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24-03-20
The California Wine Cluster
This case Describes the California wine cluster, or the group of interconnected wineries,
grape growers, suppliers, service providers, and wine-related institutions located in
California. Also describes the wine cluster in France, Italy, Australia, and Chile, the four
other major international competitors of the Californian wine.

First of all we will be starting with a cluster analysis; whereas a cluster is “geographic
concentrations of interconnected companies, specialized suppliers, services providers,
firms in related industries, training institutions and support organizations linked around
technologies or end product within a local area or region” (Porter, 1990)

In this case we will list (or map) the clusters related to the California wine industry and
the effects of clusters on the performance of the individual businesses that belong to
this cluster. In the below model of the California wine cluster, many partners, suppliers,
and complementary industries are included.
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Above is a representation of the clusters developed around the wine industry and Being
part of a cluster brings a competitive advantage, hence a cluster is seen as an
environment that enhances the competition and makes the barriers to entry in this
market high (difficulty to enter the market with the presence of clusters).

Furthermore a diamond model will help us analyze how the U.S and mainly California
became the 3rd largest wine market.
Factor Conditions:

 “Terroir” or the Best combination of soil, climate, sunlight, topography, and water for
wine grapes (The North Coast, which included Napa and Sonoma Counties)
 Efficient and Effective Labor force
 American grapes Resistant to phylloxera insects (that ravages vineyards)
 Spanish missionaries cultivated grapes in the 1700’s (well established industry)
 The San Francisco Bay allowed cool ocean air to pass between the mountains of the
Coastal Ranges, creating ideal growing temperatures

Firms Strategy & Rivalry

 Vineyards layout and management influence grape and production cost

 Innovation: new ways to plant vines
 Low entry barriers
 Cooperation through trade associations
 Intense rivalry around local wine products (Gallo vs Mondavi ) (Jug vs Premium)
 Dollar split between the Winery, wholesaler and retailer

Demand Condition

 Sophisticated local demand

 New California cuisine
 Tourism ( Hotels, restaurants etc)
 Demand for California wine in external market (export)

Related & Supported Industries

 Distribution channel
 Grape Grower's Side
 Wine Processing Facilities
 Marketing-Advertising and sales promotion
 Financial Institutions
 Academic Institutions
 Trade Association
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Government (and its role in industry regulation)

 The Bureau of Alcohol, Tobacco, and Firearms (ATF), a federal regulatory body, dictated
all labeling requirements in the United States
 Geographic designations were made through an ATF-approved “Appellation of Origin”
on the label.
 Gave states the right to regulate the consumption, production, importation,
distribution, and retail sale of all alcoholic beverages
 The American Society for Enology and Viticulture (ASEV), the principal R&D association
for the wine industry in the United States.

This diamond model explains the factors that can drive the competitive advantage of
the Californian wine over other markets and helps us understand the nations (US) edge
over other economies and explains how the government aids in improving and
maintaining this completive advantage and lists the strategies that support this edge.

Competition overview
France:
 France is and has been a dominant country in the wine industry
 France has maintained its leadership position despite declines in both the wine acreage
and overall production
 The French wine cluster focuses on higher quality wines with roughly 60% of its
vineyards producing VQPRD wine.

Italy:
 Per capita consumption in Italy was second in the world behind France
 Italians typically consumed lower quality, less expensive wines
 Germany, France, the United States, and Switzerland were the major destinations for
Italian exports.
 As in France, the Italian government maintained strict laws governing labeling to ensure
origin, quality, and vintage.
 Italy the second largest wine producer has only approximately 30 % of its production
dedicated to VQPRD wines
 The cluster boasted the world’s oldest and largest national organization of winemakers
to which 90% of Italy’s 3,500 winemakers belonged.

Australia:
 Australia was one of the few wine producing countries in which per capita consumption
was rising
 Per capita wine consumption of 4.8 gallons in 1996 placed it among the top 20 countries
in the world.
 By the 1990s, Australia had established itself as a cost-competitive producer of high-
quality wines
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 vineyards were believed by some to be near the forefront of technological development

in the world with yields at or above those in California
 Relative to California, Australia had higher labor costs
 Australia’s growth in the world export market had been nothing short of remarkable
 public funding of research and development was channeled through a variety of
organizations in Australia

Chile:
 One of the most dynamic economies in Latin America, had domestic wine consumption
of 4.2 gallons per capita, slightly less than Australia’s.
 Chile had a long history in winemaking dating back to the 1500s when Spanish
conquistadors planted mission grapes to make bulk wines
 When phylloxera struck France and California in the late 1800s, Chilean grape vines
proved immune same as Californian wine
 By the late 1980s, Chile began to make significant exports to world markets
 Attracted by lower land and labor costs, French, Spanish, U.S., and Australian companies
were establishing production facilities in Chile
 Poor infrastructure was a set back
 Chile’s wine cluster was supported by two export-oriented trade associations, the
Association of Finest Export Wine Producers (Chilevid) and the Wine Bottlers and
Exporters Association
 Chilean government established viticultural zones and stepped up regulation of wine
labeling.

As a summary the Competition in terms of production, consumption and exports in the late
1990s in the worlds wine market has been led by France and Italy. “New world” wine producers
group, including California, over the past decade had developed their successful wine cluster.
Also other regions were expected to become more significant world wine producers, benefiting
from topography and climate conditions like Australia and Chile as they began developing
cluster and getting support from local government.

Thank you,

Tarek Assaf