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Fitz-Ritter wine estate 220 years of tradition and entrepreneurship

Lambert T. Koch, Marco Biele & Sean Patrick Sassmannshausen Institute for Entrepreneurship and Innovation Research University of Wuppertal, Germany

***ABSTRACT***

The Fitz-Ritter Wine Estate was founded in 1785. In 1837, the estate was supplemented by a champagne production. Today, the young owner Johann Fitz leads / is managing director of both companies in the 9 th generation of traditional family business. German wine producers have been facing global challenges for several years. This case shows how an entrepreneurial spirit in generations of successors contributes to the survival of a firm. It also shows how a medium sized business can cope with global challenges if it commits itself to international entrepreneurship. In this complex situation, Johann Fitz has to take decisions concerning strategic positioning, customer relations, distribution channels, new business segments, investments, and the international business.

Introduction

Johann Fitz opens the door to his office on a Monday morning, holding the first bottle of a brand new product in his hands. The combination of premium sparkling wine and passion fruit will be the new FitzSecco Passion fruit, a variant for the young generation in particular. Johann is excited and rushes to the phone to call Alice, his mother, who has been responsible for the estate’s marketing and exports for the last two decades. Impatiently he dials her number. While he is waiting he looks at his watch. It is quarter past eleven and the monument protection people seem to be late. He is wondering why his mother does not answer the phone. It’s only her voice mail answering. Johann opens his email account, searching for a mail from his mother: “August, 25 th - New York wine exhibition; August 27 th – Chicago, August 29 th – Detroit.” New York City is seven hours behind, no wonder she is not answering the phone. He peruses the attached excel sheet with the latest figures of Fitz-Ritter’s export. Johann is calculating some key figures, unsure how to continue with the export business. Should he, as the new head of the company, expand foreign businesses or should he concentrate on domestic projects? Things are changing more rapidly on the domestic market, and the export requires great attention and expenses, but achieves a relatively small turnover. The door bell rings. Johann switches off his laptop. With a number of construction plans stacked under his arm, he is meeting two men from the local monument protection office, guiding them into the historical cross vault cow barn. “I will call her later”, he is thinking, “now it is time for my next project.”

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Johann Fitz is the 9 th generation, succeeding his father Konrad Fitz, who ran the family business in the last 37 years. The young vintner has inherited the passion for wine from his parents. At first, this passion remained undiscovered by himself; his interests lay in other areas. However, only weeks ago, he took over the lead of the Fitz-Ritter wine estate, right after completion of his studies in economics at the renowned University of California at Berkeley. The wine estate, founded in 1785, is located on the fringes of Bad Durkheim, a wine-

growing spa town at the edge of the Rhine Plain in south western Germany. Famous for its high quality white wine,

it is one of the largest wine estates in the area. With 22 ha (= 52 acres) it is

situated in the largest German wine-growing region, the “Pfalz” (Palatinate).

German wine-growing region, the “Pfalz” (Palatinate). Picture taken from: www.fitz-ritter.de Johann is the new

Picture taken from: www.fitz-ritter.de

Johann is the new type of vintner, who combines respect for the traditional family business and entrepreneurial spirit. In the last twenty years, the German wine market was subject to an immense change. Globalisation had a tremendous impact on the European wine industry. Conservative strategies and antiquated structures restrained German wine estates from achieving global competitive positions. A few years ago, however, a young generation of vintners entered leading positions at an increasing number of wine estates, determined not to be smothered with so called protective state intervention, but to face competition and to react successfully to the market forces. “Being a young German vintner is not

just an occupation, it is a movement. These days, it is not just about age, it needs

a certain entrepreneurial mind set to be a young German vintner” claims Johann Fitz.

In summer 2007, the successor accepted an inheritance of a renowned family business, well-known for their incentives to produce more than just wine. Growing the first Chardonnay (1992) ever in Germany and launching a small museum as well as a boutique stile wine store, Alice and Konrad Fitz were always ahead of their local competitors in terms of innovative thinking and entrepreneurial spirit. “The production of premium wine and champagne needs passion”, says Konrad Fitz. “Unfortunately, some German vintners lost track some decades ago, trying to compete with New World wine estates in mass production. Thereby, the decreasing quality of some German wines, combined with high production costs, almost ruined the international standing of German wine and many wine estates.” To understand, it will be necessary to take a look on the market and its developments in a chapter later on. First, the Fitz-Ritter family business is to be introduced in more detail.

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The Fitz–Ritter company - family business since 1785

In 1785, the Fitz-Ritter company was founded in Bad Durkheim, Germany. The founder, old Mr. Fitz, was a merchant, who decided to start something new. There are sayings the family would be of Scottish origin, explaining the – to German standards – uncommon family name. The vineyard is located at the famous “Deutsche Weinstraße” (German Wine Street) which for a distance of 53 miles crosses a German county known as Palatinate (i.e. “Pfalz”), an area well-known for its warm and sunny climate and excellent wines. In addition, a champagne production was started in 1837. The Champagne Company was started up for some special reasons: Some members of the Fitz family took part in the first German democratic national parliament in 1848 in Frankfurt. In 1832, Johann Fitz (so called “The Red Fitz”) spearheaded the German vintners protesting for the elimination of customs duties and a mutual trade area. Because of his engagement at the Hambacher Fest (a peaceful demonstration calling for more liberty) he was persecuted by the police of the Bavarian King, who owned Palatine County in those days. The Red Fitz had to take refuge in France. History has it that he hid in the Champagne where he studied the production of champagne. Later he returned home accompanied by a cellar master and together with some members of his family co-founded one of the very first German champagne productions, the “Durkheimer Champagne Factory”; it is now the oldest sparkling wine production in the area and the third oldest in Germany.

Despite the fact the Red Fitz was still wanted by political police, ironically, in 1842 The “Durkheimer Champagne Factory” became the purveyor to the royal Bavarian court. Obviously, as time changed, the king preferred Mr Fitz’s sparkling wine more than taking him in – quite a sign of product quality, may one assume. Thus, traditional wine and champagne production roots back more than 220 years. Now Johann Fitz, a relative of “The Red Fitz”, has taken over from his father Konrad Fitz and will probably lead the company into a new and

different age. Exhibits from the starting days of the champagne production are shown at the small estate museum on the first floor where one can also see ancient devices which once were used by the Romans some 2000 years ago, when they occupied Germany and introduced viniculture. Reaping hooks, knives and other tools were found on “Michelsberg”, a hillside where the Fitz-Ritter company still plants some of the best premium wine.

company still plants some of the best premium wine. Picture: The “Red” Fitz The museum is

Picture: The “Red” Fitz

The museum is not the only place to visit inside the manorial estate building. On the ground floor, the family business embraces the “Bacchus Boutique”, a gift shop founded by Alice Fitz, who has been responsible for marketing and export for many years now. After Alice had married Konrad Fitz, she started to become familiar with the wine business. “First I fell in love with Konrad, but soon, I fell in love with the wine business too”, she said. Her attempts

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at contributing something to the business were supported by the fact that she had studied business and economics. One of the very first actions she took was to launch the Bacchus Boutique, which at the time was a completely new idea among traditional wine makers, and disregarded as foolish by many of them. But later, when it proved to be a success, it was imitated by almost all of them. In line with the boutique style gift shop, Alice organises charity events and classical concerts on the estate site. Furthermore, the company sponsors art galleries and wine festivals. Alice is full of memory: “Even Johann cannot imagine the shape this estate was in when we took it over. In 1970 no one here had ever heard the word marketing. To German vintners, it was absolutely unknown to build a brand by cultural or social endorsement and event marketing. Now, this concept is broadly accepted, but most wine estates are too small to follow our strategy. Nevertheless, most of the bigger estates and co-operatives created their own brand strategy nowadays, but we still have some first mover advantages because our events have been well established at the time competitors entered.”

been well established at the time competitors entered.” Photo: Family Fitz As in the case of

Photo: Family Fitz

As in the case of the boutique and the Fitz-Ritter branding, Alice showed entrepreneurial spirit in starting international business. Her export focus is mainly on the United States, due to her American origin. According to the Association of German Praedikat Wine Estates, today’s export average is about 20-25 per cent of the total wine production with an increasing trend. 1 Fitz-Ritter started the export business in the late 1970s. It all happened more or less coincidentally. While Alice’s mother was on vacation in Germany, they were thinking about how to deliver wine into the U.S. – not for business first, but just for their own needs. Soon came the idea of expanding and the export business into the United States was born. A few years later, when Konrad and Alice went to wine exhibitions, importers from Japan, Great Britain and the Netherlands became interested in Fitz-Ritter wines and started to order. “But everything started more or less with the export into the U.S.”, Alice emphasizes.

1

www.vdp.de

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The wine is shipped to the United States and unloaded and cleared by an importer, who has to have an alcohol licence. Moreover, the importer is also responsible for the distribution of the wine. Although Alice travelled across the United States to promote the wine and “Sekt” on trade fairs, which often meant dealing directly with customers, she was not allowed to sell directly to her customers but could sell only to the distributors through the importer due to restrictive import laws of the United States. She often experienced that customers placed orders with the salesman, who handed the order on to the distributor, but some distributors never handed the orders on to the importer, for instance when the distributors felt that the margin from accumulation of orders was not worth the effort of the necessary paper work. If this happened to many distributors at the same time, the losses in potential orders would be immense, and so were the fruitless investments in sales promotion by Fitz-Ritter. The importers´ and distributors´ intermediate positions are very important for the export business as a whole. “You rely on the effort and contacts of your importer and your distributors”, Konrad Fitz says. “It has a lot to do with trust, and loyalty is hard to find”, compliments Alice. “It took us years to identify trustworthy importers and distributors in the US and other markets. It is a time and money consuming trial-and-error process. Trust is an emotion in the beginning, and proof only occurs when time passes by. Even if you have found a trustworthy, talented and ambitious distributor, you still need to do a lot of sales promotion all by yourself. And if you are not present to offer the new vintage, the importer and distributors will forget you very soon. While Fitz-Ritter was obliged to give exclusive rights to one importer, this importer has many German wines in his portfolio. Exclusiveness is part of an adhesion contract: None of the licensed importers will negotiate exclusive contracts, so a family business like Fitz-Ritter only makes up a small portion of the importer’s portfolio and thus, only relatively small efforts will be spent on sales promotion. Moreover, in a family business selling products made by good craftsmanship, customers want to know the entrepreneurial family behind the product, so they can judge the product and the reliability of delivery by the people representing the company. Furthermore, the financial stability of the importer you choose is of course vital. In the UK, we trusted one import agent and were absolutely gutted. For this reason, we are not present in the UK market anymore, and we are still looking for a trustworthy importer to take on this market.”

Alice has been travelling all across the U.S. to promote her German wines and she is also present at national and international exhibitions. Especially the Fitz-Ritter Gewurztraminer was embraced by the Americans because of its semiarid or smooth taste full of herbs and flavour, with a low amount of alcohol. “While most German exporters focused on the Riesling, soon the Gewurztraminer became our hot seller within the United States, where we positioned ourselves within a niche market.” “But our Riesling is demanded, too”, Konrad adds. Today’s business in the U.S. is getting harder and harder, due to the decreasing exchange rates, the presence of ever more competitive wineries on the export scene, and the need for intermediates who want to own their share, so it is difficult to sell the

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premium wine. Fitz-Ritter is present in many states, but turnovers concentrate on some New England Sates, New York City, other Eastern Seaboard States, Michigan, and California. Massachusetts has proven itself to be one of the toughest US markets. It is cost intensive to penetrate all states with personal sales promotion; one promotion tour causes estimated costs of an average of 5,000 Euro, and up to five tours are necessary each year. Thus, Alice tries to build up personal relationship and loyalty with distributors, who consequently care for the volume of sales to a greater extend. This approach is partly depended on mutual sympathy and by chance was successful especially with the two distributors in Michigan and California.

The business has changed a lot, says Konrad Fitz. Today the winery has to sell its wine at exhibitions and through more innovative distribution channels. Some decades ago the winery sold its wine exclusively to commission agents

without any direct sales. Commission agents actually travelled from door to door, offering their product portfolio. To their potential customers, basically housekeeping women, they offered the opportunity to taste the wine and learn more about each single product before buying any bottles. Thus, the wine distribution business was slow, but it was reliable, and good traders knew their business very well, knowing all the high purchasing customers in their area, their customers’ taste and price range and so forth,

and they achieved reasonable

turnovers. Meanwhile, the door to door business is down. The door to door wine trader is even more an endangered species than the housekeeping wife. On the one hand, as the population became more urban, more mobile, easily moving from one area to another, and suffered from higher crime rates, door to door traders were increasingly treated with mistrust. On the other hand, less young people entered this business. Today it seems that travelling salesmen in the wine retail business have reached an average age above 65 years. “When I entered the business I instinctively knew we desperately need new distribution channels. This is why I started an online shop. There was the risk that retailer would ban us, due to the fact that we decided to introduce direct customer services via internet, but until now it all went fine. We notice that online trade is an additional business with a certain set of customers and thus does not harm other distribution channels”, says Johann Fitz. 2

thus does not harm other distribution channels”, says Johann Fitz. 2 Photo: Fitz - Ritter 2

Photo: Fitz - Ritter

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www.fitz-ritter.de

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“It took some time and energy to convince our stakeholders, but we have to face market forces – and therefore we have to deal with changing consumer behaviour and with demographics. Our wine has its quality, travelling salesmen where able to convince consumers that Fitz-Ritter is something special. Today we need to renew our communication.” “The production of high quality wine is much more cost intensive than mass production. We will only be able to continue with our business if we communicate our quality advantages. The local climate, the geography of our landscape and the nature of our soils provide the opportunity to produce high quality wines in our vineyards. However, we need some ideas to sell those more expensive products in a highly competitive surrounding. In wine production, I basically focus on two areas: product quality and product portfolio. In the wine business, decisions on product portfolio, i.e. the variety of grapes you plant, are not to be changed easily. Therefore they are regarded strategic decisions. If we decided to produce different types of grapes on some acres, this would mean that on these acres over a period of at least three years no grapes will be harvested at all. That’s just due to the nature of vine, and there is nothing one can do about it. Planting vine is a long range strategic decision, change needs three years at least and bears some risks, and the amortization of the plants takes many years. If your decision is led by trend and fashion, you better make sure that the kind of grape won´t be out of fashion again soon.”

Vines have a productive life of 60 to 70 years, but after planting, it takes them three to four years until they produce a first harvest, five to seven years to achieve full productive capacity, and up to 35 years to produce the best quality grapes for wine. There is a nexus between age of vines and quality. In addition, the vintner can take a lot of actions to increase quality. Most activities are labor intensive and therefore costly. For Fitz-Ritter premium wines for instance, workers cut off 50 percent of each single bunch of grapes in spring. Therefore, the energy and sugar of the vine can concentrate in the remaining grapes, which will result in a much more intense flavour.

grapes, which will result in a much more intense flavour. Wine acreage in Bad Durkheim (Picture:

Wine acreage in Bad Durkheim (Picture: Fitz – Ritter)

Regarding the vineyards, two-third of Fitz-Ritter’s acreage is planted with Riesling. The best spots are the rolling hillsides Herrenberg, Spielberg, Abtsfronhof and Michelsberg. By their geographic situation and special soil these hills offer the foundation for

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premium wine, especially the number one premium class, so called “Grosse Gewaechse” (Great Growth), the label for the highest premium wines of The Association of German Prädikat Estates (VDP entitled estates). Each vine, each single plant is officially documented by the VDP with the aim to guarantee the highest quality. Quantities are limited and growing and harvesting of grapes as well as wine production have to be carried out traditionally by hand, combined with the most modern innovations in sustainable oenology, for a gentle treatment of grapes and wine during the production process. Thus, production remains a craft, not an industrial process, and this kind of production is expensive. A wine with its own personal character representing richness and complexity in taste is the reward for vintners, cellar masters and consumers. Exhibit 1 shows an excerpt of the comprehensive product portfolio of wines which the Fitz-Ritter wine estate is producing today.

For Fitz-Ritter like for many other members, the Association of German Praedikat Estates (VDP) is one of the most important marketing instruments. Traditionally, German vintners organized co-operative wine production. This was to decrease costs of capital by a more intense use of plant and equipment. VDP is different. It is not a co-operative in production, but in high quality wine philosophy, and its’ label is a signal in the market. Before the VDP will be introduced in more detail, it is necessary to have a look at the German wine market as well as international developments.

German wine industry and the development of a global wine market

“The Riesling Renaissance” 3 or “Following hard times, German Rieslings rise again” 4 are headlines German winemakers are pleased to read. Such headlines restore their pride. Years of trouble lie behind the German wine industry, and it is not clear if the development has really taken a different direction yet. The German vintners find themselves in a changing situation. Domestic competition is getting tougher, the purchasing power of the Germans has increased again, and foreign wines are well-known for a good cost to quality ratio, so Germany is still the no.1 importer of wine in the world. The demand for good wine is still unbowed and the reputation for excellence increasing. The German producers even have the problem of satisfying the domestic demand for premium wine. On the surface everything seems to evolve as desired. But in Europe, the problems rooted in the history of winemaking are much more serious than it looks at first sight: In Germany, growth rates of wine consumption are very promising, but a closer look at the statistics shows that only the importers benefited from this. A look at past developments will help to understand the current market situation.

3 Lynam, R. (2001), The Riesling renaissance, Hong Kong Business, p.98.

4 Wolkoff, I. (2006), Following hard times, German Rieslings rise again, Medical Post, Vol.42, Iss.20, p.39.

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German wines, Riesling for example, still have reputation of excellence, but the last fifty years put a “variety of demons” 5 on them. In the first two decades after World War II, Germans were drinking German wines, except for a small market segment at the higher end of the price scale which was occupied by famous French red wines. The giant overseas wine estates were yet not founded or at least not yet recognized. Transportation costs were high, creating a natural barrier to market entry at least for Non-European producers. But over the years, the situation changed. Wine consumption increased, and foreign wine got more and more fashionable, at first Italian wines, then wines from Spain and other European origins. During this time, the so-called New World wine producers (e.g. Australia, Chile, New Zealand, South Africa, and the United States) achieved sustainable progress on the learning curve. Decreasing transportation and production cost combined with an increase in quality made it possible to enter and finally to flood the European market. The market entry coincided with fierce price competition among German discounters and super market chains, such as ALDI, LIDL, Metro Group, Tengelmann Group, and alike.

Competition has become so fierce over the past years that even WAL- MART, the world’s largest retailer, was just swept away from the German market. To succeed, discounters search for cheap supply in a good and stable quality. Therefore the ideal typical wine offers a stable, medium quality and at the same time, needs to be produced in a high quantity making it possible to offer exactly the same product to millions of customers at several hundred discounter outlets. New World wine producers match these criteria. Moreover, they fit the needs of marketing because origins like Australia, California, Chile, New Zealand, and South Africa sound exotic, cosmopolitan, and became as fashionable as Italy, France or Spain.

For a long time, the European producers and particularly the French, Spanish and German vintners referred to their tradition and proscribed the overseas producers and their products. Consequently, the Old World winemakers were shocked when they finally realised the changing demand of retailers and wine consumers as well as the increasing quality of their competitors´ products and the rapid decrease in market shares. 6 New methods of winegrowing, new production systems and technical innovations resulted in competitive advantages of the New World vintners. They were able to produce more comparable wine on decreasing costs and to flood Europe with it. The new competitors penetrated Europe and the wine world with mass production, innovative methods and wine of all kinds. The response of European vintners was twofold: there was a call for state intervention and protection on the one hand, and the attempt to compete in mass production on the other hand. Soon numerous regulations prescribed for instance grape varieties, controlled cultivated land, and sugar content. Price

5 Wolfkoff, I. ibidem.

6 See for more detail e.g. Bartlett, Christopher A. (2003): Global Wine Wars: New World Challenges Old (A), Harvard Business School Publishing, Boston, MA.

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guarantees were given by the EU and national agricultural subsidies in France and Spain were meant support vintners by converting the overproduction of low quality wines into cash. Prices were stabilized by state intervention; wine that could not be sold on the market was simply purchased by the EU or national state authorities.

The attempts to respond to the entrance of the New World wine producers resulted in a disaster for the German winemakers. Ignoring differences in outer conditions, especially the Germans tried to copy the successful strategy from overseas producers and to respond with mass production, especially of white wine. The production was increased at the expense of quality. One major obstacle was the fact that the New World producers were able to increase cultivable land by buying additional unimproved land very cheap, whereas in Europe that strategy was just impossible. The German wine producers faced geographical and regulatory limits which prevented them from increasing their cultivable land. All viniculture areas were allocated and moreover atomised (see Exhibit 2). Therefore, increasing the production meant increasing the output of a given vineyard by emptying more liquid from each single grapevine and grape. This in turn lowered the quality significantly. Decreasing quality resulted in decreasing reputation. Consequently, the more quantity was achieved, the more reputation for quality was squeezed out. In addition, productivity increased slowly in comparison with overseas wine industry because the landscape of many German vineyards does not allow the use of heavy machinery and robots. Vineyards are typically located on very steep hillsides alongside river valleys like Rhine, Moselle, and Main. Another setback for German vintners was suffered by changes in international consumer demand in the 1990s, when there was a dramatic shift in consumption from light white wines towards red wine. Unfortunately, in the 1990 s , the climate in Germany did not conduce to red wine production very well. The more unstable climate was another obstacle which – combined with strict regulations in wine making – caused inconstant qualities and quantities, including the risk of crop failure. The conclusion after one generation of investment in mass production is that due to the small size of many estates, limited acreage and steep hillsides of many vineyards, domestic production cannot ever be expected to cover domestic demand. For importers, this gap makes it much easier to enter the German market.

German import and export in a changing world wine market

Germany is the largest import market for wine in the world. The German wine market has a heavy import surplus. The demand for white and red wine is still unbowed with an even increasing trend. Unfortunately – from a point of view of German producers – this increasing demand is mostly satisfied by imports from all around the world. There are various reasons for this development. The wine drinking habits have changed in the last decades. In many parts of the society, drinking wine is subject to fashion and lifestyle. This is not only true for the upper

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classes, but also for students, skilled labour, middle classes and pensioners. These changing habits in the consumption and perception of wine were first surveyed in the world’s largest non-producing wine market: England. Marketing departments (an organizational element that for a long time was frowned upon or at least unknown to the traditional German and European “wine artisans”) very early identified Great Britain as an ideal target market. This market did not know any domestic supply, and at the same time offered a continuously growing demand. New World producers in particular managed to satisfy this demand, winning the so called “Battle of Britain” 7 in wine industry. Considering the changing habits in wine consumption, Britain is regarded the leading market in consumer behaviour. Success on the English market therefore is regarded as an indicator for international competitiveness: “If you make it there, you’ll make it everywhere”, as wine marketing managers say.

Today, buying and drinking wine is associated with a specific lifestyle and customers are willing to pay higher prices for higher value, a matter of fact that German vintners apparently have recognized. Since advertisement presents drinking wine as the common upper class life style, copying this style makes members of the middle classes feel part of the upper class. This opens new and growing market segments around the World. The largest market for German wine is located in the United States. It can be seen in Exhibit 4 that the German wine export is still increasing. Since the late 1990s the demand for German wine is raising consistently. It coincident with the time when the first of the new generation of young German vintners successfully started to rediscover their abilities to produce first class white wines, especially famous Riesling. Accordingly, the German export quotes document an increase of wine sales, particularly outside the European market (Exhibit 3). The most important export markets for German wine, especially white wine, are the United States, Japan, Canada and Russia, whereas in Europe the largest markets for German wines are Great Britain, the Netherlands, Sweden, Norway, France and Belgium. Exhibit 4 underlines the changing export trend among German wine estates which seem to withdraw from highly competitive markets like Great Britain and France. They focus more on newly growing markets like the United States, the Scandinavian countries and especially Russia (+172.6). The activities in Asia (e.g. India and China) seem to be careful at the moment but should not be underestimated.

As mentioned before, the governments of the Old World producers tried to protect their markets with entry barriers and subsidies. For many years, market response of Old World wine producers, especially in France, did not focus on market forces, but on the call for state protection and intervention. Bilateral treaties aimed to control import activities of New World producers by increasing the export. By the year 2002, European Union (EU) Agriculture Commissioner Franz Fischler and EU officials found that protection guaranteed policy support from the wine producers’ interest groups only in the short run. But in the long run, protectionism

7 Bartlett, Christopher A. (2003), ibid, p. 8.

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resulted in an ongoing increase of the rent seeking phenomena. Additionally, intervention harmed consumer interests, since it resulted in less variety of choice and higher prices. For officials, explaining benefits of EU intervention was getting harder each year. Furthermore, EU intervention once was meant to protect producers in order to give them time for change and improvement to regain competitiveness. Instead, uncompetitive structures were preserved whereas New World producers continued improvements in productiveness and size.

producers continued improvements in productiveness and size. Development of rules in international wine trade

Development of rules in international wine trade

Consequently,

the 2006 bilateral trade agreement between the (EU) and the United States marks a turning

point

liberalization of the global wine market. The important aim of the latest conglomerates of treaties is the mutual acceptation of wine growing methods and the protection of so called semi-generic names, e.g. Burgunder, Port or Champagne which follow liberal thoughts. The agreements’ goal to

open the market into a global free one is in contrast to the Old World’s attempts to shield themselves from the pressure of the New World winemakers. However, globalisation, lower transportation costs and a growing desire for overseas products as well as changing demand and fashion trends resulted in an increasing pressure to liberalise the world market for wine. But the market is far from being a really liberal market. The EU is still paying huge amounts of state subsidies to intervene and support domestic producers. Old fashion thinking relies on the faith that state subsidies and import quotas can control increasing demand in foreign wine. Protection resulted in inflexibility. In contrast, a new generation of German wine makers are willing to face the challenge by focusing on high quality combined with tradition. They have accepted that perpetual execration of new developments and techniques does not help to survive in global competition. The process of innovation and competition cannot be stopped. Solutions to competitive challenges are to be found by a more entrepreneurial behaviour. After decades of drastic governmental intervention and the instructive past, young German vintners decided that the only chance to survive under constraints of limited resources would be to change their focus from

on

the

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mass markets towards the satisfaction of high quality wine demand. On the other hand, the German wine was by far not the only one to improve. All around the globe, due to different methods, the overall quality of wine significantly improved over the last fifty years. “There is no doubt about the fact that the overall quality of wine today is better than ever before”, attested Konrad Fitz. The competitiveness of high quality wine coming from the New World producers is tough.

Johann Fitz and the new entrepreneurial spirit in German Wine Industry

In this situation, while many other vineyards – trapped by inflexibility convention, attempts at preservation, and investments in mass production – face bankruptcy (accordingly a concentration process within the German market

(Exhibit 2) can be seen in the last years), a young generation of vintners is trying to combine traditional winemaking and innovative methods to strengthen and regain their position in the global wine industry. They developed a new image of German wine based on its traditional heritage. Today’s vintners regain strengths and the trends show that

German premium white

wine is celebrating a comeback and new German red wine a start-up – the latter due to increased knowledge, less regulations in planting varieties of grapes, and climatically changes. Increasing export ratios show a growing demand for German high quality wine, especially but not exclusively in countries outside of Europe. The U.S. market is only one example that the demand for German white wine, e.g. high quality Riesling, has gone up in the last couple of years. But overseas wine producers already jump on the bandwagon starting or increasing their own Riesling production. Due to the industry’s time to market ratio (vine growing), outcomes of this process will be noticed with a lag of time lasting three or four years, but sure will come.

of time lasting three or four years, but sure will come. Wine testing (Picture: Fitz –

Wine testing (Picture: Fitz – Ritter)

Johann Fitz is one of these young German vintners. Even so Fitz-Ritter never was involved in mass production but always dedicated to producing top quality wines, there are a lot of things to do. Konrad was always open for improving the methods of production in the vineyards and cellars and Johann continues on this path by oenological innovations most rigorously and conscientiously and without compromise. But his entrepreneurial spirit does not

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wear itself out in innovations in oenology and production methods. In addition to the online shop and the new product FitzSecco passion fruit, one of his first projects as successor of Konrad Fitz is the refurbishment of the “historical cross vault cow barn” (which has not seen cows for decades, but still was there some- how). It will be converted into a ball and dining room with winter garden, where dignified events can take place. Johann’s idea of a modern wine estate is as simple as his mission statement: Deliver high quality wine in combination with features to retain customers. Like the new room, where wedding parties can take place. “If you celebrate your wedding here, you will receive a lifetime discount and a tailored label for your special day. This is the perfect way to win over customers for our vineyard.” The tricky question for vintners in such a highly competitive market is how to retain customers. Johann sees the answer to that question in the combination of events at the winery, but this is not new for Fitz-Ritter. As mentioned above it was decades ago that the winemaking family started to host charity events and classical concerts at the traditional residence in the centre of Bad Durkheim. “But not for making money, for charity”, says Alice and, “because we feel responsible for the region and it is part of our commitment and honour to support people”. Nevertheless, this strategy resulted in some increase of customer loyalty, but now the effect diminishes and needs an innovative replacement. To Johann, the transformation of the historical cross vault cow barn into a ball room with winter garden is a symbol of the new spirit he brought into the company. Even though he was unsure about taking over the company, he now is searching for opportunities and change. “It required a little convincing, but soon I knew that I wanted to run the company and implement new ideas” emphasizes Johann. “My parents were leading the vineyard with an entrepreneurial mindset, and I want to continue this track. And continuation means change. As for every human being, my attention and power is limited. I need to concentrate on very few projects each time. Consequently, I have to develop the estate step by step. I need a priority list, showing which projects or opportunities are crucial for success and then concentrate investments on first things first.” This is why he is still unsure about the expensive export, which pays off exiguously. “The new project has potential to compensate for the declining export quotas” says Johann. “Export is an affair of my mother’s heart. She put so much effort in it, but the weak dollar is wearing the profits down.” A small company like Fitz-Ritter has to pass through 100 % of all currency changes. “Our Incoterms usually refer to CIF (when carried on ships) and CIP (in case of airfreight). In the international wine business, it is commercial custom that prices are negotiated in foreign currencies on the day of order. Payment is due after delivery. Hence we carry the risk of exchange rates, and I can tell you, we have not been lucky with the Euro to US-Dollar ratios during the last years. Just to increase the price in US- Dollar is not the answer, because we soon would bust market prices and our wine would become unsellable.” But Johann is optimistic “I will find a solution and make a decision, one way or the other.” He is someone who likes to tackle a problem. “I am a person, who likes to put my hand on it” he says during the interview. Then he tells a story from his years of study at the University of California at Berkeley: “During the summer, I

- 14 -

took part in a management program and there was a competition where students had to run a real small company. I was the manager of a painting company. It was exciting. I did all the planning and administrative processes by myself and I even employed some people for operational work. I did very well and finally won the competition. It was a great experience. But then after winning I was supposed to explain and teach my strategies and ideas to other students, but there I failed badly”, he says with a smile on his face. “I am a person who just does things, and not one to talk about it. I am not a coach or a teacher.”

First the idea crossed his mind that it could be a promising opportunity to bind customers by opening

the estate building and the gardens for the most special events in his customers’ lives. Then Johann had to

the

investments and search for capital. “We have returns on investment from wine production, but the surplus reserve cannot

cover the entire project. It can only contribute a little equity to the amount of cash needed. So I faced the task to finance the project. In a first step I limited the need for capital by a clear focus on our core competence. The project is intended to foster our sales of wine, during the event and for future delivery. It is not designed to run a restaurant. This would mean the need to employ a chef, cooks, waiters, and so on. Therefore I decided to outsource the catering. Guests are free to choose any caterer they like, and thus all the diverse demands for cuisine which may occur can be easily fulfilled. The only product I put restrictions on is wine and champagne. It has to be purchased from the Fitz-Ritter Wine Estate or the “Sektkellerei Fitz KG” respectively (i.e. the official name of the sparkling wine incorporation). Apart from that, the outsourcing of catering redounds to our advantage by the fact that for the most part calculation is detached from variable costs. Consequently, the need for capital is equated with the costs of transformation of the site. The break even point will be reached almost with the first bottle sold after the interests on the invested capital are paid.”

after the interests on the invested capital are paid.” The refurbishment of the “historical cross vault

The refurbishment of the “historical cross vault cow barn, picture taken from www.fitz-ritter.de

care

for

- 15 -

Table 1 shows the investment costs and the source of funds. 8 In the financial plan, the “KfW-Mittelstandsbank” plays a decisive role. This public financial institution once was created to help to recover from Second World War and to distribute aid from George C. Marshall’s “European Recovery Program (ERP)”. Most European countries burnt the money from the program in subventions while the German government chose a different model: They founded the KfW Bank as a fund holder. The KfW did not spend the money on subventions, but invested it by offering loans to small and medium sized innovative enterprises. Hence, the aid, once given by the US, still accumulates by amortizations, moderate interest rates and the wisdom of the creators of the so called “German Wirtschaftswunder” (the economic miracle of the 1950s); it is still beneficial to German economy. The market for informal equity is not well developed. For this reason, the KfW-Mittelstandsbank offers not only investment loans but also mezzanine capital. On condition that the entrepreneur will get involved with 15 percent equity, up to additional 25 percent of total investment can be financed by the mezzanine capital program. The remaining 60 percent of investment can be covered by an investment loan.

Total Investment:

   

500,000 €

Sources of capital:

 

Equity from surplus reserve:

   

75,000 €

Mezzanine Capital from “KfW-Mittelstandsbank” (so called Capital for Entrepreneurship Program):

   

125,000 €

Investment loan from “KfW-Mittelstandsbank” (so called Entrepreneurship Loan):

   

300,000 €

Interest rates and amortizations (year 1 starts on January 1 st 2008)

 

Mezzanine Capital

 

Year

1

2

3

4

year 5 & 6

from year 7-

15

Interest %**

0.0

3.0

4.0

5.0

6.50

6.50

Amortization*

0.0

0.0

0.0

0.0

0.0

13.888.89 €

p.a.

Investment Loan

 

Year

1

2

3

 

from year 3-20

Interest %**

max. 4.45 – 7.30 (depending on rating), Fitz-Ritter is rated A (4,45)

Amortization*

0.0

0.0

0.0

 

17,674.06 € p.a.

*) if required by the entrepreneurial enterprise amortization can be expedite

 

**) interest rates are object to change, for actual rates see www.kfw- mittelstandsbank.de.

 

Table 1: Entrepreneurial Finance for SME in Germany – an example

8 To protect the company’s interests, all financial data and sources of funds have been object to modification. Nevertheless, the data given is realistic and the source of finance is the most important for entrepreneurial start-ups and business successors in Germany. It was chosen to give the case a universal validity for entrepreneurial finance in Germany.

- 16 -

The new project looks promising. Although the project has just been

started, so far 15 couples have already booked the room and the garden for their wedding parties at a rent of 2,100 Euro a day. In addition to the rent, Johann plans

to sell around 100 bottles per event at consumer prices (see EXIBIT 1). At least 40

to 45 events per year could be scheduled at the beginning, most of them during the main season. Although Johann will accept a 600 Euro abatement of rent

during low season (15 th of October – 15 th of April), he is confident that the project will result in huge returns on investment. “Apart from the cash which we put into the project, we use our Estate’s Garden and the Cross Vault next to it, both representing assets that have lain idle for many years but soon will contribute to our business.” Market analysts state that the average German couple spends 14,000 Euro on the wedding. And not only couples but also companies, clubs, associations and private persons are looking for special locations to make their function a very special event. Due to word of mouth, internet advertisements, and

a “google-strategy” 9 , the business plan expects the number to increase to 60 or even 70 events yearly until the fourth year. Operation will start April 15, 2008.

Confident in his future plans, Johann is talking about his strategy and his mission to become the best wine company in the region, maybe not in terms of size but in quality. “We work very hard on increasing the quality of our wines.” From the first seeding to the harvest the vintner family and their employees are doing everything within the company. Even filling the wine into bottles, labelling, marketing and selling will be done by the small group of people at the Fitz-Ritter winery. The whole value chain is still within a single company. “Today, this is special”, says father Konrad, “we do everything on our own, it is demanding but we believe that you can taste it. High quality wine is our passion and we control the total process.”

wine is our passion and we control the total process.” The award winning Fitz–Ritter Garden (Picture:

The award winning Fitz–Ritter Garden (Picture: Fitz–Ritter)

Johann’s next plan is to increase the quality of wine by investments into human resources and know-how. “You can always increase the quality of wine. We have achieved a lot but still have some space left to climb up the ladder to the

9 Searching for a wedding room at www.google.de from a place located within in a circle of 100 miles around Bad Durkheim, one would find the “historical cross vault cow stall” among the first hits. The city of Frankfurt, financial capital of German economy, is located within this circle.

- 17 -

top German vineyards”, says Johann. The shift in methods of achieving quality has been drastic during the last 15 years. Meanwhile, the recognition of quality has increased too. The quality of wine evolved and so did the market: The internet and other types of easily accessible mass media created more transparency. Consumers can quickly share their experiences on wine with others. Recommendations and ratings are popular. Some of the so-called experts have a lot of power; they influence consumer behaviour and thus give incentives for higher quality. Today, markets reward quality more than years or decades ago. For this and many other reasons, Johann is monitoring the market for new high quality acreages. But it is almost impossible to buy more land because of the high prices for cultivated land in Germany. Renting land is expensive too, but if it is feasible, it is the only realistic way to increase acreage. “Purchasing good wine is another possibility, especially in the cuvee and sparkling wine production”, the young vintner adds. This strategy is feasible and can help to bypass bottlenecks in delivery, e.g. with his latest innovation FitzSecco passion fruit. “It is a product for young people who like to enjoy good quality wine with the flavor of passion fruit. It is a stylish product, which is brand new and already the “in-drink” here in our region. Demand is higher than we thought, so that for production quality wine has to be bought in addition to our volume. With this new flavored sparkling wine, Fitz-Ritter is targeting young people, especially young women. It has a great potential to become the next hot-seller of our vineyard.” Furthermore, the passion fruit secco will soon be available in smaller “Piccolo bottles” (0.2 litres) together with the latest trend in bottle caps, the so called “twist and plop” cap. Due to its low alcohol and fruity, refreshing taste, it is a good alternative to the so called “alcopops” sold at pubs and clubs, which face increasing criticism in public debate. “Changing our product portfolio, I can imagine to dedicate our entire own acreage to production of premium wine of highest quality and to round off the portfolio with quality wine bought from other vintners. The additional wine is to be placed in the medium price range and in the production of Cuvees for Champagnes, sparkling wines and FitzSecco.” This development is the logical continuation of Johann’s impact on the reinvention of the traditional Fitz-Ritter vineyard. Soon after he took over the lead of the company he reorganized the Fitz-Ritter’s price list conceptually and he also gave it a new style, emphasizing the black knight company logo and the membership of the Association of German Prädikat Wine Estates. Johann´s influence can also be seen at the company website, which now has a virtual tour and many other features around the vineyard, highlighting the new project in the “historical cross vault cow barn” and the beautiful garden which won the competition “Most beautiful garden along the German Wine Street” some years ago. The garden contains an oak tree which is more than 350 years old, a lot of roses, and the largest Gingko tree in Germany, a plant described in the famous poetry of Johann Wolfgang Goethe.

- 18 -

The Association of German Prädikat Wine Estates

The Association of German Prädikat Wine Estates (VDP) is “dedicated to making wines of the highest quality…Wines which reflect the distinctive character of their German origin and grape variety. 10 ” With its 200 members, the association embraces only 3% of the entire German viticulture area. Due to the common VDP logo, all VDP wines can be identified very easily among their competitors. Strong labelling regulations by government tend to confuse customers who do not know too much about wine. Especially in Germany and Italy regulations are misleading and differ from county to

county. The VDP attempts to liberalize regulations and to establish more common labelling rules. It emphasizes the grape, the quality, and – very important for German wine – the region and exact name of the vineyard where the wine comes from.

VDP membership is selective and it is a privilege to become a member, because a wine yard can not apply for membership. The Association selects its members, and not vice versa. To be elected, a company has to stick with a strict catalogue with numerous characteristics. One important requirement for membership in the VDP is that at least 70% of the estate’s acreage must be planted with traditional varieties. This is one reason why among VDP members the percentage of Riesling is significantly higher than the regional average. The association and its members commit themselves to traditional methods of winemaking to produce consistently superior wines. The main objective of the association is to combine the best German wine estates and the best German wines. To strengthen its position in today’s global wine world, wine production is based on three principles:

1) Vine treatment in the vine yard is without technical intervention in natural processes. 2) The use of oenological innovations is fostered whenever they increase quality, are in line with natural process, and are carried out carefully in good craftsmanship. 3) An artisan treatment of grapes and product is obligate from harvest to gentle press, to aging in a traditional wine cellar, to the final product in an attractive bottle.

wine cellar, to the final product in an attractive bottle. Picture: www.vdp.de Following these directives causes

Picture: www.vdp.de

Following these directives causes immense labour costs. On the other hand, to be rewarded with membership and to show off the VDP logo on bottles is an opportunity. There are signalling effects along with the VDP logo since the organization is known for its attempts to distinguish even higher quality premium wine from other quality wines available. It offers transparency to consumers who are lost in a market with confusing rules and regulations. “The association will

10 Association of German Prädikat Wine Estates (VDP), webpage: http://www.vdp.de

- 19 -

establish a system of estate monitoring in addition to the national German wine quality control system, to ensure and guarantee adherence to the VDP’s high standards for high-quality, naturally-produced wines.” This common goal has not changed since the first formation of regional quality circles in the end of the 19 th century. In 1910, the regional groups united into one association, to protect the attribute “natural” which became synonymous with high quality. Due to the prohibition of the term “natural” with the promulgation of the German wine law of 1971 the association adopted its present name, replacing the designation “natural” with “prädikat” (i.e. selected or entitled). Fitz-Ritter was not invited for membership but belonged to the founding members back in 1909/10 which documents the company’s tradition in the pursuit of quality.

Today’s aim is to adopt new production and marketing policies. Its initiatives include “stringent yield restrictions, institution of ecological winegrowing techniques, and the usage of the new VDP capsule as a distinguishing mark for wines from the estates of the association.” The mission is to extend the international reputation of German wine combined with the duty to protect the regional identity because many wine estates have been in the same family for centuries. For many estates, small in size but large in quality, it is the only chance of getting international recognition. Due to the lack of monetary capacities a large number of German wine estates cannot afford large marketing budgets and therefore are stuck in regional identification without a chance to extend their reputation. High bargain power of large national discounters put pressure on prices and production volumes. Hence, some traditional wine estates capitulated in the past. For many wine estates only two scenarios were thinkable:

Either increasing the production volume to produce more wine on the same acreage, which in turn lowers the quality, or decreasing the production volume to improve the quality of

the wine which again means an increase in costs and makes products unattractive for discounters. Members of the association of German Prädikat Wine Estates follow the latter strategy. Equipped with the best areas of vine cultivated land and committed to the use of old hand picking techniques during the harvest and other special crafts and skills in vine growing and wine production, the VDP estates feel constrained to the highest standards possible. Although the limitation of quantitative production outcome

the highest standards possible. Although the limitation of quantitative production outcome Picture: Fitz – Ritter -

Picture: Fitz – Ritter

- 20 -

bears high risks to the vintner, it also offers legitimacy for higher prices and marketing power to an extent that an average vintner could never achieve.

The VDP estates have earned worldwide recognition for their excellent wine and with setting up its own vineyard classification, the VDP is “performing pioneering work in Germany”. The demand in premium segments noticed by all VDP members led to an increase in latest years with today’s volume of sales by 300 million Euros for the total number of members. The average export quota rose by an additional share of 5% up to a total of 21% in 2006 (16% in 2005). Especially novices in export activities could achieve an immense increase rate in 2006. Now up to 65% of all VDP members are selling their products internationally. The average outcome of a VDP wine estate was around 65hl/ha in 2006. Due to hand picking 400 hours of work in harvesting for one hectare is average, which leads to a cost comparison by 500 €/ha (harvest by machine) versus 2,500 €/ha (handpicking). Cost in wine production is also higher, for instance in the process of pressing the grapes. The VDP presents opportunities for knowledge transfer about new techniques and the latest innovations. This networking system could be used to fasten the latest know-how exchange among vintners about e.g. brand new cultivation techniques. In terms of marketing activities, the VDP takes part at the largest exhibitions in the world like the ProWine in Dusseldorf, Germany, or at the Lincoln Center, New York. In combination with other VDP estates Fitz-Ritter advertises its best wines at moderate costs. With limited financial resources it is fairly the only chance to get recognition in the world. Due to mass competition, the Association also strives for legitimacy of the small premium class German wine estates. Johann Fitz, who represented the Fitz-Ritter vineyard at the latest exhibition in New York, emphasizes the importance of being present internationally. It is existential for him to promote his wine at exhibitions all around the world. Ironically, this could be more important for Fitz-Ritter’s domestic sales than for their export activities. “Achieving acceptance within the German market is very hard. International reputation can boost your sales. It is a signal. It gives recognition and contributes to Fitz-Ritter’s brand building”, says the young vintner. Highlighting the importance of the VDP in terms of marketing support, the latest attempts and reform developments within the EU increase the significance of the Association, especially for Fitz-Ritter and other small vintners. With less state protection and a more liberal and global wine market, the pressure for – in terms of global comparison – “small” vintners will raise exponentially.

Perspectives and Discussions

The Fitz-Ritter company is facing an important and crucial period of time. A couple of decisions have to be made which will depend massively on strategy. The wine industry has changed and it keeps changing. First effects have reached the wine estate already. In Germany and elsewhere in Europe, smaller wine estates already had to capitulate in the face of the challenges of global wine industry. In

- 21 -

Germany the concentration process has just started but has not reached its inflection point yet. Latest rumours say some of the largest German vineyards had takeovers bids from overseas. The succession process within the Fitz-Ritter company might not weaken the company although the new young head Johann Fitz starts within a though industry, but he has steeled himself against it: He enjoyed an excellent education in oenology, economics, and entrepreneurship. His father, Konrad Fitz, has retired but is still on the estate to help with his rich experience. Alice is willing to promote exports for some more years. The company is in family ownership by 100 percent. Nevertheless, future plans have to be made, it is just not enough to rest on what has been achieved so far.

The new projects Johann Fitz executed so far are all in line with the overall strategy of the company: the making of a premium quality wine estate that combines tradition and innovation. Projects have been:

The introduction of new products, i.e. the FitzSecco passion fruit sparkling wine.

A first reorganisation of product portfolio, stressing out those products with the highest quality and prices.

The reorganization of distribution channels on the domestic market including the establishment of an internet online shop.

The “historical cross vault cow barn” project to increase direct sales right on the estate site. This project also has the potential to increase customer loyalty.

New labels and elegant designs for bottles containing the most expensive wines.

Investments in human resources, i.e. hiring of a famous first-class oenologist and employing a cellar master of excellent craftsmanship.

But still more decisions lie ahead of Johann. Since every project mentioned above bears the natural risk of failure it is necessary to have a pair of thought-out alternative plans. Additionally, the reorganization and redesign of Fitz- Ritter’s distribution channels depend on customers’ willingness to buy online – without testing. Increasing investment into exhibitions and a more active advertisement is necessary to attract customers to the vineyard. The event project can only be seen as a starting point to attract new buyers while turnovers by traditional salesmen rapidly decrease. The fact of the dying breed of salesmen is an opportunity for innovative ways but it is also a threat, and it inescapably means additional marketing costs. The “historical cross vault cow barn” refurbishment project has the potential to compensate decreasing export profits. Why not concentrate on the domestic market and leave the cost intensive and often difficult export to competitors? Even though she has decades of experience, Alice admits:

“Export business is a perplexing and troublesome job, with markets not easy to understand.” Domestic demand is sufficient, especially if the “historical cross vault cow barn project” turns out fine. So why should Johann Fitz continue with the export business? What are the possible rewards of international entrepreneurship in the case of Fitz-Ritter wine estate? Should the 25 percent of given production

- 22 -

capacity that is used for international business be dedicated to the domestic market in the nearer future? How about distribution and product portfolio? Do changes in climate offer any new opportunities for differentiation of the product portfolio? Are there growth strategies any Fitz-Ritter should take advantage of? In which areas of the Fitz-Ritter business can one recognize such opportunities for growth? Are exhibitions and internet appearance enough to survive? How can the company use its latest innovation, the FitzSecco passion fruit? What could the marketing plan for FitzSecco passion fruit look like? And how can Johann gain and retain more young customers? And where should he to go with the international business? How to stay abreast of change?

These difficult questions are on Johann’s mind when he returns from the historical cross vault cow barn refurbishment site. The monument protection officials felt comfortable with the way how the ancient renaissance character of the building is carefully sustained. After taking leave from the officials, he enters his office. The phone is ringing. It is Alice calling, with excitement in her voice:

“Johann, our premium wine is positively reviewed by today’s New York Times and to boot, the “Wine Spectator” ranked the “Michelsberg” and the “Kanzel Ungestein” Riesling above 90 points. So to speak, we have just entered the international champions league at a top rank.” “What news, and the day has just started” Johann says. “Our strategy seems to turn out fine, and tonight, we shall definitively open one of the best bottles of champagne from our cellar.” But before this, Johann makes good use of the day, considering the rewards of the challenging export business from a new perspective, rethinking his opportunities and re-weighting his options.

- 23 -

Exhibit 1

ProductProduct PortfolioPortfolio 2007*2007*

Nr.Nr.

Nr.Nr.

WineWine

WineWine

PricePrice

PricePrice

BB toto BB

BB toto BB

PricePrice

PricePrice

EE toto CC

EE toto CC

Nr.Nr.

Nr.Nr.

WineWine

WineWine

PricePrice

PricePrice

BB toto BB

BB toto BB

PricePrice

PricePrice

EE toto CC

EE toto CC

619

619

2005

2005

Durkheimer Rittergarten Riesling

Durkheimer Rittergarten Riesling

2.80

2.80

5.60

5.60

613

613

2006

2006

Durkheimer Blanc de Noir

Durkheimer Blanc de Noir

3.95

3.95

7.10

7.10

621

621

2006

2006

Durkheimer Abtsfronhof Riesling

Durkheimer Abtsfronhof Riesling

3.20

3.20

6.40

6.40

616

616

2006

2006

Durkheimer Spielberg Chardonnay

Durkheimer Spielberg Chardonnay

5.15

5.15

9.30

9.30

624

624

2006

2006

Riesling CLASSIC

Riesling CLASSIC

3.20

3.20

6.40

6.40

425

425

2004

2004

Durkheimer Abtsfronhof Gewurztram.

Durkheimer Abtsfronhof Gewurztram.

6.20

6.20

10.90

10.90

335

335

2003

2003

Ungsteiner Herrenberg Riesling

Ungsteiner Herrenberg Riesling

7.70

7.70

13.50

13.50

627

627

2006

2006

Durkheimer Abtsfronhof Gewurztram.

Durkheimer Abtsfronhof Gewurztram.

4.60

4.60

8.40

8.40

536

536

2005

2005

Michelsberg Durkheim Ries. GG**

Michelsberg Durkheim Ries. GG**

11.45

11.45

19.00

19.00

339

339

2003

2003

Durkheimer Hochbenn Ries.“Ice wine“

Durkheimer Hochbenn Ries.“Ice wine“

62.00

62.00

93.00

93.00

533

533

2005

2005

Kanzel Ungstein Ries. GG**

Kanzel Ungstein Ries. GG**

12.05

12.05

20.00

20.00

938

938

1999

1999

Durkheimer Abtsfronhof Ries. Selection

Durkheimer Abtsfronhof Ries. Selection

46.00

46.00

70.00

70.00

511

511

2005

2005

Durkheimer Dornfelder red wine

Durkheimer Dornfelder red wine

3.30

3.30

6.60

6.60

645

645

2006

2006

Cuvée “Red Fitz“

Cuvée “Red Fitz“

4.10

4.10

7.40

7.40

612

612

2006

2006

Pinot Noir

Pinot Noir

4.30

4.30

7.90

7.90

415

415

2004

2004

Cuvée “Revoluzzer“

Cuvée “Revoluzzer“

8.10

8.10

14.20

14.20

218

218

2004

2004

Durkheimer Cabernet Dorsa

Durkheimer Cabernet Dorsa

9.00

9.00

14.90

14.90

314

314

2003

2003

Durkheimer Pinot Noir

Durkheimer Pinot Noir

9.90

9.90

16.50

16.50

416

416

2004

2004

Durkheimer Spielberg Chardonay

Durkheimer Spielberg Chardonay

9.95

9.95

16.50

16.50

001

001

Rittergold “dry“ (0.75 litres) sparkling wine

Rittergold “dry“ (0.75 litres) sparkling wine

2.85

2.85

5.70

5.70

A

A

FitzSecco Blanc

FitzSecco Blanc

2.60

2.60

5.20

5.20

002

002

Rittergold “dry“ (0.2 litres) sparkling wine

Rittergold “dry“ (0.2 litres) sparkling wine

0.90

0.90

1.85

1.85

B

B

FitzSecco Rosé

FitzSecco Rosé

2.60

2.60

5.20

5.20

003

003

Riesling Extra Brut (0.75 litres) spar. Wine

Riesling Extra Brut (0.75 litres) spar. Wine

4.50

4.50

8.10

8.10

C

C

FitzSecco Passion Fruit (0.75 litres)

FitzSecco Passion Fruit (0.75 litres)

2.85

2.85

5.70

5.70

E4

E4

2006

2006

Fitz-Ritter Riesling (1l.)

Fitz-Ritter Riesling (1l.)

2.45

2.45

4.90

4.90

D

D

FitzSecco Passion Fruit (0.2 litres)

FitzSecco Passion Fruit (0.2 litres)

0.90

0.90

1.80

1.80

F3

F3

2006

2006

Fitz-Ritter Red Wine (1l.)

Fitz-Ritter Red Wine (1l.)

1.85

1.85

4.70

4.70

*Figures taken from Fitz-Ritter price list (modified), business to business prices (B to B) modified for class room calculations only.

** GG = “Grosse Gewaechse“ (Great Growth)

E to C: Prices for direct sale from the Estate to private customers.

- 24 -

Exhibit 2

Viniculture companies in Germany 11

company size

Number of companies

 

from… to…

1999

2003

 

+ / -

EGE

     

<8

12,233

10,688

-

12.6

8 - <16

4,123

3,696

-

10.4

16 - <40

4,716

4,21

-

10.7

40 - <100

3,656

3,561

 

-

2.6

100 - <250

648

1,193

 

84.1

>250

55

97

 

76.4

 

25,431

23,445

 

-

7.8

EGE – European unit, 1 EGE = 1,200 € contribution margin

Source:

adapted; taken from Bundesministerium für Ernährung, Landwirtschaft und Verbraucherschutz “Ertragslage Garten- und Weinbau 2007: Daten-Analysen“; p.120

11 Only companies with a contribution margin from above 75% from wine production

- 25 -

Exhibit 3

TThhee gglloobbaall wwiinnee mmaarrkkeett

     

2006

Annual

 
         

percentage

% Share

Value

Volume

change (05/05)

2006

Rang

Countries

1.000 Eur

hl

Eur/hl

Value

Vol.

Val.

Vol.

1

EEC 25

354,661

2,185,513

162

9.7

2.5

63.2

75.2

2

Others

206,573

720,822

287

36.6

40.6

36.8

24.8

3

Great Britain

128,342

825,122

156

1.2

-8.1

22.9

28.4

4

USA

100,350

301,649

333

29

21.2

17.9

10.4

5

Netherlands

69,104

476,526

145

17.7

17

12.3

16.4

6

Norway

25,602

85,529

299

53.1

17.2

4.6

2.9

7

Sweden

23,687

176,100

135

5.8

-2.1

4.2

6.1

8

Russia

22,765

169,132

135

113.9

172.6

4.1

5.8

9

Japan

22,759

62,394

365

1.6

0.9

4.1

2.1

10

France

18,542

104,334

178

-3.9

-4.4

3.3

3.6

11

Canada

15,308

57,211

268

49.4

40.7

2.7

2

12

Swiss

13,804

24,569

640

68,6

22.9

2.5

0.7

13

SUMMARY

561,234

2,906,335

193

18.2

9.9

100

100

Source: VDW (Verband Deutscher Weinexporteure e.V.) www.vdwweinexport.de

- 26 -

Exhibit 4

Value in 1000 € / Volume in hl German exports into the United States 350.000
Value in 1000 € / Volume
in hl
German exports into the United States
350.000
300.000
250.000
Value in 1000 €
200.000
Volume in hl
150.000
100.000
50.000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Source: Verband Deutscher Weinexporteure e.V. (www.vdweinexport.de) (after publishing of Statistisches Bundesamt der Bundesrepublik Deutschland)

- 27 -

Exhibit 5

FitzFitz RitterRitter CompanyCompany -- GrowingGrowing AreasAreas

GrowingGrowing areaarea

GrowingGrowing areaarea

AcreageAcreage

AcreageAcreage

%*%*

%*%*

WineWine

WineWine

UseUse inin ProductionProduction

UseUse inin ProductionProduction

PotentialPotential QualityQuality**

PotentialPotential QualityQuality**

Durkheimer Abtsfronhof

Durkheimer Abtsfronhof

3.2

3.2

ha (7.9 acre )

ha (7.9 acre )

35

35

Riesling

Riesling

A++, A+++ & A+S

A++, A+++ & A+S

C

C

– A+++ & A+S

– A+++ & A+S

   

30

30

Gewurztraminer

Gewurztraminer

A++, A+++

A++, A+++

C

C

– A+++ & A+S

– A+++ & A+S

   

20

20

Chardonnay

Chardonnay

SWP

SWP

C

C

– A+++

– A+++

   

15

15

Sauvignon Blanc

Sauvignon Blanc

SWP

SWP

C

C

– A+++

– A+++

Durkheimer Fronhof

Durkheimer Fronhof

0.8

0.8

ha (1.98 acre)

ha (1.98 acre)

100

100

Riesling

Riesling

B, A, SWP

B, A, SWP

C

C

– A++

– A++

Durkheimer Fuchsmantel

Durkheimer Fuchsmantel

0.56

0.56

ha (1.38 acre

ha (1.38 acre

100

100

Riesling

Riesling

B, A, SWP

B, A, SWP

C

C

– A++

– A++

Ungsteiner Herrenberg / Kanzel

Ungsteiner Herrenberg / Kanzel

1.44

1.44

ha (3.46 acre)

ha (3.46 acre)

100

100

Riesling

Riesling

A+++

A+++

C

C

– A+++ & A+S

– A+++ & A+S

Durkheimer Hochbenn

Durkheimer Hochbenn

4

4

ha (9.88 acre)

ha (9.88 acre)

100

100

Riesling

Riesling

B, A, SWP, A+S

B, A, SWP, A+S

C

C

– A+++ & A+S

– A+++ & A+S

Wachenheimer Mandelgarten

Wachenheimer Mandelgarten

2

2

ha (4.94 acre)

ha (4.94 acre)

50

50

Pinot Gris

Pinot Gris

B, A, SWP

B, A, SWP

C

C

– A+

– A+

   

50

50

Pinot Blanc

Pinot Blanc

B, A, SWP

B, A, SWP

C

C

– A+

– A+

Michelsberg

Michelsberg

0.7

0.7

ha (1.73 acre)

ha (1.73 acre)

100

100

Riesling

Riesling

A+++

A+++

C

C

– A+++ & A+S

– A+++ & A+S

Rittergarten

Rittergarten

1.86

1.86

ha (4.6 acre)

ha (4.6 acre)

40

40

Riesling

Riesling

A

A

C

C

– A+++

– A+++

   

25

25

Dornfelder

Dornfelder

A, A+, A++

A, A+, A++

C

C

– A+++

– A+++

   

20

20

Cabernet Sauvignon

Cabernet Sauvignon

A++, A+++

A++, A+++

C

C

– A+++

– A+++

   

15

15

Cabernet Dorsa

Cabernet Dorsa

A++

A++

C

C

– A+++

– A+++

Durkheimer Spielberg

Durkheimer Spielberg

0.7

0.7

ha (1.73 acre)

ha (1.73 acre)

100

100

Chardonnay

Chardonnay

A++

A++

C

C

– A+++

– A+++

Others

Others

5.74

5.74

ha (14.1 acre)

ha (14.1 acre)

100

100

Diverse

Diverse

A+, A++, A+++

A+, A++, A+++

C

C

– A+++

– A+++

* Figures adapted and modified from the authors for calculations only, SWP = usage for sparkling wine production

- 28 -

Exhibit 6

PurchasingPurchasing PricesPrices forfor WineWine (cuvee(cuvee production)*production)*

WineWine

WineWine

CC

CC

BB

BB

AA

AA

A+A+ -- A+++A+++ && A+SA+S

A+A+ -- A+++A+++ && A+SA+S

Average white

Average white

0,75

0,75

0.80

0.80

0.90

0.90

No purchasing possible

No purchasing possible

Average red

Average red

0.80

0.80

0.85

0.85

0.95

0.95

No purchasing possible

No purchasing possible

 

In % of wholesale price

In % of wholesale price

 

Figures for class room calculations only.

Figures for class room calculations only.

 

* Figures adapted and modified from the authors for calculations only

- 29 -

Exhibit 7

WineWine SegmentsSegments basedbased onon QualityQuality AssessmentAssessment

PerPer Bottle:Bottle:

PerPer Bottle:Bottle:

TableTable WineWine

TableTable WineWine

AverageAverage

AverageAverage

QualityQuality

QualityQuality

PremiumPremium

PremiumPremium

TopTop

TopTop

TopTop SpecialSpecial

TopTop SpecialSpecial

SpecialitySpeciality

SpecialitySpeciality

Price Rang

Price Rang

Whole Sale

Whole Sale

<

<

1.25

1.25

1.00

1.00

2.00

2.00

2.50

2.50

3.50

3.50

3.50

3.50

5.50

5.50

6.00

6.00

10.00

10.00

10.00

10.00

18.00

18.00

>20.00

>20.00

Average

Average

margins for

margins for

100%

100%

>100%

>100%

100%

100%

>80%

>80%

>75%

>75%

>66%

>66%

>50%

>50%

retailers

retailers

Price Rang

Price Rang

Estate to

Estate to

Consumer

Consumer

<

<

2.50

2.50

2.50

2.50

4.99

4.99

5.00

5.00

7.00

7.00

7.01

7.01

9.99

9.99

10.00

10.00

14.99

14.99

15.00

15.00

30.00

30.00

>

>

30.00

30.00

Average

Average

profit (€) in

profit (€) in

0.05

0.05

0.10

0.10

0.20

0.20

0.30

0.30

0.50

0.50

1.00

1.00

2.00

2.00

whole sale

whole sale

Code

Code

C

C

B

B

A

A

A+

A+

A++

A++

A+++

A+++

A+S

A+S

Average

Average

liters per ha

liters per ha

140,000

140,000

100,000

100,000

65,000

65,000

50,000

50,000

30,000

30,000

20,000

20,000

5,000

5,000

*

*

Figures adapted and modified by the authors for class room calculations only, VDP wines will be classified “A” at least

Figures adapted and modified by the authors for class room calculations only, VDP wines will be classified “A” at least

- 30 -

Exhibit 8

DevelopmentDevelopment ofof exchangeexchange ratesrates

CurrencyCurrency

CurrencyCurrency

19.10.200719.10.2007

19.10.200719.10.2007

29.12.200629.12.2006

29.12.200629.12.2006

30.12.200530.12.2005

30.12.200530.12.2005

31.12.200431.12.2004

31.12.200431.12.2004

31.12.200331.12.2003

31.12.200331.12.2003

31.12.200231.12.2002

31.12.200231.12.2002

28.12.200128.12.2001

28.12.200128.12.2001

Euro / US-Dollar

Euro / US-Dollar

1.425

1.425

USD

USD

1.317

1.317

USD

USD

1.180

1.180

USD

USD

1.362

1.362

USD

USD

1.263

1.263

USD

USD

1.049

1.049

USD

USD

0.881

0.881

USD

USD

Euro / Brit. Pound

Euro / Brit. Pound

0.698

0.698

GBP

GBP

0.672

0.672

GBP

GBP

0.685

0.685

GBP

GBP

0.705

0.705

GBP

GBP

0.705

0.705

GBP

GBP

0.651

0.651

GBP

GBP

0.609

0.609

GBP

GBP

Euro / Yen

Euro / Yen

165.51

165.51

JPY

JPY

156.93

156.93

JPY

JPY

138.90

138.90

JPY

JPY

139.65

139.65

JPY

JPY

135.05

135.05

JPY

JPY

124.39

124.39

JPY

JPY

115.33

115.33

JPY

JPY

   

Source of unmodified data: www.bankenverband.de

Source of unmodified data: www.bankenverband.de

 

- 31 -

Exhibit 9

NNeeww pprroodduuccttss aanndd nneeww ddeessiiggnnss ffoorr bboottttlleess aanndd llaabbeellss

n n s s f f o o r r b b o o t t

Pictures: Fitz-Fitz-Ritter

n n s s f f o o r r b b o o t t
n n s s f f o o r r b b o o t t

- 32 -