres of wine annually, of which only 20% wasexported; by 2006 around 800 million litres werebeing produced with 75% for export; by 2014 theChilean Ministry of Agriculture forecasts productionof 1.2 billion litres with 85% destined for export(Richards 2006).

One key research issue that value chain method-ologies facilitate is the process of technologicalupgrading, both in terms of product and process(Humphrey and Schmitz 2002). Firms in countriesof the semi-periphery need to respond to informationflows going through the value chain and therequirements of supermarket and other retail buyersin core economy markets. Within the wine sector

of a country in the semi-periphery, upgrading canoccur through improved raw material supply (thequality of wine grapes), investment in processtechnology (stainless steel fermentation tanks andoak barrels, for example), the increasing utilisationof flying winemakers (Lagendijk 2004) and themore studied formulation of the final product interms of targeted markets.

This paper argues that the favourable exporttrajectories for Chilean wine to global markets ingeneral and the UK market in particular are partlydue to the nature of the insertion of wine-producingfirms into global value chains. As a result, thispaper is divided into three sections. First, the politicaleconomy of value chains in agro-industry will bediscussed, particularly in relation to the distinctionbetween network or quasi-hierarchical relationships.The paper then moves on to examine the theme ofretail concentration in core country markets, suchas that of the UK, and the impacts that this has onglobal value chains which incorporates Chileanwine firms. The paper then analyses how valuechains give context to the nature of upgradingwithin Chilean wine firms.

Much of the data come from a two-year BritishAcademy research project (2005–7) which examinedthe impacts of globalisation on export-orientedwine firms in Chile’s Colchagua Valley and therecord of collaboration between these firms andkey purchasing companies within the UK market.Twenty-one wine firms were interviewed in Chileand five buyers of Chilean wine from leadingUK supermarkets and specialist retail chains. Thispermitted a more detailed perspective of the natureof the relationships that Chilean export-orientedwineries established with the major world marketfor its wines.

Value chains and agro-industry

Value chain analysis has inherited some of theconcepts and methodologies from commodity chainanalysis. For example, Gereffi (1994, 97) introducedthe dimension of territoriality and described it asthe ‘spatial dispersion or concentration of productionand distribution networks, comprised of enterprisesof different sizes and types’. In value chain analysisthis dimension could focus on understanding thelinks and functional integration between producingdistricts on the one hand, and consuming spaceson the other (Cook

et al.

2006). These can begeographically highly dispersed locations – as inthe case of Chilean wine-producing districts andwine-consuming spaces in the UK.

Another dimension that value chain analysisexamines is the governance structure – the authorityand power relationships that determine how financial,


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material, and human resources are allocated andflow within a chain. This could be seen as examiningthe nature of power relations that exist along achain and the search for how key actors within thechain generate and attempt to appropriate value.Three forms of governance have been identified inthis context: inter-firm networks; quasi-hierarchicalrelationships between powerful lead firms andindependent but subordinate firms in the chain;and vertical integration.

Humphrey and Schmitz (2002, 1023) developedthe crucial distinction between value chains asnetworks and quasi-hierarchical relationships. Innetworks, firms cooperate in a more information-intensive relationship, frequently dividing essentialvalue chain competences between them. Knowledgetransfer up and down the chain is encouraged forthe potential benefit of all actors. The buyer mayspecify certain product and process standards to beattained, but should be confident that the suppliercan meet them. Humphrey and Schmitz (2002,1023) commented that ‘chains characterized byeven networks offer ideal upgrading conditions butare the least likely for developing country producersbecause of the high level of (complementary)competencies required’.

Meanwhile, in the quasi-hierarchy, the lead firmexercises a high degree of control over other firmsin the value chain. This can involve specifying thecharacteristics of the product to be produced, theprocesses to be followed and the control mechanismsto be enforced. There can be some doubt about thecompetence of the supply chain and hence thestrong involvement of the lead firm. Knowledgetransfer is very much orchestrated through thechain from the lead firm.

Are, then, the value chains in the Chilean winesector more similar to the ‘even network’ or the‘quasi-hierarchy’? In Gereffi’s (1999) work on valuechains in the global clothing sector, the mainpattern observed was distinctly quasi-hierarchical.Furthermore, quasi-hierarchical relationships havebeen found in value chains in the horticulturalsectors, such as in the relationships between largesupermarkets in the UK and fresh vegetable producersin Africa (Barrett

et al.

1999; Dolan and Humphrey2000). What then is the relationship betweengovernance and upgrading in agro-industry in general,and the wine industry in particular?

There are at least two issues that agro-industrialfirms from countries of the semi-periphery shouldconsider as they develop transactional relationshipswith powerful global buyers from the core economies.First is the issue of market access. Even when corecountries dismantle trade barriers to the import ofagricultural and agro-industrial goods, producers inthe semi-periphery and periphery do not automatically

gain market access (Humphrey and Schmitz 2001).This is because the value chains that producersfeed into are often governed by a limited numberof core country buyers intent on generating value.Through a number of annual contracts, this normallysignifies the core country buyers requiring productswith increasing quality at lower, or at least, similarprices. Nevertheless, in order to participate in exportproduction for the key global markets of NorthAmerica and the European Union, producers needaccess to the lead firms and buyers of these chains.

Secondly, becoming part of a value chain couldoffer firms a fast track to the acquisition of productioncapabilities. Those producers that gain access tothe chains’ lead firms tend to find themselves ona steep learning curve. The lead firms are verydemanding with regard to reducing cost and raisingquality, but they also transmit best practices andadvice. Thus local producers can learn a great dealfrom global buyers about how to improve theirproduction processes and attain consistent and highquality.

Research into agro-industrial value chains mustbe informed and framed by global value chainstudies both in manufacturing on the one hand andagriculture on the other (Le Heron 1993; Marsdenand Arce 1995). However, the key area of analysismust be the relationship forged between key buyers(and/or owners) in the core country markets andthe producers and suppliers in the countries of theglobal semi-periphery. For this reason, analysisshould begin by focusing on the nature of the keybuyers in core country markets.

Retail concentration in the UK and impacts on the Chilean wine value chain

Humphrey (2006, 574) argues that concentration inthe retailing of fresh and processed food has led toa substantial reorganization of agribusiness valuechains. ‘Large buyers have transformed themselvesfrom resellers of products made by others into firmsthat go out to find suppliers for the products thatthey want for their customers’. This would alsoappear to be very much the case in the wine valuechain. This section will examine the links betweenChilean wine firms and the large supermarketchains in the UK market; these are playing anincreasing role in product development, brandingand supplier selection.

Figure 1 demonstrates the broad framework ofthe downstream value chain of Chilean wine interms of the UK market. Chilean wine firms can bedivided into three: wine company groups; newlyestablished companies (both those aiming for high-quality production from the beginning and thosewith the strategy of upgrading the quality of wine

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through time); and old established wine firms tryingto restructure in order to supply global markets. Interms of gaining access to the UK market, they aremostly represented by UK distributors. Only Chile’slargest wine company, Concha y Toro, has set upits own distribution company in the UK. Althoughthis decision was seen as risky initially, it soonproved commercially viable; supply-chain manage-ment within the Concha y Toro group and its UKnetwork has improved and the 6–10% for thedistributor now stays with Concha y Toro (Davis2006).

The role of the distributors (whether Concha yToro UK or a long list of UK distributors) is then tocoordinate with the UK ontrade and offtrade. Theontrade consists of pubs, restaurants and hotels anddata from the International Wine and Spirit Record(IWSR) indicate that about 21% of Chilean wine byvolume is destined for this sector – leaving 79% forthe offtrade (IWSR 2007). Here the supermarket chainsdominate with 72% of offtrade wine sales. Withinthese supermarket chains, four supermarkets (Tesco,Sainsburys, Asda and Morrisons) are responsible for70% of total supermarket wine sales, with Tescoalone responsible for 33%.

Retail concentration has also occurred withinspecialist wine retailing groups – only three majorgroups remain at the national scale (Majestic,Oddbins and the Thresher group) and they recordabout 9% of offtrade sales. Hence, small-scalewine-retailing companies throughout the UK (localindependent wine merchants, internet and mailorder wine retailers) now only account for around19% of wine sales. Thus, increasing concentration

in the UK wine retailing sector has produced asmall number of wine buyers with a significantcombined market power; the top 10 supermarketand specialist wine retail chains account for around80% of the UK offtrade wine market. The winebuyers of these 10 key retailing companies areclear targets for export-oriented wine firms in Chileand their purchasing (and tasting) decisions havesignificant impacts on those firms.

Over the past two decades, supermarkets haveregarded sales of wine as critical for attractinghigher-spending customers and have developedcompetitive strategies based on increasing therange and quality of wine. The larger supermarketgroups outperform many of the smaller super-market groups in terms of wine sales (comparedwith total sales). Over the past decade, Tesco hasconsiderably widened its range of Chilean wines.The Chilean red wine portfolio gives an idea of theincreasing range and product differentiation thatthis has involved. By the end of 2006, Tesco soldsix Chilean Cabernet Sauvignons (ranging in pricefrom £2.99 to 9.99), four Merlots, three Pinot Noirs,two Carmenères, one Shiraz, five red blends andone 3 litre Cabernet Sauvignon box (Davis 2006).

Another element of UK supermarket strategy hasbeen to develop brand image and increase thesignificance of own-label products. This has meantthat supermarkets have taken an active role inproduct innovation and supply chain management.Humphrey (2005, 3) shows that own-label penetrationof retailing in the UK rose from around 22% in1980 to around 43% in 2001. Pursuing the Tescored wine product range, a stage further is illustrative.

Figure 1 Chilean wine: value chain downstream to UK market


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Of the 22 Chilean red wine products sold in Tescoat the end of 2006, seven were own label:

The role of own-label brands for Chilean wine isfundamental. In terms of possible consumer confusionabout price and quality there is always more consumerconfidence in buying a Tesco branded wine. As aresult Tesco branded wine accounts for nearly 50% ofChilean wine sales in Tesco branches

Davis (2006)

Tesco’s own-label quality Chilean brand (Tesco

Finest

) has greater than half of the total Chilean winesales in the higher price range, indicating that Tescoconsumers ‘believe’ in the supermarket brand imagemore as the quality increases. Supermarket chainshave thus succeeded in establishing credibility intheir own brands so that consumers do not justperceive ‘the own-label brand as a “cheap” alternative,but as a worthy competitor to the manufacturedbrand’ (Chaney 2004, 5). This growth in own-labelbranding has led to customised, complex relation-ships between supermarket buyers and wine firmsuppliers. However, through time, suppliers can acquirecompetences and diversify their customer base.

Retail concentration in the UK market has provideda key target for the upgrading strategy of manyChilean wine firms. Humphrey and Schmitz (2002,1022) argue that ‘task complexity increases asproducts become more customized and cannotbe obtained readily from alternative suppliers’.When the risk of supplier failure to cope with thiscomplexity is perceived to be low, Humphrey andSchmitz (2002) see the coordination of the valuechain as more resembling a network than a quasi-hierarchy.

The upgrading strategies of wine producers areoften linked to a highly competitive businessmodel. One medium-sized Chilean winery, LuisFelipe Edwards (LFE), demonstrates the advantagesand disadvantages of having the UK market at theend of its own value chain. It has achieved rapidexport growth by focusing on the UK as its keystrategic market. In 2005, 45% of its exports wentto the UK and its percentage to the four leadingsupermarkets (70%) was exactly the same as theindustry average. They developed a networkingrelationship with all four of the leading supermarketsin the UK, and had supply contracts with Marksand Spencer as well. The company saw the UK marketas the best barometer of international markets,‘being five years ahead of the rest of world marketsin terms of taste, price and requirements’ (Edwards2005). Furthermore, LFE saw the UK as a very openmarket, giving relatively easy access to new firms(LFE started in 1975) that are able to compete intough conditions.

However, the power of supermarkets in the UKwine market has led to very competitive pricingconditions and supermarkets tend to ‘swallow’ theprofits in the Chilean wine value chain (Edwards2005). In 2005, LFE sold 70 000 cases of premiumred wine to Tesco of Cabernet Sauvignon andCarmenère. The list price was £5.99 but Tescoinsisted on two or three promotions a year whenthe price went down to £3.99; 75% of LFE caseswere sold during these promotions. As with thenetworking model, LFE had managed to diversifyits customer base so that it could walk away fromcontracts where the prices were too demanding; forexample, it had decided not to pursue an own-labelproduction contract with Tesco in 2005 (Edwards2005).

Overall, the UK supermarket is perceived, evenby Chilean wine firms that have targeted the UKmarket, as key to their global strategy as appropriat-ing excessive value in the wine value chain.Chilean wine producers realise that they have tocope with tight ‘value’ margins in selling to UKsupermarkets and the associated high export volumesthat can develop. Thus, in the case of LFE the UKmarket provided 45% of export volume, but onlygenerated 30% of export value. Other global markets(and their retailers) provided slower market growthbut higher retention of value – 55% of exportvolume but 70% of export value in the case of LFE.

Retail concentration in the UK market has thusprovided Chilean wine producers with the opportunityof rapid growth of sales but often combined withlow per unit profitability. This links into the inter-esting relationship between geographical sourcingof wine and supermarket shelf space, particularlyin such specialist retailers as Majestic which organisetheir wine sales by country (and region in the caseof France). ‘The link between different wines andshelf space is reviewed every six months. Chileanwine has been on a steady upward path for the lastfour years’ (Pym 2006). Hence the geographicaldifferentiation of shelf space in any supermarketchain gives a snapshot of how that particular firmviews its ‘geography of wine supply’ at any particulartime. In other words, the relationship betweennational market share and shelf space in leadingUK supermarkets and specialist retail chains is veryclose. Between 2003 and 2007, the proportion ofUK supermarket wine shelf space selling Chileanwine crept up by an average of 0.25% a year from6.3 to 7.3% (Wines of Chile 2007). In the case ofMajestic, the two main elements of the rapid growthin Chilean wine shelf space were for Pinot Noirand Sauvignon Blanc products (Pym 2006).

This changing geography of UK supermarketshelf space is perhaps the key indicator of exportsuccess for the wine industries of exporting countries.

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There are different shelf space indicators for differentsupermarkets. In 2006, Majestic over-indexed onshelf space for Chilean wine compared with thenational average – 8% as opposed to 7% (Pym2006). In contrast, by 2006, Threshers was under-indexing quite severely – 4% as opposed to 7% ofshelf space for Chilean wine (McEvoy 2007). Thishad been caused by a ‘deliberate strategy toremove shelf space from Chile and give this spaceto other countries such as New Zealand’ (McEvoy2007). However, such a wide difference betweenThreshers shelf space allocation and that of thenational average for Chilean wine prompted achange of strategy in 2007. ‘Chilean wines arebeing allocated more shelf space as we believe thatChile offers the customer a good value for moneyalternative to most other New World countries’(McEvoy 2007). Associated campaigns to brief staffand communicate about Chilean wine to Thresherscustomers have been put in place. This introducesthe concept of the ‘geography of shelf spaceallocation’. If the allocation of shelf space for acountry’s wine by a leading retail firm falls too farbelow the national average, the firm is soonprompted to develop strategies to reverse this trend.Market share takes time to expand (though declinecan be quicker) due to inertia and the large numberof lobbying influences attempting to maintain existingallocations of shelf space.

The value chain approach is also applicable tomany countries of the semi-periphery as there hasbeen a very rapid process of retail concentration inthese countries as well (Reardon and Berdegué2002; Reardon and Hopkins 2006). In many LatinAmerican countries there has been a rapid shift tocentralised procurement in such countries as Brazil,Mexico and Colombia, leading to stronger bargain-ing power with suppliers and reductions of per unitfixed costs of transaction. This may reduce the perunit value received by the Chilean wine producerin these markets, but can offer the potential forsignificant growth in sales. These retailing trans-formations have facilitated Chilean wine producersin sending an increasingly differentiated range ofproducts to a more diversified set of global markets.In 2004, the Concha y Toro group sent wine exportsto 110 countries, more than three times the numberof a decade earlier (Concha y Toro 2005). Perhapsthe most dynamic Chilean exporter in this sense isMontes. This was a firm that only started in 1988,but its key growth strategy has been to producequality wines (second highest export price of allfirms – see Table 1) and to export them to as manymarkets as possible; by 2005 it was exporting to 68countries and had developed a good supply recordto both the ontrade (restaurants and hotels) as wellas the offtrade in each market.

Retail concentration in core countries, and anincreasing number of countries in the global semi-periphery, has meant that Chilean wine firms havea wide range of options in terms of developingtheir export profile. The value chains in which theyinsert themselves should be seen more as a networkthan a quasi-hierarchical relationship. Each firmhas the potential to supply a range of supermarketsin an increasingly large number of countries inwhich the process of retail concentration has takenplace. The Chilean wine producer has a certainamount of bargaining power – if a supermarketchain attempts to impose too demanding a contract,the wine firm has a number of other opportunitiesat the global scale. Nevertheless, in any particularcontract the large potential sales offered by thelarge supermarket chain will mean that expectationsover the retention of per unit value within the valuechain will have to be kept low. The combination ofneeding to improve quality and reduce price doesmean that Chilean wine firms should have clearupgrading strategies for their export products.

Value chains, upgrading and the Chilean wine firm

How have UK supermarkets created contractual andsourcing arrangements with Chilean wine firms?Supermarkets in core country markets have becomeone of the key agencies in the global value chainof any New World or wine-exporting country. Onecould refer to Gereffi’s (1999) ‘requirements thesis’of key actors in this context. Although supermarketsand other end clients do not have direct access tothe technology of their suppliers, they draw uprequirements – in this case for the wine-exportingcompanies. Requirements can be either long term(development of a brand) or short term (developmentof a new or upgraded product to see how thedevelopment of a new taste, grape variety or blendcoincides with consumers).

Unlike the Chilean fruit sector, leading UK super-markets and specialist retail chains have mainly hadto deal with Chilean, as opposed to transnational,firms. Of Chile’s 20 major firms in 2005, only twowere foreign owned – the relatively small CasaLapostolle and Los Vascos firms (Table 1). Referringback to Gereffi’s (1999) analysis of upgrading in hisvalue chain work, two themes can apply to suchagro-industrial sectors as that of wine – productand process upgrading.

Product upgrading is normally defined as movinginto more sophisticated product lines, with morevalue-added. In the wine sector, this could signifythe firm starting with the production of basic wine andthen gradually improving the product and movingup through the various quality categories – varietal,premium, super-premium and even ultra-premium.


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This would involve a slow but sustained strategy ofupgrading by the wine firm. It means developingnew higher-quality products alongside the produc-tion of the more basic categories with which thefirm started supplying international markets. Withinexport-oriented wine enterprises, this can alsoinvolve the role of flying winemakers (Lagendijk2004) who can bring knowledge of which productsare best suited for which markets.

Process upgrading constitutes a second relatedtheme. This involves transforming inputs into outputsmore efficiently, by reorganising the productionsystem or introducing superior technology. Theintroduction of stainless-steel fermentation tankswith strict temperature control and an effectivepolicy towards the supply of oak barrels are twokey examples in the wine sector. Flying winemakersare significant here as well, as they introduce theknowledge of how to best organise the process inorder to achieve the marketable product required.One example would be the slow and low-temperaturefermentation of white grapes (such as SauvignonBlanc) in order to maximise the fruit-driven componentof the final product.

Furthermore, in agro-industry there is often theneed to improve the quality of the raw materialinput. This has led to a distinct process of verticalintegration as large wine firms purchase large amountsof land (to plant new vines) and sometimes existingvineyards in order to better control the quality ofthe raw material input. The wine sector contradictsthe lessons of most agro-industrial firms as thewine firm emphasis has to be on reducing winegrape yields in the vineyard in order to maximisethe subsequent quality of the wine. It can be easierto control yields in vineyards owned and managedby the winery, rather than purchasing wine grapesfrom contract farmers or through the spot market atharvest time.

As a result, there has been an interesting shift invineyard location in Chile. When the Chilean winesector was oriented towards the domestic market,vineyard locations on the flat plains of the longitudinalCentral Valley and transverse valleys were favoured.This produced high yields of most grapes, butreduced the quality and complexity of the finalproduct. Since the 1990s, major Chilean wine firmshave been planting vineyards in ‘new’ zones, such

Table 1 Access to the UK market of Chile’s 20 major wine companies by value of exports, 2005

Wine firmYear firm

startedExport value

US$ million 2005

Proportion of export value toUK market (%)

Export volume (million litres) 2005

Price per litre(US$) 2005

Concha y Toro 1883 159.4 15.4 68.15 2.34San Pedro 1865 61.0 22.3 35.68 1.71Santa Rita 1880 39.0 9.2 9.90 3.93Cono Sur 1993 37.5 54.7 17.70 2.12Errazuriz 1870 24.6 44.5 7.84 3.13Undurraga 1885 23.1 0.5 8.11 2.85Montes 1988 22.3 10.8* 3.75 5.94Via 1998 21.5 38.9 15.14 1.42Santa Carolina 1875 20.5 5.0 8.61 2.38Santa Helena (Vinex) 1942 20.3 6.4 10.35 1.97Tarapacá 1874 19.2 7.9 6.23 3.09Carmen 1850 18.6 7.6 4.90 3.79Maipú 1948 16.0 21.3 8.48 1.89Viñedos Emiliana 1986 15.5 10.2 7.53 2.06La Rosa 1824 13.9 38.4 6.34 2.19Ventisquero 1998 13.6 45.0 6.89 1.97Los Vascos 1975 13.4 2.5 2.95 4.53Valdivieso 1879 13.2 24.3 4.98 2.64Casa Lapostolle 1994 10.8 7.1 1.56 6.89Montgras 1992 10.7 12.85 3.10 3.46

Total/average 574.1 19.1 238.19 2.41

*EstimateSource: Wines of Chile database: Duijker (1999)

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as slopes and hillsides along the transverse valleys,along the Coastal Range and on the Andeanpiedmont. Here, yields are much reduced but, ifthese vineyards are carefully managed in terms ofaccess to water, they can produce the raw materialfor much improved wines.

Chilean wine firms have been distinguished bytheir record of success in both product and processupgrading. This record of upgrading has first of allbeen set by the strategic directions taken by thelead firm, Concha y Toro. Secondly, there has beena group of firms that have upgraded as a responseto key retailers in core country markets. Thirdly,there has been what could be called the ‘flyingwinemaker model’ to upgrading.

The strategic example of the lead firm

The Concha y Toro group consists of a number ofcompanies linked by ownership (and commontechnological and marketing knowledge). The parentcompany, controlled by the Guilisasti family, hasdeveloped a number of new subsidiary firms withdistinctive roles in the overall group. The Concha yToro company, which was formed back in 1883,had by 2005 become the dominant wine-exportingenterprise in Chile, with nearly three times theexports of its nearest rival (Table 1). In addition, ithas set up or acquired three other subsidiariessince 1986, all within the top 20 firms in terms ofexports – Cono Sur, Emiliana and Maipo. SantaEmiliana (later renamed Viñedos Emiliana) was setup in 1986 and has been given the strategic focusof developing and exporting organic wines. ConoSur was established in 1993 and was given thestrategic mission of being a specialist export-orientedfirm, particularly targeting European markets. VinaMaipo, meanwhile, specialises in the cheaper,varietal market segments – hence its relatively lowaverage price per exported litre of US$1.89 (Table 1).

Together these four inter-connected firms areresponsible for more than 26% of Chilean wineexports. In this way, the Concha y Toro group hasdeveloped the characteristics of the lead firm inChile’s wine export sector. For example, the grouphas significant power and influence upstream inthe wine value chain as its constituent wineriespurchase wine grapes off farmers throughout muchof Central Chile. The prices that Concha y Torooffers for wine grapes on the open market duringthe harvest in March and April tend to be taken asthe key reference point for all other firms purchasingwine grapes from grape farmers on the spot marketat harvest time.

The role of Concha y Toro as lead firm in theChilean wine sector can also be seen in its strategyof technological upgrading. Since the 1980s, the

Concha y Toro group has invested strategically incapital goods and new technologies in order toupgrade vineyards and wineries. The aim was to setup a process of continual upgrading in order toimprove wine quality throughout the price range.At least three strategic areas have been significant:raw material supply; investment in process technology;more studied formulation of the final product interms of the requirements of targeted markets.

The example of its Cono Sur subsidiary is instruc-tive. Cono Sur was set up in 1993 to target theEuropean and particularly the UK markets. In theUK, it started its export strategy by supplying winefor own-label brands to supermarkets. This allowedCono Sur to gain knowledge of consumer tasteand supermarket requirements in the UK market,despite surviving on low margins. After havingacquired competences in supplying own-label winesto supermarkets, its strategy shifted to developingits own brand image. It was able to develop twobrands – Cono Sur and Isla Negra – the formerfocused at the premium quality category and thelatter at the varietal. By 2005, Cono Sur had becomethe fourth largest exporting company of Chileanwine and had come to rely more on the UK market(receiving 55% of firm exports) than any othercompany – see Table 1. Within the Cono Surbrand, it also developed a number of higher qualitylevels (Ocio and 20 Barrels signifying super premiumcategories). The formulation of these quality levelsand products was designed to meet the requirementsof leading supermarkets and specialist retail chainsin the UK in particular. By 2005, Cono Sur sold toall leading UK supermarkets and specialist retailchains – though the combination of productsvaried between them (Downes 2005).

Product upgrading relied on important improve-ments in its Chimbarongo winery. The technologicalupgrading of the winery required significantinvestment as with the installation of large numbersof temperature-controlled stainless-steel tanks forfermentation – with smaller tanks required for thefermentation of those wine grapes expected toproduce higher quality wines. In addition, the annualpurchase of large numbers of new oak barrels wasimportant in raising quality, particularly for thepremium and super-premium red wines. Cono Surhas not relied on flying winemakers – most of itswinemaking expertise has been developed withinCono Sur and from collaboration with the winemakersof the wider Concha y Toro group (Padilla 2005).

Upgrading has also been evident in the supply ofits raw material from the vineyards. This has had atleast three elements. First is the issue of increasingvertical integration into upstream supply and controlof vineyard management. When Cono Sur startedin 1993, it relied mainly on buying in wine grapes


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from grape farmers (both on contract and throughthe spot market). Since then, Cono Sur has beenacquiring more vineyards so that it can have morecontrol on the quality of raw material supply. By2005, Cono Sur owned 300 ha of vineyards whichmeant that it was sourcing about one-third of itswine grapes from its own vineyards. By 2009, it isdue to own and control 850 ha of vineyards,which should mean that it is fast approaching theposition of closely controlling the production ofmost of its wine grape supply (Padilla 2005).

Second, Cono Sur sources its wine grapes froman impressive range of Chile’s growing spaces. Incontrast to wine producers in other New and OldWorld countries, there is a 1200 km distancebetween its most northerly vineyards in the Elquivalley from its most southerly in the Bio-Bio valley.It has used the huge north–south range of Chile tolocate the growing of the 11 grape varieties thatit uses in the most appropriate valleys in termsof environment,

terroir

and climate; Riesling andGewurtztraminer wine grapes, for example, are mostlysourced from the cool Bio-Bio valley.

The third element is the nature of technologicalupgrading. Cono Sur has developed an advancedtechnological approach for its vineyard management– very different to that of Old World vineyards.This involves use of drip irrigation systems andfertilisers to maximise grape quality, significantpruning to restrict yields per vine and foliagemanagement to improve the uniformity of grapebunch ripening. The use of drip irrigation systemsis informed by regular measuring of soil humiditythroughout the vineyards (which are continuallymapped via satellite for vegetative stress) so thateach vine neither receives too much moisture onthe one hand nor suffers stress through lack ofmoisture on the other (Padilla 2005).

Concha y Toro has thus been a good example ofa lead firm in terms of its export-oriented strategyin general and its record of technological upgradingin particular. The fact that it has four distinctcompanies within the overall wine group means thatthere are distinct differences in setup and winemakingstyles between them. ‘It maximizes the company’spotential to be all things to all men’ (O’Halleron2007, 143). Some have argued that, as a result, it isone of the few global wine brands that has enjoyedboth critical and commercial success (O’Halleron2007). It could also be argued that its strategy ofupgrading has been the template for many of theother successful exporting wine companies from Chile.

Firm upgrading as a response to demands of retailers

One group of the top 20 Chilean wine companieshas very much followed the Concha y Toro model

of basing their export strategy on sustained upgradingand supplying key supermarkets in core countryeconomies. It is interesting to point out that thesefirms are normally newly established (less than 20years old). They first inserted themselves into inter-national markets by producing highly competitivebasic and varietal wine (good quality, low prices)and have subsequently tried steadily to upgradetheir quality and increase their prices.

One example of this strategy is seen in theperformance of Montgras. Between 2000 and2004, nearly 50% of its production was linked to amassive export of varietal wine to Sainsburys as aChristmas special offer. Whereas this gave the firmeconomies of scale in terms of production, per unitprofit or value was very low indeed. In 2005,Montgras decided to stop this deal; while exportvolumes understandably declined by 37.6%, exportvalues were down only 18.9% as the average priceper litre rose in a startling way over a 1-year period– from US$2.65 in 2004 to US$3.46 in 2005.Again this shows the trade-off in terms of prioritisingthe supply of UK supermarkets – high-volume growthalongside supermarkets receiving the greater shareof the value in the chain.

Other firms that have followed this upgradingstrategy include Ventisquiero and Via. In 2005, Viaand Ventisquero had average export prices of onlyUS$1.42 and 1.97 per litre respectively, whichimplies that they are at the beginning of thisupgrading process; Via and Ventisquero are themajor suppliers of own-label wines to the UK’slargest supermarket, Tesco. However, between 2004and 2005 they recorded the fastest growing exportsof all the top 20 Chilean wine companies. All thesefirms have an upgrading strategy closely linked tothe product requirements of key retailers in corecountry markets, particularly that of the UK; Viaand Ventisquero had 39 and 45% of their exportsrespectively go to the UK market in 2005 (Table 1).

Firms upgrading through the flying winemaker model

Another upgrading strategy has been followed bytwo foreign companies (Casa Lapostolle and LosVascos) and one Chilean company, Montes. CasaLapostolle, advised by the flying winemaker, MichelRolland, is owned by the French Marnier-Lapostollegroup. These companies have emphasised thepursuit of quality wine production for export sincethe firms were established. Upgrading is importantbut from a higher base than the previous group offirms. Table 1 shows that these three firms recordedthe three highest average export prices for their winein 2005 – between US$4.53 and 6.89 per litre. Theydid not start wine exports by supplying own-labelwine for supermarkets and, interestingly, have not

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linked their export strategy to prioritising the UKmarket.

Indeed their target market has been the UnitedStates (receiving between 40 and 60% of firmexports) where retail concentration has been muchless than in the UK in terms of wine. This is mainlydue to the institutional framework in which eachUS state has different laws governing alcoholconsumption. In effect, this has meant that there isa lack of any nationwide specialist wine retailersor US supermarket chains selling similar winebrands in all states. The US thus provides a muchmore fragmented market for Chilean wine exporters– but one with higher per unit value than the UKmarket.

These firms have emphasised the importance ofthe flying winemaker in their operations, whetherit be the foremost Chilean flying winemaker, AurelioMontes, or Michel Rolland, the Pomerol-based ‘star’of the film about globalisation and wine,

Mondovino

.Lagendijk (2004, 523) sees flying winemakers asquality and marketing symbols themselves, able toimpart success to their wine product throughtheir name being on the label. There is, however,a further issue here – the links between flyingwinemakers and wine critics – a component of whatLagendijk refers to as the cultural circuit of thewine sector. In the critical US market, the mostinfluential wine critic is Robert Parker; he has along history of giving high (and very high) evalua-tions to wines in which Michel Rolland has beeninvolved. Hence, the logic of the Casa Lapostolleupgrading strategy; it has relied on Michel Rollandto introduce modern technologies and Pomerolwinemaking knowledge to its vineyards and winery,and has then focused on selling the quality wine tothe US market, where such wines as Clos Apaltahave achieved iconic status. In 2005, 61% of CasaLapostolle’s total exports were sold within the USmarket.

This review of Chilean wine firms in terms ofglobal value chains in general and the UK market inparticular shows the vital importance of emphasisingquality and a long-term commitment to upgrading.The most successful export company, Concha yToro, has transformed itself in two decades from afirm dedicated to supplying the limited domesticmarket to a wine group with four component firms,each with clearly defined and different strategies inthe global market. Meanwhile, the new companieswith a firm commitment to upgrading have recordedrapid export growth – Montes, Montgras, Ventisqueroand Via are all less than two decades old, but havetransformed themselves into the fastest growingexporters and have developed networks withsupermarket chains in most leading core countrymarkets.

Concluding remarks

Thus, the global value chains in which Chileanwine firms have inserted themselves should beseen more as a network than a quasi-hierarchicalrelationship. As Humphrey and Schmitz (2002)pointed out, network relationships offer firms cleareropportunities for upgrading than in more hierarchicalarrangements. This does mean that the Chileanwine sector may be rather unusual in that it is oneof the few examples of significant upgrading andbargaining power being enjoyed by developingcountry firms within an agricultural or agro-industrialglobal value chain. Indeed Watts and Goodman(1997, 14) argued that in global commodity chainsin agriculture and agro-industry, capital mobility hasresulted in the centralisation of power by retailersand suggested that developing country firms (andfarms) within these commodity chains had evenless bargaining power than developing countryfirms in the (clothing) manufacturing chains studiedby Gereffi (1999).

In contrast, many Chilean wine firms have developedthe competences to supply a range of supermarketsin an increasingly large number of countries. Rapidexport growth has particularly occurred with thosecountries where the process of retail concentrationhas been significant. The Chilean wine producer hasbeen able to establish a certain amount of bargainingpower within the value chain, much more, forexample, than large-scale farmers within Chile’sfruit value chain (Gwynne 2003; Murray 1997).

Nevertheless, export-oriented wine firms havebecome highly dependent on the relationships theyforge with large supermarket chains in core countrymarkets. These supermarkets have been successfulin the scramble for value, at least within the valuechain linking Chilean producers with UK super-markets. However, this value chain has provided avehicle for rapid growth in export volume for manyChilean wine producers.

Furthermore, key retailing actors strongly influenceconsumer attitudes in their respective markets. Thisrole is closely related to what happens in the winesector at large, in terms of trends and develop-ments in markets and production. This is reflectedin the concept of the changing geographies of shelfspace within core country supermarkets. If theallocation of shelf space for a country’s wine, suchas that of Chile, differs too much from the nationalaverage, the supermarket chain is soon promptedto reverse this trend.

Value chain analysis is very much framed by thenature of the particular sector as it develops at theglobal scale (Friedland 2005). Unlike global valuechains in agriculture, wine provides an example ofan agro-industrial value chain in which significant


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value-added can occur in the processing plant(winery). In contrast to such agricultural productsas wheat or grapes, for which global exchangestend to set prices, the wine sector has much greaterflexibility in price setting and can potentially generatea huge variety of products. Prices have to benegotiated between producers and retailers ratherthan set in an exchange. The role of technologicalupgrading (through both product and process)becomes important, as this can act to differentiatethe final products of an exporting firm.

Unlike other manufacturing sectors, the export-oriented wine firm does not normally receivetechnology direct from a branded merchandiser orretailer. Rather, it provides an example of the‘requirements thesis’. As supermarkets and otherend clients do not have direct access to thetechnology of their suppliers, buyers of Chileanwine within these lead firms draw up productrequirements for the wine-exporting companies.These require wine-exporting firms to seek out therelevant technologies from other sources. In certainwine firms, flying winemakers have becomeincreasingly significant.

Technological change has not only come fromthe classic Old World countries, such as France,that have always strongly influenced the style ofChilean wine production, but also from New Worldcountries such as Australia and New Zealand(Richards 2006). Thus the geographical sources ofinformation flows for research into new processand product technologies (such as France andAustralia) are different from the main geographicalsources of knowledge relating to sales and marketing(such as the UK). This is an example of Lagendijk’s(2004) concept of interconnected locales. Places ofwinemaking in one country (which are spreadalong a 1200 km axis in Chile) are connected toplaces of exchange and consumption in another. Atthe same time, these places are connected toknowledge centres in other countries, such as thePomerol region in France (where flying winemakerssuch as Michel Rolland are based) or the Adelaideregion in Australia (home to Roseworthy, one ofthe world’s leading wine universities, and anothergroup of flying winemakers).

The ‘systemworld’ of the wine value chain thusnot only links producing spaces with consumingspaces but also links these with the spaces thatgenerate technology and the applied knowledge ofwine. The systemworld also involves the ‘culturalcircuit’ of the wine sector – wine associations, tradejournals, websites, wine critics and journalists, scholarsand experts. Some Chilean wine firms have beenable to forge export growth by harnessing thepotential of the cultural circuits as well as thevalue chains of the global wine sector.

Countries of the semi-periphery such as Chilehave long wanted to develop an export-orientedagro-industry that was based on adding value toresources, was sustainable economically in thelong term and had a trajectory of technologicalupgrading. Over the past two decades, the wine sectorin Chile has successfully developed this combina-tion of value-added, sustainability and technologicalupgrading and this has brought dramatic success inexport growth.

Dependency theory needs to adapt to thefindings of value chain research. The fact that thereare many Chilean wine companies that are nowinserted into global value chains has substantiallychanged the nature and pace of technologicalchange of the export-oriented firms. There may stillbe asymmetries in the economic relations betweencore country economies and those of the semi-periphery as dependency theory highlighted (Kayand Gwynne 2000, 51), but the insertion of firmsinto global value chains can also bring new exportopportunities and impressive records of technologicalupgrading.

Acknowledgements

I would like to thank the British Academy for fundingthis research, Michael Cox for his generous help inproviding data and contacts in the Chilean winesector, and my fellow contributors for their commentson an earlier draft.

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