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Wine Industry – Porter’s Five Forces

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Bargaining power of buyers The buyer’s power within the wine industry varies between different places in the world.

There are for example strategic differences between Europe and the “New World”. The “New World” includes countries like the US, Australia, Chile and South Africa. In Europe there is a big competition between small private family wineries while there are in the “New World” only a few large companies that have a big market share. To give you an example of this Australia have four firms that at the moment have around 75 % of the market while in France there are around 230 000 wineries.

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The power of buyers seems to be higher in Europe compared to the “New World”, in Europe the consumers have a more sophisticated taste and are more price sensitive compared to the “New World”. In Europe wine is sold through many different supermarkets which provide a wide range of different wine sorts from a lot of different private labels. This can be one of the reasons why the power of the buyers seems to be a bit higher in Europe than in for example the US.

In the US they generally don’t sell wine at supermarkets, except from Wal-Mart that just introduced a private label in their wine collection. Another reason might be that the branding in the “New World” creates a wider product differentiation which seems to reduce the power of the buyers. In general the power of the buyers within the wine industry is quite high if we talk about buyers like distributors and wholesalers. Buyers like distributors and wholesalers are probably the largest costumers for a wine company and if this is the case they will probably also gain a lot of bargaining power.

If a wine label have an organization like this, few but large buyers, they will have a position that gives them less power over bargaining with their costumers because they are afraid of losing them. The costumers are just too important for them. In a country like the US or other “New World” countries like we talked about before is this very common, to have fewer but larger costumers. If we continue to discuss about large costumers like liquor stores and restaurant we can say that they have a big bargaining power and that they are very important for the wine industry.

Something that really affects the wine prices and the industry itself is the competition between those buyers. If for example the demand is higher than the supply of wine the prices for a wine bottle will go up but if it is the other way around that the demand is lower than the supply the price for a bottle of wine will fall. There are some exceptions within Europe about the power of the buyers. For example in Sweden where it is monopoly on alcohol the bargaining power of the buyers is very low.

There is only one store in Sweden that are allowed to sell strong alcohol drinks to people over 20 years old and the prices is very high. But people still buys this drinks from the store because they can’t get it in any other way. When you are 18 years old you can buy alcohol in restaurants and pubs but you are not allowed to buy it outside those places. Many people in Sweden goes to for example “border shop” in Germany to buy alcohol for a cheaper price, but there is some limitations about what you can bring back to Sweden.

It is a different amount of beer, wine and hard liquor you are allowed to bring back over the border. Except from exceptions like Sweden buyers have a quite high bargaining power within the wine industry and together with the suppliers that also have high bargaining power the price is depending on this. 2. Bargaining power of suppliers Similar to the situation above the power of the suppliers of wine companies is very different all over the world.

The key issues of this force are the ease with which a wine producer can switch between the different input suppliers and of course the bargaining power of both the supplier’s and the buyer’s (in this case the wine company’s) party. The most important necessary inputs for the production of wine are grapes, bottles and labor. Concerning the grapes, there is an outstanding difference between the traditional wine producing countries for example in Europe (the south of France, Spain, Italy and Southeastern Europe) and big wine factories that operate as oligopolies like in the US and Australia.

Due to the bond to traditions and the higher demand for quality in Europe most of the wineries here still stick to the original way of producing wine, including the growth of the grapes on the land around the winery, a so called vertical integration (which is often considered by producers where the supplier’s price is too high or the offer is insufficient, in our case this trend results rather in traditional and cultural values than in financial ones). This eliminates the percentage of dependence on agricultural suppliers significantly, whereas concerning a big wine company the negotiation power of the supplier is quite high.

These wine companies tend to have a low sensitivity towards the price they are charged, as grapes are a crucial component of wine production. However, in both cases the price of the grapes is always influenced by the weather, which also represents a high risk factor in the wine production as such, independent of the region. The worldwide wine market is increasingly oriented towards higher quality products, with a growing demand for premium wine. This implicates a reduction in the absolute demand for wine, as higher quality leads to a higher price and therefor it is obvious that people consume less wine – but of superior quality.

The resulting falling necessity of grapes reduces the suppliers bargaining power, as the supply of grapes exceeds its demand. Regarding the bottles the bargaining power of suppliers is quite low. Bottles as such are not a very seldom or specific item, they can be produced easily and there are no decisive differences in terms of glass quality. Wine companies have the possibility to switch easily between the suppliers, including the possibilities to import from cheaper countries. More interesting is the development of the labor in the wine production, as it played, and in some areas still plays an important role in the production of wine.

Again we have to distinguish between a winery in its traditional way and a big wine factory. In Europe growing grapes is a tradition, maybe one could also call it lifestyle. The wine grower has to be a specialist in his subject, this demand for knowledge and experience implicates a greater bargaining power for the supplier, as the range of experts is rather small. Looking at the big wine factories like in the US and Australia, the bargaining power of the labor force is quite small.

High labor costs and the opportunity of new techniques lead to the trend that wine producers mechanized the pruning and harvesting as economical alternative to hand labor. This resulted in less demand for staff, and the few workers that are still employed do not need to possess a lot of knowledge or experience. All in all, the supplier’s power is at a low level in the wine industry. Generally spoken, a wine company is not so dependent on raw materials and labor, the most determining factor in producing wine is the climate, which has a powerful impact on the pricing during the entire production process. . Rivalry between existing companies Drinking wine is a matter of sophisticated feeling for taste. The preferences of consumers continue to develop when their experience grows. On the US-market the competition between white and red wine is still won by the Chardonnay. Nevertheless, customers are starting to prefer red wine products, whereas the white wine sales declined during the last years. Table wines are the biggest-selling category of wine in the US. Competition was higher in the wine industry last years than it has been in a decade ago.

This was because wineries had to compete harder for retail shelf space and restaurant wine listings and the high dollar made foreign-produced wines more attractive to U. S. consumers. The four possibility of threat of new entrants, bargaining power of buyer and supplier, and the threat of substituting products leads to the level of rivalry within the wine industry. As there are numerous competitors in the industry, the companies have to compete in order to obtain their market share. As the customer base is not very vast the growth of the whole industry is moderate.

Different marketing strategies try to place wine as product suitable for every occasion in order to acquire new customers. The high amount of competitors causes a situation of perfect competition with a huge range of different types of wine products, so that every firm wants to gain a market share with its product. A perfect information flow is the consequence of perfect competition. Nevertheless every firm tries to highlight its product of a certain type of wine. Although many firms compete on the market the products are highly differentiated, whereby price competition is weak. . Threat of new entrants Another factor of Porter`s Five Forces of Competition framework that determines the profitability of an industry is the threat of new entrants. That is one source of horizontal competition. Basically, if an industry earns a return on capital in excess of its cost of capital, other firms are interested in entering the market. If there are no barriers – i. e. the industry is contestable – the rate of profit will fall toward its competitive level. There are several criteria to measure the barriers of an industry and therefore the threat of entry.

In the following there will be stated the possible barriers of the wine industry. An important factor are the capital requirements, which are rather high for the wine industry. It requires a large amount of capital for land, plants, crushing facilities, fermentation tanks, aging barrels and warehouses. To highlight is especially the land as the grapes require the right nutrients in the soil and the right climate, e. g. an extended summer. Therefore land is a limited resource and one of the most important cost factors of the wine industry.

In the US for example, California is one of the only states with both needed agriculture components to make quality wine. Furthermore, there is a difference in the industry in the “New World” and in Europe as e. g. the US the market is dominated by relatively few big corporations, while in Europe there are mostly SMEs that are often family-owned for generations. Therefore it is easier to enter the European market as the capital requirements are not that high and Economies of Scale do not play such an important role compared to the US market.

Another possible barrier is product differentiation. If the products in an industry are well differentiated, established firms can have the advantages of brand recognition and customer loyalty. Basically the products of the wine industry are differentiated with many different sorts of wine and often the consumers have their favorite type of wine. Nevertheless, researches have shown that the wine drinkers are also curious about tasting new wines. Therefore this barrier is rather low in the wine industry.

In the wine industry there can also be legal barriers due to the fact that wine is an alcoholic beverage. In many countries there are tariffs for imported wine or even limitations. Furthermore there are regions like the northern European countries where alcohol can only be sold in special stores and the taxes on alcohol beverages are extremely high. The final step in wine production is getting the product to the customer. Most distribution from the vineyards is done with private, leased, or hired trucking companies.

In wine production timing is key, whether it is transporting juice from the vineyards, moving finished product or hauling cases of bottled product to distributors, a well-run winery relies on precise timing. The costs in the distribution channel are rather high and therefore smaller wineries often rely on local sales. There is again a difference between the US and the European market. While it is common in the traditional wine countries like France, Spain or Austria that wine can be purchased in normal supermarkets, it is – or at least was – rather uncommon in the US.

Some US producers started to sell their wine in supermarkets – one of the first was Wal-Mart that introduced a private brand. 5. Threat of substitutes In compliance with Porter’s Five Forces of Competition Framework the threat posed by substitute products not only co-determines the intensity of competition between similar beverages but also the level of profitability for the whole wine industry. The price consumers are willing to pay depends on the availability of substitute products. Demand is considered inelastic when availability of similar products is limited.

Another aspect is that the influence the substitute has on the price depends on the buyer’s propensity to substitute between alternatives. In the US-market many wineries exist, which uniformly penetrate the US-wine market. Although there are a lot of wine producers the amount of threat is minimal. There is a major product differentiation of wine due to the vast assortment of different wine types with various tastes. Therefore choosing a brand of wine is always a question of price-value measure. Irrespective of the economic situation the wine consumption tends to stay balanced, which means that demand is considered inelastic.

The price of wines is under pressure of the personal income one can dispose, so if the economic situation worsens people shift away from buying premium-priced brand name wine products in favor of lower-priced brands. The threat of substitutes to wine exists as there are a lot of other competitors producing other beverages. The one major relevant substitute product is beer, which can be considered as alcoholic alternative, if the consumer drinks a beverage just for enjoying the effects of alcohol. The other minor option may be premium-coffee, which can satisfy a costumers’ need for highly sophisticated consumption.

The degree of substitution depends on the level of relative prices of the alternative product and its performance. In the case of beer the consumer will make this decision depending on his/her awareness of wine even if the price of beer might be lower than of wine. Over the last years, wineries have tried to educate their consumers in terms of wine. In fact, customers in the US have become more acquainted with wine and American wineries have learned how to efficiently market their products, whereas wine roducers in Europe have not been so efficient in creating a customer-based awareness about wine products. Moreover US-producers have recognized that their consumers may not be experts on wine. The buyer’s opinion to substitute wine with beer seemed to be for many years the prevailing consequence of a mistaken marketing policy, which had created the paradigm that beer is the “beverage for all occasions” and therefore for lower to middle-class people, while wine is the “beverage only for special occasions”, which only high-class and educated people should drink.

As a result, at least US-producers have reconsidered their marketing strategy in order to make wine attractive to a wider audience and to remove the stereotype that wine is connected with a higher standard of living. By contrast, French producers have not yet been so efficient, whereby their wine exports are lagging behind. The irony in this former cardinal mistake was that wine originally was a beverage for lower class people in Europe. To sum up, the threat of substitute products is fairly moderate.

Wine is considered to be more a table drink, which should be enjoyed during a fine diner. There are also other alcoholic beverages, which can substitute wine like beer, cocktails, or liquors, depending on the consumer’s need for alcoholic consumption. As a result of major product differentiation between the various types of wine with different taste demand is relatively inelastic. In addition, the buyer’s propensity to substitute wine has is depending on the consumer’s awareness of wine. References

Contemporary Strategy Analysis, Robert M. Grant http://hbswk. hbs. edu/item/3910. html http://www. customwritings. com/blog/sample-research-papers/wine-industry-research-paper. html http://www. ukessays. com/essays/management/wine-industry. php http://www. wisegeek. com/what-is-wine-industry-analysis. html https://maths2. web-prod. development. adelaide. edu. au/wine-econ/papers/0101. pdf The US Produce Industry and Labor: Facing the Future in a Global Economy, Linda Calvin and Philip Martin, United States Department of Agriculture

Cite this Wine Industry – Porter’s Five Forces

Wine Industry – Porter’s Five Forces. (2016, Dec 10). Retrieved from https://graduateway.com/wine-industry-porters-five-forces/

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