Wine Industry Research Paper

Wine Industry Research Paper Free sample research paper on Wine Industry: The American wine industry is a stable and present market in the United States with room to grow. The wine industry began with the first settlers and has persevered for centuries. There are three classifications of wine: Red, White, and Blush, and table wine (a wine containing 7% to14% alcohol traditionally consumed with food) is the most popular and fastest-growing type of wine consumed. Even though wine is produced virtually everywhere in the U.S. the wine producers in California have the largest economic impact of $30 billion. Wine sales have risen in the last ten years from 11.7 billion dollars to 19 billion dollars. The Alcohol, Tobacco, and Firearms division of the Internal Revenue Service, at 8%, which is around $1.07 per gallon, heavily taxes these sales. Technological impacts have allowed winemakers to help control the quality of the wine from the vine to the liquor store. The wine industry contains high barriers to entry due to high costs of land and building manufacturing facilities. Product differentiation is quite vast, being able to make several different types of wine varieties. The value of the wine varies year to year and is often set by the opinions of a few wine experts. The economies of scale in the wine industry have the greatest impact on the cost of land for grape growing. This because the type of land needed to produce quality wine is limited in the United States. This provides an advantage to existing wine producers already having ownership of farmland. Access to distribution channels is through commercial trucking for small distributors, and leased trucking or privately owned trucking for medium to large wine producers. The bargaining power of suppliers is lower today because there is an excess amount of grapes making the supply of wine and grapes exceed demand. The bargaining power of buyers drive up the price of some wines, and drive s down the price of others. The wine industry’s threats of substitutes are mainly form alcoholic competitors such as the micro brews and non-alcoholic competitors such as the premium coffee shops. The wine industry relies on each other for grapes needed for blended wines and low production years. Rivalry between companies has increased in recent years because of increased competition for shelf space. There are three top wine producers in the U.S.: EJ Gallo Winery, Constellation Brands, and The Wine Group. Their success has comes from recent acquisitions, and their ability to change with the needs of consumers. Three key issues the wine industry is facing today are upholding advertising standards, the threat of corporate buyouts, and increasing a market for wine. Introduction Humankind has enjoyed wine for many centuries. The first settlers of the United States of America found the new world to be filled with thousands of beautiful grape vines. Much to the dismay of the settlers the wine produced from native grapes was undrinkable, tasting â€Å"overly musky† (Lukacs, 2000, p.17). This did not deter early American Settlers from trying; Thomas Jefferson was one of the earliest advocates in making American wine. Thomas Jefferson once stated, â€Å"Good wine, is a daily necessity (Lukacs, 2000 p. 2).† He chose the wines that George Washington drank, and kept the White House well stocked. Much to Jefferson’s dismay he was unable to see any quality wine come from America in his lifetime. It would be 150 years before America was able to produce quality wine (Lukacs, 2000, p3). Rarely turning a profit, wine making in the 1800 was a profession for the rich. The first successful entrepreneur was Nicholas Longworth, who came to Cincinnati Ohio in 1803. His fortune was made from real estate, but his love was of wine. Longworth was the first American to successfully make wine on American soil, using imported European Vinifera Grapes (Lukacs, 2000, p. 12). His success was short lived. The Vinifera Grapes could not survive for very long in American soil, due to lack of immunity from disease and insects (Lukacs, 2000, p.18). Americans continued to develop a grape that would flourish, and taste good. It was fifty years before hybridization became an accepted practice to produce a grape vine that could resist disease and insects. Today wine is made in nearly every state with the largest producer being California. The most crucial moment in Americans’ wine history came in 1976 when wines from America went up against French wines in a blind taste test. The judges were Frances’ most esteemed wine professionals. Twenty wines were entered: twelve from northern California. The two wines picked as the winners of the taste test were both American wines from Napa Valley, California (Lukacs, 2000, p. 4). This was a definite turning point in American wine industry. American wine was, for the first time, thought to be of good quality. This Industrial Analysis will evaluate the Wine Industry in three different ways, first by a macro level, which will look at the Social and Cultural Impacts, Political and Legal Impacts, Economic Impacts, and technological impacts that the industry has encountered in recent years. Then, through Porter Five forces of industry standards, the Analysis will discuss major barriers to entry: Threat of Substitutes, Product Differentiation, and Firm Rivalry. Then the analysis will look at the wine industry through a competitive analysis of the industries top three competitors. The evaluation will end with short discussions of three issues the wine industry is facing today. Description of Industry Wine differs by what kinds of grapes are used and what type of flavoring is added. The flavor often comes from the type of barrel used in the wine making process (usually oak). There are three main classifications of wine: Red, White and Blush. White wines are made from light-colored grapes and are generally lighter in taste than red and blush wines. Red wines are typically produced with darker grapes, and often their stems are included in the crushing process. Today, the industry categorizes wines into six different categories see figure: Table Wines Comprising about 84% of U.S. production. Sparkling wine Comprising about 6% of U.S. production Special natural Comprising about 5% of U.S. production Dessert wine Comprising about 4% of U.S. production Vermouth Comprising about 1% of U.S. production Specialty Comprising about less than 1% of U.S. production Table wines are the most popular and fastest-growing type of wine in the United States. Table wine contains 7% to 14% alcohol by volume and is traditionally consumed with food (Standard Poor, 2001). Table wines that retail at less than $3.00 a bottle are considered to be generic or â€Å"jug wines†, those retailing for $3.00 to $7.00 per bottle are considered to be premium wines, $7.00 to $14.00 super premium, and ultra premium wines retail at more than $14.00 per bottle (Standard Poor, 2001). The United States is the fourth largest wine producer in the world, averaging 465,400 gallons of wine a year. The top three countries are France, Italy, and Spain. (www.wineinstitute, 2002). Wine is produced in every state. The total of Bonded Winery Premises (licenses issued by the Bureau of Alcohol, Tobacco and Firearms for tax purposes) in the United States currently is 2,443; Half (1,210) of the licenses are in California, making California the number one factor when discussing American wine production. Social and Cultural Impacts Wine drinking and knowledge of wine is regarded as part of the wealthy and educated community. Wine is an alcoholic product however, wine producers continually try to advertise wine as part of everyday dining, to be enjoyed by people who can afford the finer things in life. According to Standards and Poor, the number of consumers buying premium wine should increase because of the increase in customers over the age of 55 who tend to consume more wine, especially premium (Standards and Poor, 2001). This increase is however very small, only about a one percents increase in sales. Wine is specifically not marketed to younger children, or advertised in a way that emphasizes the effects the alcohol will have if consumed in excess. There are voluntary standards that the wine industry published to facilitate this type of market (www.wineinstitute, 2002). This emphasis on wine drinking for the mature and sophisticated has created a general stereotype that wine is connected with a higher stand ard of living, because it can enhance one’s meal enjoyment. Political Legal Impacts Wine, which is an alcoholic product, is regulated by the Alcohol, Tobacco, and Firearms division (ATFD) of the internal Revenue Service. This makes it subjected to high levels of tax. The Federal Excise tax on these products was last increased in January 1991, which increased the tax on wine by eight percent making the tax $1.07 per gallon (Standards Poors, 2001). Economic impacts California carries the most economic importance of any wine producers in the United States. Wine is the number one finished agricultural product in retail value from the state. The industry has a total annual economic activity, according to a comprehensive new report commissioned by the wine institute and the California Association of wine grape growers, of nearly $30 billion (www.wineinstitue.org, 2002). This research shows that California’s wine industry and affiliated businesses provide 145,000 full-time equivalent jobs in the state, with a total of $4.3 billion in gross wages. California receives an average of one-billion dollars in taxes and other business licenses and fees, the federal government and other states and local municipalities collect an additional $2.1 billion a year. The tourism generated by the vineyards brings in expenditures of $1.2 billion annually (www.wineinstitute.org, 2002). California also employs around 2,136,000,000 employees working in the winery and vineyards. California wineries weathered last year’s economic slowdown and the September 11 attacks, which were especially hurtful to wineries. Shipments from California wineries have grown steadily during the past five years. The wine institute estimates the retail value of California wines sold in the US to be $13.4 billion in 2001 compared with $13 billion in 2000 (Theodore, 2002). This slow growth fits in with the small but steady increase in sales over the last ten years, which have risen from $11.7 billion dollars to $19 billion dollars (www.wineinstitute, 2000) Technological Impacts Recent Technological advances allow wine-makers to control the winemaking process more carefully than ever before. The use of stainless steel containers and careful temperature control during fermentation has revolutionized the making of white wines. Quality control during the harvest and juicing has improved also, with such innovations as night harvesting to avoid high grape temperatures and field crushing to more quickly separate juice from grapes. Improved techniques have been developed for sulfur dioxide fermentation, for monitoring sugar levels during fermentation, for stabilizing wines, and for controlling malic-lactic fermentation (a secondary process in which malic acid in the new wine is converted into lactic acid). Various chromatographic methods have been developed for determining, in detail, the composition of grapes and wines, though they have not yet replaced human tasting and sensory evaluation (Peters, 1997). The increase in use of technology has enabled the Wine make rs to deliver a more consistent quality product. Porter Five Force Model Major Barriers to Entry According to Standards and Poors, the wine industry has high barriers of entry. Such as the level of sales needed to justify the enormous legal costs associated with producing industries. The capital needed to build manufacturing facilities, together with the high costs of advertising and distribution, are other substantial barriers to entry in these industries. Small wine makers may achieve local success. However such firms often have difficulty attaining profitability with such a level of operations and may find it virtually impossible to go national (standards and Poors, 2001). There is also a very high cost of ferial farmland. Product Differentiation and Switching Costs In a Fortune magazine an article was published in September 2001 entitled Making Wine is easy. Making Money doing it is not states that the numbers of distributors is shrinking, making it harder for the average person to get into the wine market. â€Å"Brand building in this market is a daunting challenge, but anonymity is death,† states Walter Channing, author. Luckily for the new wine producer consumers typically enjoy trying new and different wine all the time. Wine drinkers look for the experience of tasting new wines. The determining factor in their selections is usually due to word of mouth, by taking a recommendation from a wine expert. Robert Parker, a wine mega critic, in May of 2002 declared the Bordeaux of 2000 to be one of the greatest vintages of the century, proclaiming it â€Å"something that comes once every thousand years†(Forbes, p.238). This drove the value of the wine per bottle to $330 solely due to Parker’s critique. This type of name recogn ition is necessary to achieve sales, according to Market Experience, Consumer Attention and Price-quality relationships for new word wines in the U.S. Market, Therefore, the price of wine increases with the increase in the producers’ reputation. This vastness in the market also makes switching costs for the consumers low. It generally will not cost them any extra money to change the type of wine they enjoy drinking. Economies of Scale And Cost Disadvantages Independent of Scale The largest factor in the wine industries Economies of scale is the cost of land for grape growing. Grapes being an agricultural product will flourish where the soil contains the right nutrients and the climate has an extended summer, which gives the grapes time to grow. Even though different types of grapes will grow virtually in any soil, the different nutrients in the soil will change the taste of the wine. In the United States California is one of the only states with both needed agriculture components to make good quality wine. Land is a limited resource, making it the highest start up cost in a vineyard. On the other hand, this gives an advantage to the wine producer who has ownership of prime properties who no longer has the cost of the land as a financial burden. Access to Distribution Channels The final step in wine production is getting the product to the customer. If the distribution channels are overlooked there can be a significant impact on a wine company efficiency, product quality, cost of operation and on the perception it holds in the minds of distributors and consumers (Beverage industry, Nov 2001). Most distribution from the vineyards is done with private, leased, or hired trucking companies. Most wine producers hire a trucking company to distribute their product. Kendall-Jackson, the 10th largest winery in the United States is located in Sonoma County of Northern California. Seeing a problem with hiring a trucking company, they saw a need for better transportation cost accounting, flexibility to expand with growth, and improving customer service. In wine production timing is key, whether it is transporting juice from the vineyards, moving finished product or hauling cases of bottled product to distributors, a well-run winery relies on precise timing (Kendall-Jackson: Smart Transportation Route to Continue Growth, Beverage Industry, Nov 2001, p. 46). Kendall-Jackson discovered having its own trucking fleets was not cost effective so they incorporated a leased trucking fleet for high priority transportation needs, and used a hired trucking fleet for outside carriers. Therefore there are several avenues that wine producers can use to transport their wine. The cost in any of the three distribution channels is high, limiting the distribution power of the smaller vineyards that typically rely on local sales. Bargaining Power of Suppliers There are two different suppliers in the winemaking industry, those who produce the grapes, and those who produce the wine. Most wine producers are their own main suppliers, because of the great timing needed from harvest to production. To ensure the quality of the juice most vineyards make and bottle their wine at their vineyards. Many vineyards will sell their grapes to each other to compensate for a bad year, or for use in blended wines. Several factors contribute to the power the suppliers have on price. If there is a shortage of a certain type of grape, due to poor production the vineyards with the products have the most power. On the other hand when there is excess in product like in the present production, the excess inventory will bring the prices down. (Time, 11, 2002). Currently the bargaining power of the suppliers is very low in the wine industry due to excess grapes, which will be later discussed as one of the key issues facing the American wine industry later in this an alysis. The same is true with the wine product. The wine that has a supply lower than demand can fetch a higher price than the wine that exceeds supply. Bargaining Power of Buyers The fate of American’s wine industry lies primarily in the hands of wine consumers. Patterns of wine consumption are key (Peters, 1997). The major buyers of wine from the vineyards are liquor stores and restaurants. Competition between these buyers can either force down the price of the wine, or increase the price of the wine. Certain wines are naturally (due to the lack of needed farm land) scarce. Competition between buyers can drive up the price of the wine per bottle because the demand is greater than the supply. On the other hand if there is excess in the production of wine the competition can force the prices down. Threat of Substitute products and services Threat of Substitutes There are wineries in more than forty states; most people live within driving distance of some version of wine country. Wineries are welcome by residents and communities because winemaking is a clean industry, and a good neighbor. Also, the associated tourism brings in a source of income (Peters, 1997). Even though vineyards are virtually everywhere the amount of threat of these vineyards is minimal. These small vineyards generally also have small markets, generally only a few hundred miles from the vineyard and other larger producers are still present in the stores and restaurants, which works to the larger producers’ benefit. On the other hand the large producers don’t benefit from the same type of branding that large beverage companies like Coke and Pepsi do. This is due generally because of the vastness of product differentiation in the market. Generally a consumer shows more favor to one cola than to another, either preferring Coke or Pepsi, then usually just drinks the one type of cola. Wine is thought to enhance food; therefore different types of wine enhance different types of food (Peters, 1997). The consumer may prefer a Chardonnay with fish, and a Merlot with a Steak. When choosing the brand of wine, customers look most for price and value. During periods of both recession and prosperity the consumption of wine tends to stay the same, however the quality of the products produced changes. This is related directly to disposable income. A decline in disposable income puts downward pressure on the prices of consumer products, as people shift away from buying premium-priced brand name products in favor of lower-priced brands and private-label goods (Standards and poors). There are several substitutes in products that may take some of the market away from even drinking wine at all; there are competitors from other beverages (Peters, 1997). Winescapes author suggest two competitors that are making a claim to the time and money of the growing number of people there is the micro brewing industry and its related brewpubs. The other, however less threatening is the growth in premium coffee shops, led by Starbucks (Peters, 1997). Firm Rivalry Rivalry Amongst Existing Competitors The buying and drinking of wine is luxury item than a needed commodity. The tastes and preferences of the consumer continue to evolve with time, and experience. Chardonnay is still the leader in wine sales in the US, but American consumers are increasingly showing a preference for red (Seeing Red, 2002). During the past decade, volume share of red wines has grown 118 percent, according to the Wine Institute; reds held 17 percent of the market in 1991, 25 percent between 1995 and last year jumped to 37 percent market share. During the same ten years white wines dropped from 49 percent market share to 40 percent, an 18 percent drop. Blush wines held their own for the first half of the decade, with 34 percent market share, but dropped to 23 percent between 1995 and 2001, a 32 percent decline. The California wines priced at more than $25 a bottle are a hot category, selling around three million cases per year. These premium California wines were almost non-existent in the mid 1980s, but are currently growing at a rate of 20 percent per year. Table wines are by far the biggest-selling category of wine in the US. With 504 million of the 563 million gallons sold last year, reports the wine institute. Table wines had 499 million gallons in sales in 2000, and have grown steadily from 461 gallons in 1997. Desert wines came in with 34 million gallons in 2001, and increase of 2 million gallons over 2000, and up from 30 million gallons in 1997. Sparkling wines sold 25 million gallons last year, down from a peak of 37 million gallons in 1999, when millennium celebrations caused consumers to stock up on the bubbly. Competition was higher in the wine industry last year than it has been in a decade, according to The Wine Institute. Wineries had to compete harder for retail shelf space and restaurant wine listings, and the dollar compared to other currencies also contributed to competition for California vintners, making foreign-made wines more affordable to U.S. consumers (Seeing Red, 2002). Competition between US states and Colorado wines are not soon going to drive either California or French wines off the shelves of wine shops in Denver, Colorado Springs, or Aspen, they may however develop sufficient local interest to allow the state’s emerging wine industry to survive. Elsewhere, in Arizona and New Mexico, or in Missouri and Arkansas the same is true. Survival is likely to be tied primarily, if not exclusively to regional loyalty. New York and Virginia are producing wines that are becoming important competitors on the national wine scene. Texas seems somewhere in between. The western wine regions along the pacific Rim of California, Oregon and Washington will continue to produce the lion’s signs of trouble in paradise, especially in the vineyards of the northern state, which can at least be partly alleviated by better weather and higher yields and by new plantings of popular cultivars (mainly Chardonnay, Merlot, and Cabernet Sauvignon) a grapevine pest and a disease have become significant nuisances. Competitive Analysis There are three top wine producers in the United States (see figure 3.3). The top producers are EJ Gallo Winery, Constellation Brands, and The Wine Group. The key to top production is size of these three. The only producer who produce solely wine is EJ Gallo. One determining factor in all three of these producers that has contributed to their success is their recent acquisitions and partnerships. Constellation Brands Inc. have just acquired Ravenswood (Wall street Journal, June, 20 2001); The Wine Group’s partnership of Southern Wine Spirits of America Inc (Beverage Industry, March 2002), and EJ Gallo recent acquisition of California’s oldest wineries Mirassou Vineyards in San Jose (Beverage Industry, October 2002). This growth has enabled these three to become the leading producers in America. The main competitive advantages that these three have are their size, branding and connection with distribution channels. Because they are so large they are able to produce several different products varying in cost and quality. For instance although The Wine Group produces both Franzia, and MD (Mad Dog) 20/20, the quality between these two products is quite different. Franzia can be found at many medium to high quality restaurants, while MD 20/20 is considered to be more of a â€Å"wino† drink, only being consumed for the sole purpose of becoming intoxicated (Lucas, 47). Constellation Brands and The Wine Group also do not win many awards for their wines, because where production of wine is concerned quantity often hurts the quality of the wine. EJ Gallo has grown and expanded for three generations because of its ability to change. EJ Gallo is a name synonymous with American wine. In recent years the family owned company has gone through some changes. One of the granddaughters has taken over the company and is striving to put quality in the wine produced, in reaction to customer demand for higher quality wines. One factor that American wine producers have faced is the lack of daily wine drinking among the American public. While in other countries wine is served with each meal, Americans don’t incorporate wine with meals on a daily basis. After Prohibition when the accepted alcohol content in wine went from 12% to 20%, wine was looked at as a way to become intoxicated and the wines that sold were inexpensive with high alcohol content. EJ Gallo saw this market and produced what Americans wanted. This has made the company extremely successful, but also the company is known for having lower quality products (Lukacs, 182). Just like after prohibition now the public is demanding higher quality wines and EJ Gallo is shifting to meet the demands of the public. Over the last few years EJ Gallo have won several awards for their wines. Figure 4.4 lists the top 20 wine brands and the company that produces them in America today, according to Standard and Poors. EJ Gallo hold 5 of the top 20 spots for the best American wine brands, it is EJ Gallo’s ability to make both high quality wines and less expensive wines, along with their distribution ability and branding, that gives EJ Gallo the largest competitive advantage from other smaller and less known competitors in the wine industry. Brands Company Franzia The wine Group Carlo Rossi EJ Gallo Winery Livingston Cellar EJ Gallo Winery Almadan Canadaigua Wine EJ Wineyards EJ Gallo Winery Sutter Home Trinchero Family Estates Woodbridge Robert Mondavi Beringer Beringer Wine Estates Inglenook Canandaigua Wine Vendage Turner Road Wintners Arbor Mist Canandaigua Wine Turning Leaf EJ Gallo Winery Turing leaf EJ Gallo Winery Peter Vella EJ Gallo Winery Corbett Canyon The Wine Group Glenn Ellen UDV Wines Fetzer Brown-Forman Beverages Boone’s EJ Gallo Wines Gossamer Bay EJ Gallo Wines Concha y Toro Banfi Vintners Key issues Advertising Standards There are several wine producers who want to make America into a quality wine producer that can compete with the rest of the worlds wine producers in quality. One of the main stumbling blocks for this initiative is the general wine consumption habit of the American people. Paul Luckas, author of the book American Vintage: The Rise of American Wine talks extensively about American wine consumption in America. Even before Prohibition wine was not thought of in the same context as other liquors. Other types of liquor were thought of as having the sole purpose of intoxication, while wine was regarded as an experience, and an enhancement to food and general living (Luckas, p65). There has also been a general consensus between premium wine producers that it is the job of the wine producers to ensure that wine keeps a positive reputation. The Wine Institute last year published a Code of advertising Standards that they feel is a good addition to the informal principles of good advertising pr actice for the winegrowing industry that was first adopted in 1948. (www.wineinstitute.com). These voluntary standards use such rules to encourage the proper use of wine. The code states that there should be no references are made to the effect of what the alcohol content may produce, or how one would act under the influence of alcohol, and any advertising should only be of people of legal age through a media where over 30% of the viewer are of legal age. One of the most import aspects of the code is for says: A distinguishing and unique feature of wine is that it is traditionally served with meals or immediately before or following a meal, Therefore, when subscribers to this code use wine advertising which visually depicts a scene or setting where wine is to be served, such advertising where appropriate shall include foods and show that they are available and are being used or are intended to be used (www.wineinstitue.com).† These codes are helpful to facilitate the proper us e of wine, but also instill the purpose of everyday use with the use of food that the wine industry would like to see as a common practice. Corporate buyouts The second issue that the wine industry faces is the threat of large corporate buyouts. One of the most interesting aspects of most wine producers is that they are small, usually family owned businesses that are able to produce quality wines. Sixty percent of all U.S. wine today is produced by five companies (Time, November4 2001). Times are tough for most in the wine industry today, which has created an opportunity for larger companies to buy out smaller. As vineyards expand in the U.S. there has become an oversupply of grapes, which has depressed prices for growers but has offered a boom to companies like Canandaigua, which buys 99% of the grapes (Time, November 4 2001). Companies are snapping up wineries that are struggling, and everyone is trying to improve quality so that the wines can command higher prices. For the consumer, this is a good thing. New winemaking technology, new foreign producers and intense competition are resulting in higher quality bottles at all price levels (Time, November 4 2001). Increase Support For Table Wine in the U.S. The last issue this analysis will discuss is the lack of support for quality table wines in the U.S. An article published in American Demographics magazine’s February 2002 issue discusses the hope that after the September 11 attacks there will be an increase in wine buying. New advertising campaigns are targeting the middle class (over forty) age group who now turn more to family and enriching home lives after September 11. The above Article commercials about wine generally show wealthy people enjoying a perfect dinner that is enhanced by the particular type of wine they are consuming. The new commercials show the more middle class typical families coming together to enjoy a bottle of wine with dinner. With new advertising such as these the wine industry hopes to increase a feeling that all social classes with dinners should enjoy wine. Conclusion and Recommendations The wine industry has existed since the beginning of the U.S. The wine industry throughout history has continued to grow making a large economic impact in California. Technology has improved the production and quality of wine in the U.S. By looking at the wine industry through Porter five-industry forces model revels high barriers to entry and even higher barriers to widespread success, however there is easy access to distribution channels. Both buyers and suppliers hold bargaining power, which equally control the price. The wine industry’s largest threat of substitutes comes from micro-brew, and specialty coffee shops. Firm rivalry is strong between the competitors, because of the large number of grapes, easy access to distribution channels and the technological improvements enabling wine makers to control the quality of their product. The trend today in the wine industry is moving toward large corporations. For this reason and the high entry barriers I would not recommend anyone to join this industry. Successful competitors have been making wine for generations, who have perfected their wines, and have created a brand for themselves. There is also and excess amount of grapes that drives the price of wine down, and increases the competition. After my research I think making wine will have to stay a hobby.