A conflict of competitiveness

Associate Professor Tony Spawton

How competitive is the wine sector ?

Within the sector some 500,000 competing winery brands in 3 consumption segments.

With the remained of the beverage sector ( beer, spirits, Alco pops ,soft drinks –not very as the wine sector in Europe in particular is loosing its “ share of throat “ with dire consequences into the future.Reduced incomes= reduced investment = reduced hectorage= and a loss of some or part of the iconic regions of the wine sector.

The essential of market competitivenessPorter “Five Forces” Analysis

Bargaining power of suppliers

Bargaining power of suppliers

Bargaining power

of buyers

Bargaining power

of buyers

Threat of new entrants

Threat of new entrants

Threat of substitutesThreat of

substitutes

Industry Rivalry

Industry Rivalry

China?

60/80% of wine is sold through supermarkets

Weakening as wine surpluses grow, Weakening as the market is not growing as quickly as its competitors. New products in the

Beer, spirit, soft drinks and watersectors

Comparing Consolidation across Product Categories

% Global Market Share of Top 4 Players in each Category

7

20

44

60

7578

0

10

20

30

40

50

60

70

80

Wine

Beer

Spirits

Tobacco

HouseHoldProducts

SoftDrinks

Concentration of Production and Competition in the Global Wine Sector(Source: Rabobank)

Top 5’s share of national wine

production (%)

Average wine sales of top 5 (US$m)

Predominant Market structure

Australia 85 310 Oligopoly

US 80 750 Oligopoly

New Zealand 80 na Oligopoly

Argentina 50 97 Mixed Chile 47 90 Mixed France (not Champagne)

13 330 Monopolistic

Spain 10 190 Monopolistic Italy 5 125 Monopolistic

Grapegrower (Vinification

Bulk Storage, Packaging)

Grape grower (supplying a singleor multiple grape

varieties)

Contract Crushing Vinification and Bulk Storage

Fully integrated winery proprietary or cooperative (Crushing, Vinification, storage,

packaging ,logistics, service provider ) Contract PackagingNégociant, Cooperative Logistics, Service Provider

Wide range agent/distributor/Wholesaler/négociant (packaging, logistics, service provider)

Hyper/ Supermarket/Liquor store

Specialist store

Mail order/Telesales/Internet Retailer/Service provider

Cellar saleHORCEA

Consumers Repertoire of Choice

Fresh grapes

Fresh grapes

Consolidation of the Channels of Distribution

Direct trading

Direct trading

Must Wine

Concentrate Juice

Consumer Brand Range Availability

Must Wine

Concentrate Juice

BULK

PACKAGED

Change in Concentration in Retailing in Selected Markets(source: Euromonitor 2004,1998)

Percentage of retail wine sales by type of outletCountry 2003 1991 Supermarket

and DiscountSpecialist Supermarket

and DiscountSpecialist

France 82 9 41 19 UK 80 15 71 29 Germany 74 7 40 12 Spain 71 17 US 67 22 49 36 Brazil 64 33 Japan 57 43 China 65 10 Australia ~45%+ by value owned by 2 companies

The Simplified Value Chain for Wine

DistributionChannelMembers ValueChain

ProducersValue Chain

GrapegrowerWine buyers Value Criteria

Equipment &Packaging

Monopolistic and Oligopolistic Competition

Oligopolistic Competition

Perfectmarket

Oligopolistic competition

Definition

A market dominated by a small number of participants who are able to collectively exert control over supply and market prices

Characteristics of an oligopoly market

The wine retail distribution system is a differentiated or heterogeneous oligopoly ( differentiated levels of wine products stocked and differing levels of consumer services) in most markets. In the US, Canada and Scandinavia government run liquor monopolies existAll Oligopolies are subject to the “ kinked demand curve affect-that is when prices fall competitors will retaliate thus reducing margins to all, whereas when prices increase not all will increase prices at the same time, if at all. Oligopolies can spark “ price wars” as competitors retaliate and increasingly non - price competition for wine sales is growing ( cents if a litre of petrol for example). Barriers to entry are high and in the case of alcohol products controlled by licensing.

Characteristics of an oligopoly market

Competition is reactive ( if one advertises the competitors will follow suit, similarly with promotions, location of retail outlets, research and development of offers, services to suppliers, services to buyers ( loyalty programs) opening hours etc. The key issue is that the oligopolies can control the market supply and therefore are able to control ( Influence) the market price. Similarly the introduction of retailer brands, promotional products, distressed products can be used to destabilise the price levels in the market ( but only in the short term)ALL markets are stationary and will return to a stationary position once the irregularities have dissipated. Oligopolistic competitors will introduce excessive levels of differentiation in order to stifle competition from other parts of the market (independent wine retailers for example causing them to surrender licenses, or be available for take over). However many fail if the relevance of the differentiation to the consumer is unappreciated by the consumer ( 80% of new produces fail in the first 6 months of the lifecycle) .

Characteristics of Monopolistic Competition in the Wine Sector

Differentiated products - Differentiated products “ good substitutes” but not “ perfect substitutes”. Many buyers and sellers – 500,000 brands and millions of consumers who have differing tastes and expectations. Sufficient knowledge – To make reasoned economic decisionsFree entry – not true of all situations as in the AOC/DOC barriers to entry are high in the non- AOC/DOC they are low. Monopolistic markets are characterised by a downward sloping demand curve therefore in the long term their profit levels will fall as cost levels increase and where the supply curve is inelastic.

The competitive position behaviors of the wine distribution chain

Grape growing

Global Wine production

Commercial (domestic)

Fine wines (global and domestic)

Supermarkets

Independent retail

Restaurant chains

Independent restaurants

Monopolistic

Monopolistic

Oligopolistic

Monopolistic

Oligopolistic

Monopolistic

Oligopolistic

Monopolistic

The marketing implications of monopolistic competitiveness

Differentiation of a heterogeneous market in the long term is not enough and Region/ winery can build distinctiveness to provide a “monopoly position" which makes gives it a “ unique perceived difference “ from other competitors. ( e.g. tempranillo- La Rioja) In the long term monopoly positions will be replicated as more producers are attracted into the new category that has been created( variety, blend, package )or in mimic of a successful marketing strategy or product ( me too). In the wine sector you need neither a vineyard or a winery ( virtual wineries) to mimic a competitor, but you can build your own brand in the bulk market via contract production and packaging.

The marketing implications of monopolistic competitiveness

Is supported by the use of branding, advertising and promotion in order to both communicate the “ perceived difference” by emphasising its relevance to the consumer category. Brands reinforce this as they become the “ symbols of quality” and the referent cue to the consumer amongst the many competing brands in the category- thus building repurchase loyalty. Brands also reduce search and transaction costs to the consumer with the added to the knowledge of the availability ( where it can be purchased). Branding in Monopolistic Competitive market is enhanced by high levels of repurchase loyalty thus the ability to ride out “ storms”caused by a poor harvest, a glut or a price war.

The marketing implications of monopolistic competitiveness

Brands and the monopolistic market generally is one where non - price promotion is used as cost efficiencies are less likely to be available due to the relatively small size of the winery and the necessary “ perceived quality “ for the wine ( quality of the packaging and presentation of the product). Branding is increasingly used to protect the unique intellectual property of a region / winery for as long as possible and to ensure that replication is avoided for as long as possible.

Perfect competition and the consuming public

Consumers operate in a environment of perfect competition:-They have a choice of a multitude of brands in all alcohol categories and range across each category.

They choose brands “ that suit them” and are disloyal to brands that do not suit them ( “change of pace brands”).

They assimilate the information based on the level of “ involvement”in the category. (it is a perfect system as they filter out extraneous information) – and are subject to selective perception. (only see what they see and hear what they want to hear)

Wine is a hedonic product and “ price and quality” are based on the levels of hedonic satisfaction at the point of “ consumption” . -“value in use”.

Success stories & case studies

The lack of understanding of competitiveness and how to develop strategies to develop competitive advantage.There are case studies where success has been achieved :-Australia – “ Global table brand” focus produced in a Oligopolistic production based on a good understanding of consumer expectations supported by an efficient supply chain to serve other Olgopolistic market . New Zealand – “ Specialist innovators and niche marketers” – focused approach limited to one segment – strong distinctiveness characteristics –realise that a product lifecycle exists and innovates accordingly.La Rioja – “ Niche Marketing” focus – small specialist segment with little competition, but needs like New Zealand to maintain a high level of innovation as other competitors will emerge. Tokai- “ Niche product” with strong product distinctiveness in a changing market for dessert wines ( flavoursome, low alcohol and reasonably priced). – very early in the lifecycle and needs greater availability and trail to grow and prosper.