There's more in that glass than meets the eye—or the palate. According to Michael Roberto, important strategic differences have bubbled up between winemakers in Europe and those in the "New World"—the U.S., Australia, South Africa, Chile, and other countries. One of his recent papers, "The Changing Structure of the Global Wine Industry," won the Best Paper award at the 2003 European Applied Business Research Conference. Roberto recently shared his thoughts on wine for HBS Working Knowledge in an e-mail Q&A.
Manda Salls: Why did you choose to study the wine industry?
Michael Roberto: My parents are Italian immigrants, and my family back in Tuscany and the Campania region of Italy continue to make their own wine. Therefore, I've always had an interest in the wine-making process. A few years ago, when teaching the Strategy course in the first year of our MBA program, I had the opportunity to write a new case about Robert Mondavi. As I conducted the research for the case, I became more fascinated with the changes taking place in the industry globally, as well as the marked differences between the industry in the Old World (Europe) and the New World (U.S., Australia, South Africa, Chile, etc.).
Q: What do you see as the major differences between Old World and New World winemakers?
A: The Old World market continues to be highly fragmented. The competitive landscape is filled with many small, privately held wineries, owned and operated by families for years, even centuries. In contrast, the New World has a number of large, publicly held corporations that are beginning to play a substantial role in the marketplace. To put this in perspective, consider the fact that France has over 230,000 wineries, none of which have a significant market share, while four firms account for 75 percent of the Australian market.
Research by my colleagues Jan Rivkin and Tarun Khanna suggests that industry structure can be quite different around the world. The wine industry is a great example of this phenomenon. For instance, consider the power of buyers in the wine industry. Buyer power appears to be higher in the Old World. Consumers are more sophisticated and somewhat more price sensitive in the Old World than in the New World. More sales occur through supermarkets and other off-premise locations in Europe, which would also suggest more buyer power there. In addition, the supermarkets offer private label wines in Europe, while they generally do not in the United States. (The exception is Wal-Mart, which recently introduced a private label wine through an alliance with E&J Gallo.) The branding in the New World also creates more product differentiation, which reduces buyer power.
Structural differences suggest that firms need to compete differently as they enter markets around the world.
We can perform similar comparisons along other dimensions of industry structure. In each case, the New World looks different from the Old World. These structural differences suggest that firms need to compete differently as they enter markets around the world.
Q: You make the point that it is easier for most of us to understand the type of grape we like (Merlot) than a region in another country (Bordeaux). These regional naming conventions seem like another example of how Old World wines can seem inaccessible to people. How can Old World wines become accessible to inexperienced consumers?
A: Over the past decade, wineries around the world have gone to great lengths to enhance their consumer education efforts. As a result, I think that consumers in the New World are becoming much more knowledgeable about wines. At the same time, I think that New World wineries in countries such as Australia have learned to sell to consumers in the U.S. much more effectively than French vineyards, for instance, because they recognize how to market to consumers who may not be experts on wine. Italian wineries also have begun to develop effective marketing and consumer education efforts for the U.S. market. The French, in particular, have not been as effective; consequently, their export performance has lagged behind other wine-producing nations in recent years.
One final note: I think that American wineries have begun to recognize that the way that they have marketed wine has limited their ability to make wine appealing to a wider audience. As Michael Mondavi has said, "For decades, our industry sent the wrong message, that wine is for special occasions, while the breweries told people that beer is the beverage of every occasion. That's crazy. In the old country [Italy], wine was a blue-collar beverage, not an elitist, white-collar drink."
Q: In 2000, Foster's of Australia bought Beringer Wine Estates of California—just one example of many consolidations in the past decade. Does the rapid consolidation of New World producers make profits at the cost of diversity? Should a beer company own a vineyard?
A: The scope economies across the beer and wine businesses appear fairly small. Certainly, Foster's can expect some advertising and marketing economies. However, few production economies exist, as the firm produces beer through a standardized, mass production process—far different than the craft of winemaking. The firm cannot distribute beer and wine on the same trucks, as beer kegs need to be refrigerated. Brand-building activities differ as well, as creating and marketing a wine brand typically diverges from the approach used to develop a beer label. Finally, sales force synergies appear minimal, as a single sales force will find it difficult to support both the wine and beer product lines.
Having said that, the Beringer's deal certainly provides Foster's with greater distribution clout. Foster's expects to use Beringer's strong position in the U.S. to enhance the sales of its Mildara Blass wines there. Furthermore, the company hopes to use its Australian organization to drive Beringer's sales in that country, and it expects to leverage its international operations to expand Beringer's presence in other nations.
What troubles me most, though, is that these types of acquisitions appear to involve a great deal of cross-subsidization. Foster's has chosen to use the cash flow from its stable, profitable beer business to fund an aggressive expansion into the premium wine business. Cross-subsidization (beer to wine in this case) only makes sense if there are sizeable scope economies. Without them, cross-subsidization does not prove optimal, since the capital markets tend to allocate resources more efficiently than corporate managers who are trying to move money from "cash cows" to "growth businesses."
Q: It sounds like supermarkets and chain stores are starting to dominate wine distribution—Costco is one of the largest wine retailers in the U.S. Is the neighborhood wine shop going the way of the local bookstore?
A: There's no question that a seismic shift is occurring at the retail and wholesale level. The number of alcoholic beverage wholesalers in the U.S. has decreased by 75 percent since the 1960s. At the retail level, wine sales are increasingly shifting to supermarkets, wholesale clubs, and the like. For instance, Robert Mondavi now sells 10 percent of its wine in unit terms through Costco. These changes in the retail and distribution channels present substantial challenges for wineries, of course, because these powerful players such as Costco have much more clout and bargaining power than small liquor stores. Smaller vineyards often can find it more difficult to secure shelf space, and all wineries find themselves facing pricing pressure from the retail and distribution channels.
There's no question that a seismic shift is occurring at the retail and wholesale level.
While the wineries may not like these changes, and the small retail shops may find the competition daunting, many consumers seem to be benefiting from these changes. After all, they can purchase quality wines at much lower prices, and they benefit from the convenience of being able to purchase wine at the same place that they procure other food and beverage products. So, I guess your view of these changes depends on your position in the marketplace.
Q: Consolidation is often followed by a series of spin-offs and divestitures. Do you see any evidence for this in the future of the wine industry?
A: I think there is a good chance that some of these large firms will divest underperforming wineries eventually. For starters, we know that several large firms have chosen not to participate aggressively in the acquisition spree that has taken place in the industry. They recognize that the scale and scope economies may be limited, and that the merger premiums have become quite high. Moreover, we know that some large distilled spirits companies, who entered the wine market quite aggressively, have begun to encounter problems. They may choose to refocus on their core business.
Q: What other research are you working on?
A: Well, my primary focus is not on industry dynamics. The focus of my research is organizational decision-making processes. At the moment, I'm conducting a large research project in which I'm interviewing thirty-five Harvard Business School alumni, and I'm exploring how they cope with intuitive doubts that emerge as they try to make critical, high-stakes decisions. I'm also working with my colleagues Amy Edmondson and Richard Bohmer on a paper that examines the flawed decision-making that took place during the Columbia space shuttle disaster.
Q: What is your favorite wine?
A: I love wines from Tuscany. Montalcino, Montepulciano, and Chianti wines are favorites.