Davenport, Leibold, Voelpel: How the Global Wine Industry is being Changed by the Innovation Economy

Up to the early 1990s, the global wine industry was dominated by large wine producing companies, often vertically integrated with extensive wine farms (or farming members), large wine producing facilities, bottling and labeling plants, distribution facilities, and extensive marketing (including branding) activities. This situation was more prevalent in the ‘New World’ wine countries such as Australia, USA, Chile, and South Africa. But also in the ‘Old World’ wine countries such as France, Spain, Italy, and Germany, the focus was similarly on cultivation, production and quality, and geographic controls. The most important economic value was regarded as control of farm (grape) production, wine production capabilities and quality controls, and protection of origin-specific ‘terroir’ image.

In the mid-1990s a new type of wine industry entrepreneur emerged, the so-called ‘negociant’, a Francophile word for ‘merchant’, but actually having a larger and more innovative content. These companies do not own any wine farms, do not own or operate any wine production activities, do not package wine, do not design wine labels or bottle any wine, and also do not own or operate any distribution facilities.

However, what they do own are innovative and market-relevant brands, and their related sustaining capabilities. In the space of just ten years, some of these companies are selling more of their own wine brands than the leading traditional large wine producing companies. They are still regarded as ‘upstarts’ and a temporary phenomenon by some, but others have realized that in the global wine industry value (and income) has shifted irrevocably from the production side to the demand side. Consider two leading negociants in the South African wine industry, Vinfruco and Western Wines, who started in the mid-1990s. In the space of ten years their leading brands, viz. Arniston Bay and Kumala respectively, have become the topselling South African brands in the United Kingdom, the world’s largest wine importing market, outperforming the leading brands of traditional large South African wine companies such as Distell and KWV. An innovative new business model has now transcended the existing (traditional) business models in the wine industry.

Why and how did this happen? During interviews executives at Vinfruco (now Omnia Wines, resulting from a recent merger) and Western Wines, revealed their focus on especially three core capabilities: Knowledge of customer needs and required benefits; innovative capability to co-design brands with key retailers in the market; and ensuring integrated and reliable supply and demand chains to deliver consistent customer value as promised in their brands. In essence, they focus on superior knowledge and brand innovation, realizing that this is where value now resides, and not in ownership of physical resources – the traditional economy view.

Of course, this requires knowledge of customer trends, needs, and behavior, knowledge of wine farming (where, what, and how to source the right grapes, and ensuring supply), knowledge of wine production and quality levels, design of wine styles that are right for certain markets, co-design of wine labels, knowledge of wine packaging, knowledge of wine distribution and logistics, and knowledge of wine retailing and merchandising. But these capabilities (and value) reside in knowledge and innovation, not in physical resources. Even the traditional large grape-growing firms such as Gallo are placing increased emphasis on detailed, quantitative analysis of customer preferences and sales patterns. In the innovation economy, characterized by the predominant value of intangible resources, companies stuck in the traditional industry value parameters are likely to increasingly suffer if they do not adapt or extend their traditional business models.

In the global wine industry, the struggle for ‘ownership’ of prominent brands and their markets are evidenced by the increasing mergers and takeovers in 2003-2005, for example, Constellation Brands (BRL Hardy, Mondavi, Nobilo), Foster’s (Wolf Blass, Beringer Blass), Gallo (Gallo, Ecco Domani), and Southcorp (Lindemans, Rosemount, Penfolds). Buying brands is one strategy, but the important issue is to energize and manage innovative capabilities for survival.