The Wine Industry: Insights

Wine Industry in earlier eras

In the ancient world, spread of viticulture and invention of methods to
conserve wine led to large scale wine production and consumption. As a
result of cultures coming in contact the knowledge of growing grapes and
technology to produce wine spread to other parts of world mainly Europe and
Mediterranean region. Wine also assumed a cultural importance with time
and began to be associated with religion; it was a key offering to Gods in
many parts of Europe and Mediterranean region. It became an important
agricultural product because of its economic value. During the middle ages,
it was a necessity as clean water supply was not available. With increasing
trade and colonization, number of substitutes like tea, coffee, clean drinking
water started emerging and thus there was demand for high quality wine
which made the producers shift focus towards quality. Certain techniques
and new methods like using fresh barrels for storage, careful grape selection,
use of glass bottle sealed with cork etc. were introduced, which were widely
adopted by all. All these methods helped improve the quality and age of
wine by better maturing. And hence evolved what was known as Fine Wine.
The industry began to face problems post mid nineteenth century due to
various issues like epidemic of phylloxera which affected quality of grapes,
the changes in societal structure which now assumed alcohol as cause of
many problems and hence campaigns were led against alcohol consumption
etc. To address the epidemic a grafting technique was introduced but many
consumers turned suspicious that it has adversely affected the flavor. Also
many wine producers switched to a high-yield variety of grapes which led to
overproduction of grapes and hence a surplus resulting in declining costs and
thereby reducing profits. Post World War I, French government came to
rescue the ailing wine industry which was due to declining exports because
of prohibition on consumption imposed by US and high tariffs in Europe.
Government provided subsidies to small producers. French government also
introduced AOC regulations which defined regions and grape varieties,
regulated methods of growing and producing wine, controlled yield and
alcohol levels etc. These laws thus associated wine with geographical
location in particular. In Europe during the World War period the wine
industry declined due to both economic and political instability. Thus Second
World War disrupted production and trade of wine.
Modern Wine Industry

The wine industry underwent a transition post World War II. The consumption
on one hand grew in many countries outside Europe mainly developing
countries owing to the economic prosperity, which was a major driver of
competitive advantage in the modern era. The demand was increasing
throughout the globe creating newer markets and thereby increasing the
consumer base.
Demand now shifted towards quality wine rather than being based on
geographical preferences. Regulations driven by the quality aspect of wine
were adopted by countries. Unlike the stress on earlier geographical location
the focus shifted on the variety of grapes employed in the wine production.
Major overhaul of the industry happened with the transformation of the
traditional production processes to industrial processes. With improved
technology and more focus on research and development wide variety of
quality wines were produced. The advanced practice of making wine involved
fermentation technique which can be easily monitored.
The demand among major European countries like France, Italy etc.
plummeted during the period. This can be attributed to the changing social
norms, availability of cheaper substitutes, weak domestic market which
boosted export of wines. Since the focus now was quality, stringent
regulations were adopted by countries mainly to make consumers aware
about the quality like labelling the variety of grapes used, region of
production etc. This new labelling regime were in contrast to the earlier focus
on and limited to mentioning the geography to which the wine belongs.
Another competitive advantage of New World wine was segmenting of wines
into a wide range based on price, region, rating, winery etc. This resulted in
adoption of marketing strategies for increasing demand which was absent
earlier. Brand segmentation was adopted to build wine brands in global
markets. In short, improved technologies, new source of grapes plantation,
marketing skills and emerged academic expertise proved to be the turning
point in the making of high quality wines of the modern world in comparison
to the Old world.
Value Chain of Wine Industry
The value chain for a wine producer would broadly consist of grape
production, wine production, packaging and distribution. The operational
stage starts with grape production which consists of agricultural operations
and transportation of produce to winery. The process begins with selecting a
viticulture site which has climatic conditions favorable for wine production,
called Terroir in French. Proper selection of a geographical location is very
important as it provides a site where land and climate interact to result in

growth of quality grapes. Climate is of great importance in new world wine

industry because of greater focus on quality.
Next step in operational stage is wine production. The juice from grapes is
extracted by crushing or pressing in machines. The production process of red
wines differs from that of white wine. While in red wine making the grape
skin is not removed to impart colour and flavor during fermentation, skin and
seeds are removed from must in white wine making. Next, yeast it added
and the mixture is stored for fermentation in either oak barrels (adds to the
tannins and vanilla flavor from the woods resulting in complex flavored wine)
or stainless steel barrels (provides clean, natural and accurate environment).
During fermentation it is required that winemaker monitors separation of
color, tannins and flavor from grape skin and when optimum character of
wine is achieved the skin can be removed. Fermentation of red wine is
continued till it becomes dry or entire sugar is converted to alcohol but in
case of white wine some sugar level is preserved and hence it is called sweet
wine. The wine is now allowed to mature to reach the desired aroma and
flavor. For red wine the aging period is 1-3 years but it is less than a year for
white wine. Finally the wine is filtered, cleared and bottled for selling. The
wine bottles are properly labelled for consumers to make an informed choice.

Grape
harvesting
and
Stemming
To Winery

Pressing/
Crushing of
grapes

Skin and
seeds
removed

Skin not
removed

Yeast
Fermentation
with certain
sugar level
retained

Yeast
Fig.1 Process flow for
production of Red and
White wine

Fermentation till
mixture is dry or
sugar converted
to alcohol

Maturin
g for
<1yr

Maturin
g for 13yr

White Wine

Red Wine

Bottling and
Labelling

These packaged wine bottles are sent to the distributers who in turn supply it
to the retailers. It is interesting
to note that auctioning is also involved for
Consumers
selling of certain premium, high-in-demand varieties.
Since the consumer demand is seeing a shift in preferences based on quality
and taste in contrast to earlier focus on geographical location of winery, the
part of the value chain that affects taste and quality is extremely important.
Thus choosing right viticulture site, for obtaining excellent grape varieties,
and employing advanced technological methods during production, to
improve taste, form important steps of value chain.
Fig.2 Value Chain of Wine
Industry

The current industry is not very attractive for new entrants. Wine making in
the current scenario is attractive for existing firms that have achieved
capacity to produce large volumes and can leverage economies of scale,
have developed distribution channels and network of grape contractors.
Opportunities exist only for innovative wine makers who can have
competitive advantage by working on supply chain techniques and can
develop newer varieties of wine satisfying the taste preferences of
consumers.
The porters five forces give a clear picture of the level of competition within
an industry and hence attractiveness which depends on overall profitability

Packaging
Matured wine bottled
Labelling of bottles

Wine Production
Stemming & crushing
Stored in barrels for fermentation
Maturing

Viticulture site selection based on required climate and soil

Transportation of produce to winery
Production technology

Grape Production

Attractiveness of wine industry

of the industry. For wine industry competition among rivalry is high. There
are many established competitors for which the consumer base is already
developed. And since wine is all about taste, the consumers have already
developed preferences for the existing wine brands. Competition on price
and perception is also high. Threat of substitutes is moderate to high. There
are many options available in alcohol segment like beer, distilled spirits and
other drinks. Also the proportion of wine consumers in alcohol consumer
base is not very high when compared to other beverages especially beer
indicating a small market size to bank upon. Threat of new entrants is
moderate. There are certain barriers with respect to legal and regulatory
impediments. While existing brands compete on high volume, the smaller
producers can enter at the lower volume level with lesser profitability.
Bargaining power of suppliers is moderate. Suppliers have bargaining power
due to uncertainties involved in yield and quality of grape production. Grape
providers are impacted by weather and soil conditions. But increasing costs
of bottling impact adversely. Bargaining power of buyers is high. Customers
have several brands to choose from. Switching costs are low and also, wine
is subject to consumer appellation and there is a strong preference for
specific wines from specific regions that wine enthusiasts demand. So
producers from all geographies may not have the same advantage of
entering the industry.

Sub
mitted byShujata Singh

Step 6