1.
How did the French become the dominant competitors in the increasingly global wine
industry for centuries? What sources of competitive advantage were they able to develop? Where were they vulnerable?
By the Christian era, wine became part of the liturgical services and monasteries planted vines and built wineries and the European nobility began planting vineyards as a symbol of prestige, competing in quality of wine they serve on their table, i.e. start of premium wine market. French wine producers became the dominant competitor as a result of four reasons. First, their geographic and climatic features played significant role. As France is in the middle of Europe culture with suitable climate and soil condition for harvesting grape, had accrued first-mover advantage and established its place as the dominant competitor in the global wine industry. Second, they became the first high-quality wine market and gained a lot experience. Especially, the negociants traded wine between France and other countries and this worked as word-of-mouth effect, increasing the reputation and dominance of French wine. Third, they used the latest innovations such as mass production of glass bottles, the use of cork stoppers and pasteurization. These innovations increased the stability and longevity of wine which allowed the transportation of wine to distant places, and birth of global wine market. Lastly, the government support made significant effect on the reputation and improvement of French wine industry. Government controlled the wine production and quality, regulations like AOC and VDQS, set detailed and quite rigid standards for vineyards and wine makers. The main vulnerable aspects of French wine industry were highly fragmented vineyard and wine production, increasing vineyard prices per acre, complex distribution and sales system, long multilevel value chain, risk of bad weather and disease; and poor roads and complex toll and tax system.
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2.
What changes in the global industry structure and competitive dynamics led the France
and other traditional producers to lose market share to challengers from Australia, US, and other New World countries?
Vineyards and wine makers had been set up in many New World countries since the 18th century, but consumption was not as high as it was in European countries. By the 1960s, the New World countries entered in the wine industry and became a key player in the market with challenging the production and marketing norms. The New World countries had several advantages over traditional producer countries in production norms. First, suitable land was widely available and less expensive, allowing the growth of much more extensive vineyards. Second, unconstrained by tradition, they began to experiment with grape growing and winemaking technology; they used mechanical harvesters, irrigation methods. Other experiments with fertilizers and pruning methods increased yield and improved grape flavor. Third, they broke the many wine making traditions and used on-site labs to provide analysis helpful in making growing and harvest decisions. Lastly, as a result of these innovations in production they were able to reduce their cost per tonne nearly to half of French wine. Also, there were challenges on marketing and demand side. First of all, the consumption per capita of wine in traditional producer countries were declining since 1966, but it was increasing for New World countries. Secondly, the New World countries were reinventing the marketing model. They came up with innovative packaging designs like “wine-in-a- box”, screw caps instead of cork ones. Besides, they
tried to appeal the palates unaccustomed to wine, launched products for this market segment. The big CPG companies -like Coca-Cola, Nestle etc- entered the market, even they left after a decade, they influence the New World wine market with their customer focused attitude and sophisticated marketing skills. Lastly, the New World producers controlled the whole value chain, extracting margins at every level and retaining bargain power. Overall, changes in production and marketing aspects of wine by 2
New World countries led the market share loss of the traditional wine producer countries. 3.
What advice would you offer today 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?
One of the major disadvantages that French wine industry faces is the strict AOC regulations. Up to a point this is an advantage for French wine industry since these regulations forces the French wine producers to produce the best wine in the world but with the emerge of the New World players, the industry environment changed and these regulations turned out to be encumbering the French wine industry with reducing the competitive power of French industry. If I were the French wine industry association head, I would try to lessen the restrictions coming from AOC. For example, I would try to increase the usage of technology in wine production and wine making, open labs to search better harvests and better taste of wine. Besides, the extreme government intervention should be stopped; the government’s purchase of surplus wine to be distilled into industrial alcohol has to stop eventually.
They need to stop rewarding the poor growers that make unsellable wine and let them go out of business so that their land can be utilized by more productive and successful growers. About the owner of a mid-size, well-regarded Bordeaux vineyard producing wines in the premium and super premium categories; actually, he is lucky since there is a shift to quality wine in the global market. But, he should be taking the advantage of technological improvements and be more responsive to the potential changes in taste of wine consumers, improve consumer focus attitude. Also, he should be more active on branding, for example in Bordeaux, there are 20,000 producers and very low possibility to launch a brand; so, they have to unite and create their own brand, this will also provide them bargaining power. In addition to these, he has to do something for simplifying long and multilevel value chain which at some part lacks of expertise to operate the system efficiently. He should be aware of the retail industry’s importance and integrate his product with retail industry with controlling the margins 3
and quality level through the supply chain. While the French should be concentrating on the lucrative U.K. market, one should not forget about other possibilities. For example, Japanese market can be a good market for high prestige French wine or giant China market with its 39.5% growth rate of 20022006 is very promising and should be entered by French wine industry. 4.
What advice would you offer today to the head of the Australian wine industry
association? To the owner of a mid-size, well-regarded vineyard in the Barossa Valley (a premier Australian wine region) producing wines in the premium and super premium categories?
The Australian wine industry association looks well-organized and I like their having a vision and mission. For more than a decade, Australia's wine producers had become accustomed to success. They achieved to be "the world's most influential and profitable supplier of branded wines by 2025" and with their export rates, seems like they almost achieved this goal. However, they have price and image problem as being “cheap and cheerful”; when we think about the increasing cost of wine production in
Australia, these are vital problem for the Australian’s wine industry since they will lose their competitive advantage of low cost. I think both the head of association and individual producers should focus on increasing the perception of Australian wine quality and invest more in global marketing campaigns, more seen with the celebrities throughout the world. They can also use upscale restaurants for merchandising their products and luxury magazines to give their ads. These are not only wine association’s duty; individual producers should be a part of the project with increasing the image of
Australian wine. Besides, the producers should try to find new techniques to reduce the cost of production and increase the efficiency. In addition to these, they should be doing research on how to produce higher quality wines like French ones. Lastly, they should not be just focused on the UK and US market, they also have to make business with the China and Asian market as well.
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5.
What advice would you offer today to the head of a major US wine industry association?
To the owner of a mid-size, well-regarded vineyard in the Napa Valley (a premier US wine region) producing wines in the premium and super premium categories?
Some industry critics suggested that because American producers had long focused on their large, high priced domestic market, they had fallen behind the prevailing global price/quality ratio, not only at the low end, but even at the higher price points. The same quality of US wines is nearly 2.7 times more expensive than the same quality of Australian one, which is a weak spot for US wine market. Major reasons for these high land cost, labor and grape production cost. So, they should decrease their cost by becoming more mechanized in wine production like Australia does. Also, I think the change in the three-tier distribution system in US is a great risk for the wine industry since it will erode the entry barrier for the export products and with their cost advantage exporters countries will be able capture significant market share in US. I would advise the wine producers in US to also produce products for middle segment. Because of their high cost, vineyards in North Coast locations targeted the super-premium and ultra-premium segments at $12 a bottle and above. On the other hand, the Central Valley which produced 70% of California's wine volume was focused on the basic segment with $1.99 price. This segmentation focus led to the middle segment of the market ($5-$8 a bottle) being underserved. If I were the producer in Napa Valley, I would produce some products for this segment also; otherwise the other countries will fill this gap with their products. Also, branding is the other issue that US don’t have a brand, they should focus on branding. Lastly, according to Exhibit 6, the per capita wine consumption in US is the least, so they should start marketing and promotion campaigns to increase the domestic consumption and producing wine regarding the domestic taste and income level.
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