The Geographical Journal, Vol. 174, No. 2, June 2008, pp.

97108

UK retail concentration, Chilean wine producers

and value chains

Blackwell Publishing Ltd

ROBERT N GWYNNE
School of Geography, Earth and Environmental Sciences, University of Birmingham, Edgbaston,
Birmingham B15 2TT
E-mail: r.n.gwynne@bham.ac.uk
This paper was accepted for publication in March 2008
This paper seeks to examine how value chains impinge upon firms within the Chilean
wine sector. The value chain analysis will further link the production and export of wine
in 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 political
economy of value chains in agro-industry is discussed, particularly in relation to the
distinction between network or quasi-hierarchical relationships. Then the paper
examines the theme of retail concentration in the UK and the impacts that this has on
global value chains which incorporate Chilean wine firms. The focus then moves to
value chains and the nature of upgrading within Chilean wine firms by examining the
strategic example of the lead firm and firm upgrading as a response to demands of UK
retailers and through the flying winemaker model. Broad conclusions on the comparative
nature of value chains and the scramble for value within them are finally made.
KEY WORDS: Chile, value chains, retail concentration, firms, wine, upgrading

Introduction

cMichael (1996) argued that the events of

the 1980s and early 1990s in the Soviet
Union, Eastern Europe, Latin America and
East Asia were of such import that the development
project, evident since post-Second World War
reconstruction, gave way to the globalisation project.
Gwynne et al. (2003) saw this as coinciding with
the abandonment of import-substituting or state-led
industrialisation schemes in favour of more exportoriented strategies amongst what they termed the
countries of the global semi-periphery.
These notable policy shifts initiated changing
relations between countries of the global semiperiphery and the core economies. Academics
required new concepts to investigate the economic
processes behind these changing relations. One
significant conceptual contribution was that of the
global commodity chain (GCC) and the first substantial
treatment 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 conducted
within transnational enterprises or through systems
of governance that link firms together in a variety

0016-7398/07/0002-0001/$00.20/0

of sourcing and contracting arrangements. The key

theme is that global trade cannot be understood
merely as the result of arms-length and market-based
transactions. Global trade is increasingly being
organised through ever more complex inter-firm
and intra-firm relationships and contracts (Gwynne
2008).
Bair (2005) sees the GCC concept as primarily
emanating from work on world systems theory.
Others have argued that the origins of the concept
of the global commodity chain lie in dependency
theory (Gibbon 2001). Global value chain (GVC)
is now another commonly used term used within
the social sciences for those studies that investigate
how firms link producers and producing spaces
with consumers and consuming spaces at the
scale of international trade in goods and services
(Humphrey 2006). According to Bair (2005), there
are significant differences between the GCC and
GVC approaches, with the latter more closely related
to international business studies, the meso-level
of sectoral dynamics and the micro-level of firm
upgrading.
However, GVC analysis uses much of the spatial
categories inherited or adapted from world systems
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98

Chilean wine producers and value chains

and dependency theories. Gibbon (2001, 346) argues

that chain coordination is still typically directed
from northern countries, since it is usually associated
with those links (or nodes) in a chain which have
particularly high barriers to entry, and because
international income distribution remains extremely
uneven. Gwynne et al. (2003, 18) attempted to
revise the world systems framework by dividing the
world into core, semi-periphery and periphery with
the semi-periphery category being determined by
whether key global economic actors perceived
countries as constituting emerging markets. This
article will pursue the Gwynne et al. approach by
referring to countries as being part of the core,
semi-periphery or periphery in terms of value chain
analysis.
This paper seeks to examine how value chains
impinge upon firms within an agro-industrial sector
of one Latin American country in the semi-periphery,
namely Chile. The sector chosen for analysis in this
paper is that of wine in Chile, notable for considerable
export growth over the past two decades (Gwynne
2006). Value chain analysis will link the production
and export of wine in Chile with the import and
retailing of this wine in one key core economy
market, namely that of the UK. The empirical focus
in this analysis will concern the scramble for value
along the chain. As Sturgeon (2001, 9) argued,
studies of industry value chains reveal the concrete
actors at the global scale as well as the linkages
that bind them into a larger whole. Themes of
governance, or the non-market coordination of
economic activity between firms, can be explored
in particular.
The Chilean wine sector has developed an
impressive export record over recent years. In the
last year of the Pinochet dictatorship 1989, Chilean
wine exports were a meagre US$35.4 million
(Banco Central de Chile 1990); by 2006 they had
reached virtually US$1 billion (Banco Central de
Chile 2007). The Chilean wine sector has become
completely restructured as a result. In the early
1990s, Chile was producing around 300 million
litres of wine annually, of which only 20% was
exported; by 2006 around 800 million litres were
being produced with 75% for export; by 2014 the
Chilean Ministry of Agriculture forecasts production
of 1.2 billion litres with 85% destined for export
(Richards 2006).
One key research issue that value chain methodologies facilitate is the process of technological
upgrading, both in terms of product and process
(Humphrey and Schmitz 2002). Firms in countries
of the semi-periphery need to respond to information
flows going through the value chain and the
requirements of supermarket and other retail buyers
in core economy markets. Within the wine sector

of a country in the semi-periphery, upgrading can

occur through improved raw material supply (the
quality of wine grapes), investment in process
technology (stainless steel fermentation tanks and
oak barrels, for example), the increasing utilisation
of flying winemakers (Lagendijk 2004) and the
more studied formulation of the final product in
terms of targeted markets.
This paper argues that the favourable export
trajectories for Chilean wine to global markets in
general and the UK market in particular are partly
due to the nature of the insertion of wine-producing
firms into global value chains. As a result, this
paper is divided into three sections. First, the political
economy of value chains in agro-industry will be
discussed, particularly in relation to the distinction
between network or quasi-hierarchical relationships.
The paper then moves on to examine the theme of
retail concentration in core country markets, such
as that of the UK, and the impacts that this has on
global value chains which incorporates Chilean
wine firms. The paper then analyses how value
chains give context to the nature of upgrading
within Chilean wine firms.
Much of the data come from a two-year British
Academy research project (20057) which examined
the impacts of globalisation on export-oriented
wine firms in Chiles Colchagua Valley and the
record of collaboration between these firms and
key purchasing companies within the UK market.
Twenty-one wine firms were interviewed in Chile
and five buyers of Chilean wine from leading
UK supermarkets and specialist retail chains. This
permitted a more detailed perspective of the nature
of the relationships that Chilean export-oriented
wineries established with the major world market
for its wines.
Value chains and agro-industry
Value chain analysis has inherited some of the
concepts and methodologies from commodity chain
analysis. For example, Gereffi (1994, 97) introduced
the dimension of territoriality and described it as
the spatial dispersion or concentration of production
and distribution networks, comprised of enterprises
of different sizes and types. In value chain analysis
this dimension could focus on understanding the
links and functional integration between producing
districts on the one hand, and consuming spaces
on the other (Cook et al. 2006). These can be
geographically highly dispersed locations as in
the case of Chilean wine-producing districts and
wine-consuming spaces in the UK.
Another dimension that value chain analysis
examines is the governance structure the authority
and power relationships that determine how financial,
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Chilean wine producers and value chains

material, and human resources are allocated and

flow within a chain. This could be seen as examining
the nature of power relations that exist along a
chain and the search for how key actors within the
chain generate and attempt to appropriate value.
Three forms of governance have been identified in
this context: inter-firm networks; quasi-hierarchical
relationships between powerful lead firms and
independent but subordinate firms in the chain;
and vertical integration.
Humphrey and Schmitz (2002, 1023) developed
the crucial distinction between value chains as
networks and quasi-hierarchical relationships. In
networks, firms cooperate in a more informationintensive relationship, frequently dividing essential
value chain competences between them. Knowledge
transfer up and down the chain is encouraged for
the potential benefit of all actors. The buyer may
specify certain product and process standards to be
attained, but should be confident that the supplier
can meet them. Humphrey and Schmitz (2002,
1023) commented that chains characterized by
even networks offer ideal upgrading conditions but
are the least likely for developing country producers
because of the high level of (complementary)
competencies required.
Meanwhile, in the quasi-hierarchy, the lead firm
exercises a high degree of control over other firms
in the value chain. This can involve specifying the
characteristics of the product to be produced, the
processes to be followed and the control mechanisms
to be enforced. There can be some doubt about the
competence of the supply chain and hence the
strong involvement of the lead firm. Knowledge
transfer is very much orchestrated through the
chain from the lead firm.
Are, then, the value chains in the Chilean wine
sector more similar to the even network or the
quasi-hierarchy? In Gereffis (1999) work on value
chains in the global clothing sector, the main
pattern observed was distinctly quasi-hierarchical.
Furthermore, quasi-hierarchical relationships have
been found in value chains in the horticultural
sectors, such as in the relationships between large
supermarkets in the UK and fresh vegetable producers
in Africa (Barrett et al. 1999; Dolan and Humphrey
2000). What then is the relationship between
governance and upgrading in agro-industry in general,
and the wine industry in particular?
There are at least two issues that agro-industrial
firms from countries of the semi-periphery should
consider as they develop transactional relationships
with powerful global buyers from the core economies.
First is the issue of market access. Even when core
countries dismantle trade barriers to the import of
agricultural and agro-industrial goods, producers in
the semi-periphery and periphery do not automatically
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99

gain market access (Humphrey and Schmitz 2001).

This is because the value chains that producers
feed into are often governed by a limited number
of core country buyers intent on generating value.
Through a number of annual contracts, this normally
signifies the core country buyers requiring products
with increasing quality at lower, or at least, similar
prices. Nevertheless, in order to participate in export
production for the key global markets of North
America and the European Union, producers need
access to the lead firms and buyers of these chains.
Secondly, becoming part of a value chain could
offer firms a fast track to the acquisition of production
capabilities. Those producers that gain access to
the chains lead firms tend to find themselves on
a steep learning curve. The lead firms are very
demanding with regard to reducing cost and raising
quality, but they also transmit best practices and
advice. Thus local producers can learn a great deal
from global buyers about how to improve their
production processes and attain consistent and high
quality.
Research into agro-industrial value chains must
be informed and framed by global value chain
studies both in manufacturing on the one hand and
agriculture on the other (Le Heron 1993; Marsden
and Arce 1995). However, the key area of analysis
must be the relationship forged between key buyers
(and/or owners) in the core country markets and
the producers and suppliers in the countries of the
global semi-periphery. For this reason, analysis
should begin by focusing on the nature of the key
buyers in core country markets.
Retail concentration in the UK and impacts on the
Chilean wine value chain
Humphrey (2006, 574) argues that concentration in
the retailing of fresh and processed food has led to
a substantial reorganization of agribusiness value
chains. Large buyers have transformed themselves
from resellers of products made by others into firms
that go out to find suppliers for the products that
they want for their customers. This would also
appear to be very much the case in the wine value
chain. This section will examine the links between
Chilean wine firms and the large supermarket
chains in the UK market; these are playing an
increasing role in product development, branding
and supplier selection.
Figure 1 demonstrates the broad framework of
the downstream value chain of Chilean wine in
terms of the UK market. Chilean wine firms can be
divided into three: wine company groups; newly
established companies (both those aiming for highquality production from the beginning and those
with the strategy of upgrading the quality of wine

100

Chilean wine producers and value chains

Figure 1 Chilean wine: value chain downstream to UK market

through time); and old established wine firms trying

to restructure in order to supply global markets. In
terms of gaining access to the UK market, they are
mostly represented by UK distributors. Only Chiles
largest wine company, Concha y Toro, has set up
its own distribution company in the UK. Although
this decision was seen as risky initially, it soon
proved commercially viable; supply-chain management within the Concha y Toro group and its UK
network has improved and the 610% for the
distributor now stays with Concha y Toro (Davis
2006).
The role of the distributors (whether Concha y
Toro UK or a long list of UK distributors) is then to
coordinate with the UK ontrade and offtrade. The
ontrade consists of pubs, restaurants and hotels and
data from the International Wine and Spirit Record
(IWSR) indicate that about 21% of Chilean wine by
volume is destined for this sector leaving 79% for
the offtrade (IWSR 2007). Here the supermarket chains
dominate with 72% of offtrade wine sales. Within
these supermarket chains, four supermarkets (Tesco,
Sainsburys, Asda and Morrisons) are responsible for
70% of total supermarket wine sales, with Tesco
alone responsible for 33%.
Retail concentration has also occurred within
specialist wine retailing groups only three major
groups remain at the national scale (Majestic,
Oddbins and the Thresher group) and they record
about 9% of offtrade sales. Hence, small-scale
wine-retailing companies throughout the UK (local
independent wine merchants, internet and mail
order wine retailers) now only account for around
19% of wine sales. Thus, increasing concentration

in the UK wine retailing sector has produced a

small number of wine buyers with a significant
combined market power; the top 10 supermarket
and specialist wine retail chains account for around
80% of the UK offtrade wine market. The wine
buyers of these 10 key retailing companies are
clear targets for export-oriented wine firms in Chile
and their purchasing (and tasting) decisions have
significant impacts on those firms.
Over the past two decades, supermarkets have
regarded sales of wine as critical for attracting
higher-spending customers and have developed
competitive strategies based on increasing the
range and quality of wine. The larger supermarket
groups outperform many of the smaller supermarket groups in terms of wine sales (compared
with total sales). Over the past decade, Tesco has
considerably widened its range of Chilean wines.
The Chilean red wine portfolio gives an idea of the
increasing range and product differentiation that
this has involved. By the end of 2006, Tesco sold
six Chilean Cabernet Sauvignons (ranging in price
from 2.99 to 9.99), four Merlots, three Pinot Noirs,
two Carmenres, one Shiraz, five red blends and
one 3 litre Cabernet Sauvignon box (Davis 2006).
Another element of UK supermarket strategy has
been to develop brand image and increase the
significance of own-label products. This has meant
that supermarkets have taken an active role in
product innovation and supply chain management.
Humphrey (2005, 3) shows that own-label penetration
of retailing in the UK rose from around 22% in
1980 to around 43% in 2001. Pursuing the Tesco
red wine product range, a stage further is illustrative.
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Chilean wine producers and value chains

Of the 22 Chilean red wine products sold in Tesco

at the end of 2006, seven were own label:
The role of own-label brands for Chilean wine is
fundamental. In terms of possible consumer confusion
about price and quality there is always more consumer
confidence in buying a Tesco branded wine. As a
result Tesco branded wine accounts for nearly 50% of
Chilean wine sales in Tesco branches
Davis (2006)

Tescos own-label quality Chilean brand (Tesco

Finest) has greater than half of the total Chilean wine
sales in the higher price range, indicating that Tesco
consumers believe in the supermarket brand image
more as the quality increases. Supermarket chains
have thus succeeded in establishing credibility in
their own brands so that consumers do not just
perceive the own-label brand as a cheap alternative,
but as a worthy competitor to the manufactured
brand (Chaney 2004, 5). This growth in own-label
branding has led to customised, complex relationships between supermarket buyers and wine firm
suppliers. However, through time, suppliers can acquire
competences and diversify their customer base.
Retail concentration in the UK market has provided
a key target for the upgrading strategy of many
Chilean wine firms. Humphrey and Schmitz (2002,
1022) argue that task complexity increases as
products become more customized and cannot
be obtained readily from alternative suppliers.
When the risk of supplier failure to cope with this
complexity is perceived to be low, Humphrey and
Schmitz (2002) see the coordination of the value
chain as more resembling a network than a quasihierarchy.
The upgrading strategies of wine producers are
often linked to a highly competitive business
model. One medium-sized Chilean winery, Luis
Felipe Edwards (LFE), demonstrates the advantages
and disadvantages of having the UK market at the
end of its own value chain. It has achieved rapid
export growth by focusing on the UK as its key
strategic market. In 2005, 45% of its exports went
to the UK and its percentage to the four leading
supermarkets (70%) was exactly the same as the
industry average. They developed a networking
relationship with all four of the leading supermarkets
in the UK, and had supply contracts with Marks
and Spencer as well. The company saw the UK market
as the best barometer of international markets,
being five years ahead of the rest of world markets
in terms of taste, price and requirements (Edwards
2005). Furthermore, LFE saw the UK as a very open
market, giving relatively easy access to new firms
(LFE started in 1975) that are able to compete in
tough conditions.
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101

However, the power of supermarkets in the UK

wine market has led to very competitive pricing
conditions and supermarkets tend to swallow the
profits in the Chilean wine value chain (Edwards
2005). In 2005, LFE sold 70 000 cases of premium
red wine to Tesco of Cabernet Sauvignon and
Carmenre. The list price was 5.99 but Tesco
insisted on two or three promotions a year when
the price went down to 3.99; 75% of LFE cases
were sold during these promotions. As with the
networking model, LFE had managed to diversify
its customer base so that it could walk away from
contracts where the prices were too demanding; for
example, it had decided not to pursue an own-label
production contract with Tesco in 2005 (Edwards
2005).
Overall, the UK supermarket is perceived, even
by Chilean wine firms that have targeted the UK
market, as key to their global strategy as appropriating excessive value in the wine value chain.
Chilean wine producers realise that they have to
cope with tight value margins in selling to UK
supermarkets and the associated high export volumes
that can develop. Thus, in the case of LFE the UK
market provided 45% of export volume, but only
generated 30% of export value. Other global markets
(and their retailers) provided slower market growth
but higher retention of value 55% of export
volume but 70% of export value in the case of LFE.
Retail concentration in the UK market has thus
provided Chilean wine producers with the opportunity
of rapid growth of sales but often combined with
low per unit profitability. This links into the interesting relationship between geographical sourcing
of wine and supermarket shelf space, particularly
in such specialist retailers as Majestic which organise
their wine sales by country (and region in the case
of France). The link between different wines and
shelf space is reviewed every six months. Chilean
wine has been on a steady upward path for the last
four years (Pym 2006). Hence the geographical
differentiation of shelf space in any supermarket
chain gives a snapshot of how that particular firm
views its geography of wine supply at any particular
time. In other words, the relationship between
national market share and shelf space in leading
UK supermarkets and specialist retail chains is very
close. Between 2003 and 2007, the proportion of
UK supermarket wine shelf space selling Chilean
wine crept up by an average of 0.25% a year from
6.3 to 7.3% (Wines of Chile 2007). In the case of
Majestic, the two main elements of the rapid growth
in Chilean wine shelf space were for Pinot Noir
and Sauvignon Blanc products (Pym 2006).
This changing geography of UK supermarket
shelf space is perhaps the key indicator of export
success for the wine industries of exporting countries.

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Chilean wine producers and value chains

There are different shelf space indicators for different

supermarkets. In 2006, Majestic over-indexed on
shelf space for Chilean wine compared with the
national average 8% as opposed to 7% (Pym
2006). In contrast, by 2006, Threshers was underindexing quite severely 4% as opposed to 7% of
shelf space for Chilean wine (McEvoy 2007). This
had been caused by a deliberate strategy to
remove shelf space from Chile and give this space
to other countries such as New Zealand (McEvoy
2007). However, such a wide difference between
Threshers shelf space allocation and that of the
national average for Chilean wine prompted a
change of strategy in 2007. Chilean wines are
being allocated more shelf space as we believe that
Chile offers the customer a good value for money
alternative to most other New World countries
(McEvoy 2007). Associated campaigns to brief staff
and communicate about Chilean wine to Threshers
customers have been put in place. This introduces
the concept of the geography of shelf space
allocation. If the allocation of shelf space for a
countrys wine by a leading retail firm falls too far
below the national average, the firm is soon
prompted to develop strategies to reverse this trend.
Market share takes time to expand (though decline
can be quicker) due to inertia and the large number
of lobbying influences attempting to maintain existing
allocations of shelf space.
The value chain approach is also applicable to
many countries of the semi-periphery as there has
been a very rapid process of retail concentration in
these countries as well (Reardon and Berdegu
2002; Reardon and Hopkins 2006). In many Latin
American countries there has been a rapid shift to
centralised procurement in such countries as Brazil,
Mexico and Colombia, leading to stronger bargaining power with suppliers and reductions of per unit
fixed costs of transaction. This may reduce the per
unit value received by the Chilean wine producer
in these markets, but can offer the potential for
significant growth in sales. These retailing transformations have facilitated Chilean wine producers
in sending an increasingly differentiated range of
products to a more diversified set of global markets.
In 2004, the Concha y Toro group sent wine exports
to 110 countries, more than three times the number
of a decade earlier (Concha y Toro 2005). Perhaps
the most dynamic Chilean exporter in this sense is
Montes. This was a firm that only started in 1988,
but its key growth strategy has been to produce
quality wines (second highest export price of all
firms see Table 1) and to export them to as many
markets as possible; by 2005 it was exporting to 68
countries and had developed a good supply record
to both the ontrade (restaurants and hotels) as well
as the offtrade in each market.

Retail concentration in core countries, and an

increasing number of countries in the global semiperiphery, has meant that Chilean wine firms have
a wide range of options in terms of developing
their export profile. The value chains in which they
insert themselves should be seen more as a network
than a quasi-hierarchical relationship. Each firm
has the potential to supply a range of supermarkets
in an increasingly large number of countries in
which the process of retail concentration has taken
place. The Chilean wine producer has a certain
amount of bargaining power if a supermarket
chain attempts to impose too demanding a contract,
the wine firm has a number of other opportunities
at the global scale. Nevertheless, in any particular
contract the large potential sales offered by the
large supermarket chain will mean that expectations
over the retention of per unit value within the value
chain will have to be kept low. The combination of
needing to improve quality and reduce price does
mean that Chilean wine firms should have clear
upgrading strategies for their export products.
Value chains, upgrading and the Chilean wine firm
How have UK supermarkets created contractual and
sourcing arrangements with Chilean wine firms?
Supermarkets in core country markets have become
one of the key agencies in the global value chain
of any New World or wine-exporting country. One
could refer to Gereffis (1999) requirements thesis
of key actors in this context. Although supermarkets
and other end clients do not have direct access to
the technology of their suppliers, they draw up
requirements in this case for the wine-exporting
companies. Requirements can be either long term
(development of a brand) or short term (development
of a new or upgraded product to see how the
development of a new taste, grape variety or blend
coincides with consumers).
Unlike the Chilean fruit sector, leading UK supermarkets and specialist retail chains have mainly had
to deal with Chilean, as opposed to transnational,
firms. Of Chiles 20 major firms in 2005, only two
were foreign owned the relatively small Casa
Lapostolle and Los Vascos firms (Table 1). Referring
back to Gereffis (1999) analysis of upgrading in his
value chain work, two themes can apply to such
agro-industrial sectors as that of wine product
and process upgrading.
Product upgrading is normally defined as moving
into more sophisticated product lines, with more
value-added. In the wine sector, this could signify
the firm starting with the production of basic wine and
then gradually improving the product and moving
up through the various quality categories varietal,
premium, super-premium and even ultra-premium.
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Chilean wine producers and value chains

103

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

Wine firm
Concha y Toro
San Pedro
Santa Rita
Cono Sur
Errazuriz
Undurraga
Montes
Via
Santa Carolina
Santa Helena (Vinex)
Tarapac
Carmen
Maip
Viedos Emiliana
La Rosa
Ventisquero
Los Vascos
Valdivieso
Casa Lapostolle
Montgras
Total/average

Year firm
started

Export value
US$ million 2005

Proportion of
export value to
UK market (%)

1883
1865
1880
1993
1870
1885
1988
1998
1875
1942
1874
1850
1948
1986
1824
1998
1975
1879
1994
1992

159.4
61.0
39.0
37.5
24.6
23.1
22.3
21.5
20.5
20.3
19.2
18.6
16.0
15.5
13.9
13.6
13.4
13.2
10.8
10.7

15.4
22.3
9.2
54.7
44.5
0.5
10.8*
38.9
5.0
6.4
7.9
7.6
21.3
10.2
38.4
45.0
2.5
24.3
7.1
12.85

68.15
35.68
9.90
17.70
7.84
8.11
3.75
15.14
8.61
10.35
6.23
4.90
8.48
7.53
6.34
6.89
2.95
4.98
1.56
3.10

2.34
1.71
3.93
2.12
3.13
2.85
5.94
1.42
2.38
1.97
3.09
3.79
1.89
2.06
2.19
1.97
4.53
2.64
6.89
3.46

574.1

19.1

238.19

2.41

Export volume
(million litres) 2005

Price per litre

(US$) 2005

*Estimate
Source: Wines of Chile database: Duijker (1999)

This would involve a slow but sustained strategy of

upgrading by the wine firm. It means developing
new higher-quality products alongside the production of the more basic categories with which the
firm started supplying international markets. Within
export-oriented wine enterprises, this can also
involve the role of flying winemakers (Lagendijk
2004) who can bring knowledge of which products
are best suited for which markets.
Process upgrading constitutes a second related
theme. This involves transforming inputs into outputs
more efficiently, by reorganising the production
system or introducing superior technology. The
introduction of stainless-steel fermentation tanks
with strict temperature control and an effective
policy towards the supply of oak barrels are two
key examples in the wine sector. Flying winemakers
are significant here as well, as they introduce the
knowledge of how to best organise the process in
order to achieve the marketable product required.
One example would be the slow and low-temperature
fermentation of white grapes (such as Sauvignon
Blanc) in order to maximise the fruit-driven component
of the final product.
Geographical Journal Vol. 174 No. 2, pp. 97 108, 2008
2008 The Author(s). Journal compilation 2008 The Royal Geographical Society

Furthermore, in agro-industry there is often the

need to improve the quality of the raw material
input. This has led to a distinct process of vertical
integration as large wine firms purchase large amounts
of land (to plant new vines) and sometimes existing
vineyards in order to better control the quality of
the raw material input. The wine sector contradicts
the lessons of most agro-industrial firms as the
wine firm emphasis has to be on reducing wine
grape yields in the vineyard in order to maximise
the subsequent quality of the wine. It can be easier
to control yields in vineyards owned and managed
by the winery, rather than purchasing wine grapes
from contract farmers or through the spot market at
harvest time.
As a result, there has been an interesting shift in
vineyard location in Chile. When the Chilean wine
sector was oriented towards the domestic market,
vineyard locations on the flat plains of the longitudinal
Central Valley and transverse valleys were favoured.
This produced high yields of most grapes, but
reduced the quality and complexity of the final
product. Since the 1990s, major Chilean wine firms
have been planting vineyards in new zones, such

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Chilean wine producers and value chains

as slopes and hillsides along the transverse valleys,

along the Coastal Range and on the Andean
piedmont. Here, yields are much reduced but, if
these vineyards are carefully managed in terms of
access to water, they can produce the raw material
for much improved wines.
Chilean wine firms have been distinguished by
their record of success in both product and process
upgrading. This record of upgrading has first of all
been set by the strategic directions taken by the
lead firm, Concha y Toro. Secondly, there has been
a group of firms that have upgraded as a response
to key retailers in core country markets. Thirdly,
there has been what could be called the flying
winemaker model to upgrading.
The strategic example of the lead firm
The Concha y Toro group consists of a number of
companies linked by ownership (and common
technological and marketing knowledge). The parent
company, controlled by the Guilisasti family, has
developed a number of new subsidiary firms with
distinctive roles in the overall group. The Concha y
Toro company, which was formed back in 1883,
had by 2005 become the dominant wine-exporting
enterprise in Chile, with nearly three times the
exports of its nearest rival (Table 1). In addition, it
has set up or acquired three other subsidiaries
since 1986, all within the top 20 firms in terms of
exports Cono Sur, Emiliana and Maipo. Santa
Emiliana (later renamed Viedos Emiliana) was set
up in 1986 and has been given the strategic focus
of developing and exporting organic wines. Cono
Sur was established in 1993 and was given the
strategic mission of being a specialist export-oriented
firm, particularly targeting European markets. Vina
Maipo, meanwhile, specialises in the cheaper,
varietal market segments hence its relatively low
average price per exported litre of US$1.89 (Table 1).
Together these four inter-connected firms are
responsible for more than 26% of Chilean wine
exports. In this way, the Concha y Toro group has
developed the characteristics of the lead firm in
Chiles wine export sector. For example, the group
has significant power and influence upstream in
the wine value chain as its constituent wineries
purchase wine grapes off farmers throughout much
of Central Chile. The prices that Concha y Toro
offers for wine grapes on the open market during
the harvest in March and April tend to be taken as
the key reference point for all other firms purchasing
wine grapes from grape farmers on the spot market
at harvest time.
The role of Concha y Toro as lead firm in the
Chilean wine sector can also be seen in its strategy
of technological upgrading. Since the 1980s, the

Concha y Toro group has invested strategically in

capital goods and new technologies in order to
upgrade vineyards and wineries. The aim was to set
up a process of continual upgrading in order to
improve 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 in
terms of the requirements of targeted markets.
The example of its Cono Sur subsidiary is instructive. Cono Sur was set up in 1993 to target the
European and particularly the UK markets. In the
UK, it started its export strategy by supplying wine
for own-label brands to supermarkets. This allowed
Cono Sur to gain knowledge of consumer taste
and supermarket requirements in the UK market,
despite surviving on low margins. After having
acquired competences in supplying own-label wines
to supermarkets, its strategy shifted to developing
its own brand image. It was able to develop two
brands Cono Sur and Isla Negra the former
focused at the premium quality category and the
latter at the varietal. By 2005, Cono Sur had become
the fourth largest exporting company of Chilean
wine and had come to rely more on the UK market
(receiving 55% of firm exports) than any other
company see Table 1. Within the Cono Sur
brand, it also developed a number of higher quality
levels (Ocio and 20 Barrels signifying super premium
categories). The formulation of these quality levels
and products was designed to meet the requirements
of leading supermarkets and specialist retail chains
in the UK in particular. By 2005, Cono Sur sold to
all leading UK supermarkets and specialist retail
chains though the combination of products
varied between them (Downes 2005).
Product upgrading relied on important improvements in its Chimbarongo winery. The technological
upgrading of the winery required significant
investment as with the installation of large numbers
of temperature-controlled stainless-steel tanks for
fermentation with smaller tanks required for the
fermentation of those wine grapes expected to
produce higher quality wines. In addition, the annual
purchase of large numbers of new oak barrels was
important in raising quality, particularly for the
premium and super-premium red wines. Cono Sur
has not relied on flying winemakers most of its
winemaking expertise has been developed within
Cono Sur and from collaboration with the winemakers
of the wider Concha y Toro group (Padilla 2005).
Upgrading has also been evident in the supply of
its raw material from the vineyards. This has had at
least three elements. First is the issue of increasing
vertical integration into upstream supply and control
of vineyard management. When Cono Sur started
in 1993, it relied mainly on buying in wine grapes
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Chilean wine producers and value chains

from grape farmers (both on contract and through

the spot market). Since then, Cono Sur has been
acquiring more vineyards so that it can have more
control on the quality of raw material supply. By
2005, Cono Sur owned 300 ha of vineyards which
meant that it was sourcing about one-third of its
wine grapes from its own vineyards. By 2009, it is
due to own and control 850 ha of vineyards,
which should mean that it is fast approaching the
position of closely controlling the production of
most of its wine grape supply (Padilla 2005).
Second, Cono Sur sources its wine grapes from
an impressive range of Chiles growing spaces. In
contrast to wine producers in other New and Old
World countries, there is a 1200 km distance
between its most northerly vineyards in the Elqui
valley from its most southerly in the Bio-Bio valley.
It has used the huge northsouth range of Chile to
locate the growing of the 11 grape varieties that
it uses in the most appropriate valleys in terms
of environment, terroir and climate; Riesling and
Gewurtztraminer wine grapes, for example, are mostly
sourced from the cool Bio-Bio valley.
The third element is the nature of technological
upgrading. Cono Sur has developed an advanced
technological approach for its vineyard management
very different to that of Old World vineyards.
This involves use of drip irrigation systems and
fertilisers to maximise grape quality, significant
pruning to restrict yields per vine and foliage
management to improve the uniformity of grape
bunch ripening. The use of drip irrigation systems
is informed by regular measuring of soil humidity
throughout the vineyards (which are continually
mapped via satellite for vegetative stress) so that
each vine neither receives too much moisture on
the one hand nor suffers stress through lack of
moisture on the other (Padilla 2005).
Concha y Toro has thus been a good example of
a lead firm in terms of its export-oriented strategy
in general and its record of technological upgrading
in particular. The fact that it has four distinct
companies within the overall wine group means that
there are distinct differences in setup and winemaking
styles between them. It maximizes the companys
potential to be all things to all men (OHalleron
2007, 143). Some have argued that, as a result, it is
one of the few global wine brands that has enjoyed
both critical and commercial success (OHalleron
2007). It could also be argued that its strategy of
upgrading has been the template for many of the
other successful exporting wine companies from Chile.
Firm upgrading as a response to demands of retailers
One group of the top 20 Chilean wine companies
has very much followed the Concha y Toro model
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105

of basing their export strategy on sustained upgrading

and supplying key supermarkets in core country
economies. It is interesting to point out that these
firms are normally newly established (less than 20
years old). They first inserted themselves into international markets by producing highly competitive
basic and varietal wine (good quality, low prices)
and have subsequently tried steadily to upgrade
their quality and increase their prices.
One example of this strategy is seen in the
performance of Montgras. Between 2000 and
2004, nearly 50% of its production was linked to a
massive export of varietal wine to Sainsburys as a
Christmas special offer. Whereas this gave the firm
economies of scale in terms of production, per unit
profit or value was very low indeed. In 2005,
Montgras decided to stop this deal; while export
volumes understandably declined by 37.6%, export
values were down only 18.9% as the average price
per 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 prioritising
the supply of UK supermarkets high-volume growth
alongside supermarkets receiving the greater share
of the value in the chain.
Other firms that have followed this upgrading
strategy include Ventisquiero and Via. In 2005, Via
and Ventisquero had average export prices of only
US$1.42 and 1.97 per litre respectively, which
implies that they are at the beginning of this
upgrading process; Via and Ventisquero are the
major suppliers of own-label wines to the UKs
largest supermarket, Tesco. However, between 2004
and 2005 they recorded the fastest growing exports
of all the top 20 Chilean wine companies. All these
firms have an upgrading strategy closely linked to
the product requirements of key retailers in core
country markets, particularly that of the UK; Via
and Ventisquero had 39 and 45% of their exports
respectively go to the UK market in 2005 (Table 1).
Firms upgrading through the flying winemaker model
Another upgrading strategy has been followed by
two foreign companies (Casa Lapostolle and Los
Vascos) and one Chilean company, Montes. Casa
Lapostolle, advised by the flying winemaker, Michel
Rolland, is owned by the French Marnier-Lapostolle
group. These companies have emphasised the
pursuit of quality wine production for export since
the firms were established. Upgrading is important
but from a higher base than the previous group of
firms. Table 1 shows that these three firms recorded
the three highest average export prices for their wine
in 2005 between US$4.53 and 6.89 per litre. They
did not start wine exports by supplying own-label
wine for supermarkets and, interestingly, have not

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Chilean wine producers and value chains

linked their export strategy to prioritising the UK

market.
Indeed their target market has been the United
States (receiving between 40 and 60% of firm
exports) where retail concentration has been much
less than in the UK in terms of wine. This is mainly
due to the institutional framework in which each
US state has different laws governing alcohol
consumption. In effect, this has meant that there is
a lack of any nationwide specialist wine retailers
or US supermarket chains selling similar wine
brands in all states. The US thus provides a much
more fragmented market for Chilean wine exporters
but one with higher per unit value than the UK
market.
These firms have emphasised the importance of
the flying winemaker in their operations, whether
it be the foremost Chilean flying winemaker, Aurelio
Montes, or Michel Rolland, the Pomerol-based star
of the film about globalisation and wine, Mondovino.
Lagendijk (2004, 523) sees flying winemakers as
quality and marketing symbols themselves, able to
impart success to their wine product through
their name being on the label. There is, however,
a further issue here the links between flying
winemakers and wine critics a component of what
Lagendijk refers to as the cultural circuit of the
wine sector. In the critical US market, the most
influential wine critic is Robert Parker; he has a
long history of giving high (and very high) evaluations to wines in which Michel Rolland has been
involved. Hence, the logic of the Casa Lapostolle
upgrading strategy; it has relied on Michel Rolland
to introduce modern technologies and Pomerol
winemaking knowledge to its vineyards and winery,
and has then focused on selling the quality wine to
the US market, where such wines as Clos Apalta
have achieved iconic status. In 2005, 61% of Casa
Lapostolles total exports were sold within the US
market.
This review of Chilean wine firms in terms of
global value chains in general and the UK market in
particular shows the vital importance of emphasising
quality and a long-term commitment to upgrading.
The most successful export company, Concha y
Toro, has transformed itself in two decades from a
firm dedicated to supplying the limited domestic
market to a wine group with four component firms,
each with clearly defined and different strategies in
the global market. Meanwhile, the new companies
with a firm commitment to upgrading have recorded
rapid export growth Montes, Montgras, Ventisquero
and Via are all less than two decades old, but have
transformed themselves into the fastest growing
exporters and have developed networks with
supermarket chains in most leading core country
markets.

Concluding remarks
Thus, the global value chains in which Chilean
wine firms have inserted themselves should be
seen more as a network than a quasi-hierarchical
relationship. As Humphrey and Schmitz (2002)
pointed out, network relationships offer firms clearer
opportunities for upgrading than in more hierarchical
arrangements. This does mean that the Chilean
wine sector may be rather unusual in that it is one
of the few examples of significant upgrading and
bargaining power being enjoyed by developing
country firms within an agricultural or agro-industrial
global value chain. Indeed Watts and Goodman
(1997, 14) argued that in global commodity chains
in agriculture and agro-industry, capital mobility has
resulted in the centralisation of power by retailers
and suggested that developing country firms (and
farms) within these commodity chains had even
less bargaining power than developing country
firms in the (clothing) manufacturing chains studied
by Gereffi (1999).
In contrast, many Chilean wine firms have developed
the competences to supply a range of supermarkets
in an increasingly large number of countries. Rapid
export growth has particularly occurred with those
countries where the process of retail concentration
has been significant. The Chilean wine producer has
been able to establish a certain amount of bargaining
power within the value chain, much more, for
example, than large-scale farmers within Chiles
fruit value chain (Gwynne 2003; Murray 1997).
Nevertheless, export-oriented wine firms have
become highly dependent on the relationships they
forge with large supermarket chains in core country
markets. These supermarkets have been successful
in the scramble for value, at least within the value
chain linking Chilean producers with UK supermarkets. However, this value chain has provided a
vehicle for rapid growth in export volume for many
Chilean wine producers.
Furthermore, key retailing actors strongly influence
consumer attitudes in their respective markets. This
role is closely related to what happens in the wine
sector at large, in terms of trends and developments in markets and production. This is reflected
in the concept of the changing geographies of shelf
space within core country supermarkets. If the
allocation of shelf space for a countrys wine, such
as that of Chile, differs too much from the national
average, the supermarket chain is soon prompted
to reverse this trend.
Value chain analysis is very much framed by the
nature of the particular sector as it develops at the
global scale (Friedland 2005). Unlike global value
chains in agriculture, wine provides an example of
an agro-industrial value chain in which significant
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Chilean wine producers and value chains

value-added can occur in the processing plant

(winery). In contrast to such agricultural products
as wheat or grapes, for which global exchanges
tend to set prices, the wine sector has much greater
flexibility in price setting and can potentially generate
a huge variety of products. Prices have to be
negotiated between producers and retailers rather
than set in an exchange. The role of technological
upgrading (through both product and process)
becomes important, as this can act to differentiate
the final products of an exporting firm.
Unlike other manufacturing sectors, the exportoriented wine firm does not normally receive
technology direct from a branded merchandiser or
retailer. Rather, it provides an example of the
requirements thesis. As supermarkets and other
end clients do not have direct access to the
technology of their suppliers, buyers of Chilean
wine within these lead firms draw up product
requirements for the wine-exporting companies.
These require wine-exporting firms to seek out the
relevant technologies from other sources. In certain
wine firms, flying winemakers have become
increasingly significant.
Technological change has not only come from
the classic Old World countries, such as France,
that have always strongly influenced the style of
Chilean wine production, but also from New World
countries such as Australia and New Zealand
(Richards 2006). Thus the geographical sources of
information flows for research into new process
and product technologies (such as France and
Australia) are different from the main geographical
sources of knowledge relating to sales and marketing
(such as the UK). This is an example of Lagendijks
(2004) concept of interconnected locales. Places of
winemaking in one country (which are spread
along a 1200 km axis in Chile) are connected to
places of exchange and consumption in another. At
the same time, these places are connected to
knowledge centres in other countries, such as the
Pomerol region in France (where flying winemakers
such as Michel Rolland are based) or the Adelaide
region in Australia (home to Roseworthy, one of
the worlds leading wine universities, and another
group of flying winemakers).
The systemworld of the wine value chain thus
not only links producing spaces with consuming
spaces but also links these with the spaces that
generate technology and the applied knowledge of
wine. The systemworld also involves the cultural
circuit of the wine sector wine associations, trade
journals, websites, wine critics and journalists, scholars
and experts. Some Chilean wine firms have been
able to forge export growth by harnessing the
potential of the cultural circuits as well as the
value chains of the global wine sector.
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107

Countries of the semi-periphery such as Chile

have long wanted to develop an export-oriented
agro-industry that was based on adding value to
resources, was sustainable economically in the
long term and had a trajectory of technological
upgrading. Over the past two decades, the wine sector
in Chile has successfully developed this combination of value-added, sustainability and technological
upgrading and this has brought dramatic success in
export growth.
Dependency theory needs to adapt to the
findings of value chain research. The fact that there
are many Chilean wine companies that are now
inserted into global value chains has substantially
changed the nature and pace of technological
change of the export-oriented firms. There may still
be asymmetries in the economic relations between
core country economies and those of the semiperiphery as dependency theory highlighted (Kay
and Gwynne 2000, 51), but the insertion of firms
into global value chains can also bring new export
opportunities and impressive records of technological
upgrading.
Acknowledgements

I would like to thank the British Academy for funding

this research, Michael Cox for his generous help in
providing data and contacts in the Chilean wine
sector, and my fellow contributors for their comments
on an earlier draft.
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