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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.