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Americans are drinking more wine. In fact, more wine is now consumed in the U.S. than in any other country including France – about 330 million 9-liter cases in 2010 worth some US$30 billion. But there is still plenty of room for that volume to grow - per capita wine consumption in the U.S. is only about 10 liters annually versus 50 liters in France and 16 liters in Chile.

This gap is starting to close with the Millenial generation, between 20 and 30 years old, putting away more wine at a younger age than any previous generation. But the challenge for Chilean wineries like Concha y Toro, Chile’s biggest wine exporter, is to capture a share of this growth in the face of strong competition.

The United States produces around 75 percent of the wine it consumes, mainly in California’s Napa valley, and imports the rest. Considering exports of bottled and bulk wine, Chile is the third largest exporter to the U.S. after Italy and Australia, accounting for 12.6 percent of total imports.

“The United States is a key market for Chile and our exports have grown steadily in the last five years,” said Lori Tieszen, executive director at Wines of Chile USA, which represents around 90 Chilean wineries in the U.S.

Unlike Argentina which is known primarily for its Malbec wine, Chile’s strength is in its diversity of wines including grapes like Sauvignon Blanc and Carmenere, said Tieszen.

After strong growth in 2008 and 2009, however, Chilean exports to the U.S. grew only 1 percent last year, while overall wine consumption was up 2 percent.

“Part of that is due to a decline in bulk exports after the earthquake, but there was also a lot more price competition and the exchange rate hurt as well,” explained Tieszen.

Concha y Toro, which accounts for nearly half of Chile’s bottled wine exports to the U.S. or some 3 million cases a year, is the third largest import brand led by its flagship premium label, Casillero del Diablo.

But, like other exporters, it has been hit by the exchange rate. With the dollar’s strong depreciation against the peso last year, Concha y Toro’s exports to the U.S. fell 1.7 percent and its share of the company’s global exports dropped to 16.2 percent from 18 percent.

“We increased prices because of higher costs and the appreciation of the peso, which affected our sales in this very competitive market,” said Blanca Bustamante, head of corporate communications at Concha y Toro.

But the dip in sales has not drained the company’s interest in the U.S. market. “Wines from Chile and Argentina are increasingly popular, especially with younger consumers who are becoming more knowledgeable about wine,” said Bustamante.

With consolidated sales of US$735 million in 2010, Concha y Toro is also one of the few Chilean brands with the marketing clout and financial muscle to expand internationally.

Last year Concha y Toro signed a sponsorship deal with the English Premiere League football club Manchester United, aiming to capture a share of the club’s huge fan base in Asia and other markets. But advertising in the United States, which is a much more competitive market, will only help sales so much.

So when Concha y Toro was approached by the investment bank Rothschild last December about a winery for sale in California, the company’s CEO, Eduardo Guilisasti, saw a golden opportunity.

California wine rush

In March, after three months of negotiations, U.S. alcoholic beverages producer Brown-Forman announced an agreement with Concha y Toro to sell Fetzer Vineyards for US$238 million.

The deal rocked the wine world and Concha y Toro’s shares immediately jumped 6.9 percent on the Santiago stock exchange.

“Concha y Toro is committed with all its strength and energy to continue building the reputation for quality that (Fetzer Vineyards) has already earned,” said Guilisasti.

The deal, which closed on April 15, has added 429 hectares of vines in California’s Mendocino County to Concha y Toro’s portfolio and production capacity of 3.1 million cases a year, including the Fetzer, Bonterra, Five Rivers, Jekel, Sanctuary and Little Black Dress labels.

 “Fetzer gives us local production and the chance to enter the domestic market, which will allow us to roughly double the volume of wine sold in the U.S.,” said Bustamante.

The deal, which Concha y Toro financed through a mix of capital and debt, will also allow the company to diversify its costs in dollars, said Bustamante. “It’s a natural hedge against the exchange rate.”

Fetzer, like Concha y Toro, began as a family-run vineyard that has grown into a large-scale producer of easy to drink wines. It was bought by Brown-Forman in 1992 and is now one of the top ten brands by volume in the U.S. market.

But its sales in the popular premium price segment, between US$7 and US$10 a bottle, have fallen in recent years amid increasing competition and cost-cutting measures.

Part of the problem is that Brown-Forman’s heart was never in the wine business. With its current focus on expanding its tequila brands in Mexico, Brown-Forman has little time to tend its vines.

“The profit margins in the wine business are not as high as the spirits business and, because of our geographic diversification, we have more growth opportunities with our spirits brands,” said Phil Lynch, vice-president and director of corporate communications at Brown-Forman.

The global economic recovery helped attract interest in Fetzer, but Concha y Toro’s reputation and its promise to retain all of Fetzer’s 260 employees were key factors in Brown-Forman’s decision to sell, said Lynch.

“Concha y Toro is an outstanding wine company with a great reputation and a strong sustainability focus, which was important to us,” said Lynch.

To aid in the transition, Brown-Forman will continue to distribute and market Fetzer wines for up to nine months until Concha y Toro determines its own marketing strategy.

Concha y Toro has an exclusive distribution arrangement with the U.S. wine importer Banfi, but any potential synergies with Fetzer would have to be studied, said Bustamante.

Under legislative amendments dating from prohibition, U.S. wineries cannot sell wine directly to a retailer so Fetzer must market its wines through a distributor like Banfi.

“At this time the plan is to maintain the distribution network as is,” said Bustamante.

Chilean know-how

Founded in 1883, Concha y Toro is the second largest winery in the world with around 9,500 hectares of vines, including 1,000 hectares in Argentina, and it knows a thing or two about producing and marketing wine.

Its experience in the U.S. market and expertise in the wine business should benefit Fetzer, said Jon Fredrikson, president of the California-based wine consultancy Gomberg, Fredrikson & Associates.

“The prospects for continued growth in the U.S. wine market are very sound and Concha y Toro has the experience to grow the business and generate good returns,” said Fredrikson.

Concha y Toro is not the first New World wine company to come to California – Australia’s Fosters bought Beringer Wine Estates in 2000 and acclaimed Chilean winemaker Agustin Huneeus owns several vineyards in Napa valley including Quintessa Estates.

“Huneeus is an example of how good Chilean know-how can make a winery very successful in the United States,” said Fredrikson.

The key to Concha y Toro’s success in the highly competitive U.S. market, according to Fredrikson, is innovation.

“This is a turnkey operation that allows Concha y Toro to come in and be creative… with clever marketing and production innovations they could do a lot,” he said.

Organic wine

One area of operations that Concha y Toro plans to expand is Fetzer’s organic wine business. Its Bonterra label is already the top selling organic wine in the U.S. with 300,000 cases sold last year, and is positioned to grow internationally.

“Fetzer’s focus on sustainability and organic wine was very attractive for us because we believe this market has a lot of potential,” said Bustamante.

Combined with its Emiliana label in Chile, Concha y Toro will have the largest organic vineyards in the world and it aims to increase exports to niche markets.

“With our expertise and extensive distribution network we will combine two very attractive brands in markets like Asia where sustainable, organic wine could be very successful,” said Bustamante.

Concha y Toro also hopes to learn from Fetzer’s experience in organic wine making techniques as well as in recycling and energy efficiency.

“California is very advanced in this sense and there is a window for us to learn a lot,” said Bustamante.

But the U.S. wine industry also has much to learn from Concha y Toro, which pairs with Fetzer like a good bottle of Carmenere and a prime rib steak. Only time will tell how well Concha y Toro manages Fetzer’s operations, but it certainly has the experience and marketing know-how to be successful.

The deal is unlikely to start a wave of acquisitions by Chilean wineries in California since Concha y Toro is unique in its size and focus on wine, but it shows that, with the right approach, Chilean companies can find excellent opportunities in the United States.

“There is a growing Chilean footprint in California, which is great for the wine industry,” said Tieszen. Wine lovers in the U.S. can drink to that.

Julian Dowling is editor of bUSiness CHILE