Auxiliary MaterialWilhelm Rall

Konrad Stahl

Case 3: Product Portfolio Choice in the Wine Industry

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Main purpose of the caseMain purpose of the case

To learn about the industry

To examine the complete portfolio restructuring of a winery including the complementary marketing strategy

In particular:

To identify the depth (vs. breadth) strategy and competitive advantage over rivals

To determine whether the Tesch model is one to be imitated

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Industry structureIndustry structure

Five major wine growing areas in Germany: Moselle, Rhine, Franconia, Rheine-Hessia, Rheinland-Palatinate.

Rhineland Palatinate (containing 2/3) 2003: 5,817 Estate wineries 6,145 Sideline (moonshine) vintners

(Mainly) sideline vintners organized in co-operatives

that absorb the crop to produce wine Bottlers (negociants) ar not major players 15 % of area cultivated serves co-operatives and

negociants

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Firm size distribution

Industry consists of extremely small scaled wineries, by international standards

Average area cultivated by an estate winery, Rhineland-Palatinate: 3.2 ha (1979), 7.5 ha (2003)

Typical French winery has more than five fold the size

Size distr‘n (%)

< 5ha 5-20 ha >20 ha

1979 77 10 2

1999 72 26.5 1.4

2003 67.5 30 2.6

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Industry evolutionIndustry evolution 19th century

German wine prices topped world prices Until the late 80’s

Slow increase in wine land Production of primarily sweet wines

Late 80’s + Decline in wine land Increasing share of dry wines produced.

1999: ¼ red, ¾ white, 2004: 1/3 red, 2/3 white Rapid technological change: Absorption of international technology

Mid 90’s + Increasing share of red wines produced

2000 + Outburst of reviews comparing wineries for the discriminating consumer

(Typical example: Vinum Journal, Annual Gault-Millau WineGuide) Enhances competition amongst premium producers Slowly increasing export (< 1.5 %, almost 50 % to GB)

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Product description (1/2)

Product extremely varied Very large number of varieties (horizontal differentiation):

10+ white, 5+ red Development towards dry vs. medium dry vs. sweet wines German wine law allows for vertical differentiation of wine

developed from the very same grape: Tafelwein, Q.b.A., Prädikatswein: Kabinett, Spätlese, Auslese,

Beerenauslese, Trockenbeerenauslese (the latter two variants almost always sweet) (share of premium to QbA wines 2005: 15.5%) Development of white and red wines in barrique

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Product description (2/2)

Especially in the Rhine valley: extreme variation in soil conditions (terroir)

Extreme horizontal and vertical differentiation in individual technique: Personal style of wine growing:

cultivation of vineyards Intensity of quantity reduction Harvesting time

Personal style of development idiosyncratic and commercial yeasts, fermentation temperature, length of fermentation, filtration (production of cuvées)

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Typical Firm (1/2)

Typical estate offers a large menue of varieties, and quality levels per variety.

Example (1): Weingut Bergdolt-St.Lamprecht, Duttweiler Top producer of Pinot Blanc in Germany Offers currently in its premium category

9 Rieslings 12 Pinot Blancs 2 Chardonnays 2 more whites from differing varieties Amongst them 5 sweet 3 Pinot Noirs 4 more reds from differing varieties 5 Cremants

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Example (2): Weingut Becker, Schweigen Top producer of Pinot Noir in Germany Offers currently

8 Rieslings 3 Pinot Blancs 3 Pinot Gris 2 Chardonnays 2 Auxerrois 1 Chardonnay 1 Blanc de Noir 1 Gewürztraminer Amongst them 5 semi-dry 6 Spätburgunder plus Several Reserve Barriques on Request 2 more reds from differing varieties 1 Cremant A variety of estate produced spirits, in particular Marcs

Typical Firm (2/2)

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Industry – main featuresIndustry – main features

Convergence towards a small mean firm size Annual product cycle

Repeat sales to the same custom Quick obsolescence from the point of view of producer

(white wines older than two years are difficult to sell) Time to market is crucial only when sold out varieties

are to be replaced imitation of technique is not very problematic, as style

differences dominate Vertical and horizontal differentiation Switching costs

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Central Feature influencing Demand: Central Feature influencing Demand: Switching costs (one stop shopping)Switching costs (one stop shopping)

Classical (and still typical) consumer Selects a winery from an extreme variation of styles

across wineries Buys at the winery after a wine tasting Selects a menu of varieties within the very same winery

from which to choose for different meals and separate consumption

Stays loyally with one winery for many years

Modern consumer: Selects winery on the basis of reviews to buy more

selectively

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External analysisExternal analysis

Customers

Suppliers

Substitute products

Potential entrants - BTE

Established rivals

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CustomersCustomers Individuals

Rely on their tastes and/or on reviews Quite important: Tasting based spontaneous

purchases

Retailers and Gastronomy Develop their own product line Rely on reviews Care about brand names

Exporters Purchase primarily high end dry and sweet wines Care about brand names Are price sensitive

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Annual wine consumption per head (2003)

• France 56 litres• Italy 51 l• Switzerland 42 l• Argentina 36 l• Spain 30 l• Germany 24 l• Australia 21 l• UK 20 l• USA < 10 l

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Suppliers

• Premium vs. Mass wine producers• Production costs:

– Very much dependent on aspired quality– land cost/ha Germany between € 5.000 and € 10.000

(Bordeaux, Napa Valley € 100.000)– Development cost/ha € 5.000 – 6.000– Hectar yield between 2.000 and 20.000 litres– Vinification € .3 - .6 per .75 l bottle

barrique development muich more expensivenew barrique barrel € 600

– Bottling € .5 – 1.5 per .75 l bottle– Storage costs– Distribution costs

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Main Distribution ChannelsMain Distribution Channels

Share of Wineries (1999) with sales to

Individual customers directly

66.7%

Retailers 10.7%

Gastronomy 21.7%

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SubstitutesSubstitutes

Beer: Highly concentrated industry Substantively less differentiated product, almost

completely commodified May be a close substitute to bulk wines, but not to

premium wines

Spirits: Highly concentrated industry for branded products Highly dispersed industry for fruit and wine spirits Some products (Marcs) served by the wine industry

itself

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Barriers to EntryBarriers to Entry

By EU decree: limited availability of land High capital cost High skill needed Production cost advantage unimportant

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External forces - summaryExternal forces - summary

Wine is an extremely differentiated commodity Consumers exhibit very idiosyncratic tastes Premium wine purchase is governed by one-stop

shopping phenomenon High Barriers to Entry Wine making industry is highly competitive in bulk

wines, but not extremely competitive in premium wines. Premium producers secure healthy profits

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Tesch‘s Product Line

84 % Riesling 8% Pinot blanc 8 % Pinot Noir All Rieslings fermented to dryness All premium Particularly interesting marketing device: the Rieslings

are labelled by a distinctively coloured label

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Tesch’s core positionTesch’s core position

Advantages: One main product line: (almost) all Premium Riesling

varieties, Exploitation of one stop shopping via a completely different

approach

Scope: Appeal to the educated and discriminating buyer High-end performance fits these customers Tesch avoids the low end of the market Tesch’s customers are (probably) not very price sensitive

since they care more about quality Tesch focuses exports – that’s where most of the

sophisticated customers are

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Tesch’s sales and marketingTesch’s sales and marketing

Sales to Exports: 15 % Gastronomy: 20 % Retail: 30 % Final custom: 35 %

Relationship buyers Individual customers – repeat sales

Transaction buyers Gastronomy Retailers

“We … like to sell to the educated customer.”

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SummarySummary

Strong one-stop purchasing effects Standardization extreme differentiation strong ex ante, little ex post competition

Success is possible only if quality is high, variety is extreme But this fits only “sophisticated customers” Tesch generally provides high end Rieslings Tesch is strong in the US market for dry wines,

where there are many “sophisticated” customers

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Case Question:

Imagine that you would consider entering the market for wine production, by purchasing an established winery with conventional product portfolio.

Would you find it attractive imitating Tesch‘s strategy?

If not, what would be the best alternative business strategy?