Ch 3 - Wine Production Businesses Flashcards
Wine production businesses
What are the 9 types of businesses (and my categories for mnemonic)?
What are 3 key innovations in businesses practices?
Overview/chapter structure
Traditional
1. Estates
2. Growers
3. Merchants
4. Coops
Hybrids
5. Grower-producers
6. Grower-merchants
Emerging models
7. Custom crush facilities
8. Virtual wineries
Innovations
1. En primeur
2. Own-label brands
3. Quality-oriented coops
Wine production businesses
What are Estates?
What are adv/disadv?
**Key info **
○ Producers who make wine from their own grapes on their premises (vineyards whole owned or leased)
○ Can have a range of estate wines and merchant wines (from brought-in grapes)
○ Larger estates tend to be more financially viable - economies of scale across production (prod more cheaply - higher vol with same equipment across diff wines), admin, marketing, purchasing
Adv
§ Full style and quality control - Estate has control over whole process = choose style/control over quality
§ Potential for higher profits - All profit from wine prod belongs to Estate, esp if sell/market directly w/o intermediaries
§ Marketing benefits - authenticity from estate-bottled, storytelling of details of where/how made
Disadv
§ Higher costs - have to cover all costs of managing vineyard and producing wine - some can’t afford. Rent less used equip (harvest machines, bottling) -> lower π
§ Vintage risk - risk of hazards (frost/hail) damage crop/reduce vol -> estate needs to ↑P maybe uncompetitive, ↓π
Wine production businesses
What are growers?
What are sales models for growers?
Adv/disadv?
Key info
○ Growers who choose to focus on selling grapes, not making/selling wine
○ Attractive for small vineyard owners who can’t afford equip/don’t want to make/sell wine
○ Can create strong reputation - Beckstoffer for CS in Napa
Sales models
○ Contracts w/ producer/merchant for one or more vintages -> gives certainty to sell at set P, tho fruit needs to meet pre-det standards or don’t buy
○ Spot market - grapes not under contract sold after harvest -> less certainty - can get higher P vs contract if shortage, but lower P if surplus
Adv
○ Simplified ops - focus on grape growing, not production or distribution/sales
○ Cash flow - payment received when grapes sold, not after wine made, matured, distrib
Disadv
○ Even more exposed to vintage var - can have little or no fruit to sell-> does ↑P, but less rev
○ Vulnerable to S/D fluctuation - oversupply -> ↓P and can be left with unsold stock = ↓π
Wine production businesses
What are merchants/negociants?
Adv/disadv?
Key info
○ Purchase grapes, juice or wine to mature, blend and sell under own label
- Trad negociant - buy immature wine and mature/sell under own label - often blend wines of diff producers
- Now - reduce quality risk - produce own wine from grapes/juice and provide tech support to ensure what they are buying is required quality
○ Some are very large/high-vol -> private label for supermarkets/rest chains
○ Micro-negociants in Burg - specialize in small prod wines - working closely with growers to best fruit for super prem wines
Adv
§ Avoid high vineyard mgt expense (tho do employ viti experts to provide advice)
§ Sourcing flexibility - ensure consistent supply in bad yrs; may have to pay higher prices on spot market in some yrs
§ Diversified sourcing mitigates vintage var risk
Disadv
§ Loss of control over early stages of prod -> quality concerns
§ High grape costs in prem regions (Burg/Napa) -> long term contracts
Wine production businesses
What is en primeur?
why did it develop?
How does it work?
Considerations for producers and buyers?
Key info
○ Producer sells wine while still in barrel, stays w/ producer until bottled - only then buyer gets it
○ Why - get cash sooner, reduce inventory risk from long mat time (capital tied up)
○ Started w/ merchants in Bord - buy wine in adv that they mature/bottle - WWII when chateau struggling to survive ○ Now - merch more of wholesaler - buy lots then sell to distributors/sellers ○ More regions adopting - when mat times 18+ mos -> Burg, Rhone, Super Tuscans, Port
Considerations
§ For producer - cash flow sooner, reduce inv risk from long mat times (capital tied up)
§ For buyer - should be cheaper before bottle -> price should rise after bottle, can go down; can be only way to access limited prod qty = important part of fine wine trade
From D3 -
- campaign starts in April following vintage - wine prof invited for barrel taste
- chateaux offer in tranches - P mostly based on rep and reviews - gauge market D for wine, adjust P in
further tranches - usually P goes up
- allocation for best houses - have to buy poor yrs to maintain allocation
- if P set too high, merch can end up with unsold wine
- en primeur price is ex cellar - it includes in-bottle cost + delivery to retailer - but excludes any taxes in buyer home market
Wine production businesses
What are coops?
How structured - general and trad vs current models?
Adv/disadv
Key info
○ Owned by a group of owners and produce/sell wines from grapes grown by members
○ Owned by members - democratic control - mgt consult members on decisions, many diff mgt structures
○ Range from small (single town/village) to very large; large get econ of scale -> some have formed regional/national companies
○ Members paid prop share of π - diff ways:
§ Trad - pay on volume -> where coop role is to make wine on behalf of members - less Q focused - and wait for buyers (Spain, Italy)
□ Small vineyards not economic to produce and market own wines
§ Curr - quality focused -> pay on quality of fruit; re-invest some π in new equip/tech and other svcs -> produce very good to outstanding wines
Adv
§ Pool financial resources - afford better equip/expertise
§ Members get access to expert viti/wm and packaging, marketing, sales
§ Marketing efficiency - some have created successful brands
§ Own-label wine - make high vol inexp wine
Disadv
§ Slow decision making, not everyone happy
§ Member conflicts hinder operational efficiency
Wine production businesses
What are the 2 hybrid models and how do they work?
Adv/disadv?
- Grower-producer
○ Grow make wine from their grapes then sell to merchant to mature and bottle -> common in Burg
○ Merch chooses length/approach to mat, can also blend
○ Adv - avoid maturation costs, avoid marketing and sales (they don’t have expertise)
○ Disadv - Lose control over finished wine, less π than if sell finished prod - Grower-merchant
○ Own vineyards and prod wines from them, but also make wine from bought grapes, juice wine
○ Produce a range - G-M’s own vineyards used for Premium style, others for inexp/mid-price
§ Guigal famous example - expensive cote rotie from own vineyard, also less exp village wines from crozes-herm, gigondas and generic Rhone
§ Some produce diff qual levels under diff labels
Wine production businesses
What are 2 emerging business models?
Adv/disadv?
- Custom Crush facilities
○ Designed for growers who do not have wm equip - turn over winemaking to company
○ Variant of coop model - mainly CA/N Amer -> super prem to inexp/high vol depending on size of facility
○ diff is growers don’t own facility - pay for use
Adv
○ Quick decisions since not owned by group
○ Grower has control over marketing/sales and all π
○ Grower avoids invest in exp equip and focus on growing/marketing; also benefit from expert wm
Disadv
○ Grower limited control over wm - good relationship is key to get style/qual desired - Virtual wineries
○ Winemakers who don’t own vineyard or winemaking facilities- mainly N Amer
○ Buy grapes/juice and rent svcs of custom crush facility
○ Vary in scale - small super prem to larger vol brands
Wine production businesses
What are conglomerates and examples?
Current trend?
Adv of conglomerates?
Majority of wine market dominated by small producers
Conglomerates
○ A few very large wine making companies, some solely wine focused, others across multi alc prod -> acct for very small % of total prod
§ EJ Gallo - multi brands - Gallo Family, Barefoot, Carlo Rossi
○ Increasing tend of major companies outside wine industry buying in -> LMVH - Moet, Veuve, Krug, Cloudy Bay and also some are buying vineyards (AXA Insurance)
Adv -
§ Vertical integration - own companies across supply chain - scale economies and negotiating power from suppliers to distrib
§ more control through route to market - less need to pay intermediaries
§ Presence in multiple markets, portfolio of brands
Wine production businesses
What are 3 innovations in the wine producer business models?
- En Primeur - selling wine before bottling to improve cash flow and reduce inventory risk (Bordeaux)
2. Own-label brands - Retailers dev exclusive wine brands in cooperation with producers
3. Quality coops - Dynamic operations focused on prem and super-prem wines
What is the difference between coop and custom crush facility?
Custom crush facility is a form of coop in CA, but the growers do not own the facility. The facility is rented out to growers to produce the wine, which is then turned back over to them to sell and capture full profit (after cost of using facility)
