Chapter 3: Types of Business Engaged in the Production of Wine

Question 1

1.

Name the types of businesses engaged in the production of wine

Answer 1

• Estates
• Growers
• Grower-Producers
• Merchants
• Grower-Merchants
• Co-Operatives
• Custom Crush Facilities
• Virtual Winemakers/wineries
• Conglomerates

Question 2

What are Estates?

Answer 2

An estate producer produces wine from its own vineyards (vineyards that are wholly owned
or leased).

Question 3

Advantages of Estate producers

Answer 3

• Estate retains control over the entire process, from growing the grapes to producing and bottling the wine
• Choose the style of wine made and ensure quality control at every stage.
• All of the profit from the production of the wine belongs to the estate.

Question 4

Businesses that act as estates and merchants

Answer 4

A business may have a range of estate wines made from their own vineyards and a range of merchant (in French négociant) wines, made from bought-in grapes.

Question 5

Marketing Advantages of Estate Producers

Answer 5

• Estates that also market and sell their wines directly, without using intermediaries, additionally take the full profit from the sale of the wine
• Consumers looking for ‘authenticity’ are often drawn to wines that are estate-bottled (although the terms used for this vary from country to country and are not always legally controlled
• As the estate knows which part
  of the vineyard the grapes came from to make a particular wine, and exactly how it was produced, they are able to include this in their marketing materials. This enables them to tell the ‘story’ of the wine, which is seen as an important marketing tool

Question 6

Disadvantages of Estate Producers

Answer 6

• Vintage Risks
• The cost of managing the vineyard and equipping and running the winery.

Some estates simply cannot afford all the equipment they require and so may need to hire it. This is particularly the case for equipment only required once a year, such as harvesting machines and bottling lines. Although hiring equipment reduces the capital required to run the estate, it eats into profits.

Question 7

Vintage Risk of Estate Producers

Answer 7

• When there is a difficult vintage, perhaps because a significant percentage of the crop has been destroyed by frost or hail, it may only be possible to produce a small volume of wine.
• In order to still make a profit, the estate may need to sell the wine at a higher price, which consumers may not be willing to pay. Even if they are, the estate may not necessarily recover the costs of producing that vintage.

Question 8

Large vs Small Estates

Answer 8

Larger estates tend to be more financially viable than smaller ones. They can benefit from economies of scale in various areas of their business, including the production process, administration and compliance, and marketing.

For example, within production, greater volumes of wine can be made more cheaply because the same equipment can be re-used to produce different wines.

Question 9

What are growers?

Answer 9

Some growers choose not to produce their own wine, concentrating solely on growing grapes that they then sell to a winemaker or merchant.

Question 10

Why be a Grower?

Answer 10

• This option is particularly attractive to owners of small vineyards who cannot justify the cost of buying or hiring expensive winery equipment and do not want to have to market and sell their wine. It also generates better cash-flow because payment is due when the grapes are sold rather than when the wine is made or sold.

Question 11

Advantages of being a Grower

Answer 11

• Growers can focus all their efforts on producing the best possible grapes, and this approach can be the source of some very high-quality fruit that is prized by winemakers.
• Beckstoffer Vineyards - who grow Cabernet Sauvignon on prime sites in Napa Valley

Question 12

Disadvantages of being a Grower

Answer 12

• Growers are particularly at risk from vintage variation and from fluctuations in supply and demand, both of which will significantly affect the price they can achieve for their grapes.
• In a bad year, they will have less fruit to sell – although a general shortage of grapes will push up the price of healthy fruit – or, in a worst-case scenario, nothing to sell at all.
• When supply exceeds demand, due to a bumper vintage or too much competition, growers will have to reduce their prices and may not be able to sell all their grapes. In either case, this will result in reduced profits or a loss.

Question 13

Grower options for selling grapes

Answer 13

• Some growers enter into a contract with a particular producer or merchant.
• The other option open to growers is to sell the grapes on the spot market.

Question 14

Grower Contracts with producer/merchant

Answer 14

• The contract may be for one vintage only or for multiple vintages (sometimes they can be for many years).
• This gives the grower some certainty that they will be able to sell their grapes at a given price, although many contracts specify that if the grapes do not meet the required quality standard or specification (e.g. minimum potential alcohol) they will be rejected or a lower price will be payable.

Question 15

Advantages of Longer term grower contracts

Answer 15

• A longer-term contract gives a grower greater security, and many such contracts lead to a strong working relationship between the parties.
• In some cases, the producers or merchants may actively work with growers to produce the best quality fruit for that brand.

Question 16

Growers selling grapes on the spot market

Answer 16

• This is where grapes that are not subject to contract are bought and sold following harvest.
• This approach can offer higher risks but also greater rewards. If there is a shortage of grapes from a particular harvest, spot sellers should achieve a higher price for their grapes than they could have expected under a contract, but if there is a surplus of grapes, the spot price is likely to be less than the contract price.

Question 17

Grower-Producers

Answer 17

• Some growers also produce wine from their grapes, but then sell it to a merchant to mature and bottle.
• This approach is still fairly common in Burgundy today.
• The grower-producer will lose control over the style of the finished wine as the merchant will choose the length and type of maturation.
• The merchant may also blend together the wines from different producers.

Question 18

The advantage to the grower-producer

Answer 18

• They do not need to incur the costs of maturation (e.g. barrels and cellar space) or of marketing the wine.
• Many grower-producers have limited marketing expertise and so may be happy to leave marketing and sales to the more experienced merchants

Question 19

The disadvantage to the grower-producer

Answer 19

The disadvantage is that the grower-producer will make a smaller profit than if they were to sell the finished wine.

Question 20

Merchants

Answer 20

• The traditional role of the négociant was to buy immature wine, mature it and sell it under the merchant’s name. In many cases, they would blend the wines of different producers prior to bottling.

Question 21

Chief risk of merchants

Answer 21

• The chief risk to merchants was that they had little control over the grape growing or winemaking process.
• For this reason, many now produce their own wine from grapes or juice and provide technical support to their suppliers to ensure that the grapes, juice or wine they buy are of the required quality.

Question 22

Key advantage of merchants

Answer 22

Although they may employ viticulturalists to advise their suppliers, they do not have the expense of buying and managing vineyards. This is particularly beneficial in regions such as Burgundy or Champagne where vineyard land is seldom sold and, when it is, the price of the land is very high.

They can pivot

Question 23

Micro-Negociants (merchant)

Answer 23

• Specialise in small-production wines, usually from individual vineyards, that can achieve super-premium prices.
• Many work closely with particular growers to be assured of the best quality fruit.

Question 24

Merchants facing bad vintages

Answer 24

The fact that merchants can buy from different growers or producers provides some protection and flexibility in bad vintages. However, in such circumstances, they may be forced to turn to the spot market to source grapes, and pay higher prices.

Question 25

Merchants dealing with high grape prices in Burgundy & Napa

Answer 25

• It has generally become much more expensive for merchants to purchase grapes
• To protect against price fluctuations, however, most merchants now have long-term contracts with their suppliers, to whom they often provide technical support and advice.

Question 26

Large Merchants

Answer 26

Some merchants produce large quantities of wine and can therefore supply private label wines for supermarkets, deep discounters and chain bars/restaurants

Question 27

Merchant Operations in Burgundy vs Bordeaux

Answer 27

Merchants operate differently from region to region. For example, négociants in Burgundy are much more involved in the production of wine than their counterparts in Bordeaux, who tend to deal more in wine that has already been made (whether in bulk or already bottled).

Question 28

En Primeur

Answer 28

En primeur (also known as ‘wine futures’) is a method of selling wine before it has been bottled. Purchasers buy the wine while it is still in barrel and it remains in the producer’s cellar until it is ready for bottling. The purchaser only receives the wine once it has been bottled, usually a few years later.

Question 29

Advantages of Chateaux selling wine En Primeur

Answer 29

By selling the wine while it is still in barrel, they can generate cash-flow earlier than if they waited to sell once bottled: the en primeur price covers all the production costs up to and including bottling.

Question 30

Advantages to Purchasers buying En Primeur

Answer 30

For purchasers, the attraction of en primeur is that it should be cheaper or easier to buy the wine at this stage.

In theory, the price will go up once the wine has been matured and bottled. However, as wine prices may go down as well as up, this is not guaranteed.

On the other hand, because wines sold en primeur tend to be produced only in limited quantities, this may be the only opportunity to buy them

Question 31

Grower-merchants

Answer 31

There are also grower-merchants who own vineyards and produce wine from those vineyards alongside wines made from bought-in grapes, juice or wine.

• Often, the vineyards owned by the merchant are used for premium wines, while grapes from other growers are used for inexpensive or mid-priced wines
• This allows merchants to produce a range of wines at all price points, which they can sell to a range of outlets.

Question 32

E. Guigal

Answer 32

a famous grower-merchant in the Rhône Valley. As well as producing some of the Rhône’s most expensive wines, such as their single-vineyard wines from the Côte-Rôtie, they also produce wines from villages such as Crozes-Hermitage and Gigondas, and generic Côtes du Rhône from bought-in grapes.

Question 33

Grower-Merchants differentiating wine

Answer 33

Some grower-merchants prefer to differentiate between wines from the different parts of the range. While E. Guigal does not, Domaine Dujac in Burgundy, for example, produces wines from their own grapes under the Domaine Dujac name and uses Dujac Père et Fils for wines made from grapes from other growers.

Question 34

Co-operatives

Answer 34

• Co-operatives are owned by a group of growers, and produce and sell wines made from grapes grown by their members.

Question 35

Benefit of Cooperatives

Answer 35

• They can pool their financial resources, meaning they can afford more expensive winemaking equipment and expertise that they could not afford if they were working individually.
• Many co-operatives also give their members access to expert viticultural and winemaking services and advice as well as marketing, packaging and sales services.

Question 36

Marketing for Cooperatives

Answer 36

Marketing the members’ wines collectively can be more efficient and effective than members working on their own. Some of the more dynamic co-operatives have created and marketed successful wine brands (examples include Plaimont in south-west France

Question 37

Cooperative labels

Answer 37

As co-operatives can make large volumes of entry-level wine, another option is to make own-label wines. Examples include La Chablisienne in Chablis

Question 38

Cooperative business structure

Answer 38

• Co-operatives are owned by their members.
• They have different management structures, but all work on the principle of democratic control: management must consult members before major decisions are made.

Question 39

Disadvantage of cooperative business structure

Answer 39

• The decision- making process can be slow and cumbersome, and the agreed course of action may not always be to the liking of individual members.

Question 40

Cooperative profit distribution

Answer 40

Members are usually paid a share of the co-operative’s annual profit, but the method of calculating that varies.

Question 41

Traditional cooperative profit distribution

Answer 41

Consider their role simply to make wine on behalf of their members and then wait for someone to come and buy it, will pay on volume. This model is still important in countries such as Spain and Italy, where vineyard sizes are small and it is not economic for growers to produce and market their own wine; however, some are not quality-focused and may struggle to survive.

Question 42

Modern cooperative profit distribution

Answer 42

Now many co-operatives are quality-focused and pay growers based on the quality of the fruit. They do not pay all their profits back to members, instead investing in the latest technology, research and effective marketing and labelling. These are some of the most dynamic wine-producing businesses, producing very good quality wine that can be excellent value.

Question 43

Benefits of large cooperatives

Answer 43

• Larger companies may compete and benefit from economies of scale – the reduction of production cost due to making and selling goods in large quantities.
• For example, they may be able to reduce cost by bulk buying materials required.
• Many co-operatives have merged to become companies that operate on a regional or national scale.

Question 44

Custom Crush Facilities

Answer 44

These are a variant of the co-operative model found mainly in North America, particularly in California. The difference is that growers do not own the facility, but rather pay each time they require its services.

Depending on their size, custom crush facilities make anything from super-premium, small-batch wines to inexpensive, large-production wines.

Question 45

Benefit of being a Custom Crush Facility

Answer 45

The company can make quick decisions and does not have to get the agreement of members, in contrast to a co-operative.

The finished wine is returned to the grower, who can then market it however they like and take the sales profit.

Question 46

Advantage to grower using custom crush facilities

Answer 46

Growers do not need to invest in expensive equipment and can focus their attention on grape growing and marketing.
They can also benefit from the expertise of the professional winemakers.

For this reason, custom crush facilities have been successful in wine regions with a number of small-volume wine producers (many of whom are new to wine production).

Question 47

Risk of growers using custom crush facilities

Answer 47

It is vital that they have a good working relationship so that the growers’ requirements are clearly understood and met by the facility’s winemaker. Otherwise, the grower will have paid to have a style of wine produced that the grower did not want.

Question 48

Virtual Winemakers/Wineries

Answer 48

• This is a term used, mainly in North America, for winemakers who do not own vineyard land or winemaking facilities.
• Virtual winemakers/wineries buy in grapes or juice and may rent facilities in another winery or employ the services of a custom crush facility.
• They vary in scale from individual virtual winemakers who produce small batches of super-premium, high-quality wines to organisations that create larger-volume brands.

Question 49

Conglomerates

Answer 49

Considering wine production only, the largest of these businesses is California-based E & J Gallo

they still account for a very small percentage of total wine production.

Question 50

Conglomerate business model

Answer 50

Conglomerates often own many smaller businesses across the various stages of the supply chain, from production (e.g. estate wineries, merchants) to distribution (e.g. distributors).

They can also afford to set up regional offices in markets that are important to them to market and sell their wines in that country or region.

Question 51

Conglomerate influence

Answer 51

Their size and influence also mean that they have significant negotiating power and can strike a hard bargain when buying grapes, juice and wine from suppliers and when selling to retailers.

Question 52

Trend of Conglomerates

Answer 52

A number of prestigious wine brands have been bought by companies specialising in luxury goods: for example Moët Hennessy-Louis Vuitton, whose wine brands include Champagne houses Moët & Chandon, Veuve Clicquot and Krug, and Cloudy Bay in New Zealand.