Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry
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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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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

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


Industry structure

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


Firm size distribution

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


Industry evolution

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)


Product description 1 2

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


Product description 2 2

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)


Typical firm 1 2

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


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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


Industry main features

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


Central feature influencing demand switching costs one stop shopping

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


External analysis

External analysis

  • Customers

  • Suppliers

  • Substitute products

  • Potential entrants - BTE

  • Established rivals


Customers

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


Annual wine consumption per head 2003

France56 litres

Italy51 l

Switzerland 42 l

Argentina36 l

Spain 30 l

Germany 24 l

Australia 21 l

UK20 l

USA< 10 l

Annual wine consumption per head (2003)


Suppliers

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


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

Main Distribution Channels


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

Barriers to Entry

  • By EU decree: limited availability of land

  • High capital cost

  • High skill needed

  • Production cost advantage unimportant


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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


Tesch s product line

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


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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.”


Auxiliary material wilhelm rall konrad stahl case 3 product portfolio choice in the wine industry

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


Case question

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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