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Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012 Challenges Facing Wineries in “Undiscovered” Wine Regions: Results from Michigan, Missouri and NW New York R. Brent Ross, Michigan State University Fabio R. Chaddad, University of Missouri-Columbia Miguel I. Gómez, Cornell University NCRCRD Webinar February 15, 2012

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012 Challenges Facing Wineries in “Undiscovered” Wine Regions:

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NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Challenges Facing Wineries in “Undiscovered” Wine Regions: Results from Michigan, Missouri

and NW New York R. Brent Ross, Michigan State University

Fabio R. Chaddad, University of Missouri-ColumbiaMiguel I. Gómez, Cornell University

NCRCRD WebinarFebruary 15, 2012

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Number of Wineries in the U.S.

19401945

19501955

19601965

19701975

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

YearSource: U.S. Tax and Trade Bureau and Wine Institute.

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

KEY DRIVING FORCES Food Curiosity

Growing Interest in Wines for Non-Traditional Regions

Local Food Movement Food Tourism

OPPORTUNITIES Vector of Regional Economic

Development Economic Clustering

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Agenda• NCRCRD Project Survey Results• Collect information about wineries• Identify challenges affecting “undiscovered” wine regions

• New Project• Funded by NIFA/AFRI• Research Objectives and Scope

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

NCRCRD ProjectObjectives and Scope• Identify the challenges faced by rural wine entrepreneurs in

“undiscovered” wine regions• Firm-level vs. Industry (region)-level

• Focus on: • Economics of Wineries • Business and Marketing Management Practices• Collective Action

• METHOD: exploratory comparative analysis• Literature review• Interviews• Industry Survey

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

New Business Ventures

Sources: U.S. Department of Agriculture, Alcohol and Tobacco Tax and Trade Bureau, Michigan Grape and Wine Industry Council, Missouri Wine and Grape Board, and New York Wine and Grape Foundation.

Michigan Missouri New York

Number of Wineries (2009)100 97 240

(up from 17 in 1995) (up from 31 in 2000) (up from 113 in 2000)

Wine Volume (2009, in million gallons) 1.4 1.1 28.7

Number of Grape Growers 711 393 1438

Wine Grape Acreage 2,100 1,600 11,000

Wine Grape Production (in tons) 5,300 4,400 172,000

Wine Industry Economic Impact

$790 million (in 2005) $1.6 billion $2.5 billion

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Michigan Wine Industry

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Missouri Wine Industry

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

NY-Penn Wine Industry

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Data Collection

• Joint mail survey conducted during May-June 2011.• Michigan• Missouri• New York (Lake Erie Region) and Pennsylvania• Target: winery owner

• Supported by interviews with winery owners, extension specialists, and industry experts

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Overview of ResultsWinery Characteristics

State Wineries RespondentsResponse

RateMichigan 80 26 33%Missouri 94 32 34%NY/PA 70 28 40%

TOTAL 244 86 35%

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

VARIABLE N MEAN MEDIAN MIN MAXWinery Age (Years)

ALL 85 11.9 7.0 0.0 47.0MICHIGAN 25 14.1 9.0 0.0 41.0MISSOURI 32 11.9 7.8 0.5 40.0NY-PENN 28 9.9 5.0 2.0 47.0

Wine Production (Cases) ALL 84 7,749 2,000 100 200,000 MICHIGAN 24 5,622 2,450 100 20,000 MISSOURI 32 12,596 1,500 100 200,000 NY-PENN 28 4,032 2,000 100 32,000

Wine Production Growth (%, 2008-2010) ALL 68 38% 20% -50% 408%MICHIGAN 26 17% 10% -50% 300%MISSOURI 21 63% 25% -25% 408%NY-PENN 21 38% 40% 10% 100%

Non-Vinifera Grapes (%) ALL 86 64% 80% 0% 100%MICHIGAN 26 38% 34% 0% 100%MISSOURI 32 84% 100% 0% 100%NY-PENN 28 64% 80% 0% 100%

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

0-2 3-5 6-10 11-15 16-20 21-30 31-50 >50 -

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Distribution of Wineries by Years in Business

ALLMIMONY_PENN

Years in Business

% Under 10 Years OldALL 65%MI 55%MO 65%NY_PENN 80%

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

0-500 501-1K 1K-2500 2501-5K 5K-10K 10K-25K 25K-50K 50K-100K >100K -

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Distribution of Wineries by Production (Cases/YR)

ALLMIMONY_PENN

Production (Cases/YR)

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

0 5 10 15 20 25 30 35 40 45 500

50,000

100,000

150,000

200,000

250,000

Wine Production by Years in Business(r = 0.42)

Wine Production Linear (Wine Production)

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

OverviewWine Owner/Manager Characteristics

0-25% 26-50% 51-75% 76-100%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% of Time Spent At The Winery

ALLMIMONY_PENN

Cum

ulati

ve %

ALL 76%MI 87%MO 75%NY_PENN 69%

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

OverviewWine Owner/Manager Characteristics

0-25% 26-50% 51-75% 76-100%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% of Net Worth Invested in the Winery

ALLMIMONY_PENN

Cum

ulati

ve %

ALL 53%MI 50%MO 58%NY_PENN 49%

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

OverviewWine Owner/Manager Characteristics

FREQUENCYCHALLENGE ALL MI MO NY_PENNBusiness Opportunity (GW+diversify) 9 0 3 6Passion for Food/Wine/People (Wine+Other) 49 17 21 11Quality of Life (2) (qual+retire+adv) 38 12 16 10Hands in Dirt (2) (dirt+satisf) 32 13 12 7Family (Family Business + Fun) 6 2 3 1Community (Tourism, EcDev) 20 7 8 5Other 3 0 0 3

Motives for Entry into Wine Industry

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Challenges Faced in “Undiscovered” Wine Regions: At the WINERY

FREQUENCY

CHALLENGE ALL MI MO NY_PENNGrape Production 32 13 12 7Winemaking 27 7 12 8Marketing 46 15 16 15Finance 25 10 8 7Managing the Winery 24 7 13 4Labor Related Issues 19 4 8 7Environmental Issues 0 0 0 0Regulatory Issues 29 9 9 11Quality 11 3 5 3Access to Resources 10 1 5 4Competition 6 0 4 2Other 5 2 0 3

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Challenges Faced in “Undiscovered” Wine Regions: In the INDUSTRY

FREQUENCYCHALLENGE ALL MI MO NY_PENNGrape Production 24 5 8 11Winemaking 21 5 8 8Marketing 38 1 23 14Finance 11 1 8 2Managing the Winery 7 1 4 2Labor Related Issues 25 15 6 4Environmental Issues 0 0 0 0Regulatory Issues 25 8 8 9Quality 25 4 13 8Access to Resources 8 5 2 1Competition 10 2 4 4Other 21 17 1 3

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Specific ChallengesMarketing

FREQUENCYCHALLENGE ALL MI MO NY_PENNSetting Prices 29 11 12 6Developing new wines 4 2 1 1Branding wine 18 0 9 9Identifying the appropriate promotion strategy 0 0 0 0Managing distribution channels 45 14 17 14Dealing with competition 15 3 9 3Segmenting the market 9 1 3 5Understanding consumer needs/wants 19 0 12 7Other 8 3 2 3

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI/NIFA GRANT AWARDAward Number: 0031130

Description: 2011-68006-30815 Chaddad, Fabio

Goal: To increase the success rate of start-up wineries and thereby foster the development of wine-hospitality-tourism clusters in emerging cool climate regions in three states – Michigan, Missouri and New York.

Rural Entrepreneurship in the Wine Industry:Identifying Success Factors Among Start-Up Wineries in Emerging Cool Climate Regions 

Situation Inputs

Knowledge

OutcomesOutputsActivities

Actions Conditions

Increased success rate of start-up wineries in cool climate regions

Development of wine-based clusters in cool climate regions

Growing number of new wineries in cool climate wine regions.

Start-up wineries face a complex set of challenges to survive and grow.

Start-up wineries need knowledge input and extension efforts to overcome challenges.

If successful, new wineries will be the basis for regional cluster development.

Wine industry stakeholder needs & assets

Research and extension staff with industry knowledge

Three graduate students in Agric. Econ.

Network of collaborators in three states

Integrated conceptual framework

Databases and expert modelers

Existing wine cluster analyses

AFRI Funding

Stakeholder input on conceptual framework

Lit. review on procurement and distribution strategies

Survey wineries and build panel data set

Econometric analyses of data across 3 states

Workshops with industry stakeholders

Study tour to developed wine region

Prepare educational materials

Hypothesis: we can identify strategies for wineries to overcome survival challenges and for industry leaders to develop wine-based regional clusters in cool climate regions.

External Factors: industry conditions that affect start-up winery survival and growth; willingness of industry participants to develop and engage in collective action strategies.

Statistical analysis of survey results

Econometric model results

Practical knowledge for wineries and industry leaders

Scientific and educational publications

eXtension CoP on Cool Climate Wine Regions

Strategic outreach plan for wine cluster development

Educational materials

Factors that affect winery survival and growth

Efficient grape procurement strategies

Marketing strategies to overcome lack of legitimacy

Extent and impacts of inter-firm collaboration

Effective collective action strategies for cluster development

Start-up wineries will:-Adopt more efficient grape procurement strategies-Develop marketing strategies to access non-local markets-Build more relationships with other wineries and related local industries

Industry leaders will adopt collective action strategies for wine cluster development

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectThe Team

Fabio R. Chaddad (University of Missouri)Michael LeonardelliRandy WestgrenGraduate students

R. Brent Ross (Michigan State University)Paul JenkinsGraduate students

Miguel I. Gomez (Cornell University)Nelson BillsGraduate students

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectConceptual Framework

Network-level Resources• Inter-winery

collaboration• Collaboration with

related industries

Business-level Resources• Human• Financial• Organizational• Entrepreneurial

orientation

Legitimacy• Regulative• Normative• Cognitive• Industry

Individual-level Resources• Human capital• Education• Experience• Skills

Survival• Cross

survival threshold

Growth• Sales• Members

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectIntegrated Project

Research Objective 1: Examine existing contractual mechanisms in buyer (winery) – supplier (grape) relationships and help the industry develop procurement strategies to reduce transaction costs, increase grape and wine quality, and winery performance.

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Detailed ResultsProcurement Strategies

Grapes Juice Bulk Wine0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ALLMICHIGANMISSOURINY-PENN

Source of Raw Product

% o

f Win

erie

s

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Detailed ResultsProcurement Strategies

Vertical Integration Spot Market Contractual Arrangement Other0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ALLMICHIGANMISSOURINY-PENN

Procurement Strategy

% o

f Win

erie

s U

sing

Str

ateg

y

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Determinants of Vertical Integration

Vertical Integration

Transaction Attributes

Asset specificity Uncertainty

Collaboration

To produce grapes Relationship with

grape growers

Quality

Grape quality Wine quality

Winery Characteristics

Experience Time commitment

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Determinants of Vertical Integration:Logit Model Estimates

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectIntegrated Project

Research Objective 2: Identify strategies to overcome distribution challenges of start-up wineries and increase their access to non-local markets.

*Legitimacy: distributors and consumers.

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

% of WineriesCHANNEL ALL MICHIGAN MISSOURI NY_PENN

At the Winery 100% 100% 100% 100%Liquor Store 41% 57% 45% 25%

Restaurant 52% 61% 35% 64%Farmers Markets 10% 4% 0% 25%Direct Shipments 56% 83% 35% 57%

Through Distributors 29% 65% 26% 4%Festivals or Community

Events 48% 35% 35% 71%Other 13% 22% 16% 4%

Detailed ResultsDistribution Channel Strategies

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Detailed ResultsDistribution Channel Strategies

At th

e W

i...

Liqu

or S

tore

Rest

aura

nt

Farm

ers .

..

Dire

ct S

h...

Thro

ugh

Di..

.

Festi

vals.

..

Oth

er

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0% % of Wine Volume by Distribution ChannelALL=82MI=23MO=31NY_PENN=28

% O

f Win

e Vo

lum

e

Other Channels:• Wine Clubs• Own Retail• Custom Wine

and CoPacking• Direct Retail

(SM + Gift Shop)

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

ALL MI MO NY_PENNArrangements with Bus Tour Co. 36% 46% 16% 50%Promotions for Returning Customers 60% 54% 66% 57%Customer Database 86% 88% 78% 93%Club Promotions 38% 54% 41% 21%Website 100% 100% 100% 100%Newsletter 68% 75% 66% 64%Social Media (Facebook, Twitter, Groupon, etc.) 95% 100% 94% 93%Price Discounts 94% 96% 94% 93%Other 4% 0% 9% 0%

Detailed ResultsOther Marketing Strategies

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Channel Choice Determinants

Distribution ChannelChoice

Horizontal Integration

Inter-winery collaboration

Vertical Integration

Share of own grape in the production

Marketing Efforts

Promotion intensity Marketing challenges

Winery Characteristics

Size Years in business

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Channel Choice Determinants:Fractional Logit Estimates

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectIntegrated Project

Research Objective 3: Examine the extent of inter-firm collaboration in emerging wine regions and develop collective action strategies to foster the development of regional clusters, including inter-winery collaboration and collaboration with supporting and related industries.

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Wine Trails

N

Member of a Wine

Association

Member of Chamber of Commerce

Is there a Food/Wine Trail in Your

Region?

Member of Food/Wine

TrailALL 82 69 65 64 54MI 22 19 18 18 16MO 32 25 25 24 19NY_PENN 28 25 22 22 19

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Detailed ResultsCollective Action Strategies

Produce Grapes

Produce Wine

Market Wine

Promote Wine

Region

Share Information

and Resources

ALL 46 35 37 68 71MI 16 16 9 19 21MO 17 11 16 27 27NY_PENN 13 8 12 22 23

Reasons to Collaborate with Other Wineries

No Interest

View Others as

Competitors

Different Business

PhilosophyNot a

Priority Lack of Trust Distance OtherALL 3 6 35 19 6 17 16MI 1 2 7 6 0 2 7MO 1 2 14 8 5 9 5NY_PENN 1 2 14 5 1 6 4

Challenges to Collaborate with Other Wineries

Time 5None 5Lack of motivation of others 2No equal wineries in region 1"Rising Tide Floats All Boats" 1

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

AFRI / NIFA ProjectIntegrated Project

Extension Objectives: Disseminate knowledge and research insights generated to engage winery owners and managers, wine industry leaders, wine grape producers, policy-makers and other wine industry stakeholders.

Approaches: Workshops with industry participants, and educational materials.

NCRCRD Webinar: Challenges Facing Wineries in “Undiscovered” Wine Regions February 15, 2012

Thank you!

AFRI/NIFA Grant AwardAward Number: 0031130

Description: 2011-68006-30815 Chaddad, Fabio