Wines in Spain- Minjares

SECTOR RESEARCH

WINE IN SPAIN

An in-depth look at strategies employed in Spain and the impact on firms and consumers.

Report Compiled by Daniel Minjares

TABLE OF CONTENTS

Table of Contents

Country Background _____________________________________________________________________________________ 1

A Brief Overview of Spain ....................................................................................................................................................................1

Sector Background..................................................................................................................................................................................1

Ownership patterns & Relevant Mergers and Acquistions ...................................................................................................2

Importance of Wine in the economy ..............................................................................................................................................2

Key Deveopments in the last five years .........................................................................................................................................2

Strategy Exploration _____________________________________________________________________________________ 3

Defintion .....................................................................................................................................................................................................3

Focus .............................................................................................................................................................................................................3

Strategy Analysis _________________________________________________________________________________________ 4

Stakeholder Impact Analysis Table .................................................................................................................................................4

Significant Stakeholder Relationships ...........................................................................................................................................5

Competitive Position Analysis ...........................................................................................................................................................6

Conclusion ________________________________________________________________________________________________ 8

Long term changes in the sector ......................................................................................................................................................8

Interesting expereinces ........................................................................................................................................................................8

Closing thoughts on sector strategies ............................................................................................................................................9

Bibliography ____________________________________________________________________________________________ 10

STRATEGIES OF THE WINE SECTOR IN SPAIN

Page 1

Country Background

A BRIEF OVERVIEW OF SPAIN

Spain is the ninth largest economy in the world, the fifth largest in Europe, and third

largest producer of Wine in the world. Spain is the world’s 51st largest country with a

landmass of 504,782 square kilometers. Spain attracts many immigrants; it doubled it’s

Spain is bordered to the north by France, Andorra and the Bay of Biscay (Mar Canta brico);

to the east by the Mediterranean; to the south by the Mediterranean and Gibraltar and to

the west, Portugal and the Atlantic Ocean. This is relevant as it is a predominantly warm

climate – one of the warmest countries in Europe—with over 3,000 hours of sunshine a

year. It is home to a diverse set of landscapes and geography, which yields a myriad of

wine regions. (Angloinfo)

SECTOR BACKGROUND

The wine industry is quite important to the Spanish Agriculture economy. The average

wine contribution to the total agriculture output is about 3%. (Bardaji and Mili) The wine

sector as a whole is evolving in an increasingly competitive international scenario

characterized by the irruption of new producing countries with innovative strategies in

production and trade (Campbell and Guibert). International positioning of new producers

is also favored by high business concentration: the five top companies control 73% of

wine production in the United States, 68% in Australia and 47% in Chile, against

respective figures of 13% in France, 10% in Spain and 5% in Italy (Anderson et al).


Page 2

OWNERSHIP PATTERNS & RELEVANT MERGERS AND ACQUISTIONS

As shown in the graph, there is

fierce competition in the wine

sector with a number of large

mergers and acquisitions. As in the

case with Napa country in the US,

wineries may change hands many

times before even the first bottling

occurs but act as a subsidiary of a

larger holding company. The reason

for many more deals is the

attractive valuation in later years.

IMPORTANCE OF WINE IN THE ECONOMY

Spain is the third largest producer of wine, accounting for 4.2 billion liters in 2004 .

Spaniards have a strong tradition of wine consumption with the country ranked fifth in

the world, though the 1.4 billion liters is a third of national production. Spain is a major

exporter, tied with Italy for first place with 1.45 billion liters of wine exported in 2004 .

Spain‟s openness to foreign trade and investment has encouraged foreign producers‟

investment. For instance, Allied Domecq has recently acquired two large Spanish brands,

Maques de Arienzo and Bodegas y Bebidas. (Hussain et al)

KEY DEVEOPMENTS IN THE LAST FIVE YEARS

In recent years, the average consumption of wine has decreased, both on a whole and in a

regional scope, (Cholette et al; Hussain et al.) Therefore, the market has shifted to put an

emphasis on exports and a large shift to a more global marketplace, heavily influencing

the market strategies discussed in this paper.


Page 3

Strategy Exploration

DEFINTION

Economies of Scope – This is an economic theory that states the average total cost of

production decreases when an increasing number of different goods are produced.

Differentiation – One of the generic marketing strategies, this is a process that displays the

differences between products. It creates a perceived advantage in the customer’s view and

can be the result of positioning it as a more attractive product by contrasting its unique

qualities with competing brands.

Exporting – The sale of goods produced in one country and shipped to another for future

sale or trade. Such sale helps an economy grow and is a core function of diplomacy and

foreign policy, fostering economic trade that can benefit both parties involved.

FOCUS

Economies of Scope – The driving factor behind the main M&As in Europe and

subsequently Spain come from strategically acquiring wineries. A single winery may make

a multitude of variations, not to mention regional and unique grape variables, many that

are used in jams, fruit juices, and even selling the barrels for spirits.

Differentiation – Wine is inherently strategically positioned as a differentiated product.

Somalis are trained to understand these unique differences, but even the standard

consumer can understand the differences in general price point segments; as such, Spain

implements specific strategies in the upper tier segments.

Exporting – As consumption has taken a downturn in the region, Spain has responded by

focusing on the outside market, producing nearly as much as the previous years but

exporting a significantly increasing amount each year.


Page 4

Strategy Analysis

STAKEHOLDER IMPACT ANALYSIS TABLE

(IMPACT ON) ECONOMIES OF SCOPE

DIFFERENTIATION EXPORTING

CUSTOMERS Customers are able to have a variety of product choices from the same brand or region.

Products are highly different and have unique appeals. Customers are able to choose from a very wide selection of choices.

Spanish wine is paired commonly in worldwide markets, and a particular favorite in the US.

EMPLOYEES With a wide scope of related products, marketing, PR, and many other fields are able to work on multiple projects within the same firm.

There is a high level of skill and knowledge about correctly growing a specific grape varietal and the region is home to many, employing many skilled workers.

With many local wineries are looking to export overseas, employees are being trained to become experts in transitioning with the firm, expanding their horizons.

COMMUNITY With Spain being the largest landmass filled with grapes, the region enjoys many of it’s products at a significantly reduced price.

Spain as of late has put a higher emphasis on locally grown high quality product and foreign mid-tiered selections.

The community has shown firms that lower end selections are not needed and prefer foreign ones.

GOVERNMENT Taxes are collected on all sales, so the firms which go after many products increase the tax collected.

Taxes on wines in Spain are based on the alcohol content and therefore the many varieties are taxed at various rates.

As Spain is one of the major exporters of wine, the government has created many tariffs and strategic partnerships.


Page 5

(IMPACT ON) Economies of Scope Differentiation Exporting

ALLIANCES Some wine is created from a number of wineries mixed together, often from multiple region varieties.

Some labels hold a number of wineries and enjoy the advantage of multiple grape varietals.

Small-scale wineries are able to get their name out overseas and are quite competitive in the world market.

COMPETITORS This intensifies internal pressure within the market, in term of Porter’s five forces.

Nearly all wines are positioned with differentiation, and as such, competitors must constantly create a unique product.

With France as a local rival, Spain must capture the world market as a result of globalization.

INVESTORS Investors often purchase labels based not on just wine but rather the economies of scope that the firm has created; major M+E activities can result in huge jumps in market capture.

With all the varieties, investors can choose very specific wineries to invest in, or select a holding firm that adds value by bundling.

With Spanish wine being assumed across the world, even smaller firms can export to a global scale with the right investor.

SIGNIFICANT STAKEHOLDER RELATIONSHIPS

• Investors in regards to economies of scope:

As previously mentioned, investors often make major M+E to capture the market in

not only the wine industry but jams, juices, and related markets. Consolidation in the

wine industry is not uncommon, even in the top producers in the region. Between 26 –

28% of all the M&A of all deals in Europe occurred in Spain (M&A International). The

largest transaction was between Carrion’s $117mn acquisition of Grupo de Bodegas

Vintaris from Ranobank; this allowed it to grow 3% in market share in just one year’s

time.


Page 6

• Government in regards to exporting:

The government plays a huge part in regards to exporting. As shown above, Spain has

the largest world surface area of wine grapes in the world and is one of the largest

exporters. Many New and Old World wineries attempt to imitate Spain’s choices of

viticulture and horticulture but the market often demands the superior products.

COMPETITIVE POSITION ANALYSIS

• Changes after implementation of strategies:

The sector has greatly expanded after implementing these strategies. Consumer taste

has shifted in recent years and prompted the region to become a powerhouse exporter.

Due to fierce overseas competition, individual firms have placed a strong

differentiation strategy in place to strategically position their mid-tiered labels up to

their top-tiered ones. Spain consumers have still taken a liking to their home

countries’ superior label, and because of heavy taxes on exports, placed proportionally

by alcohol content, the country has created a cost-effective market for premium

brands.


Page 7

• Weakness in competitive position:

In regards to the three chosen statgieis, there is not a real inherenet weakness in of

itself, but rather a weakness in the executuion of singular firms in the industry. For

example, a firm that produces only a single variety of wine must stay competitive and

implement a model that encompasses economies of scale, which is a daunting task for

smaller vineyards. However, because of this, they miss the opportunity to ever work

alongside each other (Catavino). Spanish wineries rarely work together and instead

rely on a third party holding companies to created blended wines. The choice to be an

all-in-one from the start has effectively become an double edged sword. Instead, a

savvy firm could work with neighboring vineyards, all whom are vastly differentiated,

and showcase these differences which will appeal to a consumer’s taste.

• Potential changes in the future:

The only foreseeable change in the future of the wine industry is the fact that

consumer’s taste will change with the generation and the market has to respond

accordingly. After the crash in 2008, total sales of wine have dramatically decreased.

Markup in restaurants may be tenfold the listed price and consumption rates have

dwindled (Baigorri). Wine is a status symbol beverage, which is shown when

correlated to the increase consumption of beer and the push to the export market. On

the world market, Spanish wines are known to be some of the cheaper ones but in

recent years that image has been shed to showcase a much stronger range of price

points.


Page 8

Conclusion

LONG TERM CHANGES IN THE SECTOR

All of the strategies presented have made a strong long term economic impact on the

market. The new model of the industry has shifted from being one of the best in one

variety but to putting an emphasis in building towards economies of scope. As previously

mentioned, by

achieving this, even

a small vineyard can

be competitive in

the world market.

Though various

rating systems and

exporting, a firm

that produces a

superior product

can carve out a

respectable profit

and return, which seems why Spanish wine has put a greater and greater emphasis on

increasing the planting of grapes. While consumption has tapered off, due to changes in

consumer tastes and bolstered on by economic downturn, Spain has continued to make

it’s selections available on the world market.

INTERESTING EXPEREINCES

Over the time I’ve conducted this research and paper, I’ve tried a number of Spanish wines

per the instructions of my wine professor and friends in the industry. It seemed like the

state of affairs in Spain are widely known to have been at one time a cheap alterative to


Page 9

French wine, but there are a number of stars. While wine has become more widely

consumed as the economy has returned to a more stable state, the industry has once again

shifted to respond to the changes in demand.

In regards to the sheer number of wines produced, I was simply amazed. Because of the

wide variety of climates and topography, Spain is able to put out some of the best and

affordable choices. However there is no obvious “Brand Spain” which is a clear favorite

among seasoned critics of Spanish wine. While one can point out that the Marlborough

Sauvignon Blanc put New Zealand on the map, it is hard to do the same for Spain; the

regional identity is rather unclear. Now this has not been historically a downside – as is

the case with Washington – but just another barrier when entering new markets. Whereas

the average consumer is not highly educated on Spanish wine, it poses a bit of “consumer

shock” (Veseth), where consumers panicky stroll up the wine aisle and grab the first label

they are able to pronounce instead of comparing two labels in minute detail.

CLOSING THOUGHTS ON SECTOR STRATEGIES

Overall, I believe that the general role of strategy in Spain is as complex and unique as its

wine selection: Firms employ a number of strategies and nearly all of them use a degree of

differentiation. Spanish wine is at an interesting strategic inflection point as it can choose

to focus in on carving out a brand identity or continue to create a strong presence in

existing markets, expanding the selection even more. Spain may actually begin to make

wine selection choices not on what it’s home country needs are but rather for overseas, as

we are already seeing sherry selection be traded out for more favorable alternatives.

However, it seems that Spain is in a strong position to navigate this complicated passage.


Page 10

Bibliography

Anderson, K., Norman, D. and Wittwer, G. (2001). Globalization and the world’s wine markets:

Overview. Discussion Paper nº 0143, Centre for International Economic Studies, Adelaide

University.

Bettini, O. (n.d.). Wine Annual Report and Statistics 2014. Retrieved March 12, 2015, from

http://gain.fas.usda.gov/Recent GAIN Publications/Wine Annual_Rome_EU-28_2-26-2014.pdf

Campbell, G. and Guibert, N. (2006). Old World strategies against New World competition in a

globalising wine industry. British Food Journal, 108 (4): 233-242.

Hussain, M. (n.d.). An Analysis of Globalization Forces in the Wine Industry: Implications and

Recommendations for Wineries. Retrieved March 12, 2015, from

http://online.sfsu.edu/cholette/public_research/mhscrc_JGMktg_rev041607.pdf

Prospective Trends in Wine Export Markets – Expert Views from Spain(Bardaji and Mili) retrieved

from http://ageconsearch.umn.edu/bitstream/51084/2/IAAEpaper_54.pdf

Social Media – Why Spanish Wineries are Failing, and Why Portugal Might Be Heading Toward the

Light | Catavino | Spanish wine, Portuguese wine and a whole lot more. (2009, June 23). Retrieved

March 12, 2015, from http://catavino.net/social-media-why-spanish-wineries-are-failing-and-

why-portugal-might-be-heading-toward-the-light/http://www.winesofchile.org/site/wp-

content/uploads/2011/01/woc-plan-2020-eng.pdf

Spain - A Country Overview. (n.d.). Retrieved March 10, 2015, from

http://spain.angloinfo.com/moving/country-file/country-overview

Spain Wine Drinking Plummets as Rioja Sees Future Abroad: Retail. (n.d.). Retrieved March 12,

2015, from http://www.bloomberg.com/news/articles/2011-11-02/spain-wine-drinking-

plummets-as-rioja-sees-future-abroad-retail

Wine Business - Home page for the wine industry. (n.d.). Retrieved March 12, 2015, from

http://www.winebusiness.com/

Wine Industry M&A Outlook:. (n.d.). Retrieved March 10, 2015, from

http://wesrespartners.com/wp-content/uploads/2011/10/MAI-Sector-Report_Wine1.pdf

http://ageconsearch.umn.edu/bitstream/51084/2/IAAEpaper_54.pdf

http://spain.angloinfo.com/moving/country-file/country-overview

http://www.bloomberg.com/news/articles/2011-11-02/spain-wine-drinking-plummets-as-rioja-sees-future-abroad-retail

http://www.bloomberg.com/news/articles/2011-11-02/spain-wine-drinking-plummets-as-rioja-sees-future-abroad-retail

Wines in Spain- Minjares

Documents

Transcript of Wines in Spain- Minjares