Copyright is owned by the Author of the thesis. Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only. The thesis may not be reproduced elsewhere without the permission of the Author.

THE Td T NE I NIE)I.JS Tfrt Y AI\II} THE tjf]hrsur{EFt

A studv of the production. drstributrs;rand consunptron of wine in New iealand

A thesis presented in partial futfilment of the .equr.e,nentsfor the degree of Ph.D. in Econornics at f,lassev University

Josephine Serrallach1984

II

AETS'TRAE-T

This thesis is an investigation into production, distributionr and

consumption of xine in Ne* Zealand, rith particular constderation of the

effects of the nine industry's structure and behaviour on consuoer

interest.

Government protection policies have greatly influenced expansion and

structural development of the industry. Protection of the existing localindustry was mainly effected by reducing opportunities for conpetition intxo Hayst irnplementation of irnport control regulations nhrch have

restricted conpetition from overseas wines, and introduction of licensinglaws which have favotrred control of the wine trade by a lirnited nur$er o{

licence holders.

Investigation into industry onnership patterns showed the presence of

vertical and horizontal integration at various stages of the narketing

system. l'lergers and takeovers have resulted in the foroation of a poner-

ful grotrp of cornpanies nhich control nine narketing. These conpanies are

usually associated xith breweries, Iarge distribution coapanies, and

conpanies nith overseas connections. In addition, concentration ratioscalculated at the production level provided evidence that the rineindustry is highly concentrated. In 1981 six firos controlled about BT1C

of the narket.

The degree of concentration and the onnership patterns of the l,len Zealand

nine industry are indicators of its oligopolistic structure and narket

pol€r. This narket poner is not altered by the presence sf overseas nines

in Nen Zealand as the voluoe of inports is very snall (52 of total sales

in 1978-1979r. Limited conpetition and oligopolistic industry structurehave contributed to the industry's betraviour in deteroining quality ofproducts, prices and output. Lenient regulations governing nine'naking

have also affected nine quality. Adulteration of soee Nen Zealand tinestevident froa statistical data, rrs subsequently substantiated by the

Consuoer Institute analysis of locel rines. Statistical data on iqdustryproduction indicated that r*ren the industry faced over-supPly, output ras

redrrced and prices Here oaintained.

III

Legislation for the protection of ccrrtsuner interest in Nen Zealand has

been nainly directed at prevention of malpractice that nay result fron

nonopolies, nergers and takeoversr trrd at control of certain trade

practices judged to be against the public interest (Commerce Act 19751.

Legislation has also airned to inprove the availability of infornation toconsumers and to regulate quality standards (Food and [hug Regulations

1973, Amendnent No. 5, tqB0/7s).

A consumer study Has carried out in Palmerston l.lorth to relate the

effects of industry structure and government intervention to actual

consuoer requirements and consumer perceptions of the products available

in the New Zealand narket. A survey, nhich involved a randomly selected

sarnple of 257 respondents, helped to identify three naln groups'. 327. olthe adult population surveyed rere regular consumers of nine, 382 used

nine occasionally, and the reanining 5t17. did not drink. Survey resultsindicated a reduction in the growth of nine consumption. Consuoer

preferences and consuner satisfaction with quality and prices of Ner

Zealand rines, nere also evaluated frorn survey results.

Findings froo the consuoer Euryey shoned that a group of ning users rithsinilar socio-econoaic status (nainly professional peqle) nas responsi-

ble for more than half of the total nine consunption. To provide an in-depth analysis of the perceptions and preferences of this particulargroup of regular consumers, a pilot study based on the application of

oultidinensional scaling nas carried out. Results of this study indicated

that consuners considered sone New Zealand rines to be close substitutes

for sone overseas nines (e.g., a l'len Zealand Riesling for the Gernan rine

"Blue Nun'I. Nen Zealand sparkling rines, honever, rere not considered tobe good substitutes for overseas sparkling wines. l{o rines in the sacale

ulere closely identified nith any pf the c(xlsuoer preferences (expressed

as ideal points in a nultidicensional scaling representation). This

indicated that the nines included in the saople did not totally fulfilthe reqrrirenents of the selected group of regular cqlstJmrsr either interns of quality or price.

Research findings froa both industry and consuner studies suggested that

consuoers had been deprived of the benefits o{ coagetition' Furtherroret

if consuner interest is to be protectede a rnr€ corryetitive systen has to

IV

and licensingbe developed through

IanE.

I iberalisation of iaprt policies

V

ec}<llcrwtEE (=EtlE]{Ts

I nould like to thank ny supervisors, Professr t{. Cartnright and

Professor J. Rone {or their suggestions and criticisns and Or. A. Lenis

for his encouragement.

Dr A. Anderson, Dr R. Brook, llr R. l,lcCooish, t{r H. Clark, ttr. D.

Esslemont ,and lk l'1. Reeves helped at different stages of this thesis. Dr

R. Eschenbruch and Dr Sheat froc the Ruakura Agricultural Research

Station and other people related to the rine industry cooperated inproviding i n{ormation.

I nould also like to thank f'lrs Rowe for her help at the initial phases ofthis rork, llr Sinclair for his assistance nith editing of the firstversion of the thesis and specially Dr. N. l{atts for his patience inreading several drafts and helping ne overcome language problens. I also

thank Dr. R. Falloon for his help in editing the final copy of thisthesi s.

Finally, I an grateful to ry husband, nho, with the help of a nord

processcr, typed the final copy and to ay children r*to have shared nithote all the ups and donns of the past several years.

Josephine Serrallach

Palmerstm t{orth

Ner Zealand

i,loveober l?84

TeEltE_ClE_EgllTEl{TS

ABSTRACTSACKMII{LEDGE}fNTSTABLE IF CTT{TENTSTAH-ES IN TEXTTAH.ES IN APPENDIX ATAH-ES tI{ APPEI{DIX HFIGIJRES IN TEXTIT{TRODI.ETIOIICHAPTER I - TIfORETICAI- BACKGRTXJND

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VI

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VIIXXIXI

XIII33556

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- Introduction- Theoretical approach to perfect conpetition- t{elfare economics- fheoretical approach to inperfect- Research procedure- Sunnary

cocpetitiori ..

/,-CHAPTER 2 - HISTORICAT_ BACKGRflJND2.O - Introduction2.1 - Historical developnent of the rine industry

in i{etr ZealandDevelopaents in xine consunption in NerSumnaryTRENDS OF SUPPLY AND DEI1ANDIntroduction

2.22.3

CHAPTER5.O3.1s.2s.s5.4

CHAPTER4.O4.14.24.3

CHAPTER

5.O5.15.25.55.45,5

CHAPTER6.O6.t6.26.36.f6.56.6

CTIPIER7.O7.17.27.37.47.37.67.7

:(

4

q

6

7

Theoretical approach to supplyTrends of supply

Zeal and

and decand analysis ....aalaa.a

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of concentration ..

24?42427384244

Trends in rine consulption and salesSumearyPROIXJCTTON ff{D Ilffi<ETIilG SYSTETIIntroductionl{odel of the rine narketing systeaVertical integrationSunnaryCONCENTRATItr{ IN PRODIITI(I{IntroductionTheoretical approach to the concept

444558616262626365

lleasurecents of cqrcentrati onCqrcentration in Nen Zealand industriesCmcentration ratios ln the rine industrySurnaryINI}IJSTRY CONI}I.ETIntroduction

Froduct diffrentiatiqr inkoduct accessibility andSurmryqT,ENilCilT PTI.ICIESIntrodrrction

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the ring industry ..... r....the present distributiqr syster

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Theaetical approach to industry conduct ...... .....,Price and otrtput detemination in the rine industry ...Product quality

Iinerekm - Legislativt frarcwkS:les licen:ing larsTatatimIpct cqrtrol reguletianrExprt incentivcrThr IIE rccmrdatiqrt end$nry

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gov':rn*nt legtslatict ....

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VII

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. . . . . . i . . . .. f Ol

.... t....... l0lCHAPTER

8.0g. 1

9.29.58.48.58.68.78.88.98.lo

CHAPTER9.09.19.29.S?.49.59.6i.79.8

CHAPTER

10. o10. tLO.2to.310.4LO.510.610.710.8r0,9lo. lolo. l1

10.12CHAPTER

11. O

11. tlt.21t.s11.411.5I1.6I1.7Il.g

CHRPIER

l2.o12.l12.212.s

12.112.l

B

9

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cnr{sr,.rfR }ELFAREIntroductionTheoreticel apFroach to cmsuner interestarid cqrsun€r protectiorlAntitrust policiesInf rnatian&ral ityPrice policies and consurner interestsThe situation in l{er ZealandTrade practices in the nine industryProducers' interest versus consuners'Proposed consumer analysisSurnnaryCONStJI1ER SURVEYlntroduct i onArea and population fr the surveySanple sizel'lethodologyObjectivesThe questionnaireConposition of the sampleAnalysis and interpretation of surveySunnary of findingsIIULTIDtTlENSIONAL SCALINE - TI-TEORETICALIntroductionTheoryAppLicatiansTypes of nrltidinensional scalingLinitations and diff icultiesAdvantages

interest

data .

BACKGROUND .....

............ 172

...... ... . .. 172

............ l7S

............. l7l20 srbjrctr ... 171

............ 176

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t72

Alternative approachesConputatianal aspectsData collection nethodsOptinal dimensionality and interpretationThe concept of the ideal pointAlternative coaFuter-based algorithr frnultidinensional scal ingSunaaryRESEARCTI D€SI${IntroductionObjectivesResearch proceduresSelectisr of itensNuober cf iters and nethod ofSelection of resfdrdentslfunber of respondents

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of axes

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Appl icatiqr of rultidicensional scalingSunraryRELIABILTW TF OBTAII€D DATA AI{Dtrg-YSIS TF DIRECT SITILMITIESIntroductiqrReliability ratio of Kudr{icherdssrCefflcicltt af cqrcrdancr (Illtrltidi-rrrimtl Ecrling an.lysir trfdirect rirl lerity Judge*ntrftrelyrlr o'f dircct sirilrrlty dete faClustrrr

VIIT

12.6

12.7

[2.8CHAPTER

13.O15.1ls.2[5. S

13.4CHAPTER

t4.ot4.l

14.2

14.5

t 4.4CHAPTER

15.0r5.1r5.215.5

C1{APTER

ls

l4

15

16

Analysis qf direct sinil,arity datrfr l0 subjectg rith corplete respd.tses - Grq,rp A .....Analysis of direct sinilarities datafr the 1O subjects xith inco@lete re€ponses - 6roup BSunrary

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179

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185193195195

196

198

201205?o6?o6?o6208m?

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AiIALYSIS TT D€RIVED SIIIILARITY I}ATAIntroductionEoodness of fitInput dataInterpretation of axeswith the help of the vectorial modelSunnaryANALYSIS OF PREFERENCE DATAIntroductionlleasureoents of subjects, agreenrent andgoodness of fit for ranking dataExternal non-rnetric analysis ofscenario-dependent preferences for 2O subjects ..External non-netric analysis of scenario-dependentpreferences split in tno groups of ten subjects .......

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SunnaryUT.IFOLDTN6 ANALYSISlntroductionPerceptual mapEvaluative napSuararySI,.IIIIARY TF CTh{SIJIIER STUDY ANDSUBSESI..ENT IIARIGTIT{G INNOVATIThFiSunaary of f indings - tfultidicensionalChanging consuaption patternsPackaging innovationsSunnarysut{ilARy AND Cot{CLtEiltltttfi6eneralIndustry protectian versus consuner

TablesGrape varieties&mership ef nine corpaniesThe Herf indahl approxicaticr&restiqrnaire to cqtsutersInstructims to the intervierers ef theConpositist of thc sargleCrosstabulation tabtes - Consuner surveyPerfmencr cf KySTlh to nrn PREFilJF2 at ttesseyPopulr iler Zeeland and iqrted rinelList of quelity rinetInstnrctidrt fr nltidimricrrlrcrllng intrvielrrrPerart:rr of PREFIS'2KYST cmtrol crdr

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scal ing16.O16. tt6.?16.5

CHAPTER 1717. O

t7.LBIH-IOGRAPHYAPPENDICES

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-r_AEtl_E=SIt\tTEX-rPage

?52A5232465760676868

IX

120r25r23

2.1

3.1s.2s.34.14.24.55.15.25.S6.16.26.36.47.1

9.19.29.3

Area in vines and nuatber o{ groners ......YieIds and ratiosGrape pricesOnnership of the liquor outlets inPrice movements for 1973, 1976 andConcentration of industry,s outputApproxination to Herfindahl lndexl'larket share

List of government legislationnentioned in Chapter 2Eronth rates

Beverages consumed each dayList of selected winesCoordinates in 5 dirmnsions of thesinilarity space for 2O subjectsCoordinates in 2 dinensions of thesimilarity space Igr 20 subjects

and subnissions to governoentaraa.

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Nex Zealand .,.anticipated t977

Riesling table wine - private trade prices Z4Percentage increases in retail prices of wine and the cpl.... 74lrlholesale liquor store price list - 1973 . BOPrice margins in the distributron of h,lne . gzList of government legisration and submissions to governrnentmentioned in Chapter 7 . lOONumber of Palnerston North households ll3Groups of non-wine users . IZODrinking frequency at differentoccasions for regular rine usersPercentage of nine users for everyl{ine attributes

type of nine .

0rigin of xine preferred by consurners . 126Brand pre{erences for sherry . lZ7Brand preferences for still rhite table nines l?lErand preferences for still red table wines ..... lZ7Brand preferences for rose tine ...., . 1SOBrand preferences for sparkling rine ISOPurchasing patterns .. !.. . 1Szltonthly average expenditure (xl alcoholic drinks ..... lS4Changes in consurnption over previous year lS/tConsumption in restaurants . fS7Types of overseas wines present in Nen Zealand households ... 14oPercentage of imported bottles by types of nines 14Ollarket's share of several i,ler Zealand brands ..,... 14OBrands present in Paloerston North houselrolds ...... 142

9.49.59.69.7g.B9.99.10 -9.11 -9.L2 -9.15 -9.14 -9.15 -9.16 -9.t7 -9.18 -9.19 -9.20 -

11.112. 1

L2.2

12.3

12.4

13. r

15.2

13.Sls.{

Coordinates in 3 dinensions of the rines'sioilarity sFace for lo subjects rith conplete scale values . lgoCoordinates in 3 dimensions of the rines'sioilarity Epace fr 1o subjects rith inco4lete scale values lgzCorrelation coefficients coarputed for trlo dieensions acrosssubjects and average subject for each of the lo bipolar scales lg6correlation coefficients cosrputed for three dinensions acrosssubjects and average subject for each of the lo bipotar scales 186Coordinates of vectors representing bipolar scares .......... tBgEipolar scaling directions .......r.................. l8g

x

Page

15.5 - Eoordinates of vectors in three dinensistsrepresenting bipolar scales .....,......... . lB9

14.1 - Correlation coefficients conputed for tno dinensions acrosssubjects and average subject {or each one of the scenarlosof preferences L97

L4.2 - Correlation coefficients coaputed for three dinensions acrosssubjects and average subject for each one of the fourscenarios of preferences . t97

14.3 - Coordinates of four average ideal points of scenario -dependent preference in two dinensists ... t?9

14.4 - Coordinates of four average ideal points of scenarro -dependent preference in three dinensions ........ ?OO

14.5 - Ideal points for 10 subjects ni.th complete responses 2Oz14.6 - Ideal points {or 1O srbjects nith oissing values ZOs

XI

TAEII-ES IN APPENDI X A

A.l - Hine productiqr4.2 - Laal vineyard area in l{er4.3 - 6rape producti.cr and other4.4 - Stocks4.5 - Sales of ttls Zealand xines4.6 - Irprts of wine4.7 - Exports of Ner Zealand rine4.8 - l{ine consuapticr4.9 - Consuqtiqr per cagitaA. [O - Grorth rates fror t96O to

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Zealandinputs

1980

Page

2St25:t?g2342:Hi235256236256?'7

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- TAEII-E=I IN APPEND I X

(al l{ine users - Suburban ereas(bl l{ine users - Age(cl t{ine users - t{ationality(dl t{ine users - Education(el lfine users - 0ccupation(f) Uine users - lncome

H.2 - (a) Non-rine users - Number of children- (b) Nqr-rine users - Household size- (c) Nqr-nine users - Age of children

H.3 - Crosstabulation of drinking frequency by types ofrines rcst consueed fl.,Cooking habits (?lCrosstabulation of types of winesCrosstabulation of types of rinesCrosstabulatisr of types of xinesBrands consuned in restaurants(al Crosstabulation of nuaber of(b) ttunber of f lagons by area(cl !tu6er af bottles - Age (Z)

bottles at hoce by area (Z)

(dl l{urber of bottles - Education (Z)(el lfui$er of bottles - Occupatian (T.l(f I Nurber of bottles - Incoi€ grqlp (Z)(gl tfu-er qf bottles at hom - l,lurber of children

H

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H.4 -H.5 -H.6 -H.7 -H.8 -t.t

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XII

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Thc equilibriur of a aonopotist .................,........Productian of grape rine - Table and dessert ....,............Vineyard area .r........................6rape productior ..... ......Sales of nine - Table and dessert ...t.....,......Consunption of nine - Table and dessert ... .........l{ine narketing syster .....r,... ...........Ornrship of the nine industry ...... r r.. , . .,..The existing liqur distributim nrchanisor by sales volune ...Concentration curve ..., r.Infornation flows and signalsSuburbs of Palmerston NorthBrand preferences fr different types of wineDistribution of nurnber of bottles bought per nonth ....rDistribution of nunber of ftagons bought per nonth ......Frequency distributim - No. of bottles of rine at hone......Plot of stress versus dinension .,...(al configuratisr of rines' sinilarities in three dioensionsfor 2O subjects

I

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13.115.214.1t4.2

14.3

14.l

15.115.2

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177(bl Configuratiqr of rines' similaritiesthree-dimensional space for lO subjectsConfiguration of wine similarities in atwo-dirnensional space 178Configuration of rine sinilarities in a three-dinensionalspace fr 1O sub jects rith corylete scale values .. r.......,.. 1gOconfiguration of rine sinilarities in a threedinensionalspece f or 1o sub jects rith incorylete scale values .. t. .. . r... l8zBipolar scales in tno dinensions - 20 subjects............... 1BgBipolar scales in three dioensians - ZO subjects l?tIdeal points of 2O subjects in trrc diaensions ...r.........r.. lg9Ideal points of fotrr scenariedependent preferencesof 2O subjects in three dinensians .. r...... !. ZOOIdeal points of four scenario-dependent preferences of 1Osubjects rith coaplete responses, in three diaensions- 6rc4 A ............a.....a.r...-. mzIdeal points of fotrr scenariedepetrdent prefrences of lOsubjects nith cissing values, in three dinensions - Gror.rp 8.. zosPerceptual oag of 20 subjects in threc dicensions ........ .... NTEvaluetive oaP of 20 subjectg in threr dioensiqrg ............ Zel

ina177