Global Wine War 2009: New World Versus Old

Global Wine War 2009: New World versus Old

Case Presentation Written Brief

How did the French become the dominant competitors in the increasingly global wine industry for centuries? What sources of competitive advantage were they able to develop to support their exports? Where they vulnerable?

During the Roman Empire, viticulture spread throughout the Mediterranean part of the world. By the middle Ages, it was so popular that it became embedded in the European culture. It quickly became a mark of prestige, as the nobles would compete with each other in the quality of wine that would be served daily at their tables.

For centuries, the European countries were mostly the ones with a high per capita annual consumption of wine. It was safe to say that wine was not yet a big part of the New World’s culture at that point. Being one of the pioneers of the industry, the French producers quickly became the dominant competitors of the increasingly global wine industry. The French did an excellent job at exploiting their numerous competitive advantages.

Indeed, they had many advantages: Being the first mover was highly rewarding to them considering the level of demand for wine at this time. Indeed at a given time, France had the highest per capita annual consumption of wine in the world, a staggering 115 liters. Their soil and climate condition were favorable for harvesting grape better than any other country in Europe. Louis Pasteur, inventing the pasteurization method set them on a good foot to conquer regions that were previously inaccessible to them because of poor roads and complex toll and tax system. They were therefore able to expand the areas they distributed the wine since it would no longer go bad. They became the first niche market for premium wine. Through their daily activities, they gained some key knowledge and experience that would later increase the reputation and dominance of their wine.

In the late 18th century, innovations such as the mass production of glass bottles and the use of cork stoppers revolutionized the industry. This was the inception of a global market for wine.

In recent years, the wine industry worked together with the government. As the industry expands, the government support had a significant impact on the improvement and reputation of French wines. Regulations like AOC (Appellation d’origine Controlee) and VDQS, (vins delimite de qualite superieure) were strict classifications and controls that set detailed and rigid standards for vineyards and wineries which differentiated French wines and raised the entry barriers. These laws helped identify their finest wines and sort through the complexity of a highly fragmented market.

Although highly dominant for an era, the ‘Old World’ including the French market was vulnerable. Indeed, during the French Revolution, many large estates that were seized were divided and sold at auctions. The average holding of land in France became 5.5 ha while in Australia and the United States respectively; the average vineyards holding were 167 and 213 hectares. There was a clear scarcity of land in the old world. This means that the competitors of the New World are able to produce faster and in larger quantity than the French. Also, the rainy maritime climate made late autumn harvest risky for the French while climate and soil allowed grape growing to flourish in the New world.

Also, producers were using specialized equipment such as mechanical harvesters, which greatly reduced the labor costs. They were experiencing different type of methods such as reverse osmosis, night harvesting, and fertilizers while the French remained traditional. Sometimes they do it in the name of quality, other times they have to remain traditional because of government regulations. This gave the new world a lot of advantages and made the French extremely vulnerable as their competitors could produce a substitute product at a faster rate and at a lower price.

What changes in the global industry structure and competitive dynamics led France and other traditional producers to lose market share to challengers from Australia, the U.S., and other New World countries in the late 20th century?

In the late 20th century the global wine market underwent tremendous changes. Traditional producers such as France, Italy, and Spain, which had dominated the market for centuries, were faced with new and innovative competitors. Due to their long history of grape growing and harvesting, these traditional countries had very strict rules on how to produce wines. Winemakers were controlled by government regulations as well as the weather. Therefore it was near impossible to create a brand of wine. Each year the grapes were harvested differently due to weather, which resulted in different tastes and qualities.

On the other side of the spectrum, demand for wine was rapidly rising in the New World. During the post war era, the United States and Australia saw the most growth. Unlike their traditional competitors, climate and soil were in favor of New World producers. These countries also had an abundance of land, which allowed for much larger vineyards. Vineyards in the New World were almost double the size of those in traditional countries. Along with large vineyards, New World countries were free to produce their wine in new and innovative ways. They were not confined by government regulation or tradition. New World producers began to experiment with grape growing and winemaking technology. In Australia, controlled drip irrigation allowed expansion into marginal land and reduced vintage variability while irrigation was strictly forbidden in France under AOC regulations. The larger vineyards also allowed the use of specialized equipment such as mechanical harvesters and mechanical pruners which greatly reduced labor costs. New World countries also came up with many inventions