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Auxiliary Material Wilhelm Rall Konrad Stahl Case 3: Product Portfolio Choice in the Wine Industry

Auxiliary Material Wilhelm Rall Konrad Stahl Case 3: Product Portfolio Choice in the Wine Industry. Main purpose of the case. To learn about the industry To examine the complete portfolio restructuring of a winery including the complementary marketing strategy

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Auxiliary Material Wilhelm Rall Konrad Stahl Case 3: Product Portfolio Choice in the Wine Industry

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  1. Auxiliary Material Wilhelm Rall Konrad Stahl Case 3: Product Portfolio Choice in the Wine Industry

  2. Main 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

  3. Industry 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

  4. 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

  5. Industry 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)

  6. 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

  7. 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)

  8. 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

  9. Typical Firm (2/2) • 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

  10. Industry – 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

  11. Central Feature influencing Demand: 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

  12. External analysis • Customers • Suppliers • Substitute products • Potential entrants - BTE • Established rivals

  13. Customers • 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

  14. 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 Annual wine consumption per head (2003)

  15. 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 bottlebarrique development muich more expensivenew barrique barrel € 600 • Bottling € .5 – 1.5 per .75 l bottle • Storage costs • Distribution costs

  16. Main Distribution Channels

  17. Substitutes • 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

  18. Barriers to Entry • By EU decree: limited availability of land • High capital cost • High skill needed • Production cost advantage unimportant

  19. External 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

  20. 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

  21. Tesch’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

  22. Tesch’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.”

  23. Summary • 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

  24. 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?

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