first group case[1]
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Case Analysis: Global Wine War 2009—New World vs. Old
1. France, as an early entrant into the wine industry, accrued First-mover advantages
and established its place as the dominant competitor in the global wine industry (Hill, 174). It
is true that France and Italy demonstrate decreasing trend of consumption rate over the years
since 1966 (Exhibit 3). However, according to 2001 data, France and Italy still had the
highest liters per capita of 46 and 52, compared to 9 of the U.S. and the highest production
value (Exhibit 5). French wine producers became the dominant competitor as a result of three
following reasons. First of all, French wine producers gained First-mover advantages by
becoming the first niche market for premium wines and thus gaining Economies of Learning.
French wine producers expanded the production of vintage wines that are exclusively handled
by négociants, and this helped to affirm the reputation and history of French wine. As the
high wine consumption and production rates of the Old World demonstrate, wine is
intertwined with the culture of economic aspects of people’s lives; by the mid-18th century,
there were 1.5 million families in wine-related businesses (Bartlett, 2). Second, the
government assistance further fostered the image and reputation of French wine.
Emphasizing the importance of quality, the government imposed strict regulation on wine
production and quality; the Appelalation dÓrigin Controllée (AOC) laws of 1935 “set
detailed and quite rigid standards for vineyards and wine makers” (3). Lastly, French
producers could take advantage of the late 18th century innovations such as glass bottles,
cork stoppers and the development of pasteurization (2). Again, being the first-mover to take
advantage of technology and innovations, French wine producers expanded production and
gave birth to global wine market.
2. Since the 1990s, however, the New World Producers challenged the French wine
which was constricted by restrictive industry regulations and wine-making traditions
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(Bartlett, 1). Through differentiation and technological innovation, nine slots out of top
fifteen Wine company list are taken by the New World companies (Exhibit 8). The triumph
of the New World producers can be demonstrated through the Porter’s Diamond (4+2
additional factors). 1. First, the Relating and Supporting Industries factor provides
explanation to how the New World could differentiate from the dominant, traditional market.
Due to a strict regulation, French wine industry could not add sugar even though the
consumer taste was moving from a bitter, deep wine to a sweet wine (Bartlett, 4). Also,
traditional wines were expensive, so there was an absence of cheap-wine supplier industries
in the international market. Tailoring to the new consumer preferences of sweet and cheap
wine, the New World invented white wine splitzers and cheaper price products; this new-
emerged industry was successful as “by the late 1980s, white wine represented over 75% of
U.S. sales” (7). 2. Secondly, the New World producers understood the consumer preference
better than the Old World producers did. They affected Demand Condition through a greater
advertisement of the health benefit of wine: help to prevent heart disease (7). Furthermore,
they recognized how to capture consumers through “accessibility and consumer
understanding” and “design advantage” (Exhibit 11). As a result, New World companies
claimed 14 of the world’s top 20 wine brands in 2007 (8). 3. Regarding the Firm strategy,
Structure, and Rivalry, the New World wine industry is organized to mass produce lower
quality products with advantage in price competition. Despite a disadvantage of too much
domestic rivalry, the New World expanded its market share by breaking the traditional wine
making rules and taking advantage of its capital-intensive nature and of largely consumed
cheap products. 4. The New World companies fostered Factor Endowments status thorough
advanced factors such as innovation and technology, which helped to produce low cost/ mass
production wines. 5. This leads to the additional fifth factor of Government, because the
government’s support and assured the First-Mover Advantage in breaking many wine making
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traditions. Specifically, practices such as adding oak chips into aging wines and using
computer-controlled steel tanks were forbidden in the Old World countries (4). 6.
Nevertheless, there is Chance involved, since the natural environment for growing and
producing wine varies across the countries. During the postwar economic boom, “suitable
land was widely available and less expensive” (4). Compared to 1.3 and 7.4 hectares in Italy
and France, 213 and 167 hectares of suitable land in the U.S. and Australia gave the New
World advantage of natural resources.
3. However, the prominence of the U.S. wines ranking does not signify that there
are no difficulties. The U.S. market faces three main difficulties; too much domestic rivalry,
increasing land cost, and increasing import. First, the U.S wine market faces too much
domestic rivalry. In addition, because the U.S. is a capital-intensive market, the firms are able
to produce large quantity of wine, which caused a global oversupply in wine industry. In turn,
this over supply drove down the price, and the producers would focus less on quality (12).
Simultaneously, the land cost rose in Napa Valley, CA, a main location of wine producers
(10). The increased land cost disabled the U.S. to compete with low-cost production
industries with Argentina and Chile (12). The last problem is consisted of increasing demand
of imported wines, especially premium wines (10, exhibit 6). In the last 20-year period, wine
sales in the United States declined from 800 million to 600 million liters, while consumption
of premium wines increased from 150 million to 600 million liters. The same trend is also
applied in the European Union, resulting the fall of per capita consumption of basic wine
from 31 to 18 liters, yet resulting the increase of the demand for quality wine from 10 to 15
liters (6).
In responding to the situation in 2008, we recommend the three solutions that the
American government can follow. First, the government should impose tariff rate quota, the
combination of quota and tariff to limit imports over quota (Hill, 201), to counteract
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increasing import quantity. Tariff rate quota would reduce import quantity thus protect the
domestic wine industry. Secondly, the government should intervene to lessen the domestic
rivalry. According to New Trade Theory (NTT), the government’s intervention to sustain
First-mover advantages could affect the Economies of Scale. In turn, the Economies of Scale
would pressure less competitive firms to leave the market, limiting the number of firms in the
country (178). Lastly, the government should first impose minimum quality standards for
wines and then help big companies to capture a bigger market share, in order to produce
better quality of wines. As the case states, “yet even in 2009, despite many attempts, no brand
had been able to capture as much as 1% of the global wine market, in contrast to soft drinks,
beer, and liquor, where global brands were dominant” (Bartlett, 8). We suggest that big U.S.
wine companies leading the competition should strive to capture at least 1% of the global
wine by increasing the quality. As the statistics above demonstrates, both the global and the
domestic consumers are starting to prefer premium-quality wines over basic-quality wines.
Thus, if the major U.S. wine companies target not only domestic consumers but also foreign
consumers, it would be possible to reach the 1% markup. Above all, the three biggest U.S.
companies (Constellation, E&J Gallo, and The Wine Group), also known as the top three
global wine companies, possess popularity and potential to carry out this effort (exhibits 8
and 10). Therefore, rather than competing against each other, these major American
companies should cooperate to advance the overall wine quality to Premium-level.
Subsequently, this effort would in turn help to fight the Global Wine War.
Work Cited
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Bartlett. Christopher A. Global Wine War 2009: New World versus Old. Boston: Harvard
Business Publishing, 2009. Print.
Hill, Charles W. L. "Chapter 5." International Business: Competing in the Global
Marketplace. 8th ed. New York: McGraw-Hill/Irwin, 2011. 174-201. Print.