Greek Wine Industry - Essay Example

GREEK WINE INDUSTRY Table of Contents Introduction 3 0 Porter’s National Diamond Analysis 3 1 Factor Conditions 5 2 Demand Conditions 6 3 Firm Strategy, Structure and Rivalry 7 1.4 Related and Supporting Industry 7 1.5 Government 8 1.6 Chance 9 2.0 Market Entry Strategy 9 3.0 Contemporary Management Issues 11 Conclusion 12 Introduction The importance of wine in the Greek culture has been seen for over 4000 years when they offered it to entertain their guests or shared philosophical ideas while drinking wine in intellectual gatherings (Lissarrague, 2014). Greek used wine as a necessary part of daily regimen as they were well aware of its nutritional value and cultivated nearly 300 varieties of grape since prehistoric times. Different wine critics across the world expressed that it is the distinct flavors of native varieties of grapes which create strong marketing advantages for the wine industry in Greece. With the cultural and ethical support for wine in Greece and diversities in the source of its raw materials, the wine industry flourished a lot in recent years and has been attracting tremendous investments towards improvements in wine manufacturing technologies (Konstantinidis, 2008). Henceforth starting a wine industry in Greece where the cultural and social environment provides an additional advantage along with its favorable geographic and climatic conditions for making of wines. The paper gives an illustration of the wine industry in Greece and the potential scope of a new wine firm where already large number of manufacturers supplying high quality products exists. The competitive advantages of wine industry in Greece are evaluated using the famous Porter’s National Diamond framework which focuses on the key factors or determinants in the country that a new entrant in the industry can utilize for their production and establish their business (Berger, 2008). Along with Porter’s diamond framework, an enterprise starting its business in a new domain should also consider market entry strategies to penetrate well in the competitive market for the wine in Greece while incorporating the contemporary management issues that they may face during their business. The later part of the paper hence deals with the market entry strategies of wine industry and the major contemporary issues that are prevailing in the management of the industry in Greece. 1.0 Porter’s National Diamond Analysis Michael Porter came up with attractive framework for illustrating the competitive advantage of a nation in a particular industry and the factors that can led to growth of a particular industry in a specific country (Márkus, 2008). According to Chikán (2008), the Porter’s National Diamond critically analyses the six main factors in the economy that determines the competitive position of the industry and how they stimulate the growth and profitability of the industry. The Porter’s Diamond model and the brief illustration of the six economic factors in the context of wine industry in Greece are provided in the following section. Figure 1: Porter’s National Diamond Model 1.1 Factor Conditions Physical resources: The successful growth of the wine industry in Greece is primarily due to the abundant resources available in the country. The indigenous varieties of white and red grapes cultivated across the country like Assyrtiko, Lagorthi, Robola, White Muscat and Mandelaria which resulted in production of pleasant, aromatic and superior wines blended with distinctive flavours (Thalassi Companies Inc., 2010). The abundance of resources provides raw materials to the industry at a much cheaper rate while ensuring greater profitability to the farmers because of large scale of production. The favourable weather conditions (plentiful sunshine, moderate rainfall) and fertile soil of the country are the main reasons for Greece being one of the oldest and largest grapes producing region in the world. Recent reports shows approximately 70,000 hectares of vineyards (accompanied by 50, 000 hectares for grapes and raisins) were cultivated and they yielded approximately 3.5 million hectolitres of wines annually (Bettini, 2013). The main grapes producing regions of the country are Kavala in Macedonia, Corinth in Peloponnese and Heraklion in the island of Crete (Thalassi Companies Inc., 2010). Apart from grapes, the greater availability of water (used in the production of wine) in Greece due to the fact that it is mostly surrounded by sea and has numerous streams flowing across the country also supported the wine industry. The Hellenic Sugar Industry, the sole sugar industry in Greece supplies sugar to the wide chain of wine firms at concessional rates is also a supportive factor for the industry (Tjamos et al, 2006). Infrastructure: Beside the availability of large resources of raw material for wine, the infrastructural facilities of the county contributed a lot to the growth of wine industry. The good network of transport connecting the major commercial segments of the country with agricultural sites facilitated the movement of raw grapes and sugar to the industry in short span of time (Aylward, Glynn and Gibson, 2006). The invention of modern techniques of production and the simultaneous training of the wine makers by wine schools in Greece has resulted in more productivity and efficient scale of production. Human Resources: Being a labour intensive industry, the cheaper availability of unskilled and semiskilled labour in Greece provided a greater of opportunity for the wine industry who practised large scale production. With majority of work force attaining only primary level of education and a higher participation rate of female in total work force (41.5 % of the total labour force), wine manufacturers can attract sufficient labourers offering subsistence level of wages (The World Bank, 2015). Capital resources: The capital market stability in the Greece and lower rates of interest provided a good climate for investment in the country. Majority of investments took place in the food processing industry (wine being one of them) owing to greater availability of agricultural raw materials, cheap unskilled labour and abundant land space for establishing of factories (Vlachvei and Notta, 2009). 1.2 Demand Conditions As mentioned earlier, wine has accompanied Greek civilization since ancient times and it is specialized in production and consumption of wine because of norms which considered wine to be part of their social and cultural regimen. The high demand for wine amongst the Greek was due to the fact that they considered wine to be a daily household necessity used as beverage, refreshments to the guests and even for religious ceremonies. Unlike some countries that put restrictions on the consumption of alcohols because of its disruptive effects on health, Greece identified potential medicinal and nutritive properties of wine and encouraged its consumption (Wright et al, 2008). The use of red wine as an ingredient in some food recipes as it enhanced the aroma and flavour of the food, also contributed to the rise in demand for wine by households, hotels and restaurants. The lower prices for wine offered by the wholesale manufactures to strive competition in the market with other alcohols also fuelled the its demand. According to Trevisan (2011), the change in the entertainment habits of the people of Greece with more inclination towards the traditional pattern of social gatherings and awareness about its health benefits accompanied by the fall in prices are thus the major determinants of growing demand for wine in Greece. 1.3 Firm Strategy, Structure and Rivalry As wine continued to be an important aspect of the social and cultural norms of Greeks its demand and use increased across all segments of the population. The firms producing wine shifted their production from traditional to modernised methods for production. Apart from availability of cheaper inputs, the wine industry majorly owned its growth to the cultural spectrum of the Greek society that supported its consumption The increase in the number of retail outlets selling wine and social clubs (pubs and bars) further raised the consumption which provided a large scope for the manufacturers in the market to generate large revenues (Pitoska, 2008). The presence of large number of home country producers of wine will provide a challenging and competitive market for the new entrants. The Greek Wine Cellars, Kourtaki, Boutari, Tsantali and Achaia Clauss etc. are some of the top grossing wine companies in Greece selling high quality wines (Euromonitor, 2015). These local producers remained the key players in the market generating demand for the raw materials and supplying adequate quantities of wine yearly to the households, retailers, hoteliers and restaurants. Therefore the existence of large number of strong rival firms in the industry requires that the newer entrants in the market should develop some distinctive marketing strategies to attract the consumers or supply their products at prices lower than the prevailing rates (Smit, 2010). The bargaining power of the wine consumers is generally high in Greece as there are number of alternative sellers in the market. The efficient supply chain linkages of the wine producers with their raw materials sources makes it easier for the newer entrants to start their venture by following the strategies of existing firms in the industry (Avdimiotis, Kokkinis and Kamenidou, 2012). While on the other hand, the presence of large number of rival firms in industry motivates the new firms to come up with innovative and differentiated products so as to survive the market competition (Centonze, 2010). 1.4 Related and Supporting Industry The continued growth of wine industry in Greece has its spill over effects over the related or supported industries of wine. Greece’s strengths and competitive advantages in the production of grapes enabled the wineries to extract raw materials at cheaper rates. This was hence a crucial reason for the noticeable growth of wine industry in Greece as it valued agricultural production equally as any other secondary production and the farmers were benefitted by government expenditures in irrigation, modern methods and equipments for farming and provision for agricultural subsidies. The strong backward linkage of the wine industry with agricultural sector (grapes pulp and sugar being its key ingredients) aided the wine manufacturers with lower prices for intermediaries (Giuliani and Arza, 2009). The successive growth of the wine industry also favoured the large hotels, bars and wine stores across the country. Due to the comparative advantages in the production of wine, they produced wine at much lower cost and sold them at prices that provided them a substantial profit margin. Also it is widely used by households and restaurants as a cooking ingredient on daily basis because of its usefulness in marinating and adding extra flavours to the dish. The industry generated demand for the chemicals (acids, tannins) and minerals for ageing and fermenting of wine. The glass and cork used in making wine bottles also provided a source of demand for home producers of glass and cork. This meant that along with backward linkages, the wine industry in Greece has broad network of forward linkages (through supermarket retailers, hotels, restaurateurs and bars, packaging industry) which simultaneously influenced the production of those sectors as the wine industry of Greece flourished. 1.5 Government The government of Greece plays an integral role in influencing the above factors through policies and industrial regulations that supported wine industry. Regulations and tax policies can alter the demand and supply conditions of any industry. The ease of tax rates by the government on the production of wine because of its nutritive and medicinal benefits chiefly supported the industry (Visser and de Langen, 2006). Beside this the land reform policies also benefitted grapes production through redistribution of potential but unutilized lands from the wealthy owners to the small and marginal farmers who cultivated them with their own interest of higher production and profits. Along with these the reduction in the trade and tariffs restrictions in order to stimulate the exports of wine across the world influenced the growth of wine industry in Greece. The “Wines of North Greece” Association of 39 wines companies are putting substantial efforts in promoting their wine outside Greece (Karelakis, Mattas and Chryssochoidis, 2008). EU in support of the association has devised some international programmes for marketing wines of Northern Greece in Ukraine, USA, China and Switzerland. This resulted in the recognition of Greek vintage wines in the international market and further raised the level of wine exports which motivated the wine growers to produce quality wines by application modern methods (Wesseling, 2014). 1.6 Chance Chance or the luck factors for any industry in an economy are largely beyond the control of the firms and the economy. Such factors can nullify the competitive advantages of any industry or can create new opportunities. The wine industry of Greece operating in an open market with free market force mechanisms,with minimal government restrictions and assistance through agricultural subsidies (advantageous for grape framers) influenced the production of wine positively(Hill, 2008). Similarly the sudden rise on the exchange rate or the value of currency may spur the growth of the industry which exports a significant portion of their production overseas. Thus the chance factors in case of wine industry of Greece intensify the future growth opportunities for the existing wine growers as well as the potential entrants in the market. 2.0 Market Entry Strategy Despite of the economic crisis prevailing in Greece since 2008, the foreign direct investments has been showing significant amount of capital inflows. The net inflows of capital in the food processing sector reflect the performance of Greece in attracting FDIs towards the wine industry (Viviani, 2008). The presence of vast vineyards and the large number of wineries exporting high quality wine and generating higher profits has attracted FDIs in the sector. Greece comparative advantages in the climatic and geographic conditions in production of raw materials has enhanced the investment as the investors could easily find secured source of intermediaries without the need for importing them from outside. Also a long term quality improvement in the vineyards by application of modern techniques of farming made it possible for the new firms to extract high quality resources for their products (Hussain, Cholette and Castaldi, 2008). A new firm while entering into the industry through investments hence should find appropriate channels for distribution of their capital in installation of plant and equipments, commissioning the retail stores, bars and liquor shops or establishing their own individual store and also promoting and introducing their products among the consumers. The market entry strategy also includes the sufficient availability of initial capital with business owner required for installments of modern equipments and machineries. The firm should also engage an expertise who would develop efficient methods of wine production and application of techniques to enhance the quality of the quality. Gielens and Dekimpe (2007) said that in order to compete with the old and popular wine manufacturing companies, the new firm with comparatively lower volume of market share needs to supply its products at lower prices so as to attract the consumers especially the bulk buyers (hotels, liquor shops, bars, and pubs). Though the profitability and ease in production of wine attracted FDIs in wine industry in Greece, issues prevailed regarding the capital market instability and exchange rate volatility in the economy. Masset and Weisskopf (2010) argued that while FDI inflows remain high, a rise in the exchange rate of the country will diminish the returns to the investments. The profits earned from the sale of wine to a wide distributive network of small and bulk consumers might be substantial in Euro but the actual profits (earnings in term of home currency of the investing firm) would be lower (Monastiriotis and Jordaan, 2010). The overall strategies of the FDIs should consider the financial and economic stability of the Greece. Being in the Euro zone of European Union (one of the countries that have accepted single currency Euro), they enjoyed a favorable climate in the foreign exchange market where European Central Bank arbitrates to minimize fluctuations in the exchange rate .The central bank also controls the money supply and inflation in the economy by determining the interest rates. The excessive lower rate of inflation in Greece prompted the Central Bank to initiate policies for raising the money supply and investment expenditures in order to create more demand and output. This provided a positive impact on the investment in wine industry as the central bank lowered the rate of interests (Pantelidis and Nikolopoulos, 2008). 3.0 Contemporary Management Issues The wine industry in Greece has been experiencing tremendous growth because of its national competitive advantages in viticulture and wine making. This made the sector attractive to the foreign investors. But there are some serious challenges and issues in management of wine industry in the country. The major challenges that a new wine manufacturer can face are the location of their winery, choosing an appropriate vineyard that would supply them the high quality grapes, locating their stores and entering into partnerships with local retailers, liquor shops, hotels, beverages clubs etc (Dunning, Kim and Park, 2008). The backward linkage of the wine industry with agricultural sector requires the wine manufacturer to locate their vineyard close to the source of grape firms to minimize the logistics cost as well as time in transporting the raw materials. Therefore the location choice of the winery is an important factor determining the cost and efficiency of the industry in distribution of raw materials from source to the industry. The packing of products being an integral part of manufacturing process of any food sector, wine industry also requires choosing suppliers of glass bottles and cork near the production unit. For the successful entry to the wine industry in Greece a producer hence requires possession of some expertise both in the wine making process as well as in the management of the supplier’s linkages. The location of the firm in close proximity to the intermediate sources ensures the transparent flow of information and ideas and led to organized and cooperative management of distributive network of the industry. A new firm while entering into the wine industry of Greece should devise appropriate strategies of investments in marketing so as to enhance the preferences of the consumers to its products from the products of existing rival firms. The product differentiation is the first step of entry in which the new entrant should make introduction strategy so that it products look somewhat different from the prevailing ones. In case of wine, where the products hardly differentiates in real sense from each other in composition and appearances, the firm should specifically look for a brand name that sounds more attractive and distinctive (Vrontis and Papasolomou, 2007). It can also manipulate the consumers’ choices in the market by creating appealing physical appearances of the wine bottles. Investments in advertisement are the next step of marketing process of any firm in an industry. The new entrants in the industry can introduce their products in the market and allure consumers by organizing promotional events at the supermarket retail stores and the groceries selling wine. A new participant to the wine industry requires the availability of credit at favorable rates from the financial institutions. The establishment of vineyard and installing mechanical equipment involves the majority share of the initial investments which are substantial while the revenues from the primary sales tend to be lower. This creates difficulties for a firm as it remains liable to debts for period i.e. till the sales volume reaches the level where it can generate supernormal profits and can repay their obligations. Setting up of new units in an alien countries is even difficult where there are industries in highly labour intensive as the firm requires workers (semi skilled) for its winery and for its operations and management (skilled labour). Greece is currently showing trends of rising structural unemployment due to lack of skill development and motivation for higher education (OECD, 2014). In such a scenario, while it is easier for a new producer to engage cheap labour for manufacturing of wine in the factory it simultaneously puts constraints on the availability of skilled and professionals required for daily management and operations. A new entrant in a prosperous industry in an economy faces the challenge of gaining market share. There are large numbers of reputed wine firms who enjoy significant market share and have earned loyalty of the consumers by supplying quality products. Thus, a new entrant therefore should come up with competent strategies for creating their market presence in such a strong competitive environment. Conclusion The wine industry in Greece has been one of the traditional and flourishing industries in food processing and retail sector. Wine was considered as a vital part of Greek culture and a symbol of prestige and strata in the society since ancient times. The availability of large plantations for indigenous grapes across the country has spurred the growth of the industry. The Greek wine industry entails huge distributive networks of consumers in the form of retailers, supermarket chains, liquor shops, hotels and restaurants and the households which broadened the scope of profit earnings for the industry. These general competitive advantages of the industry in Greece make it more attractive to the foreign investors. 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