Chile: A Challenging Climate for a Global Winemaker
Concha y Toro, a Chilean winemaker, faces climate risk head-on by taxing its carbon emissions, reducing its water consumption, and maintaining the quality of its grapes. But it can improve by working to mitigate the risks associated with its partners and its logistics.
If you’re a little red grape born in the greens tucked away by the Andes, the journey to maturing into a delicious bottle of premium wine is becoming long and troubled.
Temperatures are increasing, and droughts are creating opportunities for your planter to sell the water you need to the mining companies who want it more. The warm nights increase your acidity. The warm days shorten your growing cycle, making you less flavorful. The warm soil spoon-feeds you small doses of arsenic. You’re aware that you very well may desiccate – your parents burned last season, after all, and yields have been decreasing from the earthquake, the flooding, and the ominous Sun that broods over Chile.
If you’re one of the lucky ones, you’ll make it.
Concha y Toro, that Chilean winemaker that sells over 28 percent of the wine in the domestic market and exports over 30 percent of the country’s wine, will buy and process you. You’ll ferment at another facility and age in French or American oak barrels. Our children will have lower tannin levels, the barrels, who have a two year lifespan, will whisper to you. So yours will lack flavor, they do not say. You’ll be poured into glass bottles made in Chile and sealed by corks made in Portugal. You then have a 78.2 percent chance to ship oversees. Soon shipping will be slower and more expensive, as carbon taxes are implemented and as rising sea levels force ports to relocate and disrupt petroleum prices. And, sure, your cost to reach consumers has increased and your quality’s decreased, but, by golly, today you’ve made it.
While all winemakers must address supply chain risks due to climate change, Concha y Toro Winery has been recognized by the Dow Jones Sustainability Index as being especially proactive. The winery prepared for upcoming droughts way back in 2010, becoming the world’s first winery to measure its water footprint. Since then, it’s implemented in its own vineyards more effective washing procedures and a drip irrigation system that achieves 90 percent efficiency. Today its water footprint is 60 percent less than the industry average.
Management has also made strides in preparing for carbon taxes. Since 2007, the company has been tracking its greenhouse gas emissions per bottle made. Not only has it reduced them (by 4 percent, for example, in 2015), but it has also begun to internally tax them, using the raised funds for carbon dioxide reduction projects. By pricing carbon taxes into its business strategy today, Concha y Tora has been able to invest in long term sustainability and weather any carbon taxes that may soon be levied.
The firm’s competitive advantage is in providing high quality wines desired around the world at prices no other vineyard can match. So it has taken sweeping measures to protect the quality of the grapes it grows. Like other winemakers in Chile, the company has begun to use helicopters to circulate air, keeping its vines from frosting in the winter nights and its grapes from overheating during the growing season. And understanding that temperatures will rise by as much as 0.5 C in the next decade, the company has acquired land in cooler climates – farther south in Chile and north of Sonoma, California – where it can ensure that its highest quality grapes can continue to grow in identical conditions.
While Concha y Toro has been extremely committed toward protecting its grapes and its production from climate change risk, it has done comparatively little to guard itself in other areas that climate change will impact. For example, over 50% of the firm’s grapes for its premium wines come from nearly 700 independent farmers in Chile. The firm signs one year contracts with the farmers to protect itself against fluctuating prices and unexpected, low yields. But the firm does not enforce the same quality control best practices with its partners, and, as droughts occur, these farmers give up their field’s water to mining companies, who pay more. To mitigate this extreme vulnerability, Concha y Toro must invest in its partners or acquire their land.
Nor has Concha y Toro considered how climate change will impact its logistics and transportation. As an end-to-end wine maker that bears its own shipping costs, it has to. In the short term, Concha y Toro should source closer cork and oak barrel suppliers, whose materials will retain relevant tannin levels. It should also enter into long term contracts with its freight partners. Climate change threatens the petroleum industry, after all, and may result in price volatility or price increases. In the long term, Concha y Toro should study whether rising tides will force any of its delivery ports to relocate and should assess the cost impact of that relocation on its bottom line. And it could study from other vineyards in California, Australia, Italy, and France, who are innovating as well with daytime umbrellas and new, experimental vines as they work to mitigate climate change risk.
Other industries have prepared for climate risk by diversifying their locations. Should Concha y Toro continue to do so and risk losing its identity as a Chilean winemaker? How else could a company with a global supply chain reduce the effect of climate change negatively impacting its transportation costs?
Thanks for great TOM challenge article!
I believe that additional dimension to look at is the flow of information from the farmers to Concha y Toro to decrease the uncertainty of the grapes supply. If the company had better visibility into the performance of particular farmers, they would be able to better decide if they need to acquire them right away or if they can just help solve the problems with smaller investments. For example, they could use devices that measure the sap in the vines or the moisture on the field and then automatically transfer that information.[1] This way they will be able to forecast the yields better and help uncover and then solve common problems, e.g. irrigation leaks.
[1] https://www.nytimes.com/2017/01/05/business/california-wine-climate-change.html
I spent some time walking around the Concha y Toro vineyard when I lived in Chile for a few months in 2011. What struck me was the “New World” sense of pride and the relatively entrepreneurial perspective that the Chileans have towards their wine. Relative to “Old World” producers, such as Italy and France, I sensed that Chileans had a more open mind towards creating partnerships with vineyards around the globe.
Joint ventures created between Old World and New World producers have been successful in the past. For example, the California wine maker Mondavi and more traditional Chateau Mouton Rothschild produced the Opus One which was considered an excellent pairing. [1] Therefore, I don’t think that Concha y Toro would risk losing its identity by diversifying its locations. Rather, I think that Concha y Toro has the opportunity to enhance its younger brand by partnering with established, traditional vineyards to create unique combinations of wine.
Yet it is critical that the company concentrate on limiting transportation costs. Although you mention that Concha y Toro bears its own shipping costs, I think that it would be possible to transfer some of these costs to the consumer, especially for the relatively premier vintages. The company could utilize more of a dynamic pricing model such that more expensive wines to transfer and more exclusive, highly rated vintages (e.g., wines that include joint ventures with Old World producers) are marked and sold at relatively high prices. Furthermore, the company should optimize shipments by combining deliveries and scheduling routes most effectively in order to bring down total transportation costs.
[1] Prial, Frank J. “Wine Talk; 2 1/2 Decades Later, A Very Good Year.” The New York Times, The New York Times, 23 Aug. 1994, http://www.nytimes.com/1994/08/24/garden/wine-talk-2-1-2-decades-later-a-very-good-year.html.
Given that Concha y Toro is supplied by hundreds of independent grape suppliers, Matt you are correct in pointing out that these farmers present one of the greatest supply chain risks to the winemaker. I agree with your suggestion that Concha y Toro partners with these farmers to increase productivity in the wake of climate change. Producers have partnered with growers in other regions in innovative ways that include cost-effectively delivering precision agriculture (e.g. through providing agronomic and weather information), enabling access to financial services, especially during times of droughts (e.g. credit and insurance) as well as providing access to more climate change resilient inputs. Concha y Toro could adopt these innovations in order to ensure steady, reliable supply of grapes going forward.
Thank you for a particularly riveting and imaginative depiction of the issue at hand, Matt! As a (not very knowledgeable) wine lover, the narrative resonated with me. The wine making industry is particularly vulnerable to the effects of climate change due to its multiple dependencies to the shifting weather patterns you identified (rising sea levels and increase in transportation costs, soil acidity, differences in oak timber composition, day length and temperature variations). It strikes me that the wine producers have very little power to do anything against all the supply-side factors here (although as we learned in our Château Margaux case, taste might not really matter as long as you maintain pedigree). Indeed, relocation may be the only option available to some wineries: a paper published in the journal Proceedings of the National Academy of Sciences warned that grape sites may be forced to move their vineyards to higher latitudes and higher elevations [1].
One need not be completely pessimistic, however: this can also be seen as an opportunity for wineries to create a new paradigm of an ever changing prestige market, one where new wine locations can disrupt the centuries old Bordeauxs and Burgundys, which have traditionally commanded hefty premiums to their competitors. Concha y Toro has the scale and ability to purchase and develop new land across the Americas, while it is not constrained by a location-specific brand name or grape variety like its blue-blood French competitors. Why could it not then break new ground in creating new varieties of, say, Paragayan Merlot? After all, if the world is ending we might as well have good wine.
[1] Climate change, wine, and conservation, http://www.pnas.org/content/110/17/6907.abstract