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Filippo Budetta 152313 Paris MIB 2015 2017
Wine Industry An in depth analysis of the wine industry and its players
Filippo Budetta 152313 Paris MIB 2015 2017
Agenda The Wine
Wine industry overview
Numbers of rivalry
Scope of competitive rivalry
Numbers of Buyers
Product features
Research &Development role within the wine industry
Supply and demand conditions
Technological changes
Vertical Integration level
Economies of scales
Changyu winery
Cantina Valentini
Filippo Budetta 152313 Paris MIB 2015 2017
The wine
The Wine from Latin “vinum” is retained to be the oldest alcoholic beverage in the world, as there are some evidences which prove that this drink was already largely consumed in the Neolithic era. The earliest form of grape fermented was found in northern China, but several are the sources that confirm the presence of this beverage in many other countries. Later, during the medieval ages, the wine knew a further exploit becoming popular among all the different social classes and in some case assuming sacred aspects as seen in the catholic religion. The growth of wine continued through the following centuries, arriving to represent a beverage consumed worldwide besides than a millenary tradition.
Nowadays, the wine industry finds itself in a decline phase in the European market and the winery makers to sustain their profits are offering its products are opening its business to new markets such as: American, South African, Australian and New Zealand markets.
The following chapters aim to analyse and investigate about the features, dynamics and
characteristics relative to the wine industry, and an in-depth point of view would be given regarding
the Changyu winery and the cantina Valentini and their peculiarities.
Wine industry overview
The wine industry is becoming object of a growing attention coming from the research bodies that observe its evolution more precisely through the years. As the Plant & Food Research states: The global wine market is forecast to be worth US$303 billion by 2016, an increase of close to 18% since 2011 (Plantandfood.co.nz, 2016). Nevertheless, this shy growth is largely below the usual performances of the industry that saw a drastic decline in 2012, reaching the lowest point in the last 40 years.
(Morgan Stanley Research, 2013)
Filippo Budetta 152313 Paris MIB 2015 2017
The data seem suggesting that the wine industry is founding itself in a decline phase, as the market
reveals some critical points concerning: a declining production for the top10 producers over the last
ten years, a lowering consumption and a slight decrease in the hectares of the vineyard surface as
shown in the picture below.
(Wine production worldwide in 2015, 2016)
On the other hand, it has to be said that some positive events are mitigating the bad externalities
abovementioned giving new hopes to the wine makers.
These positive effects are typical of an industry in the growing phase and they comprehend the source
of new markets, that so far remained behind: America, South Africa, Australia and Chile in the last
“years have increased their export volume by 370%”(BNPParibas, 2015). Another interesting data is
concerning the increasing demand of the American consumers that have “overtaken France as the
world’s foremost wine consumer, with average annual consumption of 12 litres per person”
(BNPParibas, 2015).
Last but at least, significant are the data highlighted by the analysis of the supply demand models of
the two macro classes: “Old World” composed by France, Italy, Portugal and Spain and “New world
“composed by Usa, Chile, Australia and South Africa.
These two markets show a substantial difference in quantity referred to the production and
consumption, infect while the consumption in “Old World” is levelling out causing a spread of 379
Filippo Budetta 152313 Paris MIB 2015 2017
million of unit case, the “New World” reports a positive trend characterized by a remarkable growth
with a really small spread of 186 million unit cases.
(Morgan Stanley Research, 2013)
(Morgan Stanley Research, 2013)
Furthermore, those there are the future previsions for the market confirm a positive trend in demand,
particularly the demand for fine and premium quality wine will increase from 9% to 13% of the whole
demand. Positive, are the data concerned to lower priced wines, infect the sales of bottles above $10
will rise between 4% and 8% (SVB, 2016).
Numbers of rivals
The industry counts more of 1 million of wine makers, spread all around the world, but in spite of
this few are the leading companies as the quality wine is strictly connected to the region of origin.
Filippo Budetta 152313 Paris MIB 2015 2017
Nevertheless, three are the most important brands taking as benchmark brand value are:
Moet & Chandon: Brand part of the company LVMH, has a long tradition dated back in the 1743,
mainly specialized in champagne, is famous all around the world and represent a myth in the fashion
and luxury industry. The company make of the “terroir” concept its point of strength disponing of
1,190 hectares of vineyard in the region of Champagne-Ardenne, as the product embody and represent
the French passion for the wine.
Gallo Family Vineyards: It is an American winery founded in 1933 in California by two Italian
entrepreneurs Ernest and Julio. The company offers four lines of products: white, rosé, red and spritz.
With $4.1 Billion and over 5000 employees (Forbes.com, 2016), the Gallo Family Vineyards is the
market leader in the United States and its revenues and performances are expected to further increase.
Veuve Clicquot: It is a French champagne house founded 1772, as seen with Moet & Chandon this
winery is also part of he big conglomerate LVMH. The company has its own headquarter in Reims
and detain 515 hectares of vineyards in the region of Champagne-Ardenne. Along with other 20
brands owned by LVMH Veuve Cliquot realized in 2014 $3 973 billion (Harvard business Review ,
s.d.).
The following table shows the top 10 brands by brand value, several are the surprising features such
as the Chinese company Changyu occupying the 5th position consecrating the growth of the wine
Chinese market or the two Australian company Beringer and Lindemans occupying respectively the
7th and the 9th position. Significant are the absences of the Italian and Spanish brands that have always
dominated the industry.
(Brand Finance, 2013)
Filippo Budetta 152313 Paris MIB 2015 2017
Paradoxical is the position of the Italian companies, infect as already mentioned above none of the
Italian wineries are rated among the Top 10 brands, despite the Italian sector this year has
confirmed its position of best producer with a production of 49,5 million hectolitres (see the chart
below). This would certainly mean that the Italian production is mostly based on the SMEs that are
not comparable in size and financial capabilities with a large conglomerate such a s LVMH.
Therefore, the industry is remaining stable showing an interesting number of different competitors
really heterogeneousness in size production volume and sales.
(Wine production worldwide in 2015, 2016)
Scope of competitive rivalry
Historically, the two countries with a high demand for bottle of wine were also the two countries
with the highest volumes of production; France and Italy. Most of their production was consumed
within their own boundaries, but through the years the different tastes of the consumers and the
2008 financial recession cause a deep fall the wine in demand.
Nowadays, the European wine consumption, in the so called “Old World”, where all the famous
and historically wineries are located, is drastically declining. The two graphs bellow show how this
Filippo Budetta 152313 Paris MIB 2015 2017
data is becoming more and more serious for the wine companies that have to seek for new markets
over seas.
(Morgan Stanley Research, 2013)
(Morgan Stanley Research, 2013)
On the other hand, positive trends are shown that countries such as United States and China are likely
to be the new most important markets. The volumes of importations are rapidly growing, especially
referred to the European one rather then the South African or Australian one.
For example, it is proven that the Chinese consumers are becoming more and more fascinated by the
wine and particularly by the Italian and French products that are well known for being a niche of the
market. Therefore, is clear enough that these foreign consumers are becoming less sensible
concerning to higher premium prices.
Italianwine
Frenchwine
Filippo Budetta 152313 Paris MIB 2015 2017
The graphs in the following pages further highlights this trend showing how the Chinese consumption
of wine is growing over the years accounting in the 2012 for almost 250 million unit cases.
(Morgan Stanley Research, 2013)
The picture that the data describe in China is that the country must necessarily import to satisfy the
huge demand of the customers as the country despite its dimension arrive to produce a modest
quantity of hectolitres accounting just for 11,1 million unit cases. Moreover, the country imports
mostly from France that accounts for almost the 50% of the total imports that in 2012 accounted for
$35 million
(Morgan Stanley Research, 2013)
Filippo Budetta 152313 Paris MIB 2015 2017
(Morgan Stanley Research, 2013)
Analogue is the situation for what concerns the American market that shows signals even more
interesting than the Chinese one. The wine industry in the U.S. is monitored by the Silicon Valley
bank that every year publish a wine reports reporting the main features concerning this fast growing
market. Particularly interesting is the pace of growth in consumption that jumped from 550 million
of gallons in 2004 to 800 millions in 2014 realizing a net growth of 250 millions of gallons in ten
years.
(SVB, 2016) We can consider this data as a product of the end of growth started right after the abolishment of the
prohibitionism.
Filippo Budetta 152313 Paris MIB 2015 2017
Therefore, it is significantly important that the European wineries keep on supply the demands
coming from China and USA feeling the gap of demand and supply. Peculiarly, is to let understand
the customers the great difference between a product coming from the “Old World” and one coming
from the “New One”.
Numbers of Buyers
The wine is one of the most spread consumer good in the world, therefore giving an exact number
of the buyers might be a hard challenge. Studies conducted by the winery house constellation on the
biggest market, the American one, revel that six are the different segments of buyers and each of
them has a particular attitude concerning the purchase behaviour. By going more into the detail we
can find: Price driven customers, in the US the account for the 21% of the entire demand, they are
firmly convinced that a good bottle of wine has not to be necessarily expensive, at the base of their
choice there is the price rather than any other feature. Everyday loyal customers, representing the
20% of the demand, they consume wine regularly and they are more concerned about one brand.
The Overwhelmed customers segment is the third by size of these six segments, it accounts for a
large 19% of the total customers and contain those consumers who are not everyday drinkers. Their
purchase is mostly random as it does not imply a fix choice of a particular brand, generally
speaking they find the purchasing choice complex and overwhelming. Image seekers, accounting
for the 18% of consumers. They are not really fascinated by the product by itself but they are more
interested by the image and the status linked to the wine, this segment is rather rich and has an
appreciable propensity to consume up to 12$ per bottle.
Engaged Newcomers customers counts for the 12% of the entire demand, are consumers interested
to the world of the wine, mostly young and passionate arrive to spend up to 13$ per bottle. The last
segment is occupied the Enthusiast customers which are not sensible to price and represent the 10%
of the consumers, they arrive to spend in wine the 15% of their profits and up to pay a premium
price for a bottle of wine. Nevertheless, the different segments have heterogeneous levels of
Filippo Budetta 152313 Paris MIB 2015 2017
switching costs due to their loyalty level.
(Winebusiness.com, 2016) Other important data referred to the buyers are those related to the age, the Silicon Valley Bank
distinguish 4 groups: Millennial 21-37 years, this segment is a fast growing one, through the years
showed appreciable levels of growth, Gen X 38 – 49 years through the 2013 and 2014 this group
saw a short fall in consumption then now are being recovered, Boomers 50 – 67 years traditionally
the largest group in terms of quantity demanded in the 2015 a slight decline reshaped the market,
Matures 68+ counts for a modest 11% of the whole buyer group.
(SVB, 2016)
Filippo Budetta 152313 Paris MIB 2015 2017
Product features
The “old world” wineries should be afraid of the competitiveness brought to the markets by
company belonging to the “new world”, wines coming from the states and from Australia are
becoming more and more sophisticated and really alike to those European. Indeed, that this may
erode the selling proposition of the Italian and French company that might lost important market
shares. On the other hand, it has to be said that thanks to a long heritage the European wines are
inimitable and the European products keep on showing very different features maintaining the
different products considerably different from each other.
Research &Development role within the wine industry
Generally speaking, the wine has a really long life cycle, actually being aged represents a
distinction for a bottle of wine rather than a demerit. A winery quality is mainly based on traditions
and heritage rather than innovation and research.
In spite of this, in Australia one of the fastest growing wine market in the world have been founded
two institutes: The Australian Wine Research Institute and the Cooperative Research Centre for
Viticulture. The first aims to “carry out applied research and to service the needs of winemakers, be
involved in both undergraduate and postgraduate teaching and to coordinate information on
oenology and viticulture research to the benefit of the Australian wine industry” (Ro.uow.edu.au,
2016). The latter is more concerned about biotechnology research into grape quality improvement,
viticulture, education and technology transfer.
Therefore, is clear enough that “the coordination of this R&D has ensured that the industry remains
at the leading edge”(Aylward, 2016) and may be focal for achieve new goal.
Supply and demand conditions Really districted is the supply and demand condition as in the early years of 90s, the governments
used to buy the fermented grapes unsold to make industrial ethanol. This largely justifying the
extreme abundance in production, that has been later interrupt when the EU realized the disastrous
effects of this oversupply that was levelling out the prices to shortest prices ever.
To face this phenomenon in the 2007 the EU paid growers to “uproot 175,000 hectares (about
430,000 acres) of economically unsustainable and lesser-quality vineyards and decrease the
production” (SVB, 2016). In 2013 the productions rose again as consequence of the emerging of the
new producing countries and there is no doubt that this brought to a new decrease in prices that are
becoming lower and lower.
Filippo Budetta 152313 Paris MIB 2015 2017
(SVB, 2016)
Technological changes Despite the image of the wine as a good strictly linked to the artisanal, the technology developments
are becoming to play an incredible big role in the wine productions. Several are the technological
improvements that have been made and new ways to grow, harvest and bottle the wine. The first
technique product of the development is the RO according to which: “The smallest molecules in
wine are water and alcohol. By passing wine at high pressure over a membrane with tiny pores,
those compounds can be separated from the rest of the liquid. Only the water is added back in,
reducing the wine’s alcohol level. Slightly more porous membranes can also be used to remove
other unpleasant chemicals like acetic acid (vinegar) and ethyl acetate (a chemical used as nail-
polish remover)” (The Economist, 2013). Other techniques are ISVV spectrometers and the Bearing
fruit. The first is “used to identify thiols as the source of the signature passion fruit aroma in
sauvignon blanc, and methoxypyrazines as the cause of bell-pepper smells in cabernet sauvignon”,
the latter monitories the level of water in the grapes in order to avoid useless irrigations.
The above mentioned techniques have some positive features as they contribute to increase the
quality, but despite all they are not strictly connected to the success of a brand over another one
therefore the technology development has not a decisive role within the industry.
Filippo Budetta 152313 Paris MIB 2015 2017
Vertical Integration level Really few are the companies who adopt a direct canal of distribution, the only few able to dispone
of this strong weapon are the big companies that sell their products through fully owned shops,
adopting so a forward integration. On the other hand, the backward integration is really common
among the wine makers as most of the time are those who own the vineyards. The pattern that
brings to an indirect canal are way more spread among wineries that sell their wines to retailers and
supermarkets.
A study reveals that “wineries that produce high-quality wines are more likely to integrate vertically
than those producing low-quality wines” (Fernández-Olmos, Rosell-Martínez and Espitia-Escuer,
2009) as main result of the high transaction costs shown in the industry. Big company ensure an
effective backward integration in order to save money from the purchasing of grapes that are
seasonal products hard to forecast in quantity produced.
Filippo Budetta 152313 Paris MIB 2015 2017
Economies of scales
The economies of scale in the wine industry are a spread issue as the quality is significantly more
important than quantity, therefore the price may vary regardless the effective kilos sold. In spite of
this assumption, researchers came out with a model that explains the attractiveness of the economy
of scales referred to one company producing just one type of wine.
(DELORD, COELHO and MONTAIGNE, 2014)
They come up with several conclusions that allow the wine maker to save resources, as unit labour
cost decrease and the productivity of labour increase. The study remains anyway at a theatrical
stage as unpredictable are most of the data taken into account as well as other important variables
ignored.
Changyu winery The Changyu winery is the China’s oldest and most famous winery has a strong heritage with a
foundation dated back in 1892 by Zhangn Bishi. The company is one of the most famous in the
world as confirmed by the chart of the top 10 brands, at March 2016 the revenues accounts for the
remarkable number of 2.12 billion (Quotes.wsj.com, 2016).
Filippo Budetta 152313 Paris MIB 2015 2017
The Chinese winery is benefitting from the success that is having the Chinese wine in the
international markets as well as in the domestic one. Moreover, it dispones of a good return of
image as it embodies the Chinese passions for the spirits as well as an incredible R&D dept. and
well developed brewing equipment. All the efforts of the companies are then combined thanks to
the precious contribution of famous internationally famous wine makers such as: Augusto Reina,
Lenz Moser and John Umberto Salvi.
The revenues are sustained by the strong domestic demand that is living a profitable period in
which Chinese consumers are getting significantly interested by the wine world. “Domestic
production has increased 4x over the past decade, and is now the fifth largest producer of wine
globally. The majority of production occurs in the North East provinces, which are largely in line
with Mediterranean Europe and Californian growing regions” (Morgan Stanley Research, 2013).
The consumption is expected to further grow and the Chinese wineries aware of this eventuality are
ready to satisfy the large demand of over 400 million unit of cases. The market is perfectly balanced
as the production meet perfectly the demand, other signal that tells about the good knowledge of the
Chinese wineries of the domestic markets.
(Morgan Stanley Research, 2013)
On the other hand, significant are the efforts that the company has to put in defeating the foreign
supply, infect as seen in the previous chapter China imports a consistent part of the wine from
Europe. This means that the company has to convince its customers that the Chinese merlots are at
the same level of the European ones. The performances related to this companies are positive and
they are confirmed by the financial data, nevertheless in a market where the tradition is strongly
Filippo Budetta 152313 Paris MIB 2015 2017
influencing the board management through the marketing has to take the heritage to another step the
one of the myth.
Cantina Valentini Trebbiano
With a long tradition dated back in 1856 the cantina Valentini is most probably one of the most
famous Italian name related to the wine, the winery has the typical feature of a family business and
the employees hardly reach the number of 15. The cantina produces some of the finest wine in the
world known for their inimitable quality as well as high prices, infect a bottle of 2010 Trebbiano
d'Abruzzo worth £74,95 while the case £404,70 as reports by BERRY BROS & RUDD Wine
merchant.
The production is still the same of two hundreds years ago according to which the top quality
grapes being fermented and then left in the tanks for 2 years. The winery sells its products mostly
through indirect channels and the profits are suffering as the consumption drastically felt and the
demand supply equilibrium has an incredibly low value.
(Morgan Stanley Research, 2013)
On the other hand, the company may place its hopes on the foreign markets and leverage on the
incredible strong Italian image of the product as well as its unique image. Moreover, as confirmed
by data the the Italian market is a best performer in exports as sell outbound almost 250 million unit
cases.
Filippo Budetta 152313 Paris MIB 2015 2017
(Morgan Stanley Research, 2013)
Indeed, the company has to review its business as well as its marketing strategy, starting from
developing a web site and a store in one of the fastest growing market.
Filippo Budetta 152313 Paris MIB 2015 2017
References
Plantandfood.co.nz. (2016). Growing Futures: Wine Industry. [online] Available at: http://www.plantandfood.co.nz/growingfutures/wine [Accessed 25 May 2016].
Morgan Stanley Research, (2013). The Global Wine Industry. [online] Available at: http://blogs.reuters.com/counterparties/files/2013/10/Global-Wine-Shortage.pdf [Accessed 25 May 2016].
BNP paribas, (2015). New producers, new consumers: The revolution of the global wine market | Bank BNP Paribas. [online] Bnpparibas.com. Available at: http://www.bnpparibas.com/en/news/press-release/new-producers-new-consumers-revolution-global-wine-market [Accessed 25 May 2016].
Wine production worldwide in 2015, c. (2016). Leading countries in global wine production, 2015 | Statistic. [online] Statista. Available at: http://www.statista.com/statistics/240638/wine-production-in-selected-countries-and-regions/ [Accessed 25 May 2016].
SVB, (2016). 2016 SVB Wine Report. [online] Svb.com. Available at: http://www.svb.com/wine-report/ [Accessed 26 May 2016]. Forbes.com. (2016). Forbes Welcome. [online] Available at: http://www.forbes.com/companies/ej-gallo-winery/ [Accessed 26 May 2016]. http://www.include-digital.com, I. (2016). Best Global Brands | Brand Profiles & Valuations of the World’s Top Brands. [online] Brandirectory.com. Available at: http://brandirectory.com/league_tables/table/top-10-wine-brands-2013 [Accessed 26 May 2016].
Winebusiness.com. (2016). Constellation Segmentation Study Outlines Motivations, Behaviors of .... [online] Available at: http://www.winebusiness.com/news/?go=getArticle&dataid=134683 [Accessed 27 May 2016].
Ro.uow.edu.au. (2016). [online] Available at: http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1085&context=commpapers [Accessed 27 May 2016].
Aylward, D. (2016). Diffusion of R&D within the Australian Wine Industry. Prometheus. [online] Available at: http://www.tandfonline.com/doi/abs/10.1080/0810902021000023345?journalCode=cpro20 [Accessed 27 May 2016].
Filippo Budetta 152313 Paris MIB 2015 2017
The Economist. (2013). Bacchus to the future. [online] Available at: http://www.economist.com/news/technology-quarterly/21590767-high-tech-winemaking-technology-has-already-made-poor-plonk-thing-past [Accessed 27 May 2016].
Fernández-Olmos, M., Rosell-Martínez, J. and Espitia-Escuer, M. (2009). Vertical integration in the wine industry: a transaction costs analysis on the Rioja DOCa. Agribusiness, 25(2), pp.231-250.
DELORD, B., COELHO, A. and MONTAIGNE, É. (2014). [online] Available at: http://academyofwinebusiness.com/wp-content/uploads/2014/07/BM09_Coelho_Alfredo.pdf [Accessed 27 May 2016].
Quotes.wsj.com. (2016). 000869.CN Financial Statements - Yantai Changyu Pioneer Wine Co. Ltd. A - Wall Street Journal. [online] Available at: http://quotes.wsj.com/CN/XSHE/000869/financials [Accessed 27 May 2016].