Running head: STRATEGIC ANALYSIS OF THE NEW ZEALAND WINE PRODUCTION

INDUSTRY

Strategic Analysis of the New Zealand Wine Production Industry

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Executive Summary

This report presents that strategic analysis of New Zealand wine production industry.
To conduct analysis two important strategic analysis frameworks are used including PESTEL
analysis framework and Porter’s five force models. The macro-environment analysis
postulated that New Zealand Government has been largely supportive of wine production
industry and has introduced numbers of reforms and policies which has positively influenced
the industry. Furthermore, the demand for wine in both domestic and international markets is
observed to be increasing thus offering significant opportunity to increase the productivity
and expand the business of the major players in the industry. However, the rise in the
minimum wage by the government is ascertained to pose a significant challenge for the
organizations operating in the industry and can increase their cost of production. At the same
time, wine production industry is ascertained to require to comply with stringent laws and
regulations which has created additional pressure on the industry. Moreover, competitive
analysis of the New Zealand wine production industry demonstrated that the level of
competition is moderate, but given the increasing demand of the quality wine, more new
entrants may enter into the industry make the industry more competitive. The findings from
the analysis present that there is a huge opportunity for the New Zealand wine production
industry driven by increasing demand for wine domestically and internationally, yet there are
certain factors such as changing climatic condition, entry of new firms and changing
regulations which can impose a significant threat to the success of the industry.
Correspondingly, the New Zealand wine industry needs to use its strengths such as global
reputation and sustainable practice to gain increased customer satisfaction and reduce the
pressure caused by the stringent environment related regulations.
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Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Macro-Environmental Analysis.................................................................................................4
PESTEL Analysis...................................................................................................................5
Political Factor...................................................................................................................5
Economic Factors...............................................................................................................6
Social Factors.....................................................................................................................6
Technological Factors........................................................................................................7
Environmental Factors.......................................................................................................7
Legal Factors......................................................................................................................8
Competitive analysis..................................................................................................................8
Porter’s Five Forces of Wine Industry of New Zealand.........................................................9
The threat of new entrants..................................................................................................9
Threat of substitutes...........................................................................................................9
Bargaining power of suppliers...........................................................................................9
Bargaining power of buyers...............................................................................................9
Industry Rivalry...............................................................................................................10
Conclusion................................................................................................................................10
References................................................................................................................................12
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Introduction

In the recent years, New Zealand has earned a global reputation for its growing wine
industry that produces high quality and unique varietals. The wine industry in New Zealand is
estimated to have more than NZ$2 billion and is continuously expanding at a steady pace
with export earnings of more than NZ$1.33 billion (Hayley Media Ltd, 2018).
Correspondingly, it can be argued that export of wine forms a most important factor behind
the success of wine industry in New Zealand. In the global context, the New Zealand’s wine
industry is faced with fierce competition from the wine industries of other countries
particularly, France, Germany, Italy and Australia (Hayley Media Ltd, 2018). At the same
time, the wine industry in New Zealand is highly competitive domestically with the presence
of numbers of winemakers such as Pernod Ricard Winemakers New Zealand Limited, which
is recognized as the leading wine producers in New Zealand and Australia. Brancott Estate is
another leading wine producer in New Zealand. The wine industry in New Zealand can be
argued to be relatively consolidated (Roy, 2018). Against this backdrop, this report presents
the Strategic analysis of the New Zealand wine production industry. In this regard, the report
first conducts macro-environmental analysis using the strategic analysis tool of PESTEL.
Next, the report conducts competitive analysis using Porter's five forces framework. Finally,
the report presents the findings obtained from the analysis of the New Zealand’s wine
production industry with key focus opportunities and threats, and strengths and weaknesses
of the industry.

Macro-Environmental Analysis
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PESTEL Analysis

Political Factor

New Zealand’s wine producing industry has recently gained a global reputation for
producing world-class wines. Until 1691, the New Zealand wine producing industry was
largely focussed upon domestic consumption with no export production. However, over the
years this trend has changed and New Zealand today captures more the 2% of the global wine
markets (Hira & Benson-Rea, 2014). Correspondingly, the rapid growth in the wine
production industry of New Zealand can be attributed a variety of political factors. In this
regard, one of the major political factors is related to changes in the government policy
towards supporting the wine production industry (Lewis, 2016). Accordingly, the government
in New Zealand has been actively engaged in promoting the wine production in the country
which is evident from the fact that in the recent year government has announced the finding
of wine research institute.

In addition, the government in New Zealand has introduced policies such as

performance improvement framework with the objective to protect the local wine growers
from fierce completion from foreign companies, which has immensely benefitted and
encouraged the local producers of the wine in New Zealand to increase their production and
attain steady growth (Ministry for Primary Industries, 2017). Such policies introduced by the
government can be ascertained to have a significant impact on the wine production industry
in New Zealand. Accordingly, it is more likely to increase provide the wine producers with
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the impulse to enhance their production policy and develop a new variant of world-class
wines that cannot only cater the domestic needs but increase the industry competitiveness in
the international level.

Such support from government has positive impact on the wine production industry
and had facilitated in adopting new ways of technologies in their wine production practice. In
future, the increased government support is further anticipated to increase the
competitiveness of the New Zealand’s wine production industry both at domestic and
international level. Moreover, it offers great opportunities for the wine production industry to
expand their operations and earn substantial profit from their production activities.

Economic Factors

The demand for New Zealand wine is growing at a steady pace both in domestic markets and
in the international market. Accordingly, in the domestic context, the demand for low alcohol
wine has demonstrated continuous rise over the years while in the international markets the
demand for premium wine has shown positive growth (Eads, 2018; Fleming, Mounter, Grant,
Griffth, Villano, 2014). Accordingly, the rise in the demand for the wine both in domestic and
international markets has significantly facilitated the wine producers in New Zealand to make
a considerable investment on increasing their production capacity to meet the rising demand
for wines. However, recently the government in New Zealand has announced an increase in
the minimum wage by $0.75 to $16.50 and is committed to taking it to $20 in the next three
years (NZME. Publishing Limited, 2017). Such rise in the minimum wage although has
currently resulted in a marginal rise in the cost of production of wine but in the years to
become it can further increase the cost of production for the companies and producers
engaged in the production of wine and have significant implications on their profit margin.
Thus, it can be argued that rise in minimum wage is more likely to serve as threat for the
New Zealand’s wine production industry in a long term.

Social Factors

New Zealand has witnessed a dramatic change concerning consumer behavior.

Accordingly, it has been observed that nearly 82% of the consumers are highly conscious
about staying safe and healthy (Farrow, 2015). Correspondingly, the majority of the
consumers in New Zealand believe in promoting environmental sustainability to protect the
planet. As a result of which consumers in the wine industry in New Zealand are seen to
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largely prefer wines that are produced sustainably without the use of toxic pesticides (Farrow,
2015). It is for this reason that wine producers in New Zealand are required to ensure that
international standard of sustainable practices is followed in their vineyard and winery (NZ
Wine, 2017). The impact of such practice is strongly related with the increased the cost of
production for the wine producers in New Zealand. However, it has resulted in high-quality
production wines, which in turn has improved their competitiveness in domestic as well as
international wine markets. Thus in a short run it can be viewed as a threat, if managed
properly it can greatly help the wine producers to improve their quality of wine and gain
increased customer trust which can further have positive impact on the balance sheet of the
industry.

Technological Factors

In the current global business environment, technologies play an important role which has a
direct influence on productivity, quality as well as the competitiveness of the organizations.
Accordingly, the wine production industry in New Zealand is ascertained to use cutting edge
technology in their vineyard and winery, such as temperature and fermentation equipment
and thermographic label technology (Chromatic Technologies Inc., 2017; New Zealand
Tourism, 2018). The use of modern equipment and new technologies has positive impact on
enhancing the capabilities of the New Zealand’s wine producers to compete with the overseas
competitors. Nonetheless, it has created huge challenges for the wine producers to invest
considerable amount of money on procuring new and advanced technologies. Although the
implementation of new technologies by the wine producers can be argued to immensely
benefit them in future in terms of improved productivity but in a short run, it can result in
financial burden, particularly for those emerging and small producers of wine. Accordingly,
the advantages associated with the use of new technologies far more outweighs the
challenges associated with the its implementation and thus can be viewed as an opportunity
from the companies operating in the New Zeeland’s wine production industry.

Environmental Factors

Environmental issues such as changing climatic condition greenhouse gas emission

have become an important matter of discussion because of their growing influence on society
as well as different industries. Accordingly, it has been observed that the production of grapes
has reduced in New Zealand which has negatively influenced the production capacity of the
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wine production industry. The reduction in the production of grapes is largely attributed to the
changing climatic condition in New Zealand and grapes being one of the major ingredients in
wine production industry, it can be argued that in the years to come the industry is more
likely to face severe shortages of grapes required for the wine production (Lewis, 2016;
Mozell & Thach, 2014). The significant earthquake that jolted New Zealand in 2016 has
damaged many of the vineyards in the country which had an adverse impact on the wine
production industry, and in future as well such events can negatively influence the wine
production industry. Thus, changes in climatic condition and occurrence of natural disaster
can be argued to serve as a major threat to the successful operation of the New Zealand’s
wine production industry.

Legal Factors

Laws and regulations of a country have a direct impact on the industries operating
within the country. Correspondingly, New Zealand government has articulated several laws
and regulations, which has immensely influenced the wine production industry. In this regard,
Risk Management Act 1991 is a major piece of environment-related regulation in the country
which requires the wine producers in the country to acquire a variety of certificate such as
land use certificate, water permits and discharge safety among others. Such law is although
positively viewed by the wine producers as it reduces the environmental impact from a
business perspective, it creates huge challenges for acquiring different types of approval (Bell
Gully, 2012). It has been further anticipated that more stringent laws in the environment will
be enforced will is more likely to create increased pressure on the wine producers in the
country. At the same time, the government has enforced laws such a Wine Regulation 2006
creates strict requirements for labeling and safety. The enforcement of this Regulation has to
lead the wine producers in the country to ensure the quality of their wine and ensure their
winemaking practices place adequate attention on health and safety aspects (New Zealand
Parliamentary Counsel Office, 2015). The impact of the enforcement of law has created
greater requirement for wine producers to place adequate attention of quality of their wine
produced which has increased customer trust in the wine producing companies. However, in
future any major changes in the legal requirements can be argued to put additional pressure
on the wine producers. Correspondingly, the changes in legal factors can be claimed to act
as a threat for the New Zealand’s wine production industry.

Competitive analysis
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Porter’s Five Forces of Wine Industry of New Zealand

The threat of new entrants

The threat of new entrants in the wine industry is moderate because entrance in this
segment it requires high economies of scale and high amount of capital is required.
Furthermore, investment in technology is also required for firms to enter into this segment.
However, the regulatory entry barriers in the industry are low. Wine companies compete on
price, retail space, and branding in the low market segment. On the other hand, in the upper
market segment, the basis of competition is quality and brand reputation. The access to
industry distribution network is also hard, particularly for lower segment market players (NZ
Wine, 2017). However, the network is much accessible for higher market segment players.

Threat of substitutes

The threat of substitutes in the wine industry is high. Products such as beer, spirits and
other alcoholic beverages generate threats to the industry. Some causes for the high threat of
substitution is that customers are much enthusiastic to substitute wine for other alcoholic
drinks by preference. Furthermore, the price of the substitute products is also comparatively
inexpensive. While customers of all income level consume the substitute products, only high-
income level customers are related to wine consumption. Besides, the switching expense for
substitution is low in this industry.

Bargaining power of suppliers

The bargaining power of suppliers in the wine industry is low as there are many
suppliers of raw materials for wine creation. Given the planting and favorable weather
situation of New Zealand, the supply of grapes is plenty which helps the wine industry to
grow smoothly. Besides, with the development of technology, lots of information is available
regarding the wine industry and therefore, it becomes much easier for companies to find
suppliers. Increased globalization has also made obtaining suppliers for wine products much
easier to find (Hayley Media Ltd. 2018). The additional capacity of storing has also assisted
in maintaining the prices of products to fall.

Bargaining power of buyers

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The bargaining power of buyers in the industry is high because the industry is
characterized by oversupply, i.e., demand is less than the production. Majority of the wine
products are standardized. This allows customers to demand only industry standards. The
contractual strength of the industry is also high. In many circumstances, inexperienced wine
consumers feel confused regarding the selection of wine.

Industry Rivalry

The intensity of the rivalry between brands in the wine industry is moderate because
this segment is characterized by few large competitors. While more than 1300 wine brands
exist in New Zealand, the top ten wineries represent a significant portion of market share in
the nation. However, the rivalry is moderated because certain brands can differentiate their
products. Although bug wineries have an advantage concerning economies of scale and
capital, small wineries are capable of competing by constantly developing high-quality wine
with limited quantities (Scudamore, 2010). Since there is low switching expenses and sales
are subject to price and market demand for the high and upper segment, the rivalry is
increased between companies.

Conclusion

In conclusion, macro-environment analysis and competitive analysis for the wine

production industry in New Zealand demonstrated interesting findings. Accordingly, it has
been found that there exists a huge opportunity for the New Zealand’s wine production
industry which is characterized by expanding demand for the New Zealand’s wine both in
domestic and international context. In addition, the level of competition is the domestic
market is also ascertained to be moderate although in an international context it is quite high.
Moreover, changes in the climatic condition, stringent environmental laws, and continuous
rise in the minimum wage can be argued to impose threats to the success of the wine
production industry. Furthermore, the wine production industry in New Zealand is also
ascertained to have certain weaknesses such as limited technology use which can negatively
influence its competitiveness. To overcome these weaknesses and to effectively respond to
the potential threats, the wine production industry in New Zealand needs to continuously
strive to take advantage of its strengths such as strong global reputation and organic practice
of wine production. In this regard, the industry can use strong reputation to influence the
customer purchase decision. The use of the sustainable and organic practice in the production
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can help the industry to further enhance the quality of wine and reputation while reducing the
implication of stringent environment-related laws.
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References

Bell Gully. (2012). Winegrowers Legal Guide. Retrieved from

http://www.qualityplanning.org.nz/images/wine_growers_legal_guide_2012.pdf

Chromatic Technologies Inc. (2017). New Zealand winemaker uses thermographic label
technology. Retrieved from http://www.ctiinks.com/single-post/2017/06/27/New-
Zealand-winemaker-uses-thermographic-label-technology

Eads, L. (2018). New Zealand Eyes Premium Low Alcohol Wine Sector. Retrieved from
https://www.thedrinksbusiness.com/2018/01/new-zealand-eyes-premium-low-alcohol-
wine-sector/

Farrow, G. (2015). The rise of the conscious consumer. Retrieved from

http://www.nzherald.co.nz/element-magazine/news/article.cfm?
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Fleming, E., Mounter, S., Grant, B., Griffith, G. & Villano, R. (2014). The New World
challenge: Performance trends in wine production in major wine-exporting countries
in the 2000s and their implications for the Australian wine industry. Wine Economics
and Policy, 3(2), 115-126.

Hayley Media Ltd. (2018). New Zealand wine industry overview. Retrieved from
http://winetechnology.co.nz/resource/new-zealand-wine-industry-overview/

Hira, A. & Benson-Rea, M. (2014). New Zealand wine: a model for other small industries?,
Prometheus, 31(4), 387-398.

Lewis, O. (2016). Government announces funding for new Marlborough wine research
institute. Retrieved from https://www.stuff.co.nz/business/85733333/government-
announces-funding-for-new-marlborough-wine-research-institute

Lewis, O. (2016). Marlborough wine companies assess damage and count losses following
7.8 magnitude earthquake. Retrieved from
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https://www.stuff.co.nz/business/86566505/marlborough-wine-companies-assess-
damage-and-count-losses-following-78-magnitude-earthquake

Ministry for Primary Industries. (2017). Performance Improvement Framework. Retrieved

from https://www.ssc.govt.nz/sites/all/files/PIF-MPI-March2016_0.pdf

Mozell, M. R. & Thach, L. (2014). The impact of climate change on the global wine industry:
Challenges & solutions. Wine Economics and Policy, 3(2), 81-89.

New Zealand Parliamentary Counsel Office. (2015). Wine Regulations 2006. Retrieved from
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New Zealand Tourism. (2018). Innovation drives NZ wine industry. Retrieved from
https://media.newzealand.com/en/story-ideas/innovation-drives-nz-wine-industry/

NZ Wine. (2017). Sustainable Winegrowing NZ. Retrieved from

https://www.nzwine.com/en/sustainability/sustainable-winegrowing-nz

NZME. Publishing Limited. (2017). Minimum wage to increase to $16.50 from April, 2018.
Retrieved from http://www.nzherald.co.nz/nz/news/article.cfm?
c_id=1&objectid=11964562

Roy, E. A. (2018). Wrath about grapes: critics angry after New Zealand winemaker uses
Australian fruit. Retrieved from
https://www.theguardian.com/lifeandstyle/2018/jan/31/wrath-about-grapes-critics-
angry-after-new-zealand-winemaker-uses-australian-fruit

Scudamore, P. (2010). Top 10 New Zealand wineries. [Online] available at: Retrieved from
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wineries/#23iHuKMsPdmAwHpq.97