1. Auxiliary Material
Wilhelm Rall
Konrad Stahl
Case 3: Product Portfolio Choice in the Wine Industry

2. Main purpose of the case
To learn about the industry
To examine the complete portfolio restructuring of a winery including the complementary marketing strategy
In particular: To identify the depth (vs. breadth) strategy and
competitive advantage over rivals
To determine whether the Tesch model is one to be imitated
W. Rall and K.Stahl, Corporate Strategy, Session 1:What is a strategy?
What steps should be taken to formulate a strategy?
What types of information are needed?
What are the main components of strategy?

3. Industry structure
Five major wine growing areas in Germany: Moselle, Rhine, Franconia, Rheine-Hessia, Rheinland-Palatinate.
Rhineland Palatinate (containing 2/3) 2003:
5,817 Estate wineries
6,145 Sideline (moonshine) vintners
(Mainly) sideline vintners organized in co-operatives
that absorb the crop to produce wine
Bottlers (negociants) ar not major players
15 % of area cultivated serves co-operatives and negociants

4. Firm size distribution
Industry consists of extremely small scaled wineries, by international standards
Average area cultivated by an estate winery, Rhineland-Palatinate: 3.2 ha (1979), 7.5 ha (2003)
Typical French winery has more than five fold the size
Size distr‘n (%)
< 5ha
5-20 ha
>20 ha
1979 77 10 2
1999 72
26.5
1.4
2003
67.5 30
2.6

5. Industry evolution 19th century Until the late 80’s Late 80’s +
German wine prices topped world prices
Until the late 80’s
Slow increase in wine land
Production of primarily sweet wines
Late 80’s +
Decline in wine land
Increasing share of dry wines produced.
1999: ¼ red, ¾ white, 2004: 1/3 red, 2/3 white
Rapid technological change: Absorption of international technology
Mid 90’s +
Increasing share of red wines produced
2000 +
Outburst of reviews comparing wineries for the discriminating consumer (Typical example: Vinum Journal, Annual Gault-Millau WineGuide)
Enhances competition amongst premium producers
Slowly increasing export (< 1.5 %, almost 50 % to GB)

6. Product description (1/2)
Product extremely varied
Very large number of varieties (horizontal differentiation): 10+ white, 5+ red
Development towards dry vs. medium dry vs. sweet wines
German wine law allows for vertical differentiation of wine developed from the very same grape:
Tafelwein, Q.b.A., Prädikatswein: Kabinett, Spätlese, Auslese, Beerenauslese, Trockenbeerenauslese
(the latter two variants almost always sweet)
(share of premium to QbA wines 2005: 15.5%)
Development of white and red wines in barrique

7. Product description (2/2)
Especially in the Rhine valley: extreme variation in soil conditions (terroir)
Extreme horizontal and vertical differentiation in individual technique:
Personal style of wine growing:
cultivation of vineyards
Intensity of quantity reduction
Harvesting time
Personal style of development
idiosyncratic and commercial yeasts,
fermentation temperature,
length of fermentation,
filtration
(production of cuvées)

8. Typical Firm (1/2)
Typical estate offers a large menue of varieties, and quality levels per variety.
Example (1): Weingut Bergdolt-St.Lamprecht, Duttweiler
Top producer of Pinot Blanc in Germany
Offers currently in its premium category
9 Rieslings
12 Pinot Blancs
2 Chardonnays
2 more whites from differing varieties
Amongst them 5 sweet
3 Pinot Noirs
4 more reds from differing varieties
5 Cremants

9. Typical Firm (2/2) Example (2): Weingut Becker, Schweigen
Top producer of Pinot Noir in Germany
Offers currently
8 Rieslings
3 Pinot Blancs
3 Pinot Gris
2 Chardonnays
2 Auxerrois
1 Chardonnay
1 Blanc de Noir
1 Gewürztraminer
Amongst them 5 semi-dry
6 Spätburgunder plus Several Reserve Barriques on Request
2 more reds from differing varieties
1 Cremant
A variety of estate produced spirits, in particular Marcs

10. Industry – main features
Convergence towards a small mean firm size
Annual product cycle
Repeat sales to the same custom
Quick obsolescence from the point of view of producer (white wines older than two years are difficult to sell)
Time to market is crucial only when sold out varieties are to be replaced
imitation of technique is not very problematic, as style differences dominate
Vertical and horizontal differentiation
Switching costs

11. Classical (and still typical) consumer
Central Feature influencing Demand: Switching costs (one stop shopping)
Classical (and still typical) consumer
Selects a winery from an extreme variation of styles across wineries
Buys at the winery after a wine tasting
Selects a menu of varieties within the very same winery from which to choose for different meals and separate consumption
Stays loyally with one winery for many years
Modern consumer:
Selects winery on the basis of reviews to buy more selectively

12. External analysis Customers Suppliers Substitute products
Potential entrants - BTE
Established rivals

13. Customers Individuals Rely on their tastes and/or on reviews
Quite important: Tasting based spontaneous purchases
Retailers and Gastronomy
Develop their own product line
Rely on reviews
Care about brand names
Exporters
Purchase primarily high end dry and sweet wines
Are price sensitive

14. Annual wine consumption per head (2003)
France 56 litres
Italy 51 l
Switzerland 42 l
Argentina 36 l
Spain 30 l
Germany l
Australia 21 l
UK 20 l
USA < 10 l

15. Suppliers Premium vs. Mass wine producers Production costs:
Very much dependent on aspired quality
land cost/ha Germany between € and € (Bordeaux, Napa Valley € )
Development cost/ha € – 6.000
Hectar yield between and litres
Vinification € per .75 l bottle barrique development muich more expensive new barrique barrel € 600
Bottling € .5 – 1.5 per .75 l bottle
Storage costs
Distribution costs

16. Main Distribution Channels
Share of Wineries (1999) with sales to
Individual customers directly
66.7%
Retailers
10.7%
Gastronomy
21.7%

17. Substitutes Beer: Spirits: Highly concentrated industry
Substantively less differentiated product, almost completely commodified
May be a close substitute to bulk wines, but not to premium wines
Spirits:
Highly concentrated industry for branded products
Highly dispersed industry for fruit and wine spirits
Some products (Marcs) served by the wine industry itself

18. Barriers to Entry By EU decree: limited availability of land
High capital cost
High skill needed
Production cost advantage unimportant

19. External forces - summary
Wine is an extremely differentiated commodity
Consumers exhibit very idiosyncratic tastes
Premium wine purchase is governed by one-stop shopping phenomenon
High Barriers to Entry
Wine making industry is highly competitive in bulk wines, but not extremely competitive in premium wines. Premium producers secure healthy profits

20. Tesch‘s Product Line 84 % Riesling 8% Pinot blanc 8 % Pinot Noir
All Rieslings fermented to dryness
All premium
Particularly interesting marketing device: the Rieslings are labelled by a distinctively coloured label

21. Tesch’s core position Advantages:
One main product line: (almost) all Premium Riesling varieties,
Exploitation of one stop shopping via a completely different approach
Scope:
Appeal to the educated and discriminating buyer
High-end performance fits these customers
Tesch avoids the low end of the market
Tesch’s customers are (probably) not very price sensitive since they care more about quality
Tesch focuses exports – that’s where most of the sophisticated customers are

22. Tesch’s sales and marketing
Sales to
Exports: 15 %
Gastronomy: 20 %
Retail: 30 %
Final custom: 35 %
Relationship buyers
Individual customers – repeat sales
Transaction buyers
Gastronomy
Retailers
“We … like to sell to the educated customer.”

23. Summary Strong one-stop purchasing effects Standardization
extreme differentiation
strong ex ante, little ex post competition
Success is possible only if quality is high, variety is extreme
But this fits only “sophisticated customers”
Tesch generally provides high end Rieslings
Tesch is strong in the US market for dry wines,
where there are many “sophisticated” customers

24. Case Question:
Imagine that you would consider entering the market for wine production, by purchasing an established winery with conventional product portfolio.
Would you find it attractive imitating Tesch‘s strategy?
If not, what would be the best alternative business strategy?