3. Types of Production Businesses

Question 1

Define an Estate Producer:

Answer 1

A producer who makes wines exclusively from their own vineyards.

Question 2

Key ADVANTAGES of Estate Producers (4):

Answer 2

• entire process controlled by estate, greatest level of quality control.
• all profits go to estate; if self-marketing and selling, then less profit loss to outside sources.
• marketing benefits: ‘authenticity’, knowledge of practices, grapes, vineyards. Telling the ‘story’ of the wine = important marketing tool.
• more financially viable; economies of scale in various depts (production, admin, compliance, marketing), e.g. large volumes of wine can be made cheaply by re-using same equipment to produce different wines.

Question 3

Key DISADVANTAGES of Estate Producers (2):

Answer 3

• cost of managing vineyards/winery can be very high; not all estates can afford to buy equipment that is only used once a year so it is hired out (which also eats into profits).
• if difficult vintage, e.g. frost/hail, leads to drop in yield, wine may need to be sold at higher price to make profit. Customers may be unwilling to pay, and production costs may not be recovered.

Question 4

Define Growers:

Answer 4

Growers / Farmers that choose not to produce wine, instead focusing solely on grape growing and selling to winemakers/merchants.

Question 5

Key ADVANTAGES of Growers (3):

Answer 5

• good for smaller producers; no need to spend $ on wineries, marketing, etc…
• better cash flow = $ made when grapes are sold.
• all efforts can be focused on producing the highest-quality fruit possible = prized by winemakers.

Question 6

e.g. of prestigious Grower:

Answer 6

Andy Beckstoffer / Beckstoffer Vineyards, growing Cab on prime sites in Napa Valley, highly sought-after.

Question 7

Key DISADVANTAGES for Growers (3):

Answer 7

• very vulnerable to vintage variations and fluctuations of supply/demand.

Bad Year = less fruit to sell (though shortage can raise price of healthy fruit), worst case = no fruit.

Surplus/Bumper Crop = too much supply/competition, prices will have to be lowered to compete.

Question 8

What are the 2 main selling options for Growers, and their PROS/CONS (7)?

Answer 8

CONTRACT: vintage/multiple vintage-long with producer/merchant.

PRO: certainty of selling grapes at set $, greater security.

• strong working relationships w/producers, producers may assist growers to produce best quality.

CON: contracts may specify that if grapes don’t meet certain standards (e.g. Min PAL), = rejected or lower price.

ON THE SPOT MARKET: grapes bought and sold following harvest.

PRO: if grape shortage, growers may sell for much higher prices than under contract.

CON: if oversupply, prices likely to be lower.

Question 9

Define a Grower-Producer:

Where is this approach still popular today?

Answer 9

A grower who produces wine from their own grapes, then sells it to a merchant to mature and bottle.

Still common in Burgundy.

Question 10

Key ADVANTAGE for Grower-Producers:

Answer 10

• no costs incurred from maturation (barrels/cellar space) or marketing. Focus can be on wine-making, leaving marketing and sales to more experienced merchants.

Question 11

Key DISADVANTAGES for Grower-Producers (2):

Answer 11

• loss of control over style of finished wine, merchant may blend wines with that of other producers.
• profits will be smaller than if they were to sell own finished wine.

Question 12

Define a Merchant (3):

Answer 12

aka ‘Negociant’

An entity that purchases immature wine, matures it themselves and sells under their own name.

Wines from different producers may be blended at will.

Question 13

Key ADVANTAGES for Merchants (3):

Answer 13

• no expense of buying/maintaining vineyards, particularly beneficial in premium regions e.g. Burgundy, Champagne, where land is seldom sold, and very $$$.
• flexibility/protection from bad vintages in terms of purchasing wine from different growers/producers.
• long-term contracts with suppliers can protect against price fluctuations.

Question 14

Traditionally, what was the chief risk for Merchants?

How was this risk averted?

What is another risk involved (2)?

Answer 14

• merchants had little control over grape growing/winemaking process.

To combat this, many merchants produce their own wine from grapes/juice + provide tech support to suppliers.

• another risk is that grape prices can rise substantially in poor vintages, forcing merchants to pay higher prices.
• in premium regions, e.g. Burgundy, Napa, grape prices have risen considerably, meaning much more $ to make wine from them.

Question 15

What are ‘micro-négociants (3)’?

Answer 15

• found in Burgungy, in particular.
• sect of merchants that arose due to v. high land prices, specializing in small-production wines, usually from single-vineyard sites, that can achieve super-premium prices.
• many work closely with specific growers to obtain the best quality fruit.

Question 16

Using E. Guigal as an example, describe an alternative type of merchant/négociant (4):

What is the main advantage to a model such as this?

Answer 16

Some producers make wine from their own vineyards (usually premium), as well as produce wines from bought-in grapes (more accessible price-points).

• E. Guigal = grower-merchant in the Rhône Valley.
• produces some wines from estate vineyards, e.g. extremely $$$ single vineyard wines from Côte-Rôtie.
• produces other wines from e.g. Crozes-Hermitage, Gigondas, Cotes-du-Rhone from bought-in grapes.

this allows the producer to make wines which will be sold at different price points, at a range of different outlets.

Question 17

e.g. of a merchant that differentiates wines from estate / purchased fruit:

Answer 17

Domaine Dujac in Burgundy.

Dom. Dujac for wines from their own grapes.

Dujac Pére et Fils for wines from bought-in grapes.

Question 18

What is a sales option for merchants producing very large volumes of wine?

Answer 18

Selling to supermarkets, deep discounter and chain bars/restaurants under private labels.

Question 19

Explain how merchants can operate differently from region to region:

Answer 19

e.g. Merchants in Burgundy tend to be much more involved in the production of wines vs. Bordeaux, where merchants deal more with wine that is already made.

Question 20

‘En Priemeur’ aka:

Briefly explain what it is (3):

Answer 20

aka ‘Wine Futures’

A method of selling wine to consumers before it is bottled.

Purchasers buy wine whilst still in barrel in producer’s cellar, only receiving wine once its bottled, usually a few years later.

Long associated with Bordeaux, but now a method used for many premium wine regions, e.g. Burgundy, Rhône, Super-Tuscans and Vintage Port.

Question 21

Key advantage of the ‘En Primeur’ system for producers:

Key attractions for consumers (2):

Key risk for consumers:

Answer 21

• helps offset costs of long maturation period and production, creates cashflow earlier, while money is tied up in the cellar.

For CONSUMERS, should be cheaper/easier to buy sought-after wines at this stage, as price should go up (in theory) once bottled.

These wines are produced in limited quantities, might be the only opportunity to purchase.

Risk: prices may go down as well as up, so investment is not guaranteed.

Question 22

Define Co-operatives:

Answer 22

Production company owned by a group of growers, producing and selling wines made with grapes grown by their members.

Question 23

Key ADVANTAGES of Co-operatives (3):

Answer 23

• pooling of resources allows for more sophisticated/expensive winemaking technology than growers could purchase individually.
• other services offered to members as well, e.g., viticultural/winemaking advice, marketing/packaging/sales services.
• marketing wines collectively = more efficient than if members worked on their own.

Question 24

2 e.g’s of co-operatives that have created/marketed successful wine brands:

2 e.g’s of co-operatives making ‘own-label’, quality-focused wine:

Answer 24

Plaimont (SW France) / Badischer Winzkeller (S. Germany)

La Chablisienne (Chablis) / Mont Tauch (Fitou)

Question 25

Key DISADVANTAGE of Co-operatives:

Answer 25

• since they are owned by members, all decisions are made democratically, members must be consulted first. Therefore, decision-making process = slow, cumbersome, may not be to the liking of individual members.

Question 26

Differentiate between TRADITIONAL (4) and MODERN (3) Co-operatives:

Answer 26

TRADITIONAL:

• members paid a share of annual profits, based on volume.
• basic function is to make wine on behalf of members, then wait for someone to buy it.
• this model still important in Spain, Italy, where vineyards are small and growers do not have $$ to effectively produce/market own wine.
• not always quality-focused, can struggle.

MODERN:

• more quality-focused, pay growers based on fruit quality (not volume).
• not all profits are paid back, with some being invested in to latest tech, research, marketing, labelling.
• more dynamic, producing good quality wine + excellent value.

Question 27

Define Custom Crush Facilities (2):

Where are these mainly found?

Answer 27

Winemaking facilities that growers do not own, but pay each time they require its services.

Can make anything from super-premium, small-batch wines to inexpensive, large-production wines.

Common in California, N. America.

Question 28

Key ADVANTAGES of using Custom Crush Facilities (4):

Answer 28

• great for small-volume growers who do not have/cannot afford their own winemaking equipment.
• company will make wine in style desired by growers, can be marketed however they want, so more control vs co-operatives.
• more sales profit for grower.
• grower benefits from expertise of pro winemakers.

Question 29

Key DISADVANTAGE of using a Custom Crush Facility:

Answer 29

• trust is being handed over to third-party, so grower’s requirements/style of wine desired must be clearly communicated/understood.

Question 30

Define Virtual Winemakers/Wineries (3):

Answer 30

• mainly in N. America
• refers to winemaker who doesn’t own winemaking facilities/vineyard land, but buys fruit and rents facilities or employs custom crush facilities.
• varies in scale from small batch, super-premium high quality to large-volume winemaking.

Question 31

Define Conglomerate:

3 e.g.s :

Answer 31

Very large companies that own many different wine brands and often have interests in various alcoholic products, not just wine.

e. g. E & J Gallo in California: largest wine-only conglomerate, owns Gallo Family Vineyards, Barefoot, Carlo Rossi.
e. g. LVMH (Louis Vuitton - Moët - Hennessy); specializing in luxury brands, owns Moët & Chandon, Veuve Clicquot, Krug, Cloudy Bay.
e. g. Insurance goup AXA; owns many top Bordeaux/Burgundy houses, plus Port House Quinta do Noval.

Question 32

Key ADVANTAGES of Conglomerates (3):

Answer 32

• lots of $$$, owning many smaller businesses within the supply chain from production (estate wineries, merchants) to distribution.
• can afford to set up regional offices in many different markets/countries = greater control + efficiency, fewer $$ paid to 3rd parties.
• greater negotiating power when buying grapes/juice/wine from suppliers and selling to retailers.