The New Normal in the Wine Industry
Market Structure and Competitive Analysis in the Wine Industry
By Paul B. Finch, MBA | 6/20/2019
Well documented declines in wine sales have been the source of recent discussions within the wine industry. The nature of these discussions was encapsulated in an article by Rob McMillan of Silicon Valley Bank [published June 16, 2019] entitled The Wine Industry Won’t return to Normal. While I find myself in general agreement with Rob McMillan’s analysis and comments, I am writing this article to provide some much-needed context for these developing trends so as to provide a pragmatic and thoughtful path forward for wine producers.
The “Wine Industry” is Not the “Wine Industry”
The words we use are important as words can influence the way we think and act. In this case, the term “Wine Industry” is a misnomer. In reality, all industries are defined by the collection of firms that offer similar products [or services] that are perceived by consumers as substitutes for one another. Accordingly, as craft beer and spirits are substitutes for wine in many price categories, wine producers compete in the larger Alcohol Beverage Industry [with wine producers being constituents within the Wine Segment of the overall Alcohol Beverage Industry].
So why is this distinction important? It is important because we need to understand the Market Structure in which we compete in order to develop appropriate strategies based on the characteristics of this Market Structure.
The Alcohol Beverage Industry competes in a Market Structure best defined as Monopolistic Competition [the monopolistic part is derived from a firm’s ability to set prices and the competition part is derived from the presence of many firms with no single firm possessing monopoly power]. Moreover, a Monopolistically Competitive Market Structure is an industry composed of many firms, which if successful, are selling differentiated products and are capable of setting their own wholesale prices and achieving relatively high profit margins within the parameters of their products’ positive consumer attributes. In other words, prices can be set based on a firm’s competitive strategy and its subsequent ability to compete with substitute products [otherwise referred to as a firm’s Competitive Advantage].
In the 1990s and well into the 2000s, wine producers achieved a Competitive Advantage, primarily predicated on wine’s appeal to maturing Baby Boomers, and were largely successful as a result. However, with the decline of demand from the Baby Boomer generation, without an off-setting increase in demand from the Millennial generation, wine producers have largely failed to innovate in response to changing demographics and market entry by craft beer and spirits producers [which is normal in any competitive market where an economic profit can be earned] . In short, wine producers have generally failed to restructure their competitive strategies in order to maintain a Competitive Advantage.
Here is the good news - Because we compete in a Monopolistically Competitive Market Structure, producers can achieve Economic Profits [that is a profit in excess of the opportunity cost of similar investments] which is the holy grail for business owners and investors.
Here is the Challenge [notice I did not use the term “bad news”] - You need to compete! To do this you need to develop competitive strategies that capitalize on your products’ differentiation and positive consumer attributes.
Monopolistically Competitive Market Structures require strategies focused on product differentiation [referred to generically as a “Differentiation Strategy”] . Differentiation Strategies emphasize the following components:
· Development of a distinguishable/well recognized Brand
· Strong Market Positioning for the Brand
· A strong financial position [a well-balanced and funded Capital Structure] as a means to appropriately execute the strategy.
In order to compete and achieve success in branding, wine producers need to be prepared to hire and/or acquire outsourced marketing and sales talent with strong expertise in: (i) consumer research; (ii) product design [bottle, labeling, logo, packaging, etc.]; and (iii) the ability to develop, launch, and implement profitable strategies to increase demand.
Additionally, in order to compete and achieve success in the development, launch, and implementation of profitable strategies to increase demand, wine producers need to be prepared to think beyond standard accounting and reporting functions as it pertains to their finance team in order to vet the viability/profitability of competitive strategies and determine the appropriate funding resources required to support on-going operations. Accordingly, competing firms need to be prepared to hire and/or acquire outsourced finance personnel with strong expertise in: (i) financial analysis (including modern cost accounting approaches/methods); (ii) quantitative approaches/methods for product demand, revenue and cost forecasting as well as rate of return [collectively forecasting and business planning] and; (iii) quantitative methods for financial decision making.
In order to “Up Our Game”, firms within the wine space will likely need, to some degree, to import highly skilled talent from other industries which have the technical expertise necessary to compete within a Monopolistically Competitive Market Structure.
We need to be mindful that markets are in constant states of flux and that change is the norm and innovation is the key to success. The wine space is no different. Our market segment offers many products that have the potential to appeal to a wide range of societal demographics if positioned properly. Accordingly, with the right competitive strategy and support from well-educated and trained personnel, it is my opinion that wine producers can compete successfully.
Paul B. Finch, MBA, is co-founder and Executive Director of Benchmark Solutions (www.benchmarksolutions.us.com). Benchmark Solutions, Inc. is a boutique business advisory which provides high quality corporate finance and management accounting services to some of the most innovative and creative businesses and emerging companies in the beverage, healthcare and technology industries. Paul specializes in the areas of Financial Analysis, Forecasting and Business Planning, Financial Decision Making and Business Valuation. You can contact Paul at firstname.lastname@example.org