Microeconomics of Competitiveness - California Wine Cluster

Topics: Wine, Winemaking, Cabernet Sauvignon Pages: 5 (1085 words) Published: February 25, 2014
CASES: The California Wine Cluster, HBS Case: 9-799-124
1. Why has California emerged as one of the leading wine – producing regions in the world?

It was Californian first vintners in California who began cultivating grapes for use in sacramental wines in the mid-to-late 1700s. In the 1830s and 1840s the first commercial vineyards were established. Vintners survived by making grape juice and sacramental or medicinal wines.

2. How was California able to upgrade from producing low – quality wines to a dominant focus on premium wines over the last two decades?

In early 1900s the University of California at Davis shifted its research to fruit growing and renamed its viticulture department to be the “Department of Fruit Studies”. The wine Institute, a trade association of 48 California wineries, was founded in 1934 in San Francisco to help re-invigorate the lobbying at the state and federal levels. As prohibition came to an end, the Depression hit the U.S. economy winemaking did not regain steam until the Second World War when the U.S. was largely cut off from European sources. Demand for low quality sweet and fortified wines such as Thunderbird fueled California production throughout the 1940s and 1950s.


3. What is California’s competitive position versus France, Italy, and Chile?

a. California’s competitive position versus France:

California’s competitive position versus France is in wine prices and production cost. The competitiveness is varied by region and by quality. Labor costs in France were generally thought to exceed California’s. France had long-established apprenticeship programs at individual vineyards and winemaking establishment. The French had an aversion to what they viewed as the “mechanistic” and overly scientific methods of Californian production, seeing the discipline much more as an art handed down over the generations. Despite this, the French had a wellestablished research network and base of trained scientists. The National Institute of Agronomic Research was known for its work in both viticulture and enology. The French government took an active role in the wine industry, which was viewed as a “national treasure”.

b. California’s competitive position versus Italy:

Italian consumption rate for wine is at 15 gallons per person in 1996 behind France. Italian typically consumed lower quality, less expensive wines. Imports had very little impact in the Italian markets, accounted for less than 1% of consumption. The cluster boasted the world’s oldest and largest national organization of winemakers to which 90% of Italy’s 3,500 winemakers belonged. The Italian wine industry was becoming increasingly polarized between those winemakers adhering to a traditional focus on local markets and those targeting the global arena. The latter group was growing as wine makers such as Antinori of Tuscany brought in experts, including consultants from California, to modernize their facilities and processes to better address the needs of International markets. As in France, the Italian government maintained strict laws governing labeling to ensure origin, quality, and


vintage. The government also provided export promotion assistance of about $6 million per year.

c. California competitive position versus Chile:

Chilean consumers historically preferred inexpensive, highly acidic wines typically packaged in tetra packs or boxes. Though tariffs were low, imports accounted for less than 1% of consumption Chile had a long history in wine-making dating back to the 1500s when Spanish conguistadors planted mission grapes to make bulk wines. When phylloxera struck France and California in the late 1800s, Chilean grape vines proved immune and were the only French varietals still grown on their original root stuck in the 1990s. Roughly half of Chile’s total production went to domestic markets and consisted primarily of wines made using lesser quality, high yield grapes. Exports...
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