Types of Business Engaged in the Production of Wine Flashcards
What various types of businesses engage in the production of wine?
- Estates
- Growers
- Grower-Producers
- Merchants
- Co-operatives
- Custom Crush Facilities
- Virtual Winemakers/Wineries
- Conglomerates
Explain what an estate is and how they operate?
An estate producer produces wine exclusively from their own vineyards (vineyards that are wholly owned or leased). One of the key advantages to estate production is that the estate retains control over the entire process, from growing the grapes to producing and bottling the wine. They can therefore choose the style of wine made and ensure quality control at every stage.
Another advantage is that all of the profit from the production of the wine belongs to the estate. Estates which also market and sell their wines directly, without using intermediaries, additionally take the full profit from the sale of the wine.
There are also marketing benefits for estate wines. 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 to make a particular wine came from 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.
The main disadvantage to estate production is 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.
Another risk to estate producers is that if 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.
Estates vary hugely in size, from tiny small holdings to much larger areas. Even larger estates can make small-production wines from specific vineyards or plots.
Larger estates tend to be more financially viable than smaller ones. They can produce greater volumes of wine more cheaply because the same equipment can be re-used to produce different wines. Also, larger vineyards are easier to mechanize – a series of smaller vineyards, especially if they are not neighbouring one another, makes mechanization difficult.
In many regions, however, the average vineyard is still very small. This may be the result of historical factors: for example, French succession laws require land to be split equally between descendants, meaning that estates get smaller with each generation. Size may also be dictated by the geography of a region: in hillier regions, vineyards are limited by the terrain.
Explain what growers are and how they operate?
Some growers choose not to produce their own wine, concentrating solely on growing grapes which they then sell to a winemaker or merchant.
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.
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 which is prized by winemakers. A number of growers have made a very successful business from growing popular grape varieties in prestigious wine regions: for example, Andy Beckstoffer and Beckstoffer Vineyards who grow Cabernet Sauvignon on prime sites in Napa Valley and elsewhere in California.
However, 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.
Growers have two options for selling their grapes, each with its advantages and disadvantages.
Some growers enter into a contract with a particular producer or merchant. 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.
A longer-term contract gives a grower greater security although it is not unheard of for producers or merchants simply to terminate such contracts and source grapes elsewhere. However, many such contracts lead to a strong working relationship between the parties and producers or merchants may actively work with growers to produce the best quality fruit.
The other option open to growers is to sell the grapes on the spot market. 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 glut of grapes, the spot price is likely to be less than the contract price.
Explain what what grower-producers are and how they operate?
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 advantage to the grower-producer is that 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.
The disadvantage is that the grower-producer will make a smaller profit than if they were to sell the finished wine. They also lose control over the style of the finished wine as the merchant will choose the length and type of maturation. Also, merchants often blend together wine from different producers.
Explain what merchants are and how they operate?
The traditional role of the merchant (in French, 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.
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.
The key advantage of being a merchant is that, 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. In Burgundy in particular, this has led to the rise of the so-called micro-négociants who specialise in small-production wines, usually from individual vineyards, that often achieve super-premium prices. Whilst some work closely with particular growers, others wait to buy grapes on the spot market each year to be assured of the best-quality fruit.
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. Also, in regions such as Burgundy or Napa Valley where grape prices have risen considerably in recent years, 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.
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, whilst 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.
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.
Explain En Primeur?
En primeur (also known as ‘wine futures’) is a method of selling wine before it has been bottled. Purchasers buy the wine whilst 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.
This type of purchasing has long been associated with merchants who bought up wine in advance either to bottle themselves or to sell on to consumers when it was ready to drink.
The modern en primeur system is most closely associated with Bordeaux, where it dates back to the period following the Second World War when the châteaux were struggling to survive financially. The long maturation time required for top Bordeaux wines meant that these châteaux have large sums of money tied up in their cellars. By selling the wine whilst 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.
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. As a result, en primeur sales have become an important part of the growing fine wine trade.
The success of en primeur sales in Bordeaux encouraged other regions to create their own system Wines sold en primeur tend to be those that benefit from a period of maturation in barrel (usually 18 months or more) and those which are prized by investors, such as Burgundy, Rhône, so called ‘Super Tuscans’ and Vintage Port.
Explain what co-operatives are and how they operate?
Co-operatives are owned by a group of growers and produce and sell wines made from grapes grown by their members.
The benefit for the members is that 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.
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 or Badischer Winzerkeller in southern Germany).
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 and Mont Tauch in Fitou.
Co-operatives are owned by their members. They have different management structures but all will adhere to the principle of democratic control: management must consult members before major decisions are made. Therefore, one downside to co-operatives therefore is that 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.
Members are usually paid a share of the co-operative’s annual profit but the method of calculating that varies. The more traditional co-operatives, which 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 weight. 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.
Many co-operatives are, however, now 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 someof the most dynamic wine-producing businesses, producing very good quality wine which can be excellent value.
Co-operatives range in size from small facilities serving a single town or a village to huge operations that rank among the largest wine companies in the world.
Explain what custom crush facilities are and how they operate?
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.
These facilities have been established specifically to make wine for growers who do not have their own winemaking equipment. The facility is owned by a company which charges growers who wish to use their services, so there are none of the downsides found with co-operatives. The finished wine is returned to the grower who can then market it however they like and take the sales profit.
The advantage to the grower is that they do not need to invest in expensive equipment and can focus their attention on grapegrowing 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).
However, given that the grower is handing over production of their wine to a third party, 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 which the grower did not want.
Explain what virtual winemakers/wineries are and how they operate?
This is a term used, mainly in North America, for winemakers who do not own vineyard land or winemaking facilities. They vary in scale from individual virtual winemakers who produce small batches of super-premium, high-quality wines to organizations which create a brand of wine, sourcing fruit or juice from a large number of sources (a ‘virtual winery’).
Virtual winemakers/wineries buy in grapes or juice and may rent facilities in another winery or employ the services of a custom crush facility.
Explain what conglomerates are and how they operate?
Whilst the spirit and beer industries are dominated by a small number of major companies, the wine industry is mainly made up of much smaller businesses.
Nevertheless, there are still some very large companies (conglomerates), some of which have interests across all alcoholic products, not just wine. According to Euromonitor, the top 10 wine-producing companies in 2016 were:
Company % of world production,
- E & J Gallo, USA 2.7%
- Constellation Brands, USA 1.7%
- The Wine Group, USA 1.5%
- Treasury Wine Estate, Australia 1.12%
- Viña Concha y Toro, Chile 1.03%
- Castel Frères, France 1.02%
- Accolade Wines, Australia 0.97%
- Pernod Ricard, France 0.97%
- Grupo Peñaflor, Argentina 0.9%
- FeCoVitA, Argentina
These companies own some of the largest wine brands in the world: for example, Concha y Toro owns Casillero del Diablo, ConoSur and a number of other Chilean brands as well as Trivento in Argentina. These brands cover the full range of price points meaning Concha y Toro have access to a wide variety of outlets and potential customers.
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. All of this gives the conglomerates greater control at all stages of the route to market and reduces the need to pay intermediaries. 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.
There is an increasing trend for major companies from outside the wine industry to buy into the sector. 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. A number of insurance companies have also been investing in vineyards as part of their portfolio: AXA, for instance, owns a number of top estates in Bordeaux and Burgundy, as well as the Port house Quinta do Noval.
