Global Wine War

Introduction Human beings have been dealing with wine for thousands of years, from
the Mesopotamians to the ancient Egyptians, from the Greeks to the ancient
Romans, the latter which under their vast empire spread viticulture through the
Mediterranean region. Through centuries countries, such as France and Italy,
obtained a consolidated position in the wine industry, both in demand and production.
In the last part of the 20th century newcomers (Australia, South Africa, New Zealand,
Argentina, Chile, USA, etc.) have successfully challenged the leadership of the so-
called Old World that represented the majority of global market share.

Wine Industry Analysis using the Porter’s Five forces Model A brief Porter’s five
forces analysis can help understand how the evolving of competitive environment is
actually composed and why this market shake occurred. Figure 1. 1: Porter’s Five
Forces Model For what concerns the threat of new entrants; the Old World
companies completely underestimated this threat.

When the newcomers entered the market they could bargain market share of the pre-
existing ones without facing real opposition, exploiting better marketing strategies
and more efficient organizational approaches. Regarding to the threat of substitute
products; this seems to be a challenge for the future, with the introduction of branding
as a marketing approach; the threats from the beer industry and “soft drinks”
producers must be taken into account.

Referring to the bargaining power of buyers and suppliers, the entrants are in a much
better position because of bigger production plants which allow them to gain a
stronger contractual power towards distributors; moreover their value chains are
more concentrated removing the troubles of the too much fragmentation and variety
of actors between the producer and the consumer, which on the contrary, Old
World’s competitors are facing.

Furthermore analyzing the rivalry among existing competitors it is possible to

understand that the traditional producers are facing much more difficulties, because
they cannot exploit advantages the newcomers have, such as professional
management, large marketing investments and economies of scale and scope.
Unfortunately, these are not the only intricacies they are bearing with; the pre-existing
producers have always been in competition one against the other, making it more
difficult to achieve competitive advantages through cooperation.

Eventually the newcomers are concentrating their action in the new growing markets
while the old ones are still mainly struggling in the Old World declining markets.
Network value analysis It is also of a relevant importance introducing the Chain Value
Model that was at first presented by Porter in “Competitive Advantage. Creating and
Sustaining Superior Performance”. This model was introduces in order to better
understand the activities through which a firm, in particular a wine firm, develops a
competitive advantage and creates shareholder value (fig. 1. 2).

Concerning the primary activities we can see that in both the inbound and the
outbound network logistics, the NW producers managed to reduce costs of transport
and warehousing, exploiting new technologies of packaging (an example is the
Australian “wine-in-a-box” instead of the classic glass bottle. ) Analyzing the
outbound logistics, it is possible to explore the fact that as consequence of being big
multinationals the newcomers can bargain power of the distributors, carving out
margins which the European competitors are not able to gain due to the excess of
fragmentation which reduce contractual power towards the distributors.

With reference to the inbound logistic a major role in reducing costs per unit is played
by mechanization and scale economies, which are widely exploited by the NW
producers. The same advantages are reflected on the operations where
mechanization of harvesting and scale are making the incumbents competitors more
profitable, moreover they are also exploiting scope economies, while in the Old
World, the fragmentation and the wide specialization, which were the strength of the
systems now are showing themselves as weaknesses.

Figure 1. 2: “Chain Value Model” by Michael Porter The use of new technologies and
new organizational approaches are also incident on the quality of the final product,
which is granted by the integration of the processes and an efficient network strategy
by the newcomers, while in the OW these challenges have not been answered yet.
One of the largest disadvantages the mature competitors are facing concern the
activity of marketing and sales, where due to the newcomers approach they are
loosing the market confront.

The Old World is exploiting factors largely underemployed by the Europeans, the use
of professional marketing, market researches try to understand and forecast the
market in order to be more responsive to the real needs of the demand. The correct
use of branding from part of the NW producers is resulting as one of the strongest
competition advantage towards the OW ones. Concerning the support activities the
situation does not vary, the new-comers have advantages in the firm infrastructures
mainly because of a more efficient organization of the all networks and because of a
better organization and integration of the production chain.

As regards to the Human Resources Management the differences are mainly a

consequence of the different organization types of the actors of the market; in the
New World the companies are organized as multinationals with professional
managers and marketers, in the Old World the firms are often too small, fragmented
and in competition among them to have access to such resources. On the side of
technology development the newcomers are exploiting the new technologies in order
to gain efficiency and quality, developing new mechanical tools and new approaches
mainly regarding harvesting.

Completely different is the approach of the New World competitors, strongly opposing
the use of new technologies providing quality with a traditionalist method, an
unfortunate approach for gaining market share. In terms of procurement it is unclear
if there are advantages of one system towards the other. The outcome of the analysis
shows how the New World could gain market share against the Old World,
challenging a domination that lasted for centuries. 1. How did the French became the
dominant competitors in the increasingly global wine industry for centuries?

What sources of competitive advantage were they able to develop in order to support
their exports? Where were they vulnerable? * Competitive advantage sources: history
and traditions; know-how; experience; strong internal demand; world wide quality
recognition; leader in wine sector for centuries. * Weak areas: fragmented chain of
production; too strict regulation and classification; scarce innovations; no
differentiation of the product; poor marketing; no branding bargaining power.

As wine production grow up in the Mediterranean area, this alcoholic beverage

became more and more blended with cultures, religious traditions and everyday life in
the area that now is called the “Old World”. Wine first uses and its complex
production made it not accessible for all, actually it was considered a luxury good.
But centuries of development in the production process, like vineyard horses or row
plantations, innovations in the distribution and preservation of the wine, like cork
stopper or mass production of glass bottles, made it affordable for everyone
generating a strong internal demand in countries such us French, Italy, Germany and
so on.

Specifically, regarding France, in 1966 the domestic demand accounted for 120 liters
per capita and it became the country with the higher consumption of wine, followed
by Italy with 110 liters. In order to better understand the dimension of the market, in
the same year in Australia, USA and UK the annual per capita consumption was far
less than 10 liters.

In France, wine was not only highly consumed in every house, but it became one of
the business strengths of the country. Actually it was the second largest French
export, because History and tradition made the French wine synonymous of quality in
the whole world. Moreover, since there were hundreds of different types wine, French
government codified a hierarchical classification (Appellation d’Origin Controllee –
AOC, Vins Delimites de Qualite Superieure – VDQS, Vins de Pays) and nurtured the
concept of terroir to help consumers recognize their finest wines in a highly
fragmented market.
This significantly strict regulation was an important innovation that made the
difference among the main competitors, such as Italy or Spain. French source of
competitive advantage was not only the century know-how that permitted to have a
high quality wine and the strong internal demand, but also the demand coming from
the neighboring countries without a highly developed wine industry. Wine producers,
in many countries of Europe, were isolated from each others, and most of the world’s
wine drinkers consumed either local wines or imported from close winemakers.

This tradition made the fortune of France, since the climate and the soil in the United
Kingdom didn’t allow grape growing enough to satisfy the huge internal demand,
British were forced to import from the closest producer. The century tradition was an
advantage for the French wine because it was a symbol of quality, but it was also a
drawback, because it fiercely limited the flow of innovation and development
concerning the production, distribution and branding of wine.

Moreover, since the whole production chain was fragmented in many segments,
there was a lack of economies of scale and integration that had terrible results in
market power of the French producers. Actually branding was poor or even not
existing and a number of small producers with very small bargaining power were
incapable to deal with retailers as supermarkets loosing market visibility and the
connection with the whole segment of customers. The direct competitors, the Old
World producers, were all in the same situation: fixed to the traditions and unable to
satisfy the increasing fast-changing consumer tastes and preferences.

The fact that they had been the market leaders for centuries made them unconscious
about the possibility of new hardened competitors growing in the New World. 2 What
changes in the global industry structure and competitive dynamics led France and
other traditional producers lose their market share to challengers firm Australia, US,
and other New World countries in the late 20th century? In the last twenty years, the
worldwide wine industry has become increasingly internationalized and sophisticated,
though over the years, the market has become fragmented, international, multi-
lingual, operating in many currencies, and information-intensive.

The wine industry globally faces continued shake-up and consolidation and the
generation of mega wine companies has become inevitable as no one wine company
– listed or private – currently has more than one percent of the world wine market, in
stark contrast to other beverages. Global wine showed solid growth in volume terms
in recent years, up nearly two percent to 25,066 million liters. Still red wine provided
much of the impetus for volume growth in the world wine market over survey period,
with sales rising nearly 12% between 1998 and 2003.

However, volume growth of global wine was dampened by changing patterns of

consumption in important Western European markets, like Italy, France, Portugal and
Spain, as younger consumers moved away from traditional everyday wine drinking to
more occasional consumption. Globally, the two countries that are leading the wine
production and consumption businesses are France and Italy. However, the irony is
that these two countries are also witnessing a steady erosion of their global market
share.

In our opinion there are five key success factors that we have identified that are
extremely relevant to compete favorably in the global wine industry: * a strong
existing domestic market * domestic market growth potential * economies of scale
advantage * industry adaptability to change and * potential to attract foreign
investment. First, a strong domestic market is one where a large volume of wine is
purchased and where consumers readily select domestic wines.

Second, even more important is the potential for growth in a producer’s domestic
market, as this shows if opportunities for additional sales exist where producers may
have local knowledge and other native advantages such as local distribution. Third,
countries where production is dominated by larger firms have the advantages of
scale and scope as well as improved power in promoting and pushing their wines to
consumers and retailers. Fourth, industry adaptability to change summarizes the
willingness of producers to experiment with cost saving production methods or to
pioneer new marketing techniques.

It also indicates if producers are free from excessive regulations or blind adherence
to long standing traditions. Finally, countries that have business-friendly climates,
favorable costs or other natural comparative advantages will attract foreign
investment in wine production, which makes these countries stronger global
competitors. Old World producers were the first to define tastes and quality standards
and they have traditionally been supported by a strong local consumer base.

The New World has had to work hard to build their wine industry, both in
infrastructure and reputation. Large scale wine production is relatively recent, and
many of the New World producers faced difficulties such as currency collapse,
prohibition and international sanctions. Per-capita consumption also lags that of the
Old World countries. Yet New World producers have recently been successful in
producing consistent quality wine and in capturing global market share. .The group
with the strongest competitive position includes Australia, Chile and the United
States.

Australia and Chile both have small populations that provide for a tiny domestic
market with little potential for growth. However they are very well positioned to
produce and export wine with their adaptive, large-scale producers and their great
lure for foreign investments, providing them with a position of a strong competitive
advantage. The US is a populous, affluent nation, and while the US wine market is
already large, it has even more potential to expand. With all other key success
factors strongly favorable, the US also possesses significant competitive advantages.

The countries with the weakest competitive advantages in the global wine industry
are two traditional strongholds of wine production in the Old World: France and
Germany. While they have large domestic markets, there is little opportunity for
further growth. There are many causes of the decline of France, and the Old World in
general, in the market share of this sector; these concerns globalization, changes in
the demand, more responsive strategies of the rivals and also the lack of market
research and marketing investments by the French firms and totally ineffective
technology and innovation policy.

Moreover, the concentration of production into small wineries, complex labeling

practices and inability to leverage new production and marketing techniques does
also not bode well for effective competition in a global market place. Nor does either
country hold much potential for attracting foreign investment, save for some
traditionally undervalued areas of France, like Languedoc.

In response to the shrinking costs of transport, globalization allowed companies

situated in different areas of the globe competing in the same final market, an
example is the UK one, where in the past the demand was completely satisfied by
French, Italian and German wines. Although consumption per person has decreased
in traditional consuming and producing countries (Italy, Spain, France), the
consumption and production of wine is increasing in new countries in northern
Europe, Americas and Asia. Countries like South Africa, Australia, Chile and
Argentina are radically modifying the industry’s competitive environment.

With the “globalization” of the wine market, the environment is becoming more
competitive and producers are implementing new strategies. We can observe two
very different production and marketing models. * The traditional French model,
based on the certificate of guaranteed origin (AOC), whose objective is to turn out a
high added value typical product in limited quantities through the combination of a
demarcated territory called terroir and enforcement of constraining specifications and
regulations.

* The second, is being implemented by producers in the so called New World (the
United States/California, Australia, South Africa, Chile, Argentina). It is based on
“industrialized” mass production and intense marketing of relatively standardized
products which are easily identifiable through private brands. There are different
observable relationships between the players and the production sites in the industry.
In this context, the French wine industry appears to be in an insidious or even open
crisis. In most producing regions, a major symptom is the decrease in domestic sales
in a context of market shrink.
In addition, there is a loss of export market shares which is estimated at ten points in
several countries that have traditionally been markets for French such as Great-
Britain, Germany and Canada. In these cases, these losses are not due to an overall
market decline, which is actually on the rise, but rather to the increase in competition
by producers who are mostly from the southern hemisphere (Argentina, Chile,
Australia, South Africa) and California.

The real alleged weaknesses of the French wine industry have been the subject of
numerous analysis and reinforcement proposals: regulations which are too strict and
consequently slow down innovation, a complex and hard to understand product
supply, minimal or even no effort made concerning promotion and marketing.
Furthermore, we believe that the main mistake lies in the structural organization of
the wine industry in France. Hence, we would like to not concentrate on the wine
product and its specific qualities but will try to compare the way the industries’ players
are organized, in order to analyze where the French industry is not adequate to
modern challenges.

The terroir/AOC model has been a reference for worldwide wine production until the
1980s but it is no longer the case in the early 2000s. Why is France’s position on the
international wine markets degrading while New World wines experienced
spectacular improvements and now aim at catching up with traditional “Old World”
products?

From an organizational point of view the terroir/AOC model seems to have a certain
number of cumulative weak points in comparison to the new world’s model
(identifiable with Porter-like clusters.) In terms of the supply structures, the French
established supply model and infrastructure are characterized by fragmentation and a
high number of small winemakers that have a negative effect on investment
capacities (material or immaterial) in the industry as a whole.

This fragmentation has certainly a negative effect on the ability to innovate in terms of
products, processes and even marketing and selling. The small scale of businesses
and lack of tradition as regards pooling resources do not allow producers to find the
financial means necessary for heavy investments.

This weakness tends to neutralize the local industry’s reaction capability when it
faces the new environment pressures. The fragmented supply chain is, indeed, both
the cause and the consequence of a “non-competitive/non-co-operative” tradition
among producers; individual strategies of traditional producers aim to avoid all forms
of comparison with neighbours and potential competitors. This lack of cooperation is,
in Porter’s perspective, one of the major weak points.
On one side, for New World producers, wine-making is an economic activity and is
taken on as such: producers define output, profit and market share growth objectives
and give themselves the means to reach them. On the other, for traditional terroir
producers, wine production, though highly lucrative, is not taken on in its economic
dimension but rather centered round the “cultural” nature of the product. The “New
World producers are turned towards innovation, the terroir is founded on immutability
of tradition; it is consequently strongly resistant to change.

Terroirs’ organization model is traditionally supply driven in a context of scarcity. This

avoids producers to think about productive environment and production method
change. Consequently, traditional producers have had trouble in considering both the
qualitative and quantitative evolution of demand and its consequences on supply,
where “New World” producers are used to have a proactive behavior and, therefore,
anticipating and stimulating it.

And even when the need to change is implemented, the existence of tight regulation
within a specific AOC can make a substantial product modification or production
method more difficult to happen. A further set of identifiable weak points is linked to
the nature of the top-down complementary relationships between grape growers and
wine traders and to the transaction costs that result. The terroir/AOC” model of
organization tends to generate opportunistic behaviour that can call into question its
very survival, specifically in a very competitive context.

In fact, while the perspective of getting an AOC label encourages players to enhance
production quality, it may lead to let up on efforts made to maintain product quality
once the label has been obtained, interfering with the overall image of the terroir and
raising suspicion as regards product quality. To particularly highlight is the existence
of incomplete contracts between grape growers and winemakers/wine merchants, the
latter being responsible for the marketing of the product.

This “generates considerable price variations and makes it impossible to set up

contracts that guarantee traders constant and adequate wine supplies in terms of
quantity and quality. The problem can spread to wines beyond generic wines and
condemns, in advance, all ambitious and viable marketing strategies from the
traders. ” The presence of extremely heterogeneous quality levels within the same
appellation can thus call into question the appellation itself and therefore the whole of
the “terroir/AOC” organization and strategy.

To avoid such opportunistic behaviours, autonomous certification bodies should be

entitled to reconsider such certification on a regular basis and ban weak
products/producers. The industry’s players themselves or a third party must assume
responsibility for product quality guarantee. A major terroir organization characteristic
is fragmentation and corporatism. Consequently, taking responsibility for such
guarantee scheme is extremely difficult owing to incompatible corporatist and general
interests.

What is more, the existence of non-market regulation mechanisms (based on, for
example, family or friendship ties) can in this case be counter-productive. Indeed,
players can be tempted not to sanction one of their kin in the name of these
relationships and later themselves avoid possible sanctions, whereas the intervention
of a third party that is likely to guarantee this quality is difficult to promote with local
entities.

Under the AOC label, regulation is indeed carried out at local level by local players
themselves and therefore known to be rather lax: making it impossible to use the
label as a genuine quality guarantee. 3. 1 What advice would you offer today to the
French Minister of Agriculture? To the head of the French wine industry association?
To the owner of a mid-size, well regarded Bordeaux vineyard producing wines in the
premium and super premium categories?

* French Minister of Agriculture: increase government investments in the wine

industry; promote a responsible wine consumption of wine through events marketed
at the new generation; create a new clear classification system based on the
consumer tastes; promote the creation of big companies and disadvantage the
proliferate of little-medium producers; sign contracts with other agriculture ministers
of consumers countries in order to favour the French wine.

* Head of the French wine association: better integrate the network; quickly spread
the know-how, techniques and innovations throught the French producers; promote
wine events to increase the consumptions; promote the invention of new products
made with wine; try to anticipate the next changes in the consumer tastes; advertise
and invest more on the type of wine that is preferred by the consumers in that very
moment; make advertisement aimed to a responsible and wealthy consumption of
wine; try to drive the consumption to the type of wine that is over offered; lobbying the
ministry of agriculture in order to have grants and privileges.

* Owner of the mid-size, well regarded Bordeaux vineyard: found a bigger company
with the surrounding producers; invest in innovating the production process in order
to increase the quantity and the quality; buy extensive land in the New World and
exploit economic scale advantages. 3. 1 Possible advices to the French Minister of
Agriculture Since the main objective of France is to take back the market share of the
past and maintain the leader position in the wine market, it has to better exploit its
competitive advantages and adopt some technical and marketing innovations in
order to compete and defeat the new threatening producers.
The first functional recommendation for the French Minister of Agriculture is to
increment the government investments in the wine industry. The larger flow of money
would be used, firstly, to invent or to develop techniques and tools for harvesting or
farm vineyards, secondly, to achieve and overtake the distribution and marketing
level of the New World producers. All those developments will also increase the
production of wine and fulfil a larger portion of the international demand.

In the last ten years, the new generation has grown with a high consumption of beer
and super-alcoholic cocktails, the French Minister could aim to substitute these
beverages with the wine. He might promote a responsible wine consumption through
events directed to the new generation. It is important to advertise wine as a drink for
all ages instead of a refined beverage just for mature people as this would implement
the demand from part of the younger generation. One of the common problems of
wine consumers is choosing which kind of wine and which brand purchase at the
supermarket.

This issue could be solved with a classification of brands and wine names that could
be easily understood and memorized by the consumers. Quality can be maintained
and highlighted also gathering the large number of different types of wine in few
clusters with easy names to remember. This problem is also due to the large number
of brands in the market. The majority of potential consumers are confused and at the
end they prefer to buy a bottle of beer of a well known brand. It’s possible to
overcome this situation promoting the creation of big companies and disadvantage
the proliferation of little-medium producers.

Big companies bring into the market well-known brands, which massively increase
producers’ market power. In order to increase the French market power compared
with the direct and New World competitors’ ones, the French Minister of Agriculture
could sign contracts or agreements with other agriculture ministers of consumers
countries in order to favour the French wine. Since, UK, one of the larger consumer
countries is next to France, it would be easy to find something to exchange for a
commercial agreement. 3.

2 Possible advices to the head of the French wine industry association As the Head
of the French wine industry association to manage and represent all the wine
producers, its objective is to promote and give advantage to its associates.
Furthermore it would be useful to advise him to promote a better integration of the
wine production process from the vineyards to the final consumer. This issue could
be achieved through a cooperation or collaboration between the wine producers,
merchant traders and the retailing sector.

A superior control, permitted by this form of collaboration, avoid more handling

stages, holding less inventory, capturing the intermediaries’ mark-up, sharing
common objectives and improving the time to market. Moreover, the cooperation can
spread the know-how, technique and innovation through all the French associates. It
is really important to promote higher investments in R&D in order to fill the gap that
has occurred between France and the other New Word competitors. New innovations
and technologies bring new developments and improvements to overtake and
succeed on the marketing and distribution level of the competitors.

Concerning the distribution, communities, retailers, and consumers are demanding

more sustainable, eco-friendly packaging options, whether for everyday items or
higher end purchases like fine wine. For some products, the barrier to conversion has
been package performance. Therefore would be important to spread the use of
“green” materials to pack and deliver the products. Since the French has never
developed an efficient marketing strategy it has been difficult to align the interests
between supply and demand.

The French wine association has to try to anticipate the next changes in the
consumer tastes, by means of market surveys and data collected through an
effective wine industrial analysis. It is also important to drive the offer towards to the
type of wine that is preferred by the consumers in that very moment. On contrary it is
possible to drive also the demand and not only the supply of wine. Guiding the
consumption towards the type of wine that is over offered or over produced it is
hoped to avoid sure future losses.

Nowadays people are blasted with advertisement that recommends not consuming
wine because it is unsafe for the drinkers’ life. There will be an increment of demand
persuading consumers that a little quantity of wine is not dangerous but rather really
healthy, in particular the consumption of red wine. As well as the French Minister of
Agriculture the Head of the French wine industry Association might promote and
arrange wine events to increase the new generation consumption of wine. 3. 3
Possible advices to the owner of a middle size well regarded Bourdeaux vineyard
producing wine and premium and superpremium category

The main issue for French wine producers in the actual competitive environment,
considering how the newcomers are acting and consequently gaining market share,
is size. One of the challenges each small producer has to face is a competitive
market without boundaries, totally changed from what it was only 10 or even 5 years
ago, in which large multinationals are now efficiently operating. There is no univocal
solution to this problem, but a few advices could be given to small or mid sized
European companies.

In order to gain advantage in terms of scale but even scope, the best way is to
control the full production chain. From the vineyard to the glass, this can be obtained
through either acquisition of neighbour producers, merging with other companies to
better integrate or forming and exploiting networks. Each winemaker should analyze
the market, an affordable process, and identify its possible cooperation/competition
strategies. Maximum control over the value chain can often guarantee that the final
product is produced and sold at the company’s standards.

One of the troubles the incumbents have to face is the inconstant quality often found
within the same wine denomination. Bottles often sold at very high prices, due to a
very lousy quality denomination system, are ruining the reputation of the other
products of the same wine group. This is unacceptable as it ruins the whole regional
system, but a solution can be found through the aforementioned network
implementation or radical integration.