Case Questions
Closing Case: The Growing Trade in Growing Grapes
Wine is one of mankind’s oldest and most important industries. Archaeological evidence of wine
production dates back to 6000 B.C.E Hieroglypics from 3000 B.C.E. depict Egyptians enjoying celebratory
cups of wine. The Bible records Jesus’ first miracle, turning water into wine at the wedding feast at Cana.
Today, some 18.6 million acres of land are devoted to vineyards, which yield 26 billion liters of wine
annually. The EU produces about 55 percent of this output, with France, Italy, and Spain accounting for
the bulk of the EU’s production. The United States, Australia, China, South Africa, Chile, and Argentina
are the largest non-European producers.
Unti the 1980s, French vineyards were the dominant force in the global wine trade, with Italy, Spain, and
Germany trailing behind them. These Old-World producers benefitted from centuries of tradition and
their reputations for quality and sophistication. The mystique of French wine was in part attributable to
the belief by oenophiles (a word for wine experts) that terroir and the character of the grape itself
contributed to the creation of unique characteristics for each vineyard’s wine. (Terroir means “a sense
of place” and includes numerous factors that convey character to the wine, including soil chemistry,
topography, and the microclimate of an individual plot of land.) So critical is terroir to the French wine
industry that in the nineteenth century, French officials assessed the quality of the wine produced in
each French vineyard and established an elaborate schema for categorizing the wines according to their
location and quality – Grand cru, Premier cru, etc. Known today as the Appellation d’origine controlee
(AOC) (controlled designation of origin) system, effectively the French government provided a quality
assurance and consumer protection program for lovers of French wine. Under the AOC system, for
example, the only wines that can bear the label “Champagne” must be fermented from grapes grown in
the Champagne region of northeastern France. Grand cru champagne must originate from lands
specifically designated as such by the AOC system. The Italian and the German governments established
similar programs.
The Old World producers, although dominant, were not invulnerable to global competition, particularly
after the so-called “Judgment of Paris” in 1976, when a British wine merchant living in Paris organized a
blind taste-testing competition between French and Californian wines. To the surprise of nearly
everyone, the judges rated California wines as superior to those of French wines in the two contested
categories. (Bottle Shock, a 2008 movie starring Alan Rickman, dramatizes the events surrounding the
Judgment of Paris.) Nonetheless, French wines command a price premium in the export market,
averaging more than $6.00 a liter compared to only $3.00 for wines from Australia, Argentina, Chile, or
the United States.
The AOC system, although conferring some marketing advantages, does have some disadvantages. It
requires that consumers have a fair degree of knowledge to make wise wine purchases. Moreover,
individual vineyards are vulnerable to the vagaries of the weather. If Mother Nature fails to cooperate, a
vineyard might receive too much or too little rainfall or sunshine in a growing season; thus, the quality
of its grapes could vary from year to year. This may raise the snob appeal of the Old World wines – you
can impress your friends with your expertise by recommending one vintage over another. However,
many consumers, particularly first-time buyers, found that downright confusing. Because the AOC
system tied the wine label to the land on which the grape was grown, Old World vintners were also
limited in their ability to benefit from technological changes and economies of scale. If someone
invented a machine to facilitate grape harvesting, you could not necessarily buy out your neighbor to
capture economies of scale—his land might have a different terroir, and perhaps a different government
cru classification. As a result, the average size vineyard in France is only 7.4 acres and 1.3 acres in Italy,
compared to 167 acres in Australia and 213 acres in the United States.
Driven by the Judgment of Paris and changes in consumption patterns, wine production grew steadily
during the 1970s, 1980s, 1990s, and into the new century in New World countries such as the United
States, Chile, Argentina, Australia, and South Africa. The New World wine makers differentiated their
wines primarily by grape variety—pinot noir, cabernet sauvignon, etc. -- rather than by the specific
vineyard or chateau where the grapes were grown. Moreover, the New World wine makers relied on
branding, rather than vineyard names, to market their products. This had several advantages. First, it
simplified the purchase decision for unsophisticated buyers – remembering a brand name like Columbia
Crest or Yellowtail was often easier than recalling that of an obscure, small French vineyard. Second,
New World vintners were able to blend grapes from various vineyards to create a wine with consistent
taste from year to year, regardless of random changes in the weather. Third, they were able to market
large volumes of wine under that brand name, allowing them to distribute their products more easily
through mass-market retailers like Tesco, Marks & Spencer, Kroger, and Walmart. As a result, New
World vintners are much larger than their Old World rivals and are more able to capture economies of
scale from use of the latest technological breakthroughs and labor-saving mechanization. The four
largest firms in the United States, for example, control 56 percent of U.S. sales; for Australia, 62 percent;
and Chile, 82 percent. In France, the four largest firms are responsible for only 16 percent of sales;
Spain, 21 percent; and Italy, 10 percent.
Export markets are vitally important to both Old World and New World vineyards. About 10 billion liters
of wine are traded in a typical year. The EU accounts for 61 percent of the export market and the United
States for 4 percent, primarily from California. Because both are major consumers of wine, the bulk of
their production is consumed domestically. Such is not the case for Chile, which exports 80 percent of its
crop, and New Zealand, which consumes only one-third of its production.
Case Questions:
1. Both Old World vineyards and New World vineyards compete in the global market place. What
are the competitive advantages and disadvantages of the Old-World vineyards? Of the New
World vineyards?
2. Why are French wines able to command a price premium in export markets?
3. Should the French government relax its AOC system, allowing French vintners to expand the size
of their chateaux to capture economies of scale? Why or why not?
4. Should the U.S. government adopt an AOC system to ensure the quality of U.S. wines destined
for export markets?
5. “Bottle shops” -- small retail outlets specializing in selling fine wines—might purchase a case or
two of a specific wine when placing an order. (A case typically consists of a dozen 750-mililiter
bottles.) Buyers for large multistore firms such as Tesco or Walmart often order thousands of
cases at a time. Which type of retailer is likely to specialize in Old World wines? In New World
Wines? Give a reason for your answer.