The California Wine

Cluster
Introduction
Over the last 30 years, California had emerged as a significant player in the global wine industry, challenging
the old dominance of Italy and other European countries.

Premium California wines had achieved a quality and consistency on par with or exceeding any in the world.
Since 1889, California wines had reached a quality level sufficient enough that the French invited American
wineries to compete in the World Fair.

This case describes the group of interconnected wineries, grape growers, suppliers, service providers, and
wine-related institutions located in California that influenced the California wine cluster. Moreover, the case
also describes the wine cluster in France, Italy, Australia, and Chile, the four other major international
competitors.

To understand the successful emergence of the California wine cluster, I will analyze the cluster by using
PESTEL, Porter’s five forces, the diamond model, and cluster mapping analysis tools. Furthermore, I will
discuss California’s competitive position in comparison to France.
PESTEL ANALYSIS

1. Political
 WW2 from September 1, 1939 until September 2, 1945

2. Economical
 With a gross state (domestic) product of $1 trillion, California would have been the seventh largest
economy in the world on a standalone basis.
 California’s economy was responsible for nearly 17% or $109.5 billion of U.S. exports
 The state had been the largest agricultural producer in the United States for more than 50 years
 Agricultural production reached $26.8 billion in 1997, easily outdistancing the $15.9 billion of second
place Texas
 California exported some $7.0 billion of its agricultural production annually
 California’s San Joaquin Valley, home to roughly 50% of the state’s agricultural workforce, was
arguably the world’s premier crop growing area
 In total, agriculture accounted for nearly 10% of California’s employment
 California accounted for 11% of the total U.S. employment in food processing or approximately
180,000 people, the largest of any state
 Another major sector, tourism, generated an estimated $60 billion in annual sales and employed
670,000 people
 History of Cali wine cluster:
o the first commercial vineyards were established in the 1830s-1840s
o Spanish General Mariano Vallejo, who planted over 70,000 vines and hired a French vintner
to oversee production, founded Sonoma’s first commercial vineyard at roughly the same
time
o Desperate to revive their vineyards, Europeans began grafting their grape varietals onto
American rootstocks
o Grafting helped mute the impact of phylloxera on the European varietals growing in
California, allowing the state to surpass Ohio as the country’s leading wine producer by the
1880s
o As alcoholic drinks prohibition came to an end, the depression hit the U.S. economy
o Winemaking did not regain steam until the Second World War when the U.S. was largely cut
off from European sources
o Demand for low quality sweet and fortified wines such as Thunderbird fueled California
production throughout the 1940s and 1950s
o Between 1968 and 1972, U.S. consumption of table wine nearly doubled
o other industries in California that helped promote wine consumption such as tourism,
hotels, and restaurants
 o The Wine Spectator, established in San Francisco in 1979, would become the country’s
leading wine publication and one of the most important promoters of California wine. Its
annual lists of the world’s best wines had a major influence on U.S. consumer demand and
tastes
o Rising consumer demand for wine in the 1970s and early 1980s attracted new competitors
o Hoping to leverage their mass marketing capabilities, large corporations, including Coca-
Cola, Pillsbury, Seagram’s, and Nestlé, also entered the industry mainly through acquisitions
but exited after some time
o After peaking in 1986, U.S. wine consumption declined 20% over the next five years
o Increasing attention to exercise and health, coupled with rising concerns for public
intoxication and drunk driving, led to a general downturn in alcoholic beverage demand and
consumption
o U.S. wine consumption began to rebound in the early 1990s, spurred in part by the
November 1991 “French Paradox” broadcast on the popular news television program 60
Minutes, which extolled the health benefits of red wine
o By 1998, California growers and wineries could hardly keep up with the growing demand for
premium wines
o Grape supplies and wine inventories were strained, though the 1997 wine grape harvest,
which had been the largest in the state’s history, promised some relief
 U.S Wine Demand and Consumption
o On a per capita basis, the United States had one of the lowest levels of wine consumption at
around two gallons per year
o Retail sales of wine totaled $14 billion in 1997 compared with $70 billion for soft drinks, $55
billion for beer, and $34 billion for distilled spirits
o imports were enjoying a resurgence, as domestic wineries were unable to meet growing
consumer demand
o To help mitigate supply shortages, U.S. wineries had resorted to the importation of bulk
wine, which they then bottled and distributed domestically
o Since 1992, volume consumption had grown 2% annually, while retail sales had risen 7%
annually
o It was estimated that high-end premium California wine had historically been priced 30% to
50% below comparable French wines in the U.S. market. However, the price differential was
beginning to narrow as prices for top U.S. wines increased
 Wages for vineyard employees, including contracted vineyard development personnel, totaled $1.2
billion annually in California
 The number of production workers for all types of grapes averaged 36,500 in California in 1996,
peaking in September at 60,600 during the height of the annual harvest
 Vineyard operators typically sought to rehire the same migrant workers every year in order to
minimize training costs
 Wage rates varied by region and the type of grapes harvested
 California accounted for over 90% of wine production in the United States followed by New York
(5%) and Washington (1%)
 The state’s wine production had steadily increased since 1994, while inventories had fallen to
their lowest levels since the 1970s
 Attracted by growing consumer demand for California wine, several international wine
producers and multinational beverage companies had started a new round of investment in
California as well
 Grapes represented 40% to 60% of total wine production cost
 California wineries were importing more grapes and bulk wine from overseas, and several
producers had established joint ventures with international winemakers and growers
 Total bulk wine imports had increased from 600,000 gallons in 1995 to over 20 million gallons in
1997
 Wineries were also looking to increase their vineyard ownership
 After grapes, barrel aging was the biggest factor in determining the cost incurred and the quality
of wine produced.
 Gross profit margins for jug wine were estimated to be 30%, while premium gross margins were
generally higher at around 40% for the average popular premium wine and 50% for ultra-premium
wines
 Portugal controlled almost 80% of world cork exports, followed by Spain (7%) and Italy (4%)
 Sales of corks, capsules, and screw tops by California-based suppliers totaled roughly $175 million
per year. Sales of labels accounted for another $100 million annually
 Most states were considered “open” in that all wine and liquor distribution was performed by the
private sector
 Alcoholic beverage wholesalers enjoyed among the highest mark-ups and margins in the wholesaling
industry. In contrast, liquor stores were among the least profitable retailers
 California wines accounted for 90% of the total value of U.S. wine exports
 Though the value of U.S. exports had grown 25% annually from 1985 to 1997, U.S. wines had tiny
market shares in many of the largest wine markets in the world, especially in major wine producing
countries such as France and Italy
 Most California vineyards and winemakers financed their ongoing operations through bank loans,
many of which were made by banks located in San Francisco or in wine producing areas
 A number of financial institutions, such as Bank of America, had developed specialized financing
offerings for grape growers and wine producers, including long-term loans tied to the time required
to establish a harvestable vineyard or to age a wine stock
 Wineries were also beginning to access capital through the public markets
 On average, it took a new winery at least five years to reach profitability

3. Socio-cultural
 the United States was the third largest wine market in the world behind France and Italy
 California established a reputation for gourmet restaurants and gourmet food
 California attracted more visitors each year than any other U.S. state
 Although sold primarily in bulk, California wines by 1889 had reached a quality level sufficient
enough that the French invited American wineries to compete in the World’s Fair
 After the alcohol ban in the 1920s, Vintners survived by making grape juice and sacramental or
medicinal wines
 The onset of the 1960s sparked a renewed interest in wine as young people were eager to
experiment and were attracted by wine’s “of the earth” image
 Historically, most wineries, led by E&J Gallo in California’s Central Valley, produced inexpensive,
generically blended “jug” wines that appealed to contemporary American tastes.
 In 1976, California wines attained international prominence, winning a highly publicized Paris
competition against some top European vintages
 The 1970s and 1980s witnessed an increased production of higher quality wines that were vintage-
dated, and varietal labeled.
 the growth of lower priced varietal wines, known as “fighting varietals,” from countries such as
Australia proved extremely popular among U.S. consumers
 There was an increasing attention to exercise and health, coupled with rising concerns for public
intoxication and drunk driving
 The 1997 wine grape harvest had been the largest in the state’s history
 The United States had one of the lowest levels of wine consumption at around two gallons per year.
(Californians consumed three gallons per year per person.)
 In comparison, U.S. consumers drank almost 56 gallons of soft drinks and nearly 23 gallons of beer
per person each year
 According to the Wine Market Council, a California-based trade association, 11% of adults aged 21 to
59 drank wine on a weekly basis and accounted for 88% of total wine consumption in the United
States
 The 71% of adults who did not drink wine consisted of people who drank other alcoholic beverages
(41%) and non-drinkers (30%)
 Wine was broadly classified into three types: (1) table, which had less than 14% alcohol by volume;
(2) dessert or fortified, with greater than 14% alcohol; and (3) sparkling or champagne. California
table wines were the most popular among U.S. consumers, accounting for 64% of consumption
 Wines priced above $25 per bottle, so-called “luxury” wines, were the fastest growing segment in
the premium category
 California was the fifth largest wine grape grower in the world as of 1996 . Including wine and
traditional edible varietals, grapes were the state’s second largest farm product
 The growers were represented by one of the most influential trade associations in the cluster, the
California Association of Winegrape Growers (CAWG)
 The North Coast, which included Napa and Sonoma Counties, was perceived by most industry
experts to have the state’s best combination of soil, climate, sunlight, topography, and water
(collectively known as “terroir”) for wine grapes
 The San Francisco Bay allowed cool ocean air to pass between the mountains of the Coastal Ranges,
creating ideal growing temperatures.
 Further inland, the Central Valley, which included the San Joaquin Valley, was hotter and generally
less ideal. The terroir of the cooler Central Coast fell somewhere between the other two regions.
 Central Coast terroir’s reputation had improved dramatically since the 1980s and was quickly
approaching the quality of the North Coast in the eyes of some expert
 In the North Coast, grape workers were typically more skilled
 In general, a winery used its own vineyards to supply grapes for its highest quality wines
 The production of higher quality wines was typically less automated and in smaller volumes, and the
winemaker adopted a more “artistic” role. Lower quality wines were made in larger volumes and
were more “formula” based
 Bottle shape and labeling had a significant influence on customers’ perception of quality
 Bolder labeling and design were typically used for lower premium and jug wines in an attempt to
differentiate them from the ever-increasing number of brands on store shelves. Higher-end wines
were packaged conservatively in order to portray a refined image
 Wineries had extensive apprenticeship programs of their own that trained new winemakers in all
aspects of the winemaking process.
 State-run universities, U.C. DAVIS, U.C. Berkeley, U.C. Riverside, and Fresno State, offered highly
regarded wine research programs

4. Technological
 California is best known for its leadership in aerospace, biotechnology, and computer hardware and
software
 Science and technology played a vital role in bridging the quality gap between European and
California winemakers
 California winemakers of the 1960s and 1970s began using quantitative analysis and new techniques
to produce higher quality, more consistent wines
 Innovations flowed rapidly among the state’s vintners, especially in Napa, where most of the major
wineries were located side-by-side along State Highway 29 and its eastern parallel, the Silverado Trail
 Though much of the innovation took place at the wineries themselves, U.C. Davis helped introduce
several new technologies such as mechanical harvesting, drip irrigation, and field grafting
 The association played an active role in state and federal lobbying and sought to promote quality
wine grape production through activities such as best-practice dissemination
 Higher quality vineyards also employed more expensive irrigation and frost protection systems
 So-called “8 x 12” spacing, promoted by U.C. Davis in the 1930s, had maximized productive capacity
by providing easier access for tractors, and other farm equipment
 Larger wineries had established in-house research staffs of their own with state-of-the-art
laboratories

5. Environmental
 In 1860, phylloxera, an insect that fed on vine roots, began ravaging most of Europe’s vineyards. It
was discovered that phylloxera had migrated from the Eastern United States by ship and that only
native American grapes had rootstocks that were resistant to it
 Compounding supply problems was a new strain of phylloxera that had appeared in Northern
California in the early 1990s forcing a massive replanting effort that was still underway
 Due to replanting and new vineyard development, nearly 40% of the state’s 407,000 acres of vines
had been planted after 1989 and 20% after 1994.
 Roughly 329,000 acres were mature enough to bear grapes.
 Variations in weather resulted in dramatic fluctuations in the quality and quantity of each year’s
grape harvest
 Vines took four to five years to reach full yield and at least ten years to produce the highest quality
grapes
 Vines could live longer than fifty years
 As grape quality increased, vineyard yields generally fell
 Having to replant due to phylloxera and hoping to boost grape quality, many premium growers in the
1990s were moving to closer spacing
 As the space between vines narrowed, budding grapes were forced to compete more intensely with
one another, resulting in better grapes overall

6. Legal
 Prohibition (a legal ban on alcoholic drinks), which lasted from 1920 to 1934, nearly wiped out the
art of quality winemaking in the United States
 At the time of purchase, prices, tonnage, and sugar content (a measure of quality) were reported by
law to the state government. Keeping buyers and suppliers anonymous, the state published the
results annually for each grape varietal by growing district in California
 Because a wine’s quality depended heavily on its source of grapes, harvest year, and varietal,
domestic and foreign wineries were required to follow several federal guidelines when labeling
wines for U.S. distribution
 The Bureau of Alcohol, Tobacco, and Firearms (ATF), a federal regulatory body, dictated all labeling
requirements in the United States
 The distribution of alcoholic beverages in the United States was tightly regulated
 The twenty-first amendment to the U.S. Constitution, which repealed Prohibition in the 1930s, gave
states the right to regulate the consumption, production, importation, distribution, and retail sale of
all alcoholic beverages
 In most states, alcoholic beverage producers were not allowed to ship products to either resellers or
consumers in other states unless they had a physical presence (usually a distillery or winery) in that
state
 There was a legally mandated “three-tier” system (i.e., producer to wholesaler to retailer) through
which almost all alcohol was funneled
 Producers and wholesalers were prohibited from having direct ownership in retailers by the Federal
Alcohol Administration Act, which also forbade other “tied-house” arrangements such as the supply
of free equipment or advertising
 In several states, wineries were subject to franchise regulations that restricted them from dropping a
particular wholesaler and switching to another.
  Wholesalers generally had the right to sell a brand within a specific geographic area and typically
employed a sales staff that serviced all classes of retail outlets
 With the development of the Internet, direct shipping had become a much-debated topic within the
industry. Concerned that wineries would sell directly to underage drinkers and avoid paying excise
taxes, states were becoming tougher on enforcing existing regulations
 Twenty states prohibited all direct sales and a few like Georgia and Florida had made direct shipping
a felony
 Another 18 states imposed strict regulations on direct shipments
 Twelve states allowed direct shipments of small quantities of wine to states that provided reciprocal
treatment.
 The wine industry had lobbied heavily for fewer restrictions, arguing that states’ rights to control
alcohol distribution were in direct conflict with federal protection of interstate shipping.
 California wineries typically faced higher tariffs and retail sales taxes abroad than foreign rivals did
selling into the United States

Porter’s Five Forces

Threat of new Bargaining power Bargaining power Threat of Rivalry
entrants of suppliers of buyers substitutes
It took a winery tight supply for high The existence of The threat of Although larger
a long time to quality grapes in many wine substitute producers held
reach the mid-1990s, companies gives products like beer advantages in scale and
profitability – compounded by the buyers the option and spirits pose a capital, the smaller
five years phylloxera outbreak to pick and choose threat to the wineries were able to
industry compete by consistently
producing high quality
wine in limited quantities
Strict laws and Buyers (wineries) Low switching cost California wine Rising competition from
regulations integrate cheaper than Australia, France, Italy
backwards into comparable and Chile
supply  French wine
High The distribution of Buyers are Buyers are willing Wine sales depended
investment and alcoholic beverages informed to substitute wine either on price
capital in the United States for other competition or marketing
required was tightly alcoholic
regulated beverages based
on preference
Economies of Distribution Tight government The price of The exit barriers do not
scale channels were interventions on wine’s substitutes pose a problem as during
becoming more buyers is relatively the 1980s, food and
concentrated due cheaper such as beverage companies
to consolidation soft drinks and have divested their wine
beer holdings, choosing
instead to focus on their
core business
Diamond Model

1. Factor Conditions
 The North Coast, which included Napa and Sonoma Counties, was perceived by most industry
experts to have the state’s best combination of soil, climate, sunlight, topography, and water
(collectively known as “terroir”) for wine grapes
 The San Francisco Bay allowed cool ocean air to pass between the mountains of the Coastal Ranges,
creating ideal growing temperatures
 There was little space available for new vineyards in the North Coast, and very few commercial-sized
plots of 100 acres or more were ever placed on the market
 State-run universities, U.C. Davis, U.C. Berkeley, U.C. Riverside, and Fresno State offered highly
regarded wine research programs.
 Larger wineries had established in-house research staffs of their own with state-of-the-art
laboratories
 American grapes had rootstocks that were resistant to Phylloxera insects
 The productivity of California as a wine producing region in terms of yield per acre appears to be the
highest in the world
 California had efficient and skilled labor force

2. Demand Conditions
 Robust and sophisticated domestic demand
 Rising demand for vineyards
 imports were enjoying a resurgence, as domestic wineries were unable to meet growing consumer
demand
 Demand for low quality sweet and fortified wines such as Thunderbird fueled California production
throughout the 1940s and 1950s
 The 1970s saw the development of other industries in California that helped promote wine
consumption such as California Cuisine, Tourism, bars, hotels, and bed-and-breakfasts

3. Related and Supporting Industries

 A number of financial institutions, such as Bank of America, had developed specialized financing
offerings for grape growers and wine producers
 The growers were represented by one of the most influential trade associations in the cluster, the
California Association of Winegrape Growers (CAWG)
 The Wine Institute, a trade association of 48 California wineries, was founded in 1934 in San
Francisco to help re-invigorate the state’s wine industry, playing an active role in lobbying at the
state and federal levels
 Distributors took an active role in building wine brands
 “California Cuisine,” a movement based on organically grown foods helped promote wine
consumption
  Tourism in the state’s wine country picked up as well with the appearance of hotels, bed-and-
breakfasts, and high-end restaurants which also promoted wine consumption
 The Wine Spectator, established in San Francisco in 1979, would become the country’s leading wine
publication and one of the most important promoters of California wine

4. Firm Strategy and Rivalry

 So-called “8 x 12” vineyard spacing, promoted by U.C. Davis in the 1930s, had maximized productive
capacity by providing easier access for tractors and other farm equipment.
 As the space between vines narrowed, budding grapes were forced to compete more intensely with
one another, resulting in better grapes overall
 Vineyard operators typically sought to rehire the same migrant workers every year in order to
minimize training costs
 Several international wine producers and multinational beverage companies had started a new
round of investment in California
 Sites that previously had been unplantable due to poor drainage and inadequate water supplies
were being developed through monumental efforts
 Firms command high prices per bottle for their premium-quality products
 Large volume wine producers, whose sales forces could number in the hundreds, relied heavily on
mass marketing, utilizing both print and broadcast media extensively and making little use of wine
tours and tastings
 Most states were considered “open” in that all wine and liquor distribution was performed by the
private sector

Serendipity (chance)
The California wine industry began from first vintners who began cultivating grapes for use in sacramental
wines in the mid-to-late 1700s. In the 1830s and the 1840s, the first commercial vineyards were established.
In the 1830s and the 1840s, the first commercial vineyards were established. Completely by chance, in 1860,
phylloxera, an insect that fed on vine roots, began ravaging most of Europe’s vineyards. It was discovered
that phylloxera had migrated from the eastern united states by ship and that only American grapes had
rootstocks that were resistant to it. Desperate to revive their vineyards, Europeans began grafting their grape
varietals onto American rootstocks. The phylloxera epidemic crossed the Rockies and reached California in
the late 1870s. grafting helped mute the impact of phylloxera on the European varietals growing in the
California region, allowing the state to surpass Ohio as the countries leading wine producer by the 1880s.

Another element that could be traced to chance is the legal ban on alcoholic drinks which lasted from 1920 to
1934, nearly wiped out the art of quality winemaking in the U.S. levels. As the ban came to an end, an
economic depression hit the United States. Winemaking did not regain stream until the second world war
when the U.S. was largely cut off from European sources. Demand for low quality sweet and fortified wines
fueled California’s production throughout the 1940s and the 1950s.
Government Support
The U.S. Congress had recently revamped export promotion assistance for U.S. wineries, shifting more dollars
toward collective marketing programs operated by the Wine Institute and away from individual wineries.
Total export assistance was budgeted for $4.5 million annually with almost 75% going to the Wine Institute.
The remaining 25% was allocated to small and medium-sized wineries (less than 500 employees) who also
spent matching funds of their own.

Cluster Mapping
Discussion and Conclusion

The emergence of the California wine cluster as a leader in the wine industry can be is traced to cultural
heritage, geographical location, academic research, trade associations, consumption trends, foreign
investment, price competition, and government support.

As I mentioned earlier, Spanish missionaries, who began cultivating grapes for use in sacramental wines
in the mid-to-late 1700s, were California’s first vintners. As settlers streamed into the state in the 1830s
and the 1840s in pursuit of gold and inexpensive land, the first commercial vineyards were established.
Although sold primarily in bulk, California wines by 1889 had reached a quality sufficient enough that
the French invited American wineries to compete in the World Fair.

Furthermore, California wine grape growers were located in three broadly, defined areas - North Coast,
Central Valley, and the Central Coast. The North Coast, which included Napa and Sonoma Counties, was
perceived by most industry experts to have the state’s best combination of soil, climate, sunlight,
topography, and water (collectively known as “terroir”) for wine grapes. The San Francisco Bay allowed
cool ocean air to pass between the mountains of the Coastal Ranges, creating ideal growing
temperatures. Further inland, the Central Valley, which included the San Joaquin Valley, was hotter and
generally less ideal. The terroir of the cooler Central Coast fell somewhere between the other two
regions. Its reputation had improved dramatically since the 1980s and was quickly approaching the
quality of the North Coast in the eyes of some experts

Science and technology also played a vital role in bridging the quality gap between European and
California winemakers. Traditionally, European vintners had relied heavily on feel and time-tested
practices. California winemakers of the 1960s and 1970s began using quantitative analysis and new
techniques to produce higher quality, more consistent wines. Innovations flowed rapidly among the
state’s vintners, especially in Napa, where most of the major wineries were located side-by-side along
State Highway 29 and its eastern parallel, the Silverado Trail. Though much of the innovation took place
at the wineries themselves, U.C. Davis helped introduce several new technologies such as mechanical
harvesting, drip irrigation, and field grafting. So-called “8 x 12” spacing, promoted by U.C. Davis in the
1930s, had maximized productive capacity by providing easier access for tractors and other farm
equipment. In 1976, California wines attained international prominence, winning a highly publicized
Paris competition against some top European vintages.

Additionally, The Wine Institute, a trade association of 48 California wineries, was founded in 1934 in
San Francisco to help re-invigorate the state’s wine industry, playing an active role in lobbying at the
state and federal levels. Since its founding in the 1930s, the Wine Institute had grown into a formidable
association of 450 wineries. Its mission as a public policy advocacy group for California wineries had
remained largely unchanged. Approximately 4,000 growers produced wine grapes in 45 of the state’s 58
counties. The growers were represented by one of the most influential trade associations in the cluster,
the California Association of Winegrape Growers (CAWG). Founded in 1974, CAWG included both
wineries and independent growers that together accounted for half of the state’s wine grape
production. The association played an active role in state and federal lobbying and sought to promote
quality wine grape production through activities such as best-practice dissemination. Also, the Wine
Market Council, headquartered near San Francisco, was formed in 1995 to bring together players from
various parts of the cluster including grape growers, wineries, wholesalers, retailers, and restaurants as
part of a cooperative marketing effort.

Regarding trends in consumption, the 1970s saw the development of other industries in California that
helped promote wine consumption. The founding of Alice Waters’ Chez Panisse in Berkeley in 1971
marked the beginning of “California Cuisine,” a movement based on organically grown foods. Tourism in
the state’s wine country picked up as well with the appearance of hotels, bed-and-breakfasts, and high-
end restaurants. Wine tours also began to play an important role in consumer education. Eight million
visitors came to California’s wine country each year, spending roughly $300 million in restaurants,
hotels, and other retail establishments. Moreover, the Wine Spectator, established in San Francisco in
1979, would become the country’s leading wine publication and one of the most important promoters
of California wine. Its annual lists of the world’s best wines had a major influence on U.S. consumer
tastes

Foreign investment also had a role in the wine cluster success. Attracted by growing consumer demand
for California wine, several international wine producers and multinational beverage companies had
started a new round of investment in California as well.

California wine companies understood that wine sales highly depended on prices. Thus, California
entered into price competition with comparable French wine companies. It was estimated that high-end
premium California wine had historically been priced 30% to 50% below comparable French wines in the
U.S. market.

Lastly, the success behind California wine cluster can also be traced to government support. The U.S.
Congress had recently revamped export promotion assistance for U.S. wineries, shifting more dollars
toward collective marketing programs operated by the Wine Institute and away from individual
wineries. Total export assistance was budgeted for $4.5 million annually with almost 75% going to the
Wine Institute. The remaining 25% was allocated to small and medium-sized wineries (less than 500
employees) who also spent matching funds of their own.

As for California’s competitive position against France, the competition was based on prices and
production. The competitiveness varied by region and by wine quality. Moreover, labor costs in France
generally exceeded California’s. France had long-established apprenticeship programs at individual
vineyards and winemaking establishments. The French had an aversion to what they viewed as the
“mechanistic” and overly scientific methods of California production, seeing the discipline much more as
an art handed down over the generations. Despite this, the French had a well-established research
networks and trained scientists. The National Institute of Agronomic Research was known for its work in
both viticulture and enology.

However, as in most European countries, France suffered from chronic over production. The EU, under
the Common Agricultural Policy for wine, had taken several steps to reduce wine output in its member
states through an array of subsidies reaching nearly $1.0 billion in 1997. In addition, mandatory and
voluntary distillation, which transformed wine into alcohol for human consumption or fuel, removed
wine from the open market. Some experts believed that the EU’s tight control over yields and wine
production prevented or at least reduced the incentives to experiment with new varietals and wine
types.

In conclusion, my recommendation for California to sustain their leadership role in the wine cluster
would be to grow their wine exports as it is low - California producers commanded less than 3% of world
wine exports only. Exports can play an important role in the economy, influencing the level of economic
growth, and employment.

Therefore, the best way for the U.S. to increase its exports is by applying supply side policies to improve
competitiveness. Supply-side policies are mainly micro-economic policies aimed at making markets and
industries operate more efficiently and contribute to a faster underlying-rate of growth of real national
output. Supply side policies could include both interventionist supply side policies (such as education
and training) and market-oriented supply side policies (e.g. reducing government regulation).

Moreover, there should be an improvement in the cooperation among economic actors. Besides
traditional policy instruments, export growth could be increased by improving cooperation among
exporters and between the government and business actors. Economic cooperation is a component of
international cooperation that seeks to generate the conditions needed to facilitate the processes of
trade and financial integration in the international arena by implementing actions with the purpose of
obtaining indirect economic benefits in the medium and long term.