Assessing the Reliability of Wine Tasting: Differentiating Levels of Clinical and Statistical Meaningfulness
Domenic Cicchetti (Yale University)
dom.cicchetti@yale.edu

Recent research (Cicchetti, 2006) highlighted a number of important differences between consistent and inconsistent wine tasters from among a total of 11 judges. A weighted kappa statistic, conceptually related to the one developed by Cohen (1968) and subsequently revised by Fleiss, Cohen, & Everitt (1969), was utilized. The purpose of this presentation is to distinguish between the clinical and statistical meaning of varying levels of inter-taster reliability for the 11 judges who evaluated 10 Chardonnays (6 American and 4 French) in the heralded 1976

Paris wine competition. Four of the wines showed levels of weighted kappa values (<.40), that are considered poor by established biostatistical criteria (Cicchetti, 2001; Fleiss, Levin, & Paik, 2003) These ranged between .10, for the French Clos des Mouches 1973 chardonnay to .33 for the U.S. Veedercrest 1972 chardonnay. However, when levels of statistical significance of the weighted kappa values were obtained, only the Clos des Mouches failed to reach statistical significance at the .05 level. In fact two of the wines (the U.S.

1973 David Bruce regular, with a weighted kappa value of .27 and the U.S. Veedercrest with one of .33) reached statistical significance at beyond the .0001 level. The actual levels of Z of weighted kappa values ranged between 7.93 and 14.40.Four additional wines reached levels of fair reliability (.40-.59) with weighted kappa between .40 (the 1972 French Puligny Montrachet), and .57 (the 1973 U.S. Spring Mountain chardonnay). Levels of statistical significance, again, were way beyond the .0001 level, with Z of weighted kappa values between 13.73 and 19.20.
The last two wines, the 1974 vintage U.S. Chalone Vineyards chardonnay and the 1973 French Mersault Charmes, showed good reliability (.60-.74), with p again far beyond .0001, with corresponding Z of weighted kappa values of 17.23 and 20.76.
These findings are not weighted kappa specific, but, rather, reveal that when sample sizes are large enough, even the most trivial of results will be statistically significant, while often devoid of practical or clinical meaningfulness. Thus, a correlation of only .08 will be statistically significant when based on a sample size of 500. This might be referred to as the “big N phenomenon” (BNP).In resolving the BNP with regard to establishing the reliability of blind wine tasting, we can capitalize on the fact that for the model just discussed (multiple tasters evaluate one wine at a time), the correlation between the level of agreement, expressed as a percentage varying between 0 and 100) and weighted kappa is exactly perfect (or +1.00); and the relationship between agreement and the Z of weighted kappa approaches +1.00, or .97 for the chardonnay data.. The authors’ same experience with other models of weighted kappa means that a level of weighted kappa that is clinically meaningful will most likely be statistically significant. But high levels of statistical significance are no guarantee of clinical significance!

 

 

Balancing between Tradition and Innovation – French Wines from the Bordeaux and the Languedoc-Roussillon Regions
Sylvaine Castellano, EDHEC sylvaine.castellano@edhec.edu
Olga Ivanova, EDHEC olga.ivanova@edhec.edu

The French wine industry, in terms of its history, tradition, “terroir” and authenticity, offers many opportunities to study the dynamics between tradition and innovation. Over the past fifteen years, the wine market has gone through major changes: globalization, new entrants – from the ‘ New World’, and new products, all of which intensified competition. New processes of wine making – based on increased investments in R&D – and innovative marketing techniques – i.e., advertising, packaging, and labeling – disrupted the traditions in the mature wine industry. Hence, organizations had to consider new elements when formulating their strategies, among which innovation plays a major role. Building on Schumpeter’s creative destruction concept, it would be interesting to identify which elements are kept from the ‘traditional’ model and the ones adopted from the ‘new’ model. The aim of this paper is to create a theoretical framework that will help us reach the following two objectives: first, to explore the nature of the relationship between tradition and innovation and; second, to explore the strategic responses to institutional change. We identified two main factors that have a significant influence on the extent and type of innovative strategies adopted by companies:        
- The region of the wine production – Bordeaux and Languedoc-Roussillon, and;
-whether a wine is part of an Appellation (AOC, ‘Appellation d’Origine Contrôlée’) or not.  The institutional approach considers organizations as open systems influenced by the environment, in which they exist.  The ability that organizations have to make strategic choices - adopting the innovation and the extent of adoption - is constrained by their environment. In the present study, institutions can be defined as business practices widely adopted and/or taken-for-granted by the wine makers.  
AOCs, can also be considered as institutions. They originated as a strategic choice of the actors to cooperate in establishing quality standards and in protecting a well established notoriety. The collective dimension of AOC is governed by norms of acceptable conducts; and is based on the transmission of a set of practices.
These norms are institutionalized through generally accepted rules. Even though they have evolved over time, these rules impede to a certain extent the adoption of innovations. However, according to the strategic approach, organizational actions, whether they are Appellation or not, affect and shape the broader societal environment. Hence, it is interesting to see the extent to which traditions are affected over time by organizational actions.  Therefore, studying the dynamics between tradition and innovation will bridge the gap between the institutional and strategic approaches.  In order to study the relationship between tradition and innovation, a typology of organizational strategies has been developed. In response to the introduction of innovative ways of wine making and marketing, the French wine producers can adopt one of the following strategies: (1) ignore the market innovation since they are perceived not to be a real threat; (2) fully adopt the innovations; (3) partially adopt – the extent of adoption will differ in terms of growing techniques, wine making and marketing; (4) retaliate by developing a new way of wine production and marketing and getting back the customers lost to the new competitors and; (5) focus and improve the traditional way of wine making and marketing.  Academic implications of our study will consist of: first, getting a better understanding of the relationship between tradition and innovation through bridging the gap between strategic and institutional approaches; second, explaining the adoption – or not – of strategic innovations. Managerial implications would consist in providing a full range of innovation-related strategies in responses to new competitive dynamics.

Identification of Stochastic Processes for an Estimated Icewine Temperature Hedging Variable
Don Cyr, and Martin Kusy, Department of Finance, Brock University
, dcyr@brocku.ca

Weather derivatives represent a relatively new form of financial security with payoffs contingent on weather indices. They include various instruments such as swaps, options and option collars with payoffs dependent upon a wide variety of underlying weather–related variables such as average temperature, heating and cooling degree days, maximum or minimum temperatures, precipitation, humidity, sunshine and even temperature forecasts. These contracts provide firms with the ability to manage unforeseen climatic changes that create risk in terms of the variability of earnings and costs. The potential for their use in a wide variety of industries is great as it has been estimated that approximately one-seventh of the industrialized economy is weather sensitive. A brief listing of affected industries includes not only agriculture and utilities but also the entertainment industry, beverage, construction and apparel industries.Although the use of weather derivatives is potentially widespread it would appear that firms in many sectors of the economy have not yet established a hedging policy or even ascertained their full exposure to weather risk. Their potential use in the viticulture industry for example has seen limited applications, mainly involving the mitigation of risk in retail sales, due to climate conditions.The Niagara region of Canada represents the largest producer of icewine in the world with sales of icewine significantly contributing to the revenues of many of the over 85 wineries in the region. Icewine production is however quite sensitive to the required occurrence of relatively low temperatures during the winter months, when the grapes employed for icewine are harvested in a frozen state.  Although harvesting and production details can differ substantially between wineries, depending on the equipment available and quality of product sought, it is generally recognized that the optimal temperature for harvesting grapes destined for icewine is between -8 and -12°C. In the Niagara region these temperatures generally occur at night between the months of November through January. Although such temperatures also occur in February and possibly March, harvesting later in the winter season is usually associated with significant crop loss due to deterioration from wind, rot and other factors, and possibly a lower quality product.Given the risk icewine producers face regarding temperature, we considered the valuation of  put options whose payoff is contingent on the cumulative number of optimal icewine production hours occurring between the months of November through January in a given season. Unfortunately, hourly temperature data recorded at an appropriate government monitored meteorological weather station was available only for the period of 2003 through 2006. Based on this data however, we identified and estimated a model to predict the occurrence of optimal icewine production hours each day, using daily observed temperature variables. We were then able to estimate optimal icewine production hours during the winter months of November through January, for the 41 years of 1966 through 2006 and ultimately the cumulative icewine production hours for each period.Using standard time series analysis techniques along with intervention analysis for the identification of outliers, we then attempted to identify a stochastic process, based on the 41 year period, for the underlying variable of November through January, cumulative optimal icewine production hours. Although our results would seem to indicate that cumulative seasonal production hours appear to follow a simple Gaussian process, significant outliers were identified, through the use of intervention analysis. Contrary to common beliefs in the industry, the outliers present in the data were due to seasons of extreme cold as opposed to exceptionally warm winters.Finally using Monte Carlo simulation we explored the pricing of put options based upon cumulative icewine production hours under varying assumptions regarding the stochastic process of the underlying variable. Although we recognize the unresolved debate regarding the pricing of options on non-traded underlying assets as in current case, we estimated option prices under the assumption of risk neutrality for benchmark purposes.In addition to considering a simple Gaussian process we also explore the impact on put option prices of the assumption of a mixed jump diffusion process in recognition of the extreme outlier values present in the historical data. Our results show that although the jumps in seasonal values are relatively infrequent, their impact upon simulated option prices was significant, with the mixed jump diffusion process resulting in lower option values.Further research would require extending the study to areas of icewine production which may have a longer history of recorded temperature data, and particularly on an hourly basis. Although having lower production volume than the Niagara region, such areas exist in other parts of southern Ontario and of course worldwide such as in Germany. The efficient and simultaneous estimation of the parameters of any mixed diffusion process would also be facilitated with a greater number of observations.In addition, in the current study we have considered the risks associated with icewine production that are solely due to temperature, however other climatic variables also introduce risk. Variables such as rainfall during the growing season affects overall grape growing including those destined for icewine. In addition decay in icewine grapes due to wind destruction over the winter months is also a potentially important factor.  To hedge against these additional risk factors adds complexity, as correlations between the underlying variables must be considered.

New Wine in Old Wineskins? Is Globalization Good for Wine Drinkers in the United States?
Omer Gokcekus, Andrew Fargnoli, Seton Hall University,
gokcekom@shu.edu

To determine whether or not globalization is good for wine drinkers in the nited States , we analyzed changes in price, quality, and variety of wines available to consumers since 1988. We focus on these three dimensions because it is sensible to think that wine consumers will be better off, ceteris paribus, with lower prices, higher quality, or greater variety. While there is some sense in focusing on these three variables, there are indeed practical difficulties in conducting such research. First, identifying the wines on which to concentrate in terms of price and quality is problematic. Second, variety needs to be clearly defined. Is price or quality of a particular wine the important factor? Is it the variety in a particular regional market or a small town’s wine store? How can we choose a wine or identify a particular wine store? Even if we do so, how confident can we be that such a wine or wine store is truly representative? To deal with these issues, we focus on a representative wine drinker in the U.S. who, year to year, purchases and drinks all of the wines from the Wine Spectator’s Annual Top 100 List. Since 1988, the Wine Spectator has published its Top 100 list every year based on the same criteria. Consequently, in this paper we investigate what happened to the price, quality, and variety in the Top 100 List of the Wine Spectator over the last 18 years, from 1988 until 2005.
The Top 100 list is published in the last issue of each year, and it contains the one hundred “best” wines from that year. The editors of the Wine Spectator magazine make the determination by considering four factors, which determine the rank. The lower the rank implies a better overall wine—i.e., number one is the top of the list, and one hundred is the bottom. The four factors used by the Wine Spectator to determine rank are score, price, availability and X-factor—i.e., excitement. First, based on taste, the wines are assigned a score, which is supposed to determine each wine’s quality relative to the others. The scores are based on a 100-point scale, with 100 as the highest possible score. Second, a wine’s price is taken into account.  The release price information is included on every list. Third, in compiling the lists, availability is considered by taking into account the number of cases produced or, for the international wines, the number of cases imported. Availability keeps certain very expensive, rare, auction, subscription-based, and boutique wines off the lists.  This is important for the average wine consumer, who may not be interested in the most prestigious or luxurious wines. Fourth, the Wine Spectator looks into the “X-factor” of a wine in determining its rank. These four factors are then put together according to the editors’ judgment to create a ranked list of one hundred wines. Our analyses show that, over time, wine consumers in the United States benefit from globalization. One can observe that variety has increased. This is seen not only in a greater number of countries appearing on Top 100 lists, but also in the shares that New-New World and non-incumbent wines are gaining. Also, one can observe that price has gone down. During this period, the real price (in 1988 prices) for the basket of the entire Top 100 List was $4,313 in 1988; $3,132 in 1993; $2,533 in 1999; and $2,421 in 2004: the average real price for these wines decreased from $43 to $26. Quality was consistent at around 93 points. Variety increased from six to twelve countries; the share of countries dominating the early lists declined from 95% to 75% over time.  The increased variety can be captured by constructing a Herfindahl-Hirschman Index,, where s_it is the share of country i in the Top 100 list at year t, and n is the number of countries in the Top 100 List at year t. The HHI went down from 0.35 to 0.19. To better see the effect of increased presence of wines from different regions with different wine histories—in particular compared to the Old World—such as New and New-New World, we estimate the overall basket price of top 100 wines as a function of the wines from these two groups.  Our regression analysis indicates that replacing an Old World wine with a New-New World one lowers the average real price of the Top 100 list by 2.5%.

Overview of the German wine market – Situation and business challenges
Jon H. Hanf, Leibniz Institute for Agricultural Development in Central and Eastern Europe
Erik Schweickert, KIRBIS AG
erik.schweickert@oenologie.de Abstract

Wine production in Germany has a tradition of more than 200 years in each of the 13 German quality wine-growing regions along the rivers Rhine, Neckar, Main, Mosel, Saar, Ruwer, Ahr, Saale and Unstrut. The quality and type of wine as well as the quantity depends on different factors, wherein the grape variety plays an important role. Therefore, breeding new varieties and selecting traditional varieties took place in order to develop better wines with good quality and yields. The structure of the firms within the wine industry has an important impact on the technological practices, equipment and costs. It has to be considered that in Germany traditionally viticulture was one of different plantations on most farms, and the farms as well as the vineyards were very small. Corresponding with the structural change in the agricultural sector, the farms increased their acreage and production in combination with specialisation. The necessity for high intensity of labour hours on the one hand and the simple equipment for small growers on the other hand make viticulture economically attractive for full-time as well as part-time farmers. The structure of grape growers is still dominated by small wine-growers. More than 34.375 wine-growers are producing grapes which are mostly members of co-operatives. Nearly half of them (45 %) are cultivating less than 1 ha vineyard. Only about 2.000 wine-growers own more than 10 ha land planted with vines. About 4.400 are producing and marketing bulk wines mainly, while about 10.000 estates are producing and marketing bottled wines. In particular in the regions of Baden, Württemberg, and Franken where the grape-production is dominated by part-time viticulturists the membership of co-operatives is widely spread under viticulturists. In those regions, co-ops hold a market share of nearly 75 %. In general, wine co-operatives process the grapes, produce must, vinificate (fermentation, fining, clearing and other oenological practices in the cellar for winemaking) and bottle and market the wine. Today, there are 246 wine co-operates in Germany. However, only 147 of them have their own vinification. The acreage planted with vines from members of wine co-operatives increased up to 31.342 ha, more than 31 % of all German vineyards.In Germany however is not only the wine production multifaceted but also the traditional labelled wine-terminology is very complex. On account of this complexity people in Germany are often baffled by the jargon on wine labels. Thus, only 19 % of the wine-sales are realised as a direct sale between consumer and wineries or wine co-ops because in these cases customers perceive the costs of information as positive. They are driving to the winery and recognise the buying as an event. However, for the majority of transactions no bilateral contact exists. In this case the wines are bought out of the shelves of retailers. Being most often occasional wine drinkers these consumers are looking for uncomplicated signals, reputation or brands, to generate qualitative safety. Examples like the wine brands “Balaton”, “Blanchet” or “Rotkäppchen” indicate the enormous potential of branding. Especially younger customers chose imported wines with an easily understandable label.On account of this, the total wine is mainly distributed via discount retail chains (40 % market share), retailers (30 % market share), and direct sales of the producers (19 % market share). Since many years there is an increase in the sales of discounters and retailers observable. The continuing increase of sales volumes in these distribution channels also lead to a shift in the power of the wine chain. Competing fiercely with foreign competitors – in particular wines from the “new world” German wine producers have to intensively take care for the demands of their customers – consumers as well as retail customers. Overall the German wine production accounts for roughly 10 million hectolitres wine. However, on top of the German production 11.6 million hectolitres are imported.The aim of our paper is to give an overview of the German market and to elaborate on important developments in this market. Additionally, we want to address managerial problems esteeming of this development and to outline solution mechanisms. Furthermore, due to their high importance in the market we want to emphasis the role of wine co-operatives.

Storage-based Financial Engineering in German Wine Business
Erik Schweickert, KIRBIS AG, erik.schweickert@oenologie.de
Jon H. Hanf, Leibniz Institute for Agricultural Development in Central and Eastern Europe,hanf@iamo.de

If a (successful) winery or coop was looking for a credit in former years, it had no problem getting one from their bank. However in recent years the banks are more reluctant giving credits to enterprises of the German wine business. The main reason for this is the so called BASEL II regulations (EU (VO) 49/2006), which denote the entirety of the capital and surplus resources for the extension of credits. Another problem from the bank’s point of view is the non-existing economic key data from the wine business. Even the key data from the analysed wineries out of the Geisenheim Panel do not match the bank-specific needed comparisons. The result of these described developments is that many enterprises do not get the needed money to finance their business growth. Additionally, their liquidity is not so high that they could finance their business growth out of their cash-flow. Therefore, in the German wine-business new ways for getting more liquidity have to be found.One of these new ways is called storage-based financial engineering. It is a way to get an off-balance effect for more liquidity. Storage-based Financial Engineering (SFE) is a common method in many industries to get more liquidity for the enterprises. Therefore bank affiliated dealers buy the whole stocks out of the enterprise. For example they buy the whole vintage 2006 in January 2007. Thus a big money cash effect takes place, which enables the enterprise to spend money i.e. for their business growth. In a typical “sale and lease-back cycle” the wines and other stocks are not really transferred to the dealer. They all remain in the warehouse of the winery. And the winery has now the possibility to sell these wines (which are not in right of ownership) to their customers like all other years ago, but has to pay a charge for this sold wine every month.
Until now a storage-based financial engineering is in German wine business only a theoretical fiction because there do not exist any dealers that have the possibility or competence to rate the wines. Resulting from the German wine law the label with its declaration to varietals, vineyards and marks does not give enough valid information to rate the wine with an objective price. This is possible in countries like France, where vineyards, e.g., Pomerol, St. Julien or St. Emillion in Bordeaux, determine in context with the regional Chateaux the price of the wine objectively. But in Germany the wine-philosophy is the “quality in the glass”, so it is possible to vinificate a very high quality wine from every vineyard. So the quality in the glass and thus the value of the wine can vary from vintage to vintage every year. For this reasons the success of this working-capital finance method correlates in Germany with the implementation of a management concept for storage-based financial engineering, which is based on a objective and cheap scoring system for the wines.The aim of our paper is to develop and outline a management concept for storage-based financial engineering. Thereby the different requirements of the different types of enterprises (estates, wineries, coops, sparkling wine factories) in the German wine business have been kept in mind. Furthermore, the concept takes into account the differences in scoring between the different types of wine (must, barrel-wine, bottled-wine).

 

 

 

Corporate Strategies under Economic Regulations in the German Wine Growing Industry
Rainer Kuehl, University of Giessen
Erik Schweikert, KIRBIS AG
erik.schweickert@oenologie.de

The effects of government regulation depend on a variety of factors, e.g. the motivation for regulation, the structure of the regulatory process, and the industry’s economic characteristics. Given the substantial variation in these economic and institutional characteristics, the expected effects of regulation are likely to differ considerably across industry and time. European wine market regulations are an obvious example for economic regulation. The nature and magnitude of regulatory outcome is quite complex. Administrative enforced quantity restrictions, legal quality regulations and other bureaucratic forces and restriction affect the behavior and performance of the wine growing and marketing business and its innovation processes. There are several motivations for the implementation of a regulatory industry policy. One of the purposes is the so-called “public-interests” to protect producers and consumers by legal regulations. The purpose of the paper is to analyze in what sense wine market regulations are affecting the competitive environment of the wine growing business in Germany. Our approach is to identify and analyze the strategic choices wine growing businesses have made under the current regulatory policy regime. The conceptual framework is intended to articulate and empirically investigate linkages between policy regulations and strategic options the wine growing business is exploiting. We want to provide insight into the strategic orientation and the strategic choices the wine growing business are exploiting and what distinguishes organizations that are part of the same competitive and regulatory regime.After a brief conceptual discussion of the two main strategic approaches the market-(MBV) and the resource-based-view (RBV) we focus on an empirical research to control for the impact of industry and regulatory environmental characteristics on the perception of the strategic issues. To obtain the data we organized a questionnaire for the German wine business. A total of 521 winegrowing business directors responded to the questionnaire, a response rate of 32.1 %. For the analysis of the strategy type companies used we integrate theory and empirical research and involved a number of important strategy indicators, like the price setting behavior, the assessment of the own competitive advantages as well as the importance of information and of the future challenges.The paper will sum up with recommendations on the strategic options the German wine growing industry has under the current regulatory regime. It will also specify firm behavior and its relation to the regulatory institutions.

 

 

An Assessment of State Sponsored Agriculture Commodity Programs: The Case of the Texas Wine Marketing Assistance Program
Roger D. Hanagriff Associate Professor in Agribusiness, Sam Houston State University
Michael H. Lau, Assistant Professor in Agribusiness, Sam Houston State University
Sara Rogers, Graduate Research Assistant, Sam Houston State University

According to a recent report by the Texas Wine Marketing Research Institute, wine consumption in on the rise across the United States.  Over the past ten years, total consumption of wine in the U.S. has increased by 39%.  Wine consumption and production in Texas is increasing at a rapid rate reaching all time highs in 2005.  In Texas there are currently 113 bonded wineries.  Stakeholders in the industry believe that these increases have been due to state sponsored promotion programs for wine.  Many states including Texas have created wine programs to assist producers in the production and marketing of state produced wines.For these states, the wine industry has a tremendous economic impact.  The Indiana Wine Grape Council states that since its creation in 1989, the number of Indiana wineries has increased from 9 to nearly 30.  The wine industry in Washington State employs more than 11,000 people who have a combined annual income of $34 million and includes 162 wineries.  A recent study shows that the wine industry in Oregon provides more than $1.4 billion in economic activity to the state. The wine and grape industry in the state contributes more than $6 billion in gross sales back to the NY economy.  Because of such large economic impacts, state wine marketing programs developed to promote the consumption of locally produced wines both regional and nationally.  A study by the Giannin Foundation of Agriculture Economics (1999) found the California Table Grape Commission’s Promotion Program was successful in increasing wine sales.  In New York, enologists and viticulturists at Cornell have helped open 194 wineries across the state over the last 30 years.  The Texas Wine Marketing Assistance Program (TWMAP) is designed to aid the state’s growing wine industry, which is valued at $997 million to the Texas economy.  Further research is needed to determine if programs such as TWMAP are successful in promoting state industries and boosting the state economy.  It is critical to understand the return on investment to stakeholders and the economic impacts to the state economy.

Data and Methodology: Case Study This study uses survey data from the 2002-2005 TWMAP.  The survey incorporates questions relating to how wineries utilized TWMAP activities, promotional materials, and their perceptions regarding the effectiveness of the program.  Participants were also asked to quantify sales volume, winery visitations, and annual sales increases to measure program effectiveness.  Response rates for each annual report ranged from a 72 percent response rate when the winery numbers were low to a 55 percent response rate in the most recent report. Survey data from participating TWMAP members are descriptively summarized using frequencies, percentages, means, and cross tabulation statistics.  Additional insight was gleaned through calculating correlations among the variables using the Pearson Correlation Coefficient and using the IMPLAN model to calculate economics impacts.

Survey Results and Conclusions Promotional materials and tasting events are the most widely recognized marketing activity used by members.  In general, 100% of wineries recognized that TWMAP marketing assistance has raised the overall awareness of Texas wines.  The majority of respondents rated all areas of promotional materials as effective in promoting Texas wines.During year one, more than 94% of the wineries felt the program positively impacted their businesses.  In every year’s assessment, over 90% of the wineries felt the TWMAP positively impacted their wineries sales.  Sixty-nine percent of wineries felt that exposure at events was the key to increasing the publics’ awareness of Texas wines.  Improvement of printed materials and visibility at retail levels were also recognized as potential reason for increasing awareness.  For the first reporting period, the two-thirds of the respondents indicate that their wineries have experienced an increase in gross sales from the previous year.  For the second year, 62% of the wineries indicate they have experienced an increase in gross sales between 5% and 30%.  During the third year, a third of the respondents indicate an increase in gross sales between 11% and 30%.  Most wineries had increased sales from 10-30% over the respective time period of analysis.Total economic impacts from TWMAP were also assessed using the collected information and the IMPLAN Model.  A ratio of increased winery sales levels and direct sales from the TWMAP to program cost gives a base value to compare benefits from the program.  During the first report, there was $11.70 total return in sales per $1 of TWMAP funding, which means the industry’s returning 11 times the budget and contributing that to the Texas economy.  This figure increased every year to a high of $28.60 during the fourth report.  Direct economic returns include the percent of sales dollars wineries directly attribute to the program plus additional effects. In the first year, every dollar placed in the TWMAP directly returned eight times ($8.67) the TWMAP investment dollar.  This direct return increased annually and in 2005 returned sixteen times ($16.50) the TWMAP investment dollar.  The TWMAP program is not solely responsible for the successes of Texas wineries; however respondents do indicate that TWMAP has a positive impact on the industry.  Pearson correlations are preformed to determine if there are relationships between the TWMAP and actual benefits to the wineries.  A significant positive correlation is found between TWMAP activities and sales increases for most years, which signifies the more activities wineries participated in, the greater the amount of their sales increases in dollars.  Recommendations from this study indicate that increasing winery involvement in program activities are highly effective ways to expand local wine consumption.  This analysis also determines that state sponsored programs create marketing assistance efforts with significant economic values that benefit the state’s economy.   Further research is needed to determine statistical significance between years of program evaluation.

The New Structure of the California Wine Industry
Tony Lima, Professor of Economics, California State University, East Bay
Norma Schroder, CEO, Blue Weasel Productions, Los Altos

The traditional structure of the California wine industry rewarded growing large.  Only by producing tens of thousands of cases could a winery take advantage of economies of scale in production and distribution.  Historically, early market entry followed by growth in capacity led to lower costs and lower prices. This would, naturally, lead to even more expansion of the winery and market production.  Every winery wanted to be Gallo.Our hypothesis is that most of the market entry during the last ten years has been by wineries that have made a conscious strategic decision to stay small.  They limit production (generally to less than 10,000 cases per year, about 23,900 gallons), charge relatively high prices and sell directly to the public.  Some sales are done through the tasting room, but repeat business is handled via e-mail, the winery web site or telephone.  The owners shun distributors, and distributors shun them for not having enough capacity to fill the channel.  If a consumer happens to find their wine in a restaurant, it means the restaurant has purchased the wine directly from the winery.These small wineries have been called ultra-boutique.  This term is more widely used outside California.  Interestingly, South Africa uses the term as part of the promotion for their WineX festival.  WineX defines ultra-boutique wineries as those that produced “less than 20,000 liters in 2006.”  That amounts to 5,280 gallons or about 2,209 cases.  Small indeed.  In New Zealand the Herzog Winery (Blenheim) advertises itself as boutique.  Elsewhere it is described as ultra-boutique.The number of commercial wineries in the U.S. has tripled in the last 20 years.  In California, as the number of wineries has risen from 847 in 2000 to almost 3,000 in 2006, our paper will find that the growth in numbers is overwhelmingly in the ultra-boutique group.  There is a realization that for a boutique scale winery, moving incrementally to a higher scale annual production volume may not lead to the profit outcome the owner desires. Wineries in this category include Steven Kent (Livermore) and Passalacqua (Healdsburg).We have gathered data on the annual production capacity in terms of cases for 373 wineries located in Marin, Napa, Sonoma, Lake and Mendocino counties. As a preliminary step, we have calculated the size distribution by cases of these 373 wineries (Figure 1).To complete this paper, we will conduct a telephone survey of these wineries to gather additional information on variables which define the new industry structure.  Specifically we will ask:·         When the winery was started (to test our hypothesis that newer wineries are mainly ultra-boutique)·         The average price for a bottle of their wine (to estimate annual winery revenue and verify the premium price strategy among newer, and boutique scale wineries)·         Whether they make use of retail distribution channels in their sales effort (to verify the reliance on direct sales by the boutique scale wineries).The new industry structure portrayed in Figure 1 is consistent with a bimodal cost function in which selling costs increase dramatically when production exceeds 10,000 cases per year.  It is conventional “winery business wisdom” that to move more than about 10,000 cases requires use of distribution channels. Furthermore, the wisdom says a distributor needs a supply of 10,000 cases for a winery to be profitable to carry. So to engage with a distributor, a boutique winery needs to reach 10,000 cases and then commit that entire production to distribution. It is obvious that at the scale of 10,000, moving to distribution entails immediately lower margins and lower unit profits.  What is happening is that even though increasing returns to scale continue through the entire range of production, one input price (distribution) jumps at about 10,000 cases, causing average cost to jump sharply before it again begins to fall as output increases further.Our paper will model the bimodal nature of the cost function and use this result to estimate the share of the market (in terms of cases and revenues) that is occupied by ultra-boutique wineries in a monopolistically competitive equilibrium. (We will make necessary simplifying assumptions about demand and costs).  We will also include illustrative details about various boutique and ultra-boutique wineries in California.  Time permitting we will also interview some of the owners and include excerpts in our paper.

A Life in Wine: Ernest Gallo (1909 – 2007)
Tony Lima, Professor of Economics, California State University, East Bay
Norma Schroder, CEO, Blue Weasel Productions, Los Alto

Ernest Gallo passed away on March 6, 2007.  According to his obituary in the New York Times the E&J Gallo Winery “sells one of every four bottles of wine that Americans drink.”Ernest Gallo left an unexpected legacy.  The University of California, Berkeley’s Bancroft Library keeps an archive of extended interviews with various people (the Regional Oral History Office Among their interviews is one with Ernest Gallo conducted in 1969 – 1971.  The agreement with Mr. Gallo stated that the interview was not to be released to the public until after his death.This lengthy interview (186 pages) contains fascinating elements of the history of California winemaking, business and economics.  Here’s an example:
I remember one particular incident: I was wandering down the Jewish neighborhood at dusk; it was snowing; I was looking for people who might be going into the wine business. By referring to the telephone book, I could find people who were in the grape juice business -- that's what they used to call themselves during Prohibition -- grape juice peddlers. And one was Griffler. It was in a sub-basement, and I went down there, and I saw a large number of women bottling wine by hand. I inquired for the proprietor and Griffler, who was an elderly man, came forward and I told him I was there to sell wine. He said, "Fine, let me see your samples. In those days we had no knowledge of processing other than that you would filter the wine, then wait. With age it would clarify and stabilize, and it would take years to eliminate the sediment. So this was new wine that I had, which required filtering almost every day in order to have it clear. So, these were samples I had filtered the night before in the hotel room. I showed him one sample. He tasted it, and he asked, "What's the price?" I said, "Fifty cents a gallon." "Oh,"  he said, "Oh, no, I don't want any of this cheap stuff -- I only want good wine." I said, "Oh, I'm glad to know that. I have some very good wine here, but it is ninety cents a gallon." "Wel1," he said, "that's what I want." I said, "Fine." So I pulled out another sample of the same wine, poured it out for him. He tasted it, said, "Well, now, that's exactly what I want." So based on this I sold him one hundred barrels at ninety cents a gallon instead of fifty cents. That's the type of people who were in the business in those days. They didn't know anything about the product, and they judged it by the price.
This paper will discuss excerpts from the interview with Mr. Gallo, focusing on those relevant to California wine economic and business history.  The only possible difficulty the authors foresee is obtaining permission to use these excerpts from the Bancroft Library.  The preface to the interview states “Requests for permission to quote for publication should be addressed to the Regional Oral History Office, The Bancroft Library, and should include identification of the specific passages to be quoted, anticipated use of the passages, and identification of the user.” (We believe the library will waive their stated additional requirement that Ernest Gallo be given 30 days to review any such request.)

Critical Exposure and P-Q Relationships for New World Wines in the U.S. Market
Peter W. Roberts, Emory University
Ray Reagans, Carnegie Mellon University

“In the wine industry, quality ratings are provided by (among others) the Wine Spectator, the Wine Advocate and the Wine Enthusiast. Because quality matters to consumers and because the opinions of these experts are deemed credible, a wine’s price should be a positive function of how well it is rated by the critics. In their study of price-quality relationships in a sample of Bordeaux wines, Landon and Smith (1997) find a positive relationship between the quality ratings reported in the Wine Spectator and wine prices. A similar result is obtained by Benjamin and Podolny (1999) in their study of California wines (using quality ratings from the Connoisseur’s Guide) and by Schamel and Anderson (2003) in their study of wines from Australia and New Zealand (using quality ratings from James Halliday and Winestate).These analyses all suggest a strong and unwavering relationship between published quality ratings and product prices. However, using data from Consumer Reports covering 1,271 different product markets, Tellis and Wernerfelt (1987: 249) show that despite the positive correlation between quality ratings and prices, the range of these correlations is very high. A similar observation has been made in the wine industry where Jones and Storchmann (2001: 127) conclude that “it is clear that there are great differences between particular chateaux in respect to Parker-point elasticities of the prices.” In light of this, it is troubling that existing research has not considered factors that either strengthen or weaken the observed association between quality ratings and wine prices.One such factor is attention. As Arrow (1974: 37) noted, “each individual economic agent is assumed to start with the ability to receive some signals from the natural and social environment. This capacity is not, however, unlimited, and the scarcity of information-handling ability is an essential feature for understanding ... behavior.” We follow Arrow and propose that the strength of the association between a wine’s price and its quality rating will depend on the extent to which individuals are paying attention to the product and its rating. A quality rating is a very precise and highly relevant quality indicator because the information that it contains is maximally relevant to the focal product. However, it also lacks salience at low levels of attention; individuals who are not paying close attention will likely miss it.This leaves the question of what influences attention. Although accidents, affiliations and strategic actions may influence market attention, we focus on the process whereby attention accumulates as a function of a producer’s history of critical coverage. In addition to providing information about quality, the appearance of a critical review directs the attention of market participants toward certain producers and their products. Zuckerman (1999; 2003) shows that the distribution of legitimacy across firms is influenced by the coverage decisions made by investment analysts. Firms that attract the right kind of coverage are more likely to make it into investors’ consideration sets. In his analysis of theater critics at the Edinburgh Festival Fringe, Shrum (1991; 1996) shows that irrespective of the quality of the reviews, simply being reviewed increased the probability that an act will be noticed by potential audience members.We extend these analyses and argue that critics channel attention within wine markets by providing certain producers with more critical coverage over longer periods of time. Thus, the positive impact of a product’s quality rating on its price increases with its producer’s critical exposure (i.e., its history of critical coverage). This prediction is confirmed in an analysis of New World wines selling into the

U.S. market over the 1987 to 2001 period. While a wine’s price is a positive function of its own quality rating, the strength of the price-quality relationship increases with a producer’s critical exposure.

Standards for Quality and the Coordinating Role of Critics
Greta Hsu, University of California, Davis
Peter W. Roberts, Emory University
Anand Swaminathan, University of California, Davis

In this paper, we elaborate the coordinating role played by critics within markets by proposing that critics are more effective at facilitating orderly pricing arrangements when producers are able to anticipate the quality information that they will release to the market. With their many evaluations, critics apply and communicate standards for quality within markets. When these standards are clearer, they provide a more tangible basis for producers to anticipate the reactions to their products. As such, they have greater ability to forecast the quality judgments that critics will later disseminate. This stronger basis for coordination means that list prices will more accurately reflect published quality ratings – even though critics do not make their judgments until after products are produced and priced.Our prediction is tested in the market for U.S. wines. Although wine consumers are concerned about product quality, it is virtually impossible to determine the quality of a bottle of wine before opening and tasting it. As such, wine consumers have come to rely on the quality ratings in established publications such as the Wine Spectator to inform their purchase decisions. Because consumers accept critics’ judgments as legitimate proxies for unobservable product quality, these ratings are closely monitored by distributors, retailers and customers, as well as by producers. However, when it comes to pricing, the vast majority of the wines in the market have their prices set when they are released to the market; only a very small percentage of them have their prices adjusted after release, either at auction or through negotiations between consumers and retailers. Because critics’ judgments are typically formed and published only after the wines are in the market, producers must set list prices without knowing what quality information will eventually influence consumer valuations. We propose and then demonstrate that the accuracy with which wine producers set their prices is higher in varietal markets (e.g., the markets for cabernet sauvignon, merlot or chardonnay) that evidence clearer standards for product quality.After outlining our theory and the pricing order prediction that it implies, we describe a novel approach that was developed to measure the presence of standards for quality across nineteen different varietal markets and over fifteen years. This approach entails comparing the wine reviews’ evaluative (i.e., score) and analytic (i.e., tasting note) elements. We use the scores to identify all of the exemplar wines within each varietal market in each year. These are the wines that received quality scores of ninety or higher and therefore classified by the Wine Spectator as ‘Classic’ or ‘Outstanding’ wines. When the relevant words in the tasting notes that describe exemplar wines are more similar across reviews, we infer that critics have a clearer idea of what high quality wines in that varietal market should be like. This, in turn, provides guidance to producers who must anticipate how the critics will react to a wine that possesses a certain set of characteristics and then price their wines accordingly. On the other hand, when the text in the reviews of exemplar wines displays little or no overlap, we infer that the varietal market lacks clear standards for product quality. The lower descriptive similarity reflects more ambiguity over what characteristics top wines should have and thus offers less help for producers looking for pricing guidance.We employ a multiplicative heteroscedasticity (or variance function) model to assess the impact of clearer quality standards on list price variability around expected levels. The results confirm that our similarity measure is associated with significantly lower variance in list prices around those predicted by a robust model of wine price. We interpret this finding as evidence that quality standards lead to more orderly pricing arrangements.

Climate Change Adaptation Strategies in Viticulture
Manfred Stock, Thomas Kartschall and Martin Wodinski
Potsdam Institute for Climate Impact Research

The general objective of climate impact research in viticulture is to assess its vulnerability with respect to climate change and to develop possible adaptation strategies. Regional climate change scenarios until 2055 have been developed and evaluated for several German viticultural areas and selected European sites:·         Mosel, Rheingau, Pfalz, Württemberg,·         Werder (DE), Eisenstadt (AT), Alghero, and Pisa (IT).A statistical regional model was used to derive a Basic Scenario for the period 1951-2003 from observed climatological data. The Future Scenario for the period 2004-2055 has been evaluated as projection of the trends of temperature, precipitation and record days. Resulting potential impacts were derived using the Huglin Index and appropriate phenologically based indices by coupling the climate scenarios with a phenology model. Relevant deduced climatological variables were identified and potentially critical changes detected. Some of the results are:·         A Northbound shift of potential viticultural areas and to higher elevations,·         An acceleration of all phenological phases,·         An increasing probability for tropical nights (Tmin > 20°C) during maturation (firstly observed in 2003),·         An increasing probability of extremely humid conditions during maturation leading to higher pest risks (as in 2006),
An integrated assessment of grape vine and grape moth (Lobesia botrana) phenology for Alghero (Sardinia) showed an increasing probability for overlapping of maturation and the appearance of a later generation of L. botrana in future with a high potential of damage.For the development of adaptation strategies of viticulture to impacts of climate change we propose a six step approach:1.      Transfer the regional climate scenarios to specific sites,2.      Analyse the specific climatic sensitivity of the site,3.      Relate climate exposure to the phenological phases,4.      Assess the potential impacts as site specific cause-effect relations,5.      Evaluate appropriate adaptation measures, and6.      Evaluate the remaining vulnerability to climate change (risks and chances), considering modifications by non-climatic effects, e.g. changing wine market.
Such an adaptation strategy should be established using an expert-guided stakeholder dialogue.

Identifying different influences of the evaluation of wine
Gergely SzolnokiSection of Economics and Market ResearchResearch Institute of Geisenheim, 65366 Geisenheim, Von-Lade-Str. 1, Germany
Email: Szolnoki@fa-gm.de

Research e.g. by Sánchez and Gil (1997), Hegen (1998), Tustin and Lockshin (2001) and Szolnoki (2007) shows that there is some key factors during the buying decision without tasting the wine, which could be seen as quality indicators and lead the orientation of the consumers. The question is how strong the influence of different factors is, if there is a possibility to taste the wine before buying it.       
It is generally agreed that the expected value of a bottle of wine is influenced by its basic and by its additional value. Basic value is in this case the perceived taste of wine, while factors like the image of origin, the variety and the brand name as well as the packaging function as additional value during the buying process. We assume that the factors of the additional value have a significant influence on the consumer’s evaluation of how the wine tastes. 
A survey with wine-tasting was made for identifying and quantifying the influence of selected attributes of the additional value on the evaluating of the taste of the wine.
It was assumed that there is a significant difference between consumer groups depending on the weight of the influence of attributes like identification (origin and variety) and packaging on the evaluation of wine.Methodology In order to avoid a direct survey, a wine-tasting was conducted within as a central location test with German wine consumers. This test simulated a real buying process including the tasting of the wine. We modeled a buying situation by defining the preliminary decisions for the interviewees: “Put yourself in the situation that you are looking for a good dry white wine to enjoy over dinner tonight with friends”. The buying motive, the colour and the flavour of the wine were defined, so that we reduced the influence of the preliminary decisions to zero.
The respondents tasted four wines, first of all they had a blind tasting, after that a Mosel Riesling, an Italian Pinot Grigio and finally a Rheingau Riesling. The pretense of the tasting was that the respondents got the same wine in three different kinds of packaging. We asked the respondents to evaluate first the packaging, the image of the origin, of the variety and of the brand name and afterwards the taste of the wine.The attributes were evaluated on a 1-to-7-scale so that a linear regression model could be created as follows:      (1)           TasteP _ij = f (Pack _ij, Orig _ij, Var _ij, Brand _ij,TasteN _ij)

The model was estimated using ordinary least squares (OLS), the estimation based on the examination of wine attributes of the521 respondents.Results  Table 1 presents the regression results for the model defined in equation (1). The data of the test wines were put together and examined as a whole (cumulative examination). This kind of examination resulted in a better adjusted R-Square.

Table 1

 

As Table 1 shows all of the independent variables have a significant influence on the perceived taste of the wine. If the respondents have been consistent they would have evaluated all the four wines including the blind tasting the same. The significant variables exhibit the visual influence of the attributes and the coefficients quantify the degree of this influence.
Packaging (0.258) and brand name (0.256) are by far the strongest factors to modify the tasting perception. They were seen in this case as an indicator of quality. The variety places third with a coefficient of 0.185. It is unusual that the neutral tasting is only the second lowest factor followed by the origin of the wine.
The respondent group was divided into five segments based on factors such as socio-demographic and behavioral patterns: 1. Younger consumers without experience; 2. Price sensitive consumers; 3. Older wine connoisseur; 4. Red wine enthusiasts; 5. Older wine drinkers with high income.
A segment-specific regression examination confirmed the differences between the five consumer groups, as well. The members of the different segments use quality indicators for evaluating the wine. This claim is based on the varying degree of influence of the evaluation attributes on the individual respondent. ConclusionWe can conclude that the factors packaging, origin, variety and brand name influence not only a buying decision when a wine can not be tasted but also in cases when the consumers can taste the wine before buying it. In the latter situations this factors have a direct influence on the evaluation of the wine. The degree of the influence varies according to which consumer segment the respondent belongs.

 

An Econometric Analysis of a Wine Import Function for Brazil
Susan Schommer Instituto de Matemática Pura e Aplicada (IMPA), Brazil,
schommer@impa.br.

 

In 2005, total Brazilian wine consumption (vitis vinifera) was 61 million liters of which 37.5 mill. liters (61.4%) were imported (domestic production was 23.5 mill liters).
In 2006, Brazilian wine imports increased by 24%, with 46.4 million liters imported (Figure 1). Figure 1 – Brazilian Wine Imports 1980-2006
in million liters

Source: Emprapa
Econometric analyses postulate that imports are a function of relative prices and real income (Houthakker and Magee, 1969; Leamer and Stern, 1970; Murray and Ginman, 1976; Goldstein and Khan, 1985; and Carone, 1996) cited by Dutta and Ahmed (2006). According to Azevedo and

Portugal (1998) and Dutta and Ahmed (2006) there exists a long-run relationship (cointegration) between aggregate import volume and relative prices and real income.

This paper is aimed at estimating structural equations (considering long-run and short-run relationships) of the wine import demand in Brazil during the period from 1980 to 2006. Specifically, the objective of the paper is to determine whether there exists a long-run relationship between Brazil's wine import quantity and its major determinants. The hypothesis of the existence of a cointegrated relationship between aggregate import quantity and its major determinants is tested using cointegration technique developed by Engle and Granger (1987). Quantity imported is found to be cointegrated with real exchange rates and real GDP, i.e., both are important determinants of the wine import function for Brazil. The estimated coefficient of the error correction term indicates a high adjustment speed towards  equilibrium. Our econometric estimates of the wine import-demand functions for Brazil suggest that import-demand is largely explained by real GDP, which relates to the general level of economic activity in the country. The demand for imports appears to be sensitive to import price changes, but it increases less than proportionately to an increase in real exchange rates. In the long-run model, the estimated coefficient of a policy dummy variable for trade liberalization shows suggest only small effects. Engle and Granger’s (1987) cointegration analysis can be easily applied for other goods as well and may provide insights regarding trade elasticities for different goods, which in turn should be interesting for exporting countries.
 References Azevedo, A. and M. S. Portugal (1998). Abertura Comercial Brasileira e Instabilidade da Demanda de Importações. Nova Economia, Belo Horizonte, v. 08, n. 01, p. 37-63. Dutta, D. and N. Ahmed (2006). N. An Aggregate Import Demand Function for India: A Cointegration Analysis. School of Economics and Political Science, University of

Sydney. Engle, R. F. and C. W. J. Granger (1987), Cointegration and Error Correction: Representation, Estimation and Testing, Econometrica, 55:251-76.

 

Tracing international wine marketing research
 - a three ways assessment

René C. G. Arnold, Dipl. Betriebswirt (FH) Heilbronn

The author has assessed the international wine marketing world by three very different means:
(1) An in-depth literature review leading to a detailed overview of the research conducted within recent years. (2) A rather quantitatively imprinted meta-content analysis backing the literature review with accurate numbers for the multitude of different categories, topics and sub-topics. (3) An online survey of international researchers and marketing managers engaged with wine marketing around the world providing corresponding qualitative insights into the field of interest.
The first part of the literature review verifies that there is a great need for further marketing education and efforts in the wine industry. They are still very product-focused and tend to hide behind the cherished uniqueness of the product instead of facing this issue in corresponding marketing action. Its second part reveals some detailed insights into what is known about the marketing mix in the international wine industry research. By taking a close look at the published research, one can, indeed, find at least something about nearly any topic of interest. This is also true for research concerning the wine consumer. However, there are still some blank fields. For instance, one of the major future issues – the new generation of wine consumers – is barely studied. Additionally, there are very few articles in the field of advertising and promotion as well as POS and here especially on-trade environments. The second part, consisting of the meta-content analysis, shows corresponding results at a quantitative base. Beside some limitations, mostly due to assortment problems or the fact that particular topics played only a minor role in the literature review, this part of the paper provides detailed insights into the actual state of wine marketing research. First of all, it is interesting to see that academic and non-academic journals address their efforts to different areas. Whereas academic journals concentrate on the theoretical part, non-academic journals emphasize the practical topics of winery marketing management and wine business administration. Overall, it is positive to note that both types of journals offer quite detailed information about wine consumers and their behavior. On the other hand, the picture derived from the literature review of little activity in the field of POS/POP environments is also verified. Moreover, wine marketing researchers do not seem to be interested in reflecting their efforts for there are few articles discussing the state, progress and usefulness of their research. The third part, presenting an online survey of international researchers and marketing managers engaged in the field of wine marketing, serves as a companion piece, completing the meta-content analysis. Here, the actual perceptions of the researchers and managers are measured. Hence, they are compared to the results of the meta-content analysis. Overall, the survey depicts that wine marketing still has many possibilities to develop and gain further importance. In comparison with the quantitative results, one finds out that the perception of the participants and the actual state of research fit quite well. However, most countries receive only medium scores for their wine marketing efforts as well as for the cooperation of wine marketing academics and the wine industry. In the future, the wine marketing research should take more notice of new young consumers, their beliefs, needs and wishes in order to design products and copies matching to this group. There is a lot to learn from other beverage industries like beer or spirits in this area. Directly connected to this, there is a need to better understand advertising and promotions of all kinds in the field of wine marketing. Concerning the wine consumer, it would be especially interesting to find out more about the way he perceives wine. Regrettable is also the lack of research conducted in the area of on-trade environments even despite their great importance for the sale of wine. All this, however, may still not overcome the major problem we have to face, namely especially SME wineries which close their eyes to the necessity and usefulness of marketing. Although they have great opportunities offered by their small size and the direct customer contact, they do not make use of them. Beyond this, they usually do not have any strategic thought of their business. Both issues may partly be due to the personal utility many winemakers draw from their businesses. However, business life will become even more competitive. Therefore, those with a clear USP and strategic concept as well as operational marketing support will have better chances to survive than all the others. Product quality should not be the aim, but rather the starting point of this process.

 

Bowling Alone, Drinking Together
Paolo Buonanno Department of Economics, University of Bergamo, Via dei Caniana, 2 – 24127 ­Bergamo (BG) – Italy. Tel.: +39 – 035 2025681. Fax: + 39 035 2052549. Email: paolo.buonanno@unibg.it
Paolo Vanin University of Padua & Pompeu Fabra University of Barcelona

 

This paper explores the relationship between wine consumption and social capital. In particular, we investigate the effects of associational networks and participation to social life on wine consumption. We study this relationship using a survey conducted by the Italian Statistical Office (ISTAT) on over 54,000 individuals. If socially enjoyed leisure and wine consumption are complement goods, we may expect a positive relationship. In turn, if alcohol abuse disrupts social links, a negative relationship may result. Our analysis allows to assess the relative importance of these two effects and to empirically qualify them.
Recent literature focuses on the health effects of alcohol consumption and on the social costs deriving from the abuse of alcoholic substances in particular among youths. 

Murray and Lopez (1997), as well as Jernigan (2001), point out that world-wide 5% of all deaths of people between the ages of 5 and 29 in 1990 were attributable to alcohol use. English, Holman, and Milne (1995) estimate that 34% of all motor vehicle crash deaths, 47% of homicides, 41% of suicides and 44% of burns were attributable to alcohol use. More focused on adolescent behaviors, Hawkins, Catalano, and Miller (1992) conclude that drug and alcohol abuse undermines motivation, interferes with cognitive processes, contributes to mood disorders and increases the risk of accidental injury or death. Moreover, alcohol and other drugs are a major factor in acquiring AIDS, violent crimes, child abuse and neglect and unemployment (Hawkins et al., 1992). Other studies show that the probability of alcohol dependence is higher among people who started to drink alcohol in adolescence (Grant & Dawson, 1997). Similarly, young people who started to consume alcohol in adolescence are more likely to have incidents related to this consumption, such as traffic fatalities (Hingson, Heeren, Jamanka, & Howland, 2000). Other studies research into the social costs associated with these consumptions, which result in a loss of human capital and reductions in productivity (Rice, Kelman, Miller, & Dunmeyer, 1990).

Less scholar attention has been devoted to the positive relationship between wine consumption and social life. In particular, in Italy wine is a fundamental ingredient of any social event, and indeed it contributes to its success. Thus one expects that socially enjoyed leisure and wine consumption are complement goods, that wine fosters sociability and its consumption is higher, where higher are the opportunities to participate in social events. Such events range from dining at home with the whole family to meeting in associations and clubs, from parties to business meeting. Indeed, by drinking together individuals have the opportunity to meet friends and/or colleagues, to chat together, know other persons and exchange information. In this sense the presence of associational networks and a more strong social life may influence and determine the level of wine consumption. Data on social capital can be used to single out the effects of some of these opportunities, and the historical roots of social capital allow to partially control for reverse causation. This allows us to assess the relative merits of the two approaches, to establish the degree of complementarity/substitutability between wine consumption and various forms of social life, and to assess the disruptive effect that alcohol abuse may have on social ties.  Starting from the seminal work by Putnam (1993) on the role of social capital for government well functioning, several contributions in this literature have focused on Italian data. This is due to the fact that Italy displays large and persistent provincial disparities in social and economic characteristics in spite of having common policies, institutions, laws, justice system and school system, of having police forces organised at national level, and of being ethnically and religiously quite homogeneous. Thus, changes in these factors are not responsible for socio-economic differences across Italian provinces, and this in turn substantially reduces the omitted variable problems affecting many cross-country studies. In this paper we exploit provincial level variations in civic norms and associational networks in Italy to investigate their effects on wine consumption. Since social characteristics in Italy are often peculiar traits of single cities, provincial data are probably best suited to capture social capital in this country.  Several studies, from Knack and Keefer (1997) to Bjørnskov (2006), find empirically that social capital is best described as a collection of three main dimensions, namely generalized trust, civic norms and associational networks, and that these dimensions have different impacts on economic outcomes. Since our aim is to study the latter two dimensions, we separately consider provincial level measures of cultural and recreational associations, voluntary associations, voter turnout at referenda and blood donations. Empirical work on social capital is typically affected by several methodological problems, the main of which are, besides omitted variables, measurement errors and endogeneity. As far as endogeneity is concerned, we consider blood donations and referenda turnout as safely exogenous variables with respect to wine consumption. Indeed, blood donations seem to be as exogenous a variable as possible, and the referenda we consider have never concerned issues either related to wine consumption or related aspects. To control for the possible endogeneity of association density, we exploit the fact that associational networks in Italy are to a significant extent a historical heritage. We then use Putnam’s (1993) historical data on associations in Italy

as an instrument for current associations, arguing that it is unlikely that such instrument is correlated to current wine consumption through other channels.

 

 

Reputation and Firm Survival in a Competitive Environment: Empirical Evidence from the German Wine Industry
Bernd Frick  Faculty of Management and Economics, Witten/Herdecke University, Alfred-Herrhausen-Strasse 50, D-58448 Witten, E-mail:
bfrick@uni-wh.de

When service attributes in general and service quality in particular are difficult to observe, consumers tend to use past quality as an indicator of present or future quality. Thus, a firm’s decision to produce high quality services eventually leads to the gradual emergence of a reputation. A seller who chooses to enter the high quality segment of the market must, therefore, initially invest in his reputation via the production of superior quality. During the initial investment period, the producer must sell his products at less than cost, because he cannot command the prices associated with high quality until his reputation is established. This, in turn, implies that in equilibrium high quality items must sell for a premium above their costs of production. This premium represents the return on the initial investment in reputation (Shapiro 1983)¹.  Moreover, the premium that a reputable firm earns induces it to maintain its reputation. Without premiums for high quality products, firms would find that an “opportunistic” strategy of quality reductions is profit maximizing: While quality reductions typically yield immediate cost savings, the adverse effects on reputation will arise only in the longer run. If, however, an opportunistic strategy allows profits to be made, it would always dominate, unless higher profits can be earned via a faithful strategy of quality maintenance. Never-theless, there always remains room for potential quality cutting by producers. Due to moral hazard and adverse selection reasons, perfect guarantees are not feasible.  Using an unbalanced panel of 854 German wineries over the period 1994-20032, I test the hypothesis that firms that have acquired a certain reputation for the quality of their prod-ucts are less likely to exit the market. The reason for choosing the wine industry is obvious, because production requires sector-specific human capital as well as machinery for which no alternative use exists. Therefore, moral hazard is unlikely to occur. Thus, I estimate the impact of reputation (as measured by wine experts) on firm survival. The estimates are of the following general form: 

(1) FS = β₀ + β₁ REP + β₂ REP² + β₃ REP³ + β₄ D94 + β Σ FC + β Σ RD + ξ

where  FS: firm survival (number of years in sample (Min. 1; Max 10; Mean 6,1)) REP: reputation (as measured by wine guide (Min. 0,5; Max 5,0; Mean: 1,7)) D94: winery included in first edition already (dummy variable; 0=no; 1=yes) ΣFC: vector of firm characteristics (acreage, number bottles produced per year, etc.) ΣRD: vector of region dummies (n=13; reference region: Nahe) It appears that – other things equal – the higher the reputation of a firm the more likely it is to survive in a highly competitive environment, where even the largest producers have negligible market shares only. Moreover, it appears that the impact of reputation on firm survival is not linear, suggesting that exit costs increase exponentially. This finding is robust across different types of regression models.  -------------------------------  ¹ It is certainly useful in this context to distinguish between individual firm reputation and collective reputation (Landon and Smith 1998: 629). While the former is based on the past quality of the firm’s output, the latter may be defined as the average quality produced by a group of firms to which an individual firm belongs. It is typically less costly for consumers to acquire information on collective quality that can then be used as an indicator of the quality produced by individual firms in that group. For example, a consumer’s expectation of the quality of a wine made by an individual winemaker from the Mosel valley may depend on the average quality of all

Mosel wines. ² The data set has been compiled using the most prestigious German wine guide - the “Gault Millau” - whose first edition appeared in 1994.  Literature Frick, B. (2004): Does Ownership Matter? Empirical Evidence from the German Wine Industry. Kyklos, 57, 357-386
Landon, S. and C.E. Smith (1998): Quality Expectations, Reputation, and Price. Southern Economic Journal, 64, 628-647
Shapiro, C. (1983): Premiums for High Quality Products as Return

 

New wines in old bottles? The case of quality wines and distillation measures in the EU
Evens Salies, Charge d'etudes a l'OFCE, 250, rue Albert Einstein, 06560 Valbonne, France, evens.salies@sciences-po.fr
Bodo Steiner, Assistant Professor, Department of Rural Economy, 515 General ServicesBuilding, University of Alberta, Edmonton, Alberta, T6G 2H1, bsteiner@ualberta.caAbstract

 

Not long after the introduction of the European Community (EC) wine regime in 1962, a structural surplus emerged during the 1970's in the market for table wines Mart (1987). After a series of distillation measures and associated production and storage subsidies were put into place during the 1984/85 marketing year, the European Court of Auditors reviewed the consequences of these measures. It found that these measures were a disguised and expensive method of disposing of surplus wine. The Court also concluded that the measures did not encourage producers to improve the quality of table wines, and that distillation interventions transfered the problem of structural surplus from the wine market to the alcohol market Mart (1987). Despite this early criticism, a complex and ine_cient system of distillation measures has remained. However, following a recent communication from the EU commission to the Council and the EU Parliament Commission (2006), it is expected that after more than four decades, the first true reform to the EU wine regime will be unveiled during the summer of 2007. This reform package is likely to abolish support for by-product distillation, potable alcohol and dual-purpose grape distillation, as well as private storage support and crisis distillation measures. This paper aims to provide further evidence in support of a radical, market oriented reform of the current EU wine regime, by revealing the significance of the spill-over of the structural problem from lower quality EU wine markets, towards higher quality wine markets in Europe. Given the importance of the French wine market in the EU, and the key role of

France in Europe in downgrading quality wines, our analysis is confined to France. The implications of downgrading are to lower the quality in the table wine market. We expect that downgrading results in the transfer of surpluses of quality wines produced in specified regions (QWPSR) into the market for non-QWPSR wines (i.e. table wines). Previous analyses of the EU wine market have modeled price and quantity interventions under the assumption of imperfect competition (Jayet, Mathurin, and Hofstetter (1998); Jayet (2001)), and have focused on the income effects of the EU wine market policies, including an analysis of the implications of the possible introduction of a EU quota system (Perretti 1997). This paper analyzes how the evolution of table wines and QWPSR in France is related to buying-in prices for distillation measures and thus EAGGF expenditures (European Agricultural Guidance and Guarantee Fund, EAGGF). We show that the distillation measures have not only led to an increase in the supply-demand imbalance of quality wines, but also to a lowering of the actual quality within the category of quality wines. We show that the distillation subsidies induce producers to produce more wine on lower quality vineyards, such that the marginal productivity declines as vineyard acreage increases. The incentives to produce more wine by expanding vineyard size are enhanced by the yield restrictions that are imposed due to national and EU regulation. In order to measure the degree of quality convergence towards lower levels of quality we are using panel price index methods. ReferencesCommission, E. (2006). Communication from the Commission to the Council andthe European Parliament: Towards a sustainable European wine sector. Brussels: 22.06.2006, COM(2006) 319 final.Jayet, P. (2001). Evaluation de politiques de retrait des terres pour la regulationd'un marche agricole. Annales d'Economie et Statistique 61, 119-150.Jayet, P., J. Mathurin, and A. Hofstetter (1998). Un modele des echanges             europeens pour l'evaluation de la politique viticole. Les cahiers de l'EICV 2(September).Mart, M. (1987). Community wine distillation measures, special report no.4/87(87/c 297/02), european court of auditors, no.c 297/14, 6.11.1987. OficialJournal of the European Communities .Perretti, B. (1997). Is a typical C.A.P. for typical products possible?: An economicanalysis of the new market policy for the wine sector. Parma, Italy : paper presented at the 52nd EAAE Seminar, Typical and traditional production: Rural effects and agro-industrial problems, June 19-21.

 

Wine and Global Warming in Alsace
Evidence from the Little Ice Age
Karl Storchmann Economics Department, Whitman College, Walla Walla, WA 99362, USA
email: storchkh@whitman.edu

There are numerous studies quantifying the economic impact of global warming on agriculture. Most papers relied on the production –function approach which only refers to yield changes of a given crop and does not account for behavioral changes of the farmer.  The hedonic or Ricardian approach, as employed in a cross-sectional analysis by Mendelsohn, Nordhaus, and Shaw (henceforth MNS) (1994, 1996), on the other hand, examines the impact of climatic and other variables on land values and assumes that farmers try to optimize the usage of their land and may introduce new crops. While this approach is superior to the production-function approach in its accounting for crop substitutions, it nonetheless suffers from serious shortcomings. Specifically, it (a) does not account for adjustment costs, (b) does not treat irrigation adequately, (c) produces results too sensitive to different weighting schemes (e.g., cropland versus crop-revenue weights), (d) omits county-fixed effects that may confuse climate with other factors (e.g., soil quality), and (e) assumes agricultural prices to remain constant.Our analysis focuses on the latter issue and evaluates the effects of climatic changes on wine employing a long-term dynamic time series model for a particular region, the French Alsace. The model draws on long-run historical data and was estimated for the time period from 1525 to 1875. Relying on times series data for one geographical point purges the model of problems (c) and (d) mentioned above. In addition, since Alsatian vineyards have never been irrigated, issue (b) can be discarded as well. The model considers the complex relationship between crop yield and price simultaneously.Since measured weather data for

Alsace for the observed time period are not available we referred to index weather data for Switzerland as well as instrumentally measured weather data for the Netherlands

. Both data bases led to surprisingly similar results.- Wine prices are determined by wine quantity (crop yield) and wine quality. While high quantity has a negative influence on the price, better quality raises the wine price.

- Wine quality appears to be a relative term depending mainly on the quality of prior vintages and, therefore, on temperatures in preceding years. Above average temperatures will produce above average wine qualities. However, the logarithmic specification indicates that quality improvements do not grow linearly but slow down with rising temperatures.
  - Crop yields crucially depend on weather conditions. Precipitation prior to the growing season has a beneficial effect on wine quantities whereas rain during the blossoming period will lead to lower crop yields. Increasing temperature is beneficial for wine quantity, but at a decreasing rate. Ultimately, if temperature is higher than a certain optimum crop yields will decline at an increasing rate.
- Crop yields also depend on wine prices in preceding years. With a time lag, high wine prices will induce higher crop yields and more plantings and vice versa.

- The model suggests that present temperatures are optimal for crop yields and close to optimal for wine quality. Any further warming will lead to a decline in wine quantities. The entailing price increase is too small to offset this effect. Thus, rising temperatures will result in revenue decreases. A warming by 2^oC is likely to lead to a fall in revenue between 16% and 21%.

Using a Hedonic Model of Solar Radiation to Assess the Economic Effect of Climate Change: The Case of Mosel Valley Vineyards
Orley Ashenfelter, Economics Department, Princeton University Princeton, NJ ,
email: 6789@princeton.edu
Karl Storchmann Economics Department, Whitman College, Walla Walla, WA 99362, USA
email: storchkh@whitman.edu

In this paper we provide a simple, credible method for assessing the effects of climate change on the quality of agricultural land and then apply this method using a rich set of data on the vineyards of theMosel Valley in Germany. The basic idea is to use a simple model of solar radiation to measure the amount of energy collected by a vineyard, and then to establish the econometric relation between energy and vineyard quality.  Coupling this hedonic function with the elementary physics of heat and energy permits a straightforward calculation of the impact of any climate change on vineyard quality (and prices).  We show that the variability in vineyard quality in this region is due primarily to the extent to which each vineyard is able to capture radiant solar energy, so that these data provide a particularly credible “experiment” for identifying and measuring the appropriate hedonic equation.Our empirical results indicate that the vineyards of the Mosel Valley will increase in value under a scenario of global warming, and perhaps by a considerable amount.  Vineyard and grape prices increase more than proportionally with greater ripeness, so that we estimate a 3°C increase in temperature would more than double the value of this vineyard area, while a 1°C increase would increase prices by about 20 percent.