Wine Industry Complications - Essay Example

Introduction The Wine Industry has been increasingly become complicated on the onset of globalisation. Globalisation has opened up opportunities for all wine companies to market their products in countries with prices competitive with other products. It is because no particular wine company is considered to be dominant or owns even at least one percent share in this vast market (Benson-Rea, 2004). France and Italy leads the production and consumption of wine globally but they have seen a steady decline of their market share along with other players such as the United Kingdom, United Stares, Australia and other European countries. The decline can be attributed to competition among winemakers and emergence of new players that strategically takes up a chunk of the market pie (Synergyst 2006). Among the new player is the New Zealand Wine Industry, even though it has a low base in 1980s at just about 4.5 million dollars in export, now it has exceeded it initial targets by 50%. The New Zealand Wine Industry was dominated by four major players that account for almost 80% of all exports and 16% is accounted from the 17 medium sized wineries. Almost all these wineries export a third of their production volume. One of this medium sized winery is the Coopers Creek (Case Study, 2001). Coopers Creek was established by Andrew and Cynthia Hendry in 1980. Andrew being a former worker in a wine company and Cynthia on pate making venture proved to be a right combination. The winery is located between the Huapai and Kumeu region in northwest Auckland that includes a four hectare vineyard. The company was formed with the partnership of its first winemaker, Randy Weaver and vintage and soon after the first label was introduced to the market (www.cooperscreek.com.nz/history.html). The company was arranged in a way that the winemaker, Andrew and the shareholders, made up mostly of grape growers, share a third of the company. He intentionally wanted the winemaker to be a part owner to have a more hands on approach in wine making at the same time joins in major decisions awaiting the company. The growers on the other hand wanted to be paid the highest price for its grape but at the same time as shareholders, they wanted to bargain for lower prices. That is why, as profits were generated, Andrew bought the share of the growers because it became difficult for them to play on both sides. Just after two years, the first Coopers Creek vintage was produced and soon after that the first label was introduced in the local market (Case Study, 2001) . After acquisition of additional vineyards and a new winemaker after Randy returned to the US, Kim Crawford the company continued to explore additional markets. It is their primary objective to grow the grapes where they grow best for best grapes are reflected in their wines. Coopers Creek was then considered to be one of the successful medium-sized winery of the decade and at the same time an 'Award for Excellence in Exporting' was received by the company in 1997. Now, at almost 20 years, the winery is still developing ways to improve its products with its new winemaker Simon Nunns. A steady increase in its production volume was observed in order to meet the local and international demand of its products (www.cooperscreek.com.nz/history.html). Business Background One of the initial strategies utilised by Hendrey was establishing collaboration between local competitors in the west Auckland area. It was during one of his visit in Australia that he observed the collaboration of some Australian wineries locally and he wanted to try the idea in New Zealand. The group regularly meets to decide their next move. They initially formed a joint advertising and promotion relationship with each other that they arranged special tours, special wines and music at each vineyard as part of their marketing strategy. They also collaborate on wine tasting when introducing new wines and labels. As the success of their collaboration on the marketing initiatives was felt, they also decided to collaborate also on the production side as well, like sharing equipment and grape crushing at times. Collaboration on joint purchasing on packaging materials such as corks, bottles and barrel also proved to be cost effective as the freight and purchasing cost is lessened (Case Study, 2001). But these collaborations did not impede the fact that they are still competitors vying for market share. Especially to the international market, when a customer decides to buy a New Zealand wine, Coopers Creek is in competition with every other New Zealand wineries. It is known that these wineries collaborate on the premise that it is efficient and beneficial for all (Benson-Rea, 2004). Domestic Market The domestic wine market of New Zealand is increasingly competitive with nearly 400 producers and worsened by cheaper imports from Australia. In order to compete locally, Coopers Creek domestic marketing strategy is primarily concentrated on three fronts, on-premise, and liquor stores and on supermarkets. In addition to this, the company hired three full time sales representatives. One focuses only on restaurant sales and the other two on retail, apart from this; they also have an army of commissioned sales personnel dedicated on selling the product on the countryside. The result was Coopers Creek was dealing with a large number of Auckland based restaurants and able to offer prices that are competitive. Andrew believes that the start of supermarket wine sales needs more personal intervention along with rising competition that is why the company has representation on the country's largest supermarket chain. But this feat was far fetched from what Andrew had already planned. The wineries in New Zealand are regulated by the New Zealand Wine Institute. The institute administers export certification as well as chemical and blind tasting. In order to sell, companies are required to secure a license and apply for membership. Andrew once became the representative for the medium sized wineries in the institute. Locally, the company have received its share of negative publicity such as the alleged breach in the Food Regulations Act and the Food Act in 1995. The company in turn decided to voluntarily suspend its export operation pending the investigation. The investigations and audit done by the New Zealand Ministry of Health showed discrepancies in record keeping and make up and labelling of some its 1995 and 1996 wines. Ironically, two of the wines that were subject to the investigation won the London International Wine Challenge(Case Study, 2001). International Market Their entry to the international market was delayed because the company wanted to secure enough long-term commitments from grape producers and also establish a concrete grip on the domestic market. The success of the Coopers Creek domestically made Andrew set his eyes on the lucrative international market. He grabbed the opportunity in one of the Wine Expos in Melbourne held by the New Zealand Wine Institute. Initially in 1987 only 1% of the total production volume went to exports mainly to Australia. In just more than a decade, the wine industry of Australia and New Zealand boomed(Anderson, 2003). Now, 49 % of the total production is solely for the export alone. Considering the global demand of wine as static while the export supplies is expanding rapidly, the average price of exported wine is going to succumb to pressure and eventually decline in the coming years(Andersen, 2003). Basically winning wine expos and wine challenges helps the reputation of the wine as well as the company as a whole. Collaboratively, Coopers Creek entered and developed the Australian, UK, US and Canadian markets and Holland, Belgium, Ireland, Hong Kong, Singapore and Switzerland, which Coopers Creek had essentially developed on its own (Benson-Rea, 2004). United Kingdom Market In 1989 Coopers Creek initiated a serious export strategy first to the United Kingdom, in partnership with the New Zealand Wine Institute. The result was the formation of the United Kingdom Wine Guild in 1992 which is a partnership of Trade New Zealand, a publicly funded body concerned in promoting overseas trade, and wineries already in the United Kingdom market and those interested in entering the market. One-third of its fund is given by the Trade New Zealand within a limited period and two-thirds by the active exporters and the one percent levy collection on free on-board sales. The funds were used to establish an office in London with full time employees dedicated to promote and support the sales of New Zealand wines. The Wine Guild was controlled by its board of directors which Andrew was one of them. They provide financial and marketing expertise for successful operation of the guild and at the same time ideas for future development. The strategy was to give the New Zealand wines the highest average price in the United Kingdoms market. The emerging wine companies of the US, Chile and Europe wanted to supply the reliable and profitable supermarkets, the New Zealand wines targets the 'fine' wine enthusiasts as well as connoisseurs (Benson-Rea, 2004). Small wineries such as Coopers Creek must focus on developing niche or special markets and must also gain profits from other areas such as non-wine sales such as crushing and other services (White, 2002). This was until voting was in place where decisions are made thru consensus. After the funding from the government ceased, the board was disbanded and control was transferred to the Wine Institute. At the same time the institute moved to a system that presents United Kingdom promotion initiatives and invited participation which results to a feeling of loss of involvement in the Guild (Case Study, 2001). In 2000, the Coopers Creek brand dropped because of the takeover of Threshers of the Victoria wines and this coincided with being out of stock for six months which in 2003 a French wine company bought in bulk the New Zealand Sauvignon Blanc, which it branded as New Zealand wine and sold in the Tesco supermarket chain in the UK. The brand is also affected by the increasing proportion of New Zealand wine companies becoming owned in partial or whole by foreign companies. The challenges encountered by the New Zealand wine industry in 2004 arises from the global market and local responses to these. One of these was the difference of steady consumption and increased global production. A major question for New Zealand companies is managing the growth of processing facilities and the marketing and promotional efforts that would be required. By 2004 the company was dealing with three importers which is a consortium represented by 60 independent wine merchants. This was the result of Andrews' personal selling he conducts and involved in the production of special label for that group that is aside from his appointed sellers. The majority of sales are attributed to the independent liquor stores, restaurants and hotels and regional distributors. Cooper Creek catered for buyers' own brands in the United Kingdom but even though this was useful for the company, it was not profitable. Andrew thought that it would sell more in the United States than in the United Kingdom because he did not want to rely on the United Kingdom market alone (Benson-Rea, 2004). US Market Coopers Creek first entered the United States' market in six East Coast states thru a broker he met in a fair in Las Vegas but the business turned sour when the relationship between the retailers and the broker was strained. The diversion of products intended for United Kingdom to the United State was decided on the speed and development potential of the United States market. Inevitably, it is estimated that the United States market will replace the United Kingdom market in 2007-2008. A major break for New Zealand wines and Coopers Creek was when in 1996 they took the stand in Boston in a fair alongside seafood's, venison's and other produce. This led to the development of a network of distributors and at the same time conducting wine tasting state-by-state. Coopers Creek transferred to a larger and experienced distributor with specialty in on-premise representation, being in the top three distributors' means that it services to more than 2,000 restaurants in New York alone. Andrew considers an on-premise focus critical because unlike in the retail sector which Australian and New Zealand wines were marketed together, Australian wines are more attractive because of cheaper price due to the ability to achieve scale economies. It was seen that in 2004 Coopers Creek directly exported to New York and New Jersey at around one container every two months for this specific region (Benson-Rea, 2004). The other states are beginning to buy direct given increasing volumes. An agreement between a Chilean winery, a California and a US importer, helped Coopers Creek share the costs of employing a brand manager in the US. His duty was to organise all the promotions and going out with the sales representatives, just as the same job that Andrew when he travels abroad. After this agreement the sales rose from 1,500 cases in the late '90s to 6,000 in 2000 and eventually to 10,000 cases in 2001. Since the wineries produced different portfolio of wines, they did not directly compete with each other. In cutting out the importer, and distributing across 15 states from warehouses Coopers Creek had been able to reduce the cost to restaurants by 35 per cent, making its wine extremely competitive in the critical on-premise segment. Since the volume was not viable for the brand manager since half of its salary came from cases sold. He started selling wines for Chilean, Australian and South African wineries. An increase of 30 percent in sales for successive years and representations in 33 states was experienced in 2004. The talk with exclusive brand manager was in the table when the Australian winery decided to drop from the agreement. Negotiations to supply own a label wine to US supermarkets is also being done and in 2003, Coopers Creek supplied a special label Marlborough Sauvignon Blanc to twenty-six stores of Trader Joe on the East Coast (Benson-Rea, 2004). Canada One of the toughest markets faced by Coopers Creek is Ontario because they impose 100% margin on liquor prices by the state monopoly. It took six months for Andrew with the Ontario Liquor Control Board to reach an agreement to sell his wine in all 630 stores controlled by the board. Adjustments were made such as, special labels and cartons and heated transport containers had to e developed to meet local requirements and to allow it to be shipped in winter. The effort of the Coopers Creek gained them Trade New Zealand Export Commendation by the recommendation of the New Zealand Trade Commissioner in Canada. Years after, the company had two more listings by the board which increases the exports to about 6000 cases a year. Because of the relationship of Coopers Creek to Ontario Liquor Control Board, they became the biggest New Zealand supplier to Canada and making it the only New Zealand winery represented on the stores' shelves all year round. It is expected to sell about 20,000 cases in one market alone. It is also starting to sell in other Canadian provinces like the Nova Scotia, British Columbia and New Brunswick grid and soon to Alberta, Quebec and Manitoba (Benson-Rea, 2004). Coopers Creek products are also visible in Asia particularly in Taiwan and Singapore for since in 2003, they have been exporting to these Asian countries as well. Andrew always jumps at every opportunity he can in selling his product. He was concentrating on developing small markets that sells on-premise a broad margin of wines. This made the Cooper Creeks wine in the permanent wine list of restaurants. He visits his overseas importers regularly during trade and wine shows and has been a constant reminder to the importers that the winery was committed to the market, and allows the importers to focus on the brand and at the same time very clear about the amount of product they could get in the future. It was perceived that competition is greatest in New Zealand because of the influx of lower priced New Zealand products which are owned by foreign corporations capable of lowering their prices that is why Andrew sees China, Japan and Taiwan as his future targets. It was observed that on-premise sales represents a small but significant percentage of the exports as a whole, it would still be the supermarket and liquor store fronts that will continue to account for the majority of the revenue. This growth is easily achieved by dealing directly to costumers than through a broker (Benson-Rea, 2004). In order to cope with the increasing market demand especially on the international market and to sustain the growth it achieved the company had to increase its supply of grapes way above from the original four hectares it initially uses. This was done by acquisition of additional lands in West Auckland and Hawkes Bay in North Island, and purchasing of grapes from independent growers in the South Island. This allowed the company to decrease the risk of the effect of bad weather condition in the growing islands. In 1990, 90% of its grape supplies are from 20 independent suppliers. The suppliers are in long-term contracts that depend mainly on the quality of the grapes produced. This will lessen the additional risk of unreliable and untested quality of grapes from new suppliers. Although the company wanted to grow its own grapes, but had to wait until the prices of lands stabilise. Buying bulk wine from other wineries also helped the company in meeting its export demand without having to produce the wines itself. It was Andrews' intention to let the wineries with the enough overhead structure produce the cheap wines and buys it from them (Benson-Rea, 2004). Cooper Creeks uses the batch production system that was set up to produce 25-30 tonne lots. The company can crush up to 120 tonnes a day giving it an advantage. It can also juice for other wineries as the cost of installing the crushing plant is insignificant compared to the benefits it can produce. It allowed traceability on each tank consignment and at the same time in bottling runs where retention samples were kept for each delivery (Case Study, 2001). The maximum production of Coopers Creek is based on the optimum 1000 tonnes crushed grapes so that the administrative costs will not rise and the quality of the wines will not deteriorate. Maintaining the size of the winery is important so as to avoid dilution of the shareholding to fund expansion and that future growth is thru servicing the export market. It is Coopers Creek strategy is based on carefully controlled but finite quantity to sell for the year. They consider the requirements of each market as to wine styles, and when the grapes came, they can manipulate the prices and points at the same time maintaining the quality standards of each market. Also, in order to retain the flexibility of the company, they decided not to label the bottles of wine until they are certain where it was going. Major decisions are done in the supply stage up to the point of buying bulk wine from other wineries to keep the supplies going. In an instance there was an invitation for summer promotion of New Zealand wine and only Coopers Creek took the challenge. Since Coopers Creek does not have all the wine it needed, they bought bulk wines from some local companies and even made money from it (Case Study, 2001). The perennial problem that faces the New Zealand wine industry from growing is its supply. Considering the cost of new land and the economics in growing, it became apparently difficult to sustain growth without the influx of money. Competitors especially overseas are welcomed but not to the point that the distinctiveness and competitive advantage will not be compromised (Benson-Rea, 2004). Conclusion Coopers Creek initial success was mainly due to the strong and strategic alliances made by Andrew Hendry with its grape producers. Although initially the grapes they use is from the growers that are at the same time shareholders which he eventually bought out because of conflict in interest. He has foreseen that eventually the demand for grapes increases as the demand increase. He achieved this by forging long-term contract with independent producers that assures him of a steady supply of grapes that will sustain his company for a long time. He did not only limit it to the supply of grapes but when needed he bought bulk wine from local companies just to fill out the needed volume. After some time he acquired additional land area to grow the grapes just to augment the deficiency in the supply of grapes. He also ensures the loyalty of the winemaker by making him a stockholder himself. Although changes in his winemakers was seen, the lucrative position he offers as a part owner deems to be attractive to winemakers thus he does not worry about running out of winemakers (Benson-Rea, 2004). Provision of a large scale crusher also helped his company in having an advantage of its capability to crush large amounts of grapes when needed. At the same time he can crush grapes for other wineries. Collaboration with other local wineries promotes a healthy competition in which all the member wineries can benefit from. Collaboration on joint advertising and promotions helps the locals in appreciating the locally produced wines. The collaboration is not only limited in marketing ideas. Cost effective collaborations such as joint purchasing provides additional savings for the wineries (Case Study, 2001). Marketing in three fronts; on-premise, liquor stores and in supermarkets ensures regular profits. Focusing on the restaurant also deemed important for the company since people are willing to pay more in restaurants that is why a full time sales representative is hired for that particular area. Steady income is also seen from supermarkets since Coopers Creek wines can be seen in the largest supermarket chain in New Zealand (Benson-Rea, 2004). A study (Lockshin, 2001) on the life cycle of the New Zealand wine industry shows that the life cycle can be characterized by the growth in the industry for the past five years, the development and demand of the products, the level of information about the products, the plants capacity, the price of the plants products, growth in different types of distribution and the level of the advertising the plant uses for its products. Using this as the gauge, it shows that the Coopers Creek winery can and will continue to prosper. After the success in the domestic market, the company tried to expand its horizon by entering foreign markets such as UK, US, Canada and Europe. Although stiff competition is expected the company relied on collaborative efforts by fellow New Zealand wineries. One of which is the creation of developmental marketing groups such as the United Kingdom Wine Guild. It provided an avenue for the New Zealand wines to be sold in United Kingdom at competitive prices. Joining in wine expos and trade fairs overseas also provided an opportunity for the product to be sold in other countries. Hiring a brand manager also provided a boost in the market in the United States. A steady increase in sales was seen in United States when he hired a large distributor that specialises mainly on-premise style. Securing a relationship with the Ontario Liquor Control Board deemed beneficial because Coopers Creek became the only New Zealand wine sold in all its stores. Regular visitation and hands-on consultation with the importers and renewing their commitment in selling the products helped sustain the overseas market. The shift to focus on on-premise front was observed as the influx of more cheaper wines from foreign-owned New Zealand companies that poses a direct threat in the market was seen in United Kingdom. The direct competitiveness of the two products led to the change of the marketing strategy of Coopers Creek. Instead on focusing in supermarkets, the company shifted its eyes to the niche of the 'fine' wine enthusiasts and connoisseurs mostly in the restaurant and hotels. The companies' decision to continue its expansion overseas in the coming years such as targeting potential markets in Asia such as China, Taiwan and Japan proves to be a sustainable one. Considering the initial success it had gained in Singapore and Taiwan in 2003 it is possible that same will turn out in other Asian markets. The primary goal to shift the UK market to US market in the next years will also be profitable as planned. Andrew Hendreys' relationship based marketing approach is mainly traditional compared to the market-based transaction but proved to be successful its domestic and international endeavours. The idea of selling the company is far fetched considering the way it can manoeuvre away from stiff competition overseas. As long as it can sustain its on-premise sales, and for the fact that since it is a medium enterprise minimal profits are expected at the same time minimal production costs are used. References Anderson, K. 2003. Wine quality and varietal, regional and winery reputations: Hedonic Prices for Australia and New Zealand. Economic Record. September 1, 2003 . Anthony, L. 2004.Wine Distributors Share Strategies for Selling More Wine; New Study Reveals Ways Wineries Can Improve Distributor Relationships and Increase Sales. PR Newswire. December 14, 2004 Australian Wine Online. Copyright 2006 Winetitles Pty Ltd Baack, S., Castaldi R., Silverman, R., Competition in the Global Wine Industry: A U.S. Perspective. Benson-Rea, M. & Wilson, H. 2004. Coopers Greek and the New Zealand wine industry Burman , J. Mergers mania slows, but is not over. Condon, R. Working on the Other Side. Lockshin, L. 2001 Organizational Life Cycles in Small New Zealand Wineries. Journal of Small Business Management. October 1, 2001. Mckenzie, D. 2002. Small wineries need to act. Australasian Business Intelligence . November 13, 2002. Pacheas, J. 2002. Non-wine advice to small wineries. Australasian Business Intelligence. September 8, 2002. Synergyst. 2006. Market Analysis - Competition in Global Wine Market Market Research Report March 2006. Thunderbird School of Global Management, Copyright 2007 White, L. 2002. Diversify or die, small wineries told. Australasian Business Intelligence. September 19, 2002. www.cooperscreek.co.nz/market/casestudy.pdf -Case Study 2001. April 3 2007 www.cooperscreek.com.nz/history. April 3, 2007 Read More