Global Value Chain analysis is an industry-centric view of economic globalization that highlights the linkages between economic actors and across geographic space. It offers important information about upgrading.
The Wine Industry’s Global Value Chain
The red stars indicate areas of high value added activities.
Land R&D: A wine’s value is intricately linked to the geographical location of production (grape & wine production in the above chain). A region can boast that its wine contains a high antioxidant content, for instance, which is very important to wine consumers that seek to improve their health through moderate amounts of alcohol. A region can also boast that its vineyards have been exposed to minimal intervention and manipulation techniques, luring those looking for sustainable and ‘natural’ wine.
The wine industry is especially promising to countries, and not only firms, because of the value added economic aspect of wine-producing regions. Governments support research programs in development and improvement of their wine industry because of the reputation and economic inflow this brings.
Packaging: Given that the commodity is a luxury good, a producer’s artistic reputation with relation to packaging also plays a huge role in how a producer perceives a wine’s quality. Uninformed consumers make their purchases primarily on how luxurious and attractive the wine appears. Similarly, young consumers might opt for a label that seems both sophisticated and trendy. Thus, packaging is also an area where producers focus and best learn how to market the product’s attributes, targeting each type of buyer. This is especially true for wine being retailed, as producers worry about differentiating their products. For example, Foster’s Group and Constellation Brands have launched major merchandising programs to become identifiable to their public that has a low switching cost.
Marketing: Castle Rock Winery provides an interesting case for the ever increasing importance of marketing. This winery, ranking as the 25th largest wine seller in the United States, does not have a vineyard or winery, but rather buys its grapes from select geographical locations. If this trend continues to grow, analogous to the manufacturing outsourcing trend of the late 1900s, then marketing will be even more critical in ensuring global dominance. With globalization, the race to social media platforms has steadily been on the rise in the last decade. The increased focus on marketing does not detract from the focus on production, but rather adds another dimension and ‘worry’ for those firms seeking to maximize their value added activities.
The red arrows indicate areas that global competitors are paying more attention to.
The big three: In 2012, only three companies (E.&J. Gallo Winery, Constellation Brands Inc. and The Wine Group Inc.) represented almost half of the industry’s growth by 8%. In terms of percent of market share, it is worth noting that Treasury Wine Estates leads closely behind these big three.
Distribution: An increasing worry in the industry is the impact of retailers. Currently retailers only hold 20.3% of the market (as opposed to supermarkets holding 40.6% and on-trade holding 27.8%) but this figure is expected to grow, along with changes in consumer behavior.
Total Wine & More, for instance, is the fastest growing wine retailer in the United States with more than 88 stores. Retail sales of wine have raised concern about differentiation. Price may still be a very accurate indicator of quality if you’re producing high end wine, as typically was when the industry was producer driven. But in a search to distinguish wine in a supermarket, packaging still remains important for both misinformed buyers.
E-Commerce, has also captured many wine investor’s attention, receiving mixed reviews. Amazon has taken the lead in the United States, launching their wine webpage in 2012 with exclusive shipping rates. Amazon began charging wineries $40 a month to join Amazon Wine, along with a 15% fee for each sale. Yet, in the United States online sales only account for 1% of total wine sales. Amazon’s attempt to capture value through this stage of the value chain might not be the most effective, considering state regulations on alcohol sales. Utah and Kentucky, for instance, consider this a felony. Wine.com, another e-seller, was fined by the state of New York for shipping wine in a gift food basket. Thus, the evidence makes online sales of wine in the United States a very risky and perhaps detrimental business strategy.
Worldwide however, we could predict that wine’s e-commerce adds greater responsibility to the consumer, as well as pressure to the producer to better highlight themselves in the vast sea of easily comparable wines. These moves have begun revolutionizing the industry.
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