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