Maintaining the competitive edge – wine industry
I found it interesting that the title provided for my remarks included the phrase “Maintaining the Competitive Edge”. It seems very clear that for the American wine industry, when speaking about the global marketplace, we’re neither very competitive nor have any type of significant edge that any global competitor has yet had to worry about.
“America doesn’t know what its point of difference is, and that’s its problem.” That’s the view expressed by a major U.K. wine buyer in the current Wine & Spirits International magazine. Is he right? Exports of U.S. wine have risen every year since 1986, but in many years, just barely, measured in either dollars, gallons or cases. Clearly we can, and should, do better.
Our friends in Australia looked out one day at a rather small population (and some rather abundant vineyard plantings) and came to the conclusion that exporting to the world market was a duty, not just a virtue. They also quickly grasped that Fair Trade does not automatically mean Free Trade, as anyone facing the relatively high tariffs in Australia can attest. More about that later.
In the United States, by contrast, we’ve yet to effectively work together as an industry to conquer or adapt to the changing tastes of Generations X, Y and Z… (too many young people to keep track of, with a marketing half-life that seems to get shorter all the time).
Will they move from Cosmopolitans and Frappacinos to Merlots as they get older, as those of us in Generation — what would it be, T, U, V?–graduated from Rolling Rock to Whiskey Sours to elegant Cabernets?
It takes only a moment for a newcomer like me to see how fragmented we are as an industry. We are torn at from all sides. We have regulatory issues with both the state and federal government (not to mention the rest of the world!). We are watching the consolidation of the three-tier system and wondering whether this is good or bad. We are suddenly the “bad guys” for environmentalists, and the neo-prohibitionists seem to always be lurking right around the corner. Add in our famously large company and individual egos and it’s a wonder we can ever even contemplate working together on something like expanding the global marketplace for U.S. wines.
The parallels to my past life do exist: its not as if we didn’t have famously large egos in the computer business.
But no one was confused about where the computer industry stood on global issues. We did our best to speak with one voice, and speak loudly. We built markets to benefit the industry, and then we got in and competed as hard as we could with each other.
The wine industry faces the same issues. We need to set personalities aside and move forward together. It is a tough task without fragmentation, and a nearly impossible task with fragmentation.
The Home Market
Becoming competitive in a global marketplace also includes the great untapped market that exists right here at home… before our global competitors steal it away from us.
That’s a real concern. Australia has surpassed Chile as the third-largest exporter of bottled table wines to the U.S. (year to date, March 2000).
These are wines that are targeted squarely in our prime areas of growth, at the premium end of the pyramid. If these growth rates continue, Australia could surpass France as the number two exporter of table wines to the U.S. within three years.
Wine is imported into the U.S. at a rate that usually exceeds exports by a ratio of 2.5 to 1. Now I realize other countries have had a 6,000-year head start on developing effective programs, but… Do we believe our export programs can demonstrate that kind of strength any time soon?
As I look back over my first six months in the wine business, I must confess that I was frankly surprised, if not astonished, at how domestic (sic) the U.S. wine business is.
* Hewlett-Packard more than 50% international for the last two decades;
* Kendall-Jackson about 3%. Few U.S. wineries have done better. Most still in single digits;
* We’ve hired a new team and we’re definitely going to take a more aggressive approach to overseas markets.
In fact, I believe one of my most important missions at Kendall-Jackson is to develop our overseas markets. I would like Kendall-Jackson to become one of, if not the first, truly global wine companies.
* If much forecasted “grape glut” ever arrives (it never has),
* Or if U.S. economy slows significantly and growth in premium wine sales slow,
We will be able to turn to overseas markets for growth.
I have a real passion for overseas business and I am unashamedly in favor of free trade.
As I thought about these remarks, I found the Strategic Priority III of the Wine Vision Plan very compelling. It reads: Position U.S. wine as the high-quality, high-value product across price points in markets targeted for the greatest prosperity.
Markets such as Japan (which doubled wine consumption in the short period between 1995-98), the United Kingdom or China.
Gaining the competitive edge in any market, of course, rests on some fundamental truths such as building awareness, then preference, for the product, whether it’s wine or computer chips. As the reality of China draws nearer, as it moves from a curiosity to a most-favored trading partner, the tendency is still to want to avoid risk, to be patient and go slow.
After all, we sell only some $2 million of wine in that market today, where distribution is totally controlled–and tightly controlled–by the government, and tariffs top 65%. They have unique customs, we say, mixing soda pop with fine wine. They prefer sweet wines. Change will come slowly, if ever, or at all.
My personal experiences suggest otherwise, and my management instincts tell me that to be competitive in the global marketplace we will need to accept risk as a matter of course, and give ourselves the freedom to fail, and to learn from these early mistakes.
My first trip to China came some 16 years ago, and I’ve visited there nearly two dozen times in all since 1984. The change I witnessed in that decade and a half is nothing short of breathtaking.
In 1984 the hotels we stayed in would have rated, at best, a half-star from a generous rating agency. Air service was infrequent. There were no private cars, just waves of bicycles for as far as you could see. The trip in from the airport was long and arduous. Only a few (mostly young) people could be seen in anything resembling Western dress. You might stop and take pictures of them.
If we traveled there tomorrow you would find several 747s landing each hour, with passengers heading toward the city center on a new freeway, or one of the eight-lane ring roads that make getting around far easier than traveling up and down Highway 101 in Sonoma County. We would have our choice of five-star hotels such as the Portman Regent or the Shangri-La.
We’d feel right at home when we looked at the dress worn by people of all ages in the public squares and roadways. And like any tourist, you’d want to shop for something to bring home, and you’d find shopping centers and lots to consider. In fact, it might be harder to find a trinket back home than it is in China today.
China is entering the modern world at warp speed and woe to anyone who believes the risks are too high, the wait too long or the customs too strange. Change is a constant of Chinese life today, and there is no doubt that China and the rest of Asia will be among our largest wine consuming nations just 10 years from now. Will it be U.S. wine or the wines from down under?
Free Trade Is Critical
Free or “fair” world trade is critical to our economy. Global businesses like HP or Motorola or Coca-Cola depend on it. Businesses like Kendall-Jackson and other wineries will depend more on open markets in the future.
Even local businesses like restaurants, gas stations, dairies and dry cleaners which depend on a robust local economy are indirectly very dependent on fair trade and open markets. And how about local businesses like coopers, stainless steel fabricators, label printers or glass manufacturers?
While the Wine Vision Priority III calls for reducing or eliminating tariffs in producing and non-producing nations, removing or eliminating trade barriers here in the U.S. market, and facilitating broader and easier distribution in global markets, it’s important to realize that positive feelings about global trade aren’t automatic or widely held.
In a recent newsmagazine, the headline was “Backlash–Behind the Anxiety Over Globalization”:
* Fear that free trade harms wages for U.S. workers, jobs for U.S. workers and the global environment;
* Some statistics from Business Week/Harris Poll (1,024 interviews): 64% think globalization benefits U.S. economy; 68% think U.S. consumers gain; 42% bad for U.S. job outlook; 38% bad for environment; 68% lower wages (11% undecided, only 19% think higher wages).
Bottom line–people are very scared about free trade. This is curious because the U.S. market is already the most open in the world. Fair trade in most cases means unilateral opening of overseas markets to U.S. goods. Clearly, most
people in the U.S. don’t understand this.
While at HP, I worked on global trade issues because I believed they were:
* Important to HP;
* Important to sustained growth of U.S. economy;
* Important to the development of underdeveloped countries: wipe out poverty; wipe out illiteracy; contribute to peace and stability.
I feel the same sense of commitment now that I’m in the wine industry.
Because of my involvement I found myself in Seattle late last year at the ill-fated WTO meeting. It was a frightening and sobering experience–a graphic demonstration of just how little people understand about the complex subject of global trade.
Many vivid images won’t go away:
* IAM machinists from Boeing marching in protest;
* Teamsters from Seattle port marching in protest;
* Delegates from important trading partner countries being pelted with cans and bottles;
* A protester wearing Nike running shoes destroying the sign above entrance to the downtown Nike store;
* Environmentalists protesting development of trade with a whole host of countries.
Pretty intelligent people were doing things which make no sense in context of the strength of the United States, of their own well-being and the progress of their causes, whether the cause is:
* preservation of jobs;
* preservation or improvement the environment;
* elimination of child labor;
* protection of intellectual property.
What’s wrong with the picture from Seattle?
* it’s too late for the U.S. to isolate itself-“fortress U.S.”;
* We are the most important market for world products;
* We are already very export dependent.
The Wine Market
In 1998 wine exports accounted for an estimated 13% of U.S. production, double that of exports in 1990. Last year was expected to show an improvement of 22% over the year before. The world is ready, really ready to finally discover U.S. (especially California) wines.
Demand for premium wines on a global basis is climbing. California has always distinguished itself as a premium leader. The category has never been bigger.
The question really becomes: Will we support and develop this market or lose it, virtually abdicating it to the Australians… to the ever-improving wines from South America… and even to old world wine regions like the Languedoc, which is moving from its traditional value/volume focus to one with higher aspirations?
We simply can’t stop trading with everyone who is behaving as we did decades ago. And we can’t expect to export without allowing our trading partners to export to us.
We are making progress for U.S. wine in the world market. But to be truly competitive in the global market, we have to decide to really focus on expanding our horizons. We need something other than lip service…and in some areas, the evidence suggests we’re beginning to do that.
Trade agreements already in place have:
* Opened markets;
* Lowered tariffs;
* Reduced unfair competition such as trade distorting subsidies.
* Under NAFTA, all tariffs between the U.S. and Canada were eliminated in 1998. Canada is now the second largest market for U.S. wines;
* Japan has committed to reducing the tariff on U.S. wines from 21.3 to 15% over the next six years;
* All member countries of the WTO are required to make technical requirements clearer and to provide greater protection for trademarks…although trademarks remain contentious (just ask any winemaker whose family name happens to be the same as a small town in Italy).
The never-ending fight over geographical indications remains equally vexing and lends itself to horse-trading of the worst kind–you let me use Johannisberg Riesling for another few years, and I’ll concede X. The U.S. still faces a number of wine trade barriers which we must continue to fight to overcome if we are truly to become competitive on the world stage.
Norway, Finland and Taiwan maintain state or provincial monopolies that restrict the import of U.S. wines. (Non-wine producing countries are consistently less friendly to imports and frankly, we haven’t devised a good strategy yet to deal with that.)
Hong Kong subjects wines made from grapes to a tariff of 60% while Asian wines made from plums, rice or grains pay only 30%.
Similar barriers exist in China, Thailand and Singapore. In all these countries there are complex licensing restrictions, shipment restrictions, and additive restrictions.
The Latin American Market
In Latin America and Mexico, U.S. wine exports are at a competitive disadvantage because of assorted trade agreements with third world countries that provide for preferential treatment among member countries. Chile has signed trade agreements with a wide range of neighbors–including Canada–that offer preferential or duty-free access for Chilean wine and other products.
And still more trade barriers we currently face are:
* Onerous labeling requirements;
* Labels for export to Canada must be bi-lingual;
* Korbel can’t ship champagne to France because… well, you know;
* Some countries require bottling dates, which is not a common U.S. wine industry practice. Others need a special recycling symbol.
Here’s a small example: a list of the most common documents needed to export wine:
* Import License;
* Certificate of Origin;
* Certificate of Radiation;
* Certificate of Free Sale;
* Certificate of Hygiene;
* Certificate of Manufacture;
* Pre-Shipment Inspection Report;
* Certificate of Age;
* Certificate of Analysis;
* Certificate of Authenticity;
* Certificate of Health;
* Certificate of Fitness for Human Consumption;
* Certificate of Value.
Is there any real doubt that nearly all of this “Baker’s Dozen” of bureaucratic paperwork is intended to answer only one question: is this a quality product fit for consumption in the importing country?
Oenological Practices: practices that are common here, such as the use of ion exchange, are often banned in other countries.
Phytosanitary Barriers: these standards basically protect the public health, but here again we often disagree-not for scientific or rationale reasons, but for cultural ones. In the EU, regulators tend to look at our wines as being overly manufactured, “industrial” if you will, with all the negatives you can attach to that phrase. At a time when Europe is leading the way in its resistance to geneticallymodified food (so-called Frankenfood), we’ll need to keep wine out of this debate, as far away as possible so we don’t get caught in an unrelated trade dispute. The current debate over organic labeling comes to mind.
Japan’s trade leaders are famous for finding ways to restrict imports. They are likely, for example, to accept a federal definition of organic wines but reject a state or thirdparty registration. We need to anticipate such actions and work to be sure they do not harm our industry.
And we’ll need to carefully consider the implications of our research into genetically-modified rootstock that is specifically engineered to fight Pierce’s Disease, for example. Will the EU object to this?
With the European Union, we’re making some progress.
We have agreed to forego the former practice of granting annual derogations for certain winemaking practices by extending these understandings through 2003 to provide wine producers some sense of certainty during this time period.
We’re also making progress in our own New World Wine Producers group, which was formed after the industry’s frustration with the roadblocks often put up by the OIV in Paris. The New World Wine Producers, of course, includes the U.S., South Africa, Australia, New Zealand and all the South American producers. This group is working to establish both a zero-zero tariff and a set of standards which can be agreed upon by all member countries.
With luck, agreements can be reached before 2003 on many of these issues so they are no longer barriers to trade.
Of course, we have to be careful to practice what we preach.
Just this month, U.S. trade officials are negotiating with the Australians over subsidies for, of all things, leather. Now what does that have to do with wine? As it turns out, plenty. U.S. officials are contemplating placing higher tariffs on imports of Australian lamb, seafood, cheese… and wine (perhaps doubling the tariff from five to 10%).
The head of the Winemakers Federation of Australia, Alister Pur brick, said: “We’re concerned that we’re going to be caught in the middle of a trade war not of our own making….” I can imagine U.S. wine officials saying something very similar, at another time, in a similar situation.
Free Trade Sideshows
One thing we must do as we work our way towards fair trade for wine is to assure that we are not drawn into the endless sideshows that result in higher tariffs for wine because somebody’s mad at the banana industry. Wine for wine, straight up.
So, let’s assume we have a world where free, or fair, trade is possible.
The relevant question remains: how can our U.S. wine industry succeed in overseas markets? I have a two word answer to that question–THINK GLOBAL. Okay, you say–what does that mean?
It means doing things quite differently than our natural protectionist instincts tell us.
So, here’s my list and a few examples:
FIRST, do something to get involved:
* Don’t be afraid to take a risk;
* Don’t be afraid to make a mistake.
It might mean investing in winemaking ventures overseas. Kendall-Jackson Wine Estates has just this year (2000) finished building estate wineries in Chile (Calina), Argentina (Tapiz) and we expect to import wine from our estate in Tuscany, Villa Arceno, this year.
For HP this meant getting involved in Russia 27 years ago, Latin America 32 years ago, Japan more than 35 years ago and China 18 years ago. For the wine industry that may mean going to China today.
Most of all we are adding global marketing to every strategic plan, making it more than just an afterthought or a “some-day” dream.
I say “global marketing” very deliberately. Increasing exports is akin to the notion of shipping, or increasing depletions. Global marketing is thinking in developmental terms, building brands that reach out and create relationships with consumers. Not selling them once or twice, but building a lasting, long-term exchange for the mutual benefit of both.
High risk, probably expensive, but potentially high payoff moves.
SECOND, tailor the product to the market.
Some markets like U.S. products, others don’t. One wine drinker’s fruit-forward-oaky-Chardonnay is another wine drinker’s flabby fruit bomb. For HP, this meant offering products with local language capability–new keyboards, new software, local language documents. For Coca-Cola, long a ubiquitous symbol of America, it means finally “going native.” In Turkey, Coke is selling a pear-flavored drink. In Germany, berry.
For the wine industry this may mean adjusting the flavor to local tastes, or even a “taste for excitement.”
That same U.K. buyer I mentioned at the beginning of my remarks–the one who thinks we don’t know what our point of difference may be–also made an interesting observation: “why not introduce other varietals… there’s not much point in giving them just Cabernet and Merlot as they can get those wines from just about anywhere in the world, and frequently at competitive prices.”
Interesting advice, and not just because I tend to think he has a point. It’s the Australian model again, and one we should all examine.
We’re listening at Kendall-Jackson by introducing Collage, a new blended series of wines at competitive price points. Collage features blends that include: Cabernet-Shiraz; Semillon-Chardonnay; and Zinfandel-Shiraz.
THIRD, hire talented local people as quickly as possible.
It’s okay to use ex-patriates for startups but there is a tendency to leave them in place too long. It’s important to get “locals” in all jobs ASAP. It’s
much easier to indoctrinate locals into company culture than it is to teach ex-pats about the local culture. That’s nearly impossible in some countries (e.g. Korea, Japan).
* Better accepted in local market;
* Have better instincts.
In a recent Harpers issue on California wines that interviewed British wine buyers, the consensus was that California wines lack image, wineries need to work the market better and hit better price points.
Those sound like pretty generic kinds of statements… but not to an experienced local, who can read between the lines and recommend tactical adjustments and approaches that actually work.
Even as major U.S. wine retailers like Safeway or Walmart go increasingly global, understanding what makes the Safeway in Londonderry different from the Safeway in Napa is something that might not be done well if we rely only on U.S. insights.
And knowing that there is one gentleman at Marriott hotels who is deciding what wines every Marriott hotel outside the United States will put on their core lists–and that he is not an American, and may not have our appreciation for California wines–is a pretty good thing to kick around with one of his fellow countrymen, I think.
FOURTH, work to adapt to local culture, but don’t compromise on “Standards of Business Conduct”:
* Don’t have to;
* May have to forego some business;
* Need to draw a “bright line” and don’t cross it–zero tolerance the best policy;
* Develop a reputation as “no compromise” company. People will do business with you on that basis–of course, the opposite is also true.
Consequences of operating on the “wrong side” can be devastating. Audit aggressively and often in countries which allow questionable practices–must be proactive.
FINALLY, be patient. Not easy to enter new markets. Don’t usually have good results in short-term (3-5 years).
Long-term results can be exceptionally rewarding, HP examples:
* Korea–over $1B in 10 years;
* Japan–largest non-U.S. market–approaching $4B;
* China–$1B+ last year.
We in the American wine business are simply not thinking big enough, and perhaps not strategically enough.
Rather than spend our limited Foreign Agricultural Service (FAS) dollars in a scatter-gun approach, making decisions about which countries get marketing efforts based on vacation plans, we should target and focus market by market, penetrating, if not conquering, before moving on to a new target.
The United State of California campaign from the Wine Institute is a current and increasingly worthy example of such an approach and it has already paid dividends: we have moved ahead of… Bulgaria… in sales in the U.K. market… and that says all we need to say about where we’ve been, and where we need to go. (Actually, it has been an effective program, moving off-trade sales up in the last year nearly 40%.)
This is an investment that is sure to pay off… if we act, and act now to secure our futures. It is important we all redouble our efforts to make sure trade is conducted on a level playing field so the U.S. doesn’t become an island.
We need to spread the facts and success stories about world trade to counter the horror stories of lost American jobs, child labor and destruction of the environment.
We’re standing at a crossroads.
Fortress U.S.A. is in one direction.
The most open markets we’ve ever known are in the other.
Given that U.S. markets are already the most open in the world, we have everything to gain and very little to lose.
Lewis Platt delivered this speech to the Wine Vision Conference in July of 2000, shortly after he was named chief executive officer for Kendall-Jackson.
COPYRIGHT 2001 Hiaring Company
COPYRIGHT 2001 Gale Group