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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
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
slide9

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
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)
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
slide17

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
slide18

Barriers to Entry

  • By EU decree: limited availability of land
  • High capital cost
  • High skill needed
  • Production cost advantage unimportant
slide19

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
slide21

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
slide22

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.”
slide23

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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