Pennsylvania Wine Industry - An Assessment

By: James Dombrosky, Ph.D. and Shailendra Gajanan, Ph.D. University of Pittsburgh at Bradford

March 2013 EXECUTIVE SUMMARY This research examined the Pennsylvania wine industry’s characteristics, and compared the industry in terms of growth, state funding and shipping laws with those of other wine producing states in the East. The research also examined the industry’s use of economic funding and technical assistance programs, its capacity and growth potential, and its strengths, weaknesses, opportunities, and threats. Finally, it offered considerations for the industry and policymakers. For the study, the researchers used secondary data, interviewed industry stakeholders, observed and participated in two annual meetings of the Pennsylvania Winery Association (PWA), and conducted a survey to obtain data for an economic analysis on capacity and growth potential. According to the research results, the Pennsylvania wine industry is growing, but not as rapidly as some other eastern states, including Ohio, Maryland, Virginia, and North Carolina, over the last 5 years. All of those states, except Maryland, have higher annual wine production volumes than Pennsylvania. Pennsylvania wine production is also lower than that of New Jersey, and much lower than that of New York; however those states experienced small declines in wine production over the examined 5-year period of 2007-2011. Of the comparison states, New York, Ohio, Virginia, and North Carolina were found to have significantly higher levels of state funding for research and promotion than Pennsylvania. Funding sources for state wine industries included “dedicated” funding sources provided by excise taxes or similar assessments, legislative appropriations, grants and “gifts,” or private-sector funding. According to the study results, nine Pennsylvania wineries received state loans totaling more than $1.1 million, or an average of $126,483 per loan, from 2007 to 2012. In addition to the loans provided to individual wineries, PWA received two Tourism Promotion Assistance Grants and one Regional Marketing Partnership Grant totaling $550,000 from 2007 to 2012. Penn State Cooperative Extension provided viticultural and enological education. The study also found that the Pennsylvania wine industry is currently operating at 76 percent of capacity given current industry and market conditions. The analysis found that Pennsylvania’s wine industry has room for growth without additional investment in production factors such as land, labor, technology, and capital goods applied to production. Such growth does not preclude the need for additional research and marketing. Growth may be achieved beyond 100 percent of current capacity; however such growth will require additional investment in pro- duction factors. The research found that, in addition to Pennsylvania’s individual winery operators, the principal players in the Pennsylvania wine industry are the Pennsylvania Liquor Control Board, PWA, the Pennsylvania Wine Market- ing and Research Board, and Penn State University, primarily through its extension services. Additional support comes from the Pennsylvania Department of Community and Economic Development and the Pennsylvania Department of Agriculture. The research found that Pennsylvania wineries are promoted by the vast majority of Tourism Promotion Agencies: with 81 percent of Pennsylvania wine being sold directly from the wineries or winery outlets, tourists are an essen- tial distribution channel. Overall, the study found that the Pennsylva- nia wine industry has demonstrated consistent growth. It has done so in part because Pennsylva- nia is the fifth largest grape producer in the U.S. However, the industry faces continuous challenges, from viticulture to enology to marketing. About 81 percent of the industry’s product is sold directly from winer- Table of Contents ies, with virtually no sales at the wholesale or distributor level. There are limits as to how far this niche-marketing model can take the industry Introduction...... 2 without action taken at the state level. Goals and Objectives...... 7 The researchers offered the following policy considerations: Methodology...... 7 • Designate any expected revenues from direct shipments of out-of-state Results...... 8 wine to fund Pennsylvania wine research and marketing; Conclusions...... 13 • Implement policies that facilitate and encourage increased signage for Policy Considerations...... 14 wine trails and wine regions; • Enact policies that facilitate increased sales of local wines at PLCB References...... 18 stores; • Revise PLCB Code to include a BYOB License to sell Pennsylvania wines; and • Provide incentives to wineries to use Pennsylvania grapes.

INTRODUCTION According to the Pennsylvania Liquor Control Board PLCB code states that the exception to the state-con- (PLCB), Pennsylvania wine production increased from trolled distribution of all alcoholic beverages afforded 559,637 gallons in 2000 to 1.81 million gallons in to licensed limited wineries was created for “promoting 2010. According to the same PLCB production data, tourism and recreational development in Pennsylvania.” the number of wineries producing wine in/from Penn- An estimated 894,000 tourists visited Pennsylvania sylvania increased from 60 in 2000 to 159 in 2010. The wineries in 2007, which is an increase from the 877,000 Pennsylvania wine, winegrape and related industries reported tourists in 2005 (MKF Research, 2009). generated an estimated $870 million in economic value Warganau and Che (2006) suggested that wine tour- in 2007, including $32.2 million in retail wine sales ism, which includes visiting vineyards, wineries, wine (MKF Research, 2009). (Note: at the time of this study, festivals, and wine shows for recreational purposes, Frank Rimerman + Co. was conducting an updated eco- can serve as a distribution channel for locally grown nomic impact study, with an expected completion date wines. Ryan, DeBord, and McClellan (2006) conducted of December 2012.) an industry assessment of agritourism in Pennsylvania According to the U.S. Department of Agriculture for a study sponsored by the Center for Rural Pennsyl- (USDA), Pennsylvania is the fifth largest wine grape vania. Of 311 respondents in a survey of agricultural producer in the U.S. behind California, Washington, tourists to and within Pennsylvania, the most popular New York, and Oregon (USDA, 2012). activity identified in the agricultural education category Continued expansion of the Pennsylvania wine indus- was winery/brewery tours. A review of the websites of try would likely benefit Pennsylvania agriculture and the 49 designated Tourism Promotion Agencies (TPAs) tourism, two of the state’s largest industries. The U.S. eligible to participate in Pennsylvania’s Tourism Pro- Alcohol and Tobacco Tax and Trade Bureau (USTTB) motion Assistance grant program found that 40 TPAs labeling regulations require that, for wine to be des- promote wineries or wine tours on their websites; most ignated with a state appellation, such as Pennsylvania of the remainder represent counties without wineries wine, at least 75 percent of the grapes used must be present. grown in Pennsylvania and the wine must be “finished” Wine tourism is an essential distribution channel in in Pennsylvania. Pennsylvania, with 81 percent of wine sold directly to Tourism would also be a likely beneficiary. The consumers in 2010 (PLCB, 2012).

2 The Center for Rural Pennsylvania Composition of the Privatization of the PLCB was debated in 2012, and Pennsylvania Wine Industry continued efforts at privatization are occurring in 2013. The principal players in the Pennsylvania wine indus- It is not known how privatization would affect the Penn- try are the PLCB, the Pennsylvania Winery Association sylvania wine industry. (PWA), the Pennsylvania Wine Marketing and Research Program (PWMRP), Penn State Cooperative Extension, Pennsylvania Winery Association and individual wineries. The Pennsylvania Department PWA is a non-profit trade association organized to: of Agriculture and Department of Community and provide marketing assistance to Pennsylvania limited Economic Development’s (DCED) Office of Tourism wineries; provide forums for the exchange of informa- play supporting roles. Each of these components is tion and experience among members; and sponsor and described below. support legislation and regulations that will benefit Pennsylvania’s wine industry and oppose those that will Pennsylvania Liquor Control Board be detrimental. According to the July 10, 2012 minutes The state’s role in the Pennsylvania wine industry is of Pennsylvania Wine Marketing and Research Board significant. Not only is the Pennsylvania wine industry meeting, 118 Pennsylvania wineries reported sales as of an important part of agriculture and tourism, but the July 3, 2012 and membership in the PWA was 110, or regulation and distribution of Pennsylvania wine is more than 90 percent of Pennsylvania wineries that had controlled to a great extent by the PLCB through its reported production in the first half of 2012. regulatory and distribution functions. Pennsylvania is one of just two states with exclusive Pennsylvania Wine Marketing and Research control over both the distribution and retail components Program and Board of what is known as the three-tier distribution system. The PWMRP was created in accordance with the The three-tier distribution system for alcoholic bever- Pennsylvania Department of Agriculture’s Agricultural ages in the U.S. consists of independent producers, Commodities Marketing Act. The program’s purpose wholesalers and distributors, and retailers. This system is to provide funds for wine and wine grape research was implemented by most states upon the repeal of Pro- and to support promotion and marketing of wines for hibition (Shanker, 1999). The PLCB buys more than $1 the benefit of Pennsylvania’s producers. The funds are billion worth of product (PLCB, 2012) from suppliers generated by a $.15/gallon charge on all wine produced and distributes more than 12 million cases of wine and in Pennsylvania and are administered by a nine-member spirits annually to more than 600 state-operated retail board (PWMRB) consisting of the Pennsylvania Sec- outlets, which sell to consumers. retary of Agriculture and eight non-salaried members The PLCB is responsible for all licensing and retail- who are current Pennsylvania wine producers and are ing of wine in Pennsylvania. For limited wineries, that appointed by the Secretary. There are also at least three role extends to approval of applications for sale at up standing committees including marketing, enology, to five additional board-approved locations in addition and viticulture, consisting of non-board members and to the winery itself, and at expositions and farmers’ that might include wine grape growers, wine retailers, markets. and others the board chooses to assign. As of April 26, The PLCB also purchases Pennsylvania wines to sell 2012, funds collected from members based on 2011 at its stores. In 2010, the PLCB purchased 123,296 wine production totaled $138,600 (PWMRB, 2012). gallons of wine from Pennsylvania limited wineries, representing about 11 percent of Pennsylvania limited Penn State University winery sales for 2010. Pennsylvania wineries receive Penn State University is also a partner to the wine approximately 50 percent of the retail price for their industry with viticulture and enology extension services wine and the wine may be distributed to any Pennsylva- along with non-dedicated research in plant pathology, nia Wine and Spirits Store from one of three warehouse horticulture, entomology, crop and soil science and food locations. At the time of the research, a pilot program science (Chien, 2011). Research stations in Erie and was being tested with three wineries that would provide Adams counties have teaching and pathology research the opportunity for Pennsylvania wineries to deliver vineyards. Pennsylvania is also part of USDA-NE 1020, and sell to nearby PLCB stores of their choice. a multi-state evaluation of wine grape varieties and clones project.

Pennsylvania Wine Industry - An Assessment 3 Penn State’s research enologist is based in the De- bonded wineries in 2005 and 140 in 2011 (PWA, 2011). partment of Food Science at Penn State’s main campus According to PWA, 120 of the 140 bonded Pennsylva- with support provided by PWA, PWMRB, and Penn nia wineries were actually operational in 2011. State’s College of Agricultural Sciences. The research The same survey asked respondents to identify the enologist conducts on-site evaluations of winemak- city closest to them from a list that included Johnstown, ing operations, recommends improvements, and keeps State College, Altoona, Sharon and Williamsport, all winemakers apprised of the latest science regarding of which are located in rural counties as defined by wine production methods, winery economics, and busi- the Center for Rural Pennsylvania. Of the 58 respon- ness practices (Gill, 2011). dents, 62 percent were located less than 30 miles from The state’s viticulture educator, working through the closest city, while the remaining 38 percent were Penn State Cooperative Extension’s Wine Grape located 30 miles or more from the closest city. Program, provides viticulture educational services and The survey also indicated that about 30 percent of re- opportunities to commercial vineyards in Pennsylvania, spondents reported annual production of between 1,000 mainly through workshops, field meetings and visits, and 4,999 gallons, while about 19 percent reported pro- electronic media and direct contact with grape growers. duction of 20,000 gallons or more in 2009. Nearly 90 In his work with wine grapes, the viticulture educator percent reported production under 40,000 gallons. Only collaborates with other Penn State faculty in horticul- two wineries reported production of 60,000 gallons of ture, plant pathology, entomology, and crop and soil wine or more for 2009. The smallest of nine USTTB sciences (Weidner, 2010). classifications for wine production is “up to 5,000 gal- lons.” The mid-point of the classifications is “50,000 Pennsylvania Wineries to 100,000 gallons.” Therefore, this survey’s findings According to the most recent PLCB data available support a study by MKF Research (2009) that stated at the time of the research, 159 Pennsylvania wineries “the Pennsylvania wine industry is comprised primarily produced wine in 2010. An additional seven wineries of smaller wineries producing less than 20,000 gallons from outside Pennsylvania were included in the PLCB per year.” production reports, and minutes from the most recent Of the 57 survey respondents who answered a ques- PWA meeting report that there were 204 licensed Penn- tion about the percent of grapes grown by the winery, sylvania wineries. 32 percent reported growing less than 10 percent of According to PLCB Code, Pennsylvania limited win- their own grapes, 28 percent reported growing 10 to 49 ery license holders may produce up to 200,000 gallons percent of their own grapes, and 40 percent reported of wine, wine coolers, and alcoholic ciders per year. growing 50 percent or more of their own grapes for use Limited wineries may sell their products to individuals in their wines (Dombrosky, 2011). at retail on the licensed premises, to the PLCB, hotel, USDA (2011) reported that, in 2003, Pennsylvania’s restaurant, club, brewery, and public service liquor wine grape crop of 10,500 tons had a crop value of licensees. Pennsylvania limited wineries are permitted $2,793,000. Crop value peaked in 2006 with 16,200 up to five satellite locations and can obtain permits for tons and a value of $6,642,000. Crop value declined off-premises festivals and wine tastings (PLCB, 2012). to 8,400 tons produced in 2009, with a value of A change to the code allows limited winery licenses to $3,805,000, and rebounded in 2010 with 10,300 tons be held by any in-state or out-of-state winery adhering produced and a crop value of $4,913,000. More than to the specified limitations, although the vast majority 70 percent of Pennsylvania wine grapes are Native of licensees operate within Pennsylvania. American, with 67 percent being Concord, and about 4 From an attitudinal survey of winery operators, percent being Niagara. These grapes are used to make Dombrosky (2011) found that 33 of the 61 respondent the sweet wines for which Pennsylvania is best known. wineries had been in operation under current owner- Hybrid (Chambourcin, De Chaunac, etc.) account for ship for less than 10 years. Seven respondents said their about 13 percent, Vinifera (Cabernet, Merlot, etc.) for winery had been in operation under current manage- about 9 percent, and others for about 8 percent. ment for more than 30 years. It was not surprising that The researchers learned from talking with some the majority of respondent wineries were less than 10 large winery operators who grow their own grapes that years old given the recent growth of the Pennsylvania wineries from other eastern states purchase juice from wine industry from 57 bonded wineries in 1998 to 111 Pennsylvania grapes for processing into wine; no statis-

4 The Center for Rural Pennsylvania tics were available for the quantity of grapes Figure 1: Pennsylvania Wine Grape and Wine Production, or juice exported to other states. Figure 1 2003 to 2010 depicts the trend in Pennsylvania’s wine grape production from 2003 to 2010, compared with its trend in wine production. Dombrosky (2011) also found that about 42 percent of winery operators had a graduate- level education, 28 percent had a 4-year degree, 4 percent had a 2-year degree and 23 percent had some college or a high-school di- ploma. Winery operators were not asked about their field of study in college, so conclusions could not be drawn about the benefit or need for formal education to operate a winery. Dombrosky (2011) also found that 56 per- cent of the principal operators of the winery were 55 years old or older, 40 percent were between 35 and 54 years old, and 4 percent were between 25 and 34 years old.

Funding As previously mentioned, the Pennsylvania wine industry funds the PWMRP through a self-imposed $.15/gallon assessment that is administered by the Pennsylvania Department of Agriculture. The program was enacted in accordance with the Agriculture Commodities Marketing The PWA received federal grants as part of USDA’s Act of 1998, and the initial marketing season was 2001. Specialty Crop Block Grant Program, which was autho- The general purpose of the program is to provide funds rized under the federal Farm Bill. Those grants have pro- for wine and grape research and to support promotion vided between $33,000 and $45,000, and have been used and marketing of wine for the benefit of Pennsylvania to improve the quality of Pennsylvania wine through producers. Article VI addresses the interconnectivity of the Wine Quality Initiative. For 2013, USDA awarded a Pennsylvania’s wine grape production industry and its $32,000 grant, which will be used in re-branding efforts wine production industry, and states that the board shall for Pennsylvania wine. “to the extent practicable, endeavor to include growers of In 2009-2011, PWA received a Regional Marketing wine grapes in its consideration of appropriate research Partnership Grant and two Tourism Promotion Assis- or marketing projects relating to wine grapes or wine tance Grants from DCED for $75,000, $50,000, and production.” Article VIII states that at least 30 percent of $75,000, respectively; those grants, however, are no annual funding shall be allocated to viticultural research. longer offered. The proposed budget for 2012-2013 was based on an For 2013, the Pennsylvania wine industry expects to estimated 5 percent growth in revenue, which would be have $307,000 to work with including $150,000 collect- $150,000, for fiscal year 2013. ed from Pennsylvania wineries through the $.15/gallon Additional funding has been provided in the form of self-imposed assessment; $125,000 as part of the budget a budget line item for Agricultural Promotion, Educa- line item provided to the Department of Agriculture for tion and Exports. For the 2012-2013 budget, funding Agricultural Promotion, Education and Exports; and was set at $196,000; a large reduction from the $1 mil- $32,000 from a USDA grant. Only the $150,000 from lion in the 2009-2010 budget. The money is allocated the PWMRP is a dedicated funding source with other between wine and mushrooms, with $125,000 going to sources uncertain. the Pennsylvania wine industry in 2012.

Pennsylvania Wine Industry - An Assessment 5 Granholm Decision Capacity and Growth Potential The Supreme Court decision on Granholm v. Heald, There is considerable data on the Pennsylvania wine 544 U.S. 460 (2005) had a major impact on the Penn- industry, including economic impact data from MKF sylvania wine industry. The Court ruled that regulations Research (2006, 2009). According to MKF Research in Michigan and New York that allowed in-state, but not data, the full economic impact of winegrapes and wine out-of-state wineries, to make direct sales to customers on the Pennsylvania economy grew from $661 million discriminated against interstate commerce. in 2005 to $870 million in 2007. (Note: at the time of The PLCB initially responded by issuing an advisory this research, an updated economic impact study was that said in-state wineries could no longer sell or ship due in December 2012.) directly to customers, in effect complying with the Gra- However, existing economic impact studies on the nholm decision by disallowing direct sales from in-state wine industry do not address the sector’s capacity and wineries rather than allowing direct sales and ship- growth potential. These existing studies focus on the ping from out-of-state wineries. PWA and two in-state economic impact of the wine industry using an input- wineries then filed suit in the Commonwealth Court output (IO) methodology through IMPLAN1. While the of Pennsylvania [Pennsylvania Wine Assn. v. Com- IO framework is suited for economic impact studies, monwealth of Pennsylvania, No. 564 MD 2005, (Pa. it cannot identify whether current output levels in the Commw. Ct., filed Nov. 4, 2005)], challenging the va- industry are efficient, given input prices, input avail- lidity of the advisory notice. The Commonwealth Court ability and demand. A basic assumption in input-output granted a temporary restraining order against enforce- models is that the level of production, or output, is ment of the advisory notice, and Pennsylvania wineries directly proportional to the use of inputs. For instance, continued to sell directly and ship to customers. if labor is the only input needed for production, then Compliance with the Granholm decision required the input-output model assumes that as more labor is out-of-state wineries to be treated equally. Therefore, added, the output produced increases by a fixed-propor- the PLCB had to issue Pennsylvania Limited Winery tion. The same assumption is extended to include other Licenses to out-of-state wineries. Additionally, the inputs, namely capital, equipment, machinery, energy PLCB could no longer enforce the regulation requiring and transportation. Hence, the input-output modeling 75 percent of grapes to be from Pennsylvania and the approach is known as constant-proportions technol- other 25 percent to be from within 350 miles, because it ogy, or is often referred to as an approach that assumes was considered discriminatory. Federal USTTB label- constant returns-to-scale. However, this assumption is ing laws that require 75 percent of grapes to be from not a serious setback for input-output models because, the appellation stated on the label are still in effect, so a these models examine intra-industry trade in the whole wine designated as a “Pennsylvania wine” must contain economy, and estimate the multipliers for different 75 percent of Pennsylvania grapes. However, Pennsyl- policy proposals. vania licensed wineries may make wine with grapes The multipliers derived from input-output simulations from another state as long as it is not labeled “Pennsyl- are valid under the assumption of constant returns, and vania wine.” Other USTTB labeling regulations govern also under fixed prices. That is, under the input-output specific requirements for such labels. The researchers methodology, prices of outputs and inputs are fixed, and found that many Pennsylvania wineries continue to pro- are taken as given. The input-output methodology uses duce wine with all or mostly all Pennsylvania grapes; technical details about input use and output produced however, currently there is no incentive to do so. from different sectors. This methodology does not Another ramification from these rulings is that out-of- allow for fluctuations in prices of different outputs or state wineries are not required to pay the $.15/gallon re- inputs. Consequently, certain key scenarios, such as search and marketing assessment since it would not have cost-push inflation2, cannot be adequately modeled the same benefit for them as it does for Pennsylvania under this methodology. Therefore, industrial capacity wineries, and again, may be considered discriminatory. and growth cannot vary with price fluctuations, and this feature is a shortcoming that the researchers addressed in this study.

1. Research by the MKF Research group (particularly for Pennsylvania) issued in 2009. 2. Cost-push inflation is a type ofinflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available.

6 The Center for Rural Pennsylvania Additionally, the input-output model does not allow Secondary Data Sources for input substitutability, and most importantly, the The researchers used secondary data for the state input-output modeling approach is also very similar to comparisons and the use of economic development an engineering approach in its assumption that the ob- funding. Data were from USDA, USTTB, and DCED served installed levels of inputs in a company are also for the years 2007 through 2011. the optimal levels. Additionally, testimony from a Public Hearing on This study identified current industry capacity and Direct Shipment of Wine from a Pennsylvania House growth potential of the Pennsylvania wine industry us- of Representatives Committee on Liquor Control, held ing a cost-function approach that relaxed these require- July 13, 2011, was used as a reference point for the ments. The researchers used existing data on prices and considerations section. Additional secondary sources input use, including the size of wineries, and estimated were consulted and reviewed, and are cited throughout the efficient levels of production. They then compared the report. those levels to the actual levels of production, and de- rived the capacity utilization rates3. Survey The findings from this study may be beneficial to The researchers conducted a survey of winery opera- policy makers, winery operators, grape growers, restau- tors to determine industry capacity and growth poten- rants, and other tourism stakeholders interested in pro- tial. The survey required participants to review winery tecting and maximizing the economic impact and other records and share production and cost data. The survey important benefits of wine production within the state. was sent to 121 wineries; however, only 12 wineries responded with the requested data, for a response rate GOALS AND OBJECTIVES of 10 percent. The goals of this study, which was conducted in 2011 The cost figures obtained were sufficient for the and 2012, were to provide: a comparison between the statistical analysis, which was adapted to control for a wine industry of Pennsylvania and the wine industries small sample size. The results were robust and statisti- of New York, Ohio, Maryland, New Jersey, Virginia, cally significant, and compatible with a similar study and North Carolina; an assessment of the Pennsyl- (Fickle, 1996) conducted in Washington. vania wine industry’s participation in state economic The researchers also used the results of a study con- development and technical assistance programs; a ducted between 2009 and 2011 by one of the principal determination and report of the current capacity and investigators on the Pennsylvania wine industry and the growth potential for the Pennsylvania wine industry; an distribution of Pennsylvania wine through restaurants. analysis of the strengths, weaknesses, opportunities and The survey was sent to 120 Pennsylvania winery opera- threats (SWOT) of the Pennsylvania wine industry; and tors and returned by 61 operators, for a response rate of specific policy considerations. 51 percent. Demographic characteristics of the wineries In addition to these stated goals, the researchers of- and winery operators as identified by that survey are fered demographic data about Pennsylvania wineries provided as part of this assessment. and winery operators that are available from research conducted by principal investigator Dombrosky (2011) Interviews and Observations on the distribution of Pennsylvania wines through res- The researchers used purposeful sampling for the taurants, conducted between 2009 and 2011. selection of interviewees. In purposeful sampling, the researchers intentionally select individuals that will help answer the research problem. The interviews, METHODOLOGY along with observations, were used to obtain data for The research methods included a review of secondary the SWOT analysis and the data gathered from the data, a survey of winery operators, interviews with in- interviews significantly informed considerations for dustry and government stakeholders, and observations public policy. at industry events. Interviewees included eight winery operators, the state viticulture extension educator, the director of 3. The capacity utilization rates were derived from operations that currently PWA, the chief executive officer (CEO) of the PLCB, exist in the industry, and did not include the effect of new competition that and a member of PLCB’s legal council. One of the enter the sector. winery operators interviewed was a member of the

Pennsylvania Wine Industry - An Assessment 7 PWMRB. Two of the interviewees sat on PWMRB PLCB data of wineries licensed as Pennsylvania winer- committees. The researchers also interviewed others, ies but with locations outside of Pennsylvania. such as the director of tourism grants for DCED, for Among the seven comparison states, New York, answers to very specific questions, but these interviews Virginia, and Ohio received the most state funding for were not included in the interview totals. research and promotion. Funding among the compari- The researchers were given full access to the proceed- son states consisted of “dedicated” funding, legislative ings of PWA’s 2011 and 2012 annual meetings. At these appropriations, grants and “gifts,” or private sector meetings, the researchers had informal discussions with funds, typically from industry stakeholders. Dedicated meeting participants. The researchers also participated funding refers to an assessment or excise tax placed on with winery operators in a demonstration of the Wine wine sold in a state that is dedicated to that state’s wine Quality Initiative being conducted by Penn State Exten- industry. Such funding is not as vulnerable to state bud- sion’s enologist. get cuts or other shifts in funding to different areas. In Ohio, an excise tax of $.05 is placed on all wine sold in the state, not just wines produced in Ohio. Ac- RESULTS cording to the Ohio 2010-2011 budget, $850,000 was Wine Industries in Other Eastern States allocated for Ohio wine marketing and research. Pennsylvania can be “grouped” from a viticulture New Jersey’s wine industry receives $.47/gallon on perspective with its eastern counterparts from the North all sales of New Jersey wine sold by winery licensees Shore of Lake Ontario to Georgia (Chien, 2004). Chien each year amounting to $144,000 in 2011. notes that “while this is a geologically, geographically Virginia, which increased its wine production about and climatically diverse area, there are enough com- 19 percent in the 5-year period, established the Wine mon threads among important viticulture qualities to Promotion Fund (SB237/HB588), placing a $.40/liter consider it a region with sub-appellations, similar to assessment on Virginia wine products, a portion of California as a wine producing entity.” which is to be used specifically for researching, mar- The researchers selected the following comparison keting, and promoting Virginia’s wine industry. The states from this region that have growing or established Virginia General Assembly in 2012 agreed to more than wine industries: New York, Ohio, New Jersey, Mary- triple the amount of funds placed into the fund, increas- land, Virginia, and North Carolina. The comparisons ing the amount from the original $580,000 to $1.8 mil- did not include viticultural or enological attributes but lion (Rimerman, 2012). did include growth trends both in production and the New York’s funding has been reduced in recent years number of wineries, along with the amount of state sup- to $713,000 per year in appropriated legislative funds, a port, and wine shipping laws (See Table 1). reduction from the $3 million received in 2007 (Trezise, New York has, by far, the largest wine industry 2012). among the comparison states based on both wine pro- Pennsylvania wineries fund the PWMRP with a self- duction (25.18 million gallons) and number of wineries imposed $.15/gallon tax on all Pennsylvania wine sold; (261), and ranked second only to California in U.S. the fund is administered by the Pennsylvania Depart- wine production in 2011 (USTTB, 2012). The next ment of Agriculture in accordance with the require- closest of the comparison states is Ohio, with 1.57 mil- ments of the Agricultural Commodities Marketing Act lion gallons. Based on 2011 data from USTTB, Penn- (ACMA) and yields about $140,000 annually that is sylvania ranked sixth among comparison states in wine used for wine industry research and marketing. At least production, with 922,632 gallons produced, and third in 30 percent of the available funds must be allocated the number of bonded wineries with 144. Federal law to viticulture research (Pennsylvania Bulletin, 2012). requires that anyone wishing to conduct wine opera- Additionally, the industry receives budget line-item tions must first establish premises, obtain a bond and support of varying amounts as part of an Agricultural receive permission from the USTTB. Bonded wineries Promotion, Education and Exports line item. That line are those that have received permission and obtained item was eliminated and later restored to the 2012- a USTTB bond. Data from the PLCB were also avail- 2013 budget. The elimination, however, highlights the able through 2010 and are provided here for reference. uncertain environment in which the Pennsylvania wine PLCB data may vary from USTTB for a variety of industry must operate. reasons, including reporting timing and the inclusion in Shipment of wine was included in the comparison

8 The Center for Rural Pennsylvania Table 1: State Comparisons Pennsylvania

* PLCB data include non-Pennsylvania wineries with Pennsylvania Limited Winery licenses. Not available for 2009 due to change that year in data reporting procedures. Dedicated funding source: self-funded; wineries contribute $.15/gallon of Pennsylvania wine sold to PWMRP, which is administered by the Pennsylvania Department of Agriculture. Legislative funds appropriated: $125,000 as part of budget line item provided to the Pennsylvania Department of Agriculture for Agricultural Promotion, Education and Exports. Wine shipping laws: currently allowed in-state. Maryland

Dedicated funding source: none. Legislative funds appropriated: none (grants and low-interest loans available for grape growers). Wine shipping laws: direct shipments permitted; permit required; 18 cases per household per year. New Jersey

Dedicated funding source: New Jersey Wine Industry Advisory Council receives $.47/gallon on all sales of New Jersey wine sold by plenary and farm winery licensees each year (www.state.nj.us/agriculture). Legislative funds appropriated: $144,000 of above funneled back to industry in 2011. (Additional funding through grants from the New Jersey Wine Industry Advisory Council and the New Jersey Department of Agriculture). Wine shipping laws: direct shipments per- mitted; permit required; shipments permitted only from wineries producing 250,000 gallons or less; 12 cases per person per year; signed into law January 2012. New York

Dedicated funding source: none. Legislative funds appropriated: $750,000 (grants and gifts up to $1.25 million). Wine shipping laws: direct shipments permitted; permit required; taxes paid; 36 cases annually.

North Carolina

Dedicated funding source: none. Current legislative funds (2012-13): $500,000- one year, non-recurring. Wine shipping laws: direct shipments permitted; permit required; 2 cases per month limit. Ohio

Dedicated funding source: wine excise taxes, $.05/gallon on all wines sold in Ohio. Legislative funds appropriated: $700,000. Wine shipping laws: direct shipments permitted; $25 permit; only wineries producing less than 250,000 gal- lons annually are allowed to ship to consumers; 24 cases per household annually. Virginia

Dedicated funding source: $.40/liter ($3.60/case) on Virginia wine products. Legislative funds appropriated: $1.325 million in 2010/11 budget vs. $580k previous year. Wine shipping laws: direct shipments permitted; permit required; 2 cases per month. Pennsylvania Wine Industry - An Assessment 9 because it has recently been an issue in Pennsylvania. Inquiries to PennTAP as to the use of PennTAP pro- All the comparison states except Pennsylvania allow grams found that PennTAP has helped wineries over direct shipping from wineries to consumers, with vary- the years with food safety and innovation capabilities; ing restrictions and limitations. Pennsylvania wineries however, quantifying those efforts was not possible. continue to ship as per the post-Granholm decision re- One reason identified that may account for the limited straining order, while out-of-state wineries do not ship use of PennTAP services may be the extensive technical directly to Pennsylvania consumers. services provided by Penn State Cooperative Exten- For Table 1, wine production statistics were taken sion, and services provided by a strong winery associa- from the USTTB website (USTTB.org) and data on the tion. Numerous resources are provided by Penn State number of wineries were compiled from USTTB data Cooperative Extension on viticulture and enology, and by Wine Business Monthly (2012). by PWA for marketing and promotion. According to the Pennsylvania Wine Grape Network Participation in State Economic Development (PWGN) website, Penn State Cooperative Extension Funding and Technical Assistance Programs provides viticulture education services and opportuni- From 2007 to 2012, DCED issued loans to nine Penn- ties to the commercial vineyard industry in Pennsyl- sylvania wineries totaling $1,138,345, or an average of vania, mainly through workshops, field meetings and $126,483 per loan. visits, electronic media and direct contact with grape Eight loans were made under DCED’s Small Busi- growers. PWGN is a web portal that disseminates cur- ness First (SBF) program, which provides low interest rent and relevant viticulture news, information, and loan financing of up to $200,000 for land and building events to commercial wine growers in Pennsylvania acquisition and construction, machinery and equipment and non-western wine states (PWGN, 2012). PWGN purchases, and working capital. is funded by Penn State University’s College of Ag- Five of the eight SBF loans were part of the First ricultural Sciences and PWMRP. Through PWGN, Industries Program sub-category that focuses on agri- Extension’s viticulture educator provides educational culture and tourism enterprises. According to DCED, resources and holds seminars on viticulture. Exten- the state investments made through the First Industries sion’s enologist conducts on-site evaluations of wine- Program provide low interest loans, loan guarantees making operations, recommends improvements and and grants to agriculture and tourism-related businesses keep winemakers apprised of the latest science regard- to assist with business promotion and expansion. ing wine production methods, winery economics and The largest DCED loan was made under the Penn- business practices. Through its Wine Quality Initiative sylvania Industrial Development Authority (PIDA) (WQI), a program that assists wineries in implementing program for $240,845, greater than the $200,000 quality assurance testing programs based on standard- maximum provided under the SBF program. The PIDA ized sensory evaluation techniques, the industry strives program provides capital to businesses, including agri- to improve wine quality throughout the state. Ac- cultural processors, for building acquisition, construc- cording to Penn State Cooperative Extension (2012), tion and renovation work. approximately 33 percent of the Pennsylvania wine In addition to the loans provided to individual winer- industry participated in a recent WQI conducted during ies, two Tourism Promotion Assistance Grants and one 2011-2012. Based on the researchers’ observation at Regional Marketing Partnership Grant were provided to two PWA conferences and interviews with eight winery PWA totaling $200,000. Therefore, a total of $550,000 operators, these resources are welcomed and used by in grants and $1,138,000 in loans were provided by the majority of the Pennsylvania wine industry. DCED to members of the Pennsylvania wine industry from 2007 to 2012. Industrial Capacity and Growth Potential No such data exist for the Pennsylvania Technical This research examined whether the wine industry is Assistance Program (PennTAP). PennTAP provides operating at capacity and if it has any growth potential. technological assistance and information to small com- The research began with the assumption that, if the panies that lack in-house expertise or resources to re- industry is currently operating at full capacity, then any solve specific technology questions or needs (PennTAP, future growth must come at added costs, such as expan- 2012). Service topic areas include advanced informa- sion of facilities or equipment upgrade. Similarly, if tion technology, energy, sustainability, work safety past trends indicated that the industry was undergoing a services, food industry, and new product development.

10 The Center for Rural Pennsylvania decline, in terms of production, shipments and employ- Economies of Scale ment, then increasing capacity was not a viable option. From an economic standpoint, a firm is said to experi- First, it was important to establish the conditions ence economies of scale whenever the per-unit costs of for an industry’s future growth taking into account the production, or the average cost of production, declines industry’s current operating capacity. The crucial ques- as more units are produced. Under such conditions, tion asked was could the industry increase production the average cost declines as more output is produced. at lower per-unit costs. In other words, is there an op- However, it is possible that the average cost of produc- portunity to expand production at lower per-unit costs tion has a U-shape, which means, that the per-unit costs so as to exploit the economies of scale? decline for a range of output, and then begin to go up. When the per-unit costs start going up, then it means Capacity Utilization that the firm must engage in measures to cut back on Often “capacity” output for a company or a plant is production, or devise methods to reduce the average approximated through various indicators of “installed costs of production. On the other hand, if the average capacity.” Installed capacity or “engineering capacity” costs of production fall as more output is produced, is defined as the maximum output that can be produced then the firm can produce more output and experience given the fixed factors of production (size of the plant, lower per-unit costs. By and large, economists have equipment and machinery requirements) and when estimated the average costs for many industries and there are no constraints on the flow of variable inputs, have found that there are significant economies of scale such as labor and electricity. at low output levels, but that these tend to diminish as The capacity utilization (CU) indices based on pro- output increases. Further, this line of research has also duction and engineering data are popular and widely shown that the average cost eventually flattens out at used but they are ad hoc in nature with ambiguous high output levels. What this means is there is a limit interpretations and suspect economic foundations. Fur- to the cost advantages that can be reaped with higher thermore, information regarding determinants of CU output5. and its response to external shocks are not integrated According to PLCB data (2008), about 90 percent of into the model. Also, there is no way to directly link Pennsylvania wineries are smaller establishments that changes in observed economic variables, such as inter- produce less than 20,000 gallons per year and almost 66 est rates, to changes in CU. percent of wineries produce less than 5,000 gallons per For this study, the researchers used a microeconomic year. approach called the “choice theoretic approach” to To estimate the economies of scale for Pennsylvania analyze the determinants of CU. This microeconomic wineries, the researchers used the survey responses for methodology provided two advantages: the methodol- data on costs of production and gallons produced from ogy incorporates the economic behavior of a firm and the 12 wineries that responded to the survey. Nine out computes the magnitude of CU and enables a determi- of the 10 wineries that reported the data in the survey nation of the effects of input price changes, and chang- were small establishments. Hence, while most of the es in the demand conditions on CU. data collected is representative of the whole industry, The application of choice-theoretic measures of CU the actual sample size for this study is rather limited. indicated that existing wineries operate under less-than- However, the researchers were able to obtain the results full capacity and that there are opportunities to expand for the economies of scale, which were statistically sig- capacity in the long run. The research estimates indi- nificant and consistent with a similar study conducted cated that there are opportunities that can be exploited, by Fickle et al. (1996)6. because the industry can still take advantage of unused The results indicated that, for most ranges of wine capacity for future growth4. production, per-unit costs decline as production in- creases. Consequently, since most of the wineries were

4. It should be noted that the sample size was rather small, with only 10 observations without missing values. However, the statistical estimation of the cost function yielded an R2 = 0.90 and statistically significant estimates. Consequently, with limited data, the researchers were not in a position to conduct further statistical tests, but given the sample size, they were able to generate statistically significant results with a parsimonious model. 5. For references see Edwin Mansfield, Managerial Economics (1993), Chapter 8, page 311 and also F.M.Scherer, Industrial Market Structure and Economic Performance, 2nd Edition. 6. It should be noted that with only 12 observations, the sample size was relatively small. However, the results indicate that a linear regression analysis pro- 2 vides an R­ = 0.8 and the estimates were significant at 99 percent.

Pennsylvania Wine Industry - An Assessment 11 Table 2: Increased Output Cost Reduction in costs by almost 0.31 percent for every 1 percent increase in production (or per-unit cost elasticity). The unit-cost reductions for select ranges of production are presented in Table 3. The negative unit cost elasticity measures indicated that there are significant scale economies for the wine sector, and that lower per-unit costs will accompany this sector’s expansion. From the analysis and estimation of CU, the researchers examined whether the industry can actually exploit these scale economies. If an industry currently oper- ates at full capacity, then the possibility of expanding the industry’s scale of operation becomes very difficult. Consequently, the research estimates of the wine industry’s current CU rate are very important. These estimates indicated that wineries operate at 76 percent capacity, which imply that economies of scale exist in the industry and Table 3: Cost Reductions per Range of Production may be exploited in the long run. Therefore, the analysis demonstrated that Pennsylvania’s wine industry has room for growth without additional investment in production factors such as land, labor, technology, and capital goods. Such growth does not preclude the need for research and marketing, which are outside the factors of production. For growth to be achieved beyond 100 percent of current capacity, additional investments in production factors will be needed. Strategies for exploiting the economies of scale for the Pennsylvania wine industry are provided below the 20,000-gallon range, economies and advan- below in the strengths, weaknesses, opportunities and tage of size would exist for most Pennsylvania wineries. threats (SWOT) analysis. The results in Table 2 indicate that, as the winery size increases, so do costs, but on a decreasing scale. Inter- SWOT Analysis estingly, these results are also compatible with those The researchers conducted a SWOT analysis of the obtained by Fickle, Folwell, Ball and Clary (1996) for Pennsylvania wine industry from an economic/business the wine industry in Washington. perspective. SWOT analysis is common in business and Using the information from Table 2, the researchers typically views strengths and weaknesses as internal derived unit costs and unit cost elasticity for selected factors, and opportunities and threats as external fac- production ranges. From the regression estimates and tors. This SWOT analysis was informed by interviews the values of cost and output, the researchers estimated with the director of PWA, eight winery operators, the that a winery that produces about 1,250 gallons has Penn State viticulture extension educator, and the CEO a per-unit cost of $130, while a winery that produces of the PLCB. It was also informed by the researchers’ 3,250 gallons has a per-unit cost of $65, or a reduction observation and participation at two annual conferences

12 The Center for Rural Pennsylvania Table 4: SWOT Analysis

of PWA, and by Dombrosky’s (2011) research. Finally, of the industry, from viticulture to enology to market- it was informed by extensive review of secondary data ing. About 87 percent of its product is sold directly sources. As with any qualitative research, the research- from the winery, with about 1 percent sold through ers’ interpretation of data also informed the findings. restaurants, and virtually no sales at the wholesale or The analysis is summarized in Table 4. distributor level. There are limits as to how far this niche-marketing model can take the industry without CONCLUSIONS action taken at the state level. The Pennsylvania wine industry has demonstrated This analysis demonstrated that the industry is cur- consistent growth and has performed above the level of rently functioning at 76 percent of its capacity, with most eastern states, and most states overall. It has done each 1 percent increase in wine production associ- so, in part, because it is the fifth largest grape producer ated with a projected 39 percent reduction in per-unit in the U.S., and, based on the observations and inter- cost production. Achievement of this growth and cost actions of the researchers, because of the quality and reduction in the Pennsylvania wine industry would passion of the people in the industry. enable associated growth to accrue to the Pennsylva- However, it faces continuous challenges in all aspects nia agriculture and tourism industries, with which the

Pennsylvania Wine Industry - An Assessment 13 Pennsylvania wine industry is so closely intertwined. Implement policy that facilitates and To achieve this growth it must address deficiencies in encourages increased signage for wine trails transparency of information, in collection and access of and wine regions marketing information, and in overall research. According to PWA, more than 70 Pennsylvania win- eries belong to 11 wine trails located throughout the POLICY CONSIDERATIONS state. PWA promotes the wine trails primarily through Designate pending revenues from shipments its website and public relations activities. In addition, to fund dedicated funding source each wine trail plans its own events and promotes itself It is expected that out-of-state wine shipments will independently. soon be allowed in Pennsylvania and are a potential Dombrosky (2011) found that seven of the eight threat to local wineries. It is not disputed that these Pennsylvania winery operators he interviewed men- shipments should be allowed; in fact allowance of such tioned the success they have had from their involve- shipments is desirable and recommended. Allowing ment in wine trails. The only exception was the one these shipments would also present an opportunity for a winery that was the only winery in its county. Location dedicated funding source for Pennsylvania wineries. and proximity to other attractions appear to be critical An estimate of the revenue that may be generated by to success. For the other seven operators interviewed, allowing out-of-state shipments can be derived from tourists visiting the wine trails were an important New York State, which began allowing direct shipping source of business since the wine trail and related in 2005. Wineries that shipped directly to New York events help get tourists and other to the wineries. reported $54 million in sales to New York consumers Wine trails are most closely integrated with the over- between March 2009 and February 2010 (Matthews, all tourism experience. In addition to tourists whose 2011). These sales yielded about $4.5 million in sales primary motive was visiting wineries, operators also taxes. Additionally, the New York Liquor Authority has mentioned other tourist-related business important to collected $431,375 in permit fees from wineries in the their wineries, such as hunting, fishing, other outdoor 15 states registered with New York for direct shipping. activities, and historic and heritage destinations. According to Wine Handbook (2007), the most recent Carmichael (2005) conducted an exit survey at eight se- data that could be located, consumption of table wine lected wineries in the Niagara region of Canada. When in New York was about three times the consumption of asked the main reason for their visits to the Niagara table wine in Pennsylvania. Therefore, if the shipment region, only about 46 percent said wineries, although of wine into the state were approved, and estimated to about 70 percent of the visitors surveyed purchased be about 33 percent of shipments into New York, the wine. Visiting friends and relatives, and visiting attrac- value would be approximately $18 million. If just a 2 tions, such as Niagara Falls, were among other reasons percent allocation of the estimated sales generated from given, with about 10 percent saying they lived in the direct shipments went to the Pennsylvania wine indus- area. Rural landscapes, the variety of wineries, ease of try for research and promotion, an estimated $360,000 access, and good signage most influenced visitor enjoy- annually could be generated. This recommendation ment of the region. would apply only to direct wine shipments. The researchers visited a variety of wineries for Of course there are other ways to derive an appro- this study, almost all of which were part of attractive priate dedicated allocation to the Pennsylvania wine rural landscapes. Access to wineries on rural roads industry. The important point is that these shipments, if was adequate. However, while most of the wineries allowed, present an opportunity to create a dedicated al- visited had small signs posted on rural roads provid- location from the sale of wine to the Pennsylvania wine ing directions to their wineries, the researchers did not industry. This would put Pennsylvania on closer or see any signs for wine trails, and only one sign along equal footing with wine industries in other major wine busier highways. One winery operator reported that he producing states, without the need for an uncertain received a local grant for a highway sign funded by a budget line-item allocation. hotel tax. Given the importance placed on tourism and wine trails by the winery operators interviewed, and their perceived lack of state support, improved signage could be a means for the state to assist the state wine and grape industries, and tourism. It would not only

14 The Center for Rural Pennsylvania enhance the tourism experience, but also help build the At the time of the research, Pennsylvania winer- Pennsylvania wine brand. ies wishing to distribute wine through PLCB stores Findings from both this study and the literature re- had to ship their wine to one of three central distribu- view suggest that winery visitation is part of an overall tion points for sale at an unknown store in any part of tourism experience. Links and alliances along wine the state. Generally, only the largest wineries availed trails and in wine regions should extend beyond other themselves to this distribution method. The research- wineries to other tourist attractions and tourism service ers concluded that a middle ground could be reached: providers including restaurants, lodging operators and PLCB stores that are located within certain Pennsylva- tour guides. nia wine trails could carry an assortment of wines from Similar to recommendations made by Ryan, DeBord local wineries that are located in the trail’s jurisdiction. and McClellan (2006) for Pennsylvania agritourism, The Pennsylvania wine industry must use this op- allowances for signage for the Pennsylvania wine portunity to facilitate the sale of local wines at PLCB industry should be made. Currently, signs are either stores within specified jurisdictions. A pilot study with not allowed or are cost prohibitive for most Pennsyl- three wineries selling wine through local PLCB stores vania wineries. While adhering to the restrictions of was underway as this study was being conducted. This the Federal Highway Administration and the Highway program should be evaluated and expanded if proven Beautification Act of 1965, and adhering to or modi- effective, or analyzed to determine why it was ineffec- fying Pennsylvania Code Chapter 445, promotion of tive. Pennsylvania wineries needs to be facilitated through more affordable and more present signage. One recom- Revise PLCB Code to include a BYOB mendation would be to model it after the grant program License to sell Pennsylvania wines made available from the Pennsylvania Department of Currently, the PLCB code has license designations Conservation and Natural Resources (2011) for busi- for Restaurants, Clubs, Distributors (Beer), Eating nesses located in the Pennsylvania Wilds. A second op- Places (a limited “E” category license allowing only tion would be a coordinated effort to design and place beer sales), and Hotels. Additionally, restaurants with- signage promoting the 11 Pennsylvania wine trails. As out a liquor license are permitted to allow customers to such, signage could be funded through DCED’s Tour- “bring their own bottle” (BYOB) of wine. Many offer ism Office in alliance with PWA and trail members. “corkerage” service, which is either complimentary or New York State offers affordable wine trail signs for for a small charge. wine trail members. Each road sign costs about $250. The researchers recommend adding the allowance of According to the president of the New York Wine and sale of Pennsylvania wines to the Eating Places cat- Grape Foundation (NYWGF), the signs “pay for them- egory and adding a license category allowing only the selves the first day in terms of consumer traffic and sale of Pennsylvania wines at BYOB restaurants. The sales” (Collins, 2006). New York trail members enlisted presumption is that the price of such a license would be the support of state government and the Department of accessible to most small businesses. Transportation to increase wine trail signs throughout the area. Trail members pay a percentage of the signage Provide incentivies to wineries to use maintenance costs. Individual road winery signs suc- Pennsylvania grapes cessfully direct tourists through the region, and increase Currently, many users of Pennsylvania grapes do so trail awareness for local areas. voluntarily, and consequently, have no extended incen- tives to pursue this loyalty. This is especially true since Enact policy that facilitates the increased sale the Granholm decision. Consequently, it is important to of local wines at PLCB stores identify and reward the users of Pennsylvania grapes, One of the difficulties the PLCB stores face in stock- either in terms of a direct subsidy or tax-relief. Without ing Pennsylvania wines is the lack of a single brand for adequate incentives, the enforcement issue and brand- “Pennsylvania wine.” There are more than 140 winer- ing of Pennsylvania wine remain weak. ies, each producing an extended product line. Hence, it is difficult for PLCB stores to choose from this portfo- lio and provide optimal shelf-space. On the other hand, the local wineries would benefit greatly from increased exposure of their product lines in PLCB venues.

Pennsylvania Wine Industry - An Assessment 15 Additional recommendations latter aim is difficult given a typical winery’s small bud- The following two recommendations do not pertain get. To overcome this limitation, wineries, as a group, specifically to legislative policy, but suggest niche- or the PWMRB, as a consortium, could seek endorse- marketing strategies to help the industry grow and ments from wine shows and wine writers, and align the experience increased economies of scale. Any growth Pennsylvania brand with other strong brands that reflect in the Pennsylvania wine industry is likely to accrue to the industry’s potential. These efforts also complement Pennsylvania agriculture and tourism. While they are the use of collaborative marketing approaches, such interrelated, the second strategy of creating a web portal as event marketing and marketing networks. Finally, is not necessarily dependent on the first recommenda- branding “Pennsylvania wine” is a crucial step for tion of creating a marketing niche. future development. The brand-building strategy is more than just posi- Create a niche tioning and creating a right image. It is about producing As markets become more competitive, firms of all the best quality wine with Pennsylvania grapes, and sizes must become more focused. Smaller specialist also has a fundamentally sound link in the production, organizations must develop market niches that distance distribution and selling chain. Similarly, the develop- themselves from larger wineries producing an extended ment of the “Pennsylvania Wine” brand must involve a product line (Swaminathan, 2001). As the resource base number of marketing actions that build and strengthen of these firms limits the strategic options available, relationships throughout the demand chain, build mar- small firms must place greater emphasis on relation- ket awareness of the product, and build internal com- ship strategies with a small target market of consum- mitment to the industry’s goals. ers, distributors and retailers (Mintzberg et al., 1998; Small wineries cannot afford to undertake mass ad- Beverland and Lindgreen, 2001)7. vertising. Consequently, these wineries have identified Creating a niche for small wineries is important for at other ways of building their individual reputation and least two reasons. First, as Geene et al. (1999) indi- awareness among their target customers. To comple- cated, the world wine market is undergoing substan- ment these efforts, PWMRB can also help by gaining tial changes, with an increase in market segmentation endorsements from a number of sources: independent between large and niche players. Second, wineries of journalists and wine shows, co-branding with strong all sizes will have to increase their market orientation complementary brands, and using collective events and focus simultaneously on building market awareness and promotion. Wine show results and awards are also and relationships, necessitating an increased strategic important in increasing niche markets. Consumers focus (Beverland and Lockshin, 2001; Beverland and view these results as an indicator of quality. There- Lindgreen, 2001; Swaminathan, 2001). fore, PWMRB and others should encourage individual Development of new markets, however, requires a wineries to enter events, and the industry should view heavy focus and increased investment in distribution endorsements as an important part of its marketing channels, marketing, and branding. Geene et al. (1999) strategy. Finally, co-branding should also be viewed as indicated the challenges facing the wine industry are another strategic policy initiative. Co-branding could be shifting demand, increased competition, and low brand accomplished through cooperative marketing strate- awareness. With these difficulties in the background, a gies with other like-minded wineries or alignment with few strategies that could be pursued by PWMRB and other high-profile brands that share similar features others are noted below, with a view towards developing within the category. For example, co-branding could a niche market for small wineries in Pennsylvania. arise between local restaurants and local tourist goods. The notion that “Pennsylvania wine” has an excel- Brand building and endorsements lent quality must become fundamental across all actors. The wineries in Pennsylvania and PWMRB can The investment on quality and on the product charac- develop a number of marketing strategies, which can be teristics through research and a permanent enologist divided into marketing mix, branding, and relationship must be publicized to develop an image of the growing marketing. Beverland and Lockshin (2001) stressed the viticulture in Pennsylvania. Further, the award-winning importance of strong relationships with customers and brands must be firmly established in the minds of con- an awareness of brand among the target market. This sumers.

7. Also see Aldrich, 1999; Swaminathan, 2001; and Beverland and Lockshin, 2001.

16 The Center for Rural Pennsylvania Table 5: Typical Web Interface Component

Most small wineries undertake some limited advertis- mation transmission in the fruit-producer and winer- ing. Most print exposure is through wine reviews and ies channel8. Consequently, second-generation web involvement in promotional events. Mostly, advertis- interface models have to be developed between the fruit ing is done via the Internet, as the wineries believe the supplier wineries in the value chain, with incentives Internet will have a huge impact on the sale of wine. for the wineries’ participation. A typical web-interface Unfortunately, many sites are not continuously updated component is illustrated in Table 5. and redesigned, which involves constant investment. The above description in the flow chart character- Consequently, a holistic web presence, which tracks izes some salient features of the demand-supply model and updates all information across the state, is required. between fruit producers and wineries. The interaction between these groups indicated by the arrows going Strengthen niche markets with Web interface both ways underplays the flow of information in this This consideration suggests the creation of a web por- channel network. The mutual advantages of creating tal that would enable transparency of information and “an Internet market” to both parties are obvious. Final- increased efficiencies. Current web interaction between ly, if vendors are given incentives based on the amount Pennsylvania wineries and consumers falls in line with of Pennsylvania grapes, or fruits, that are purchased via principles of direct marketing. The existing websites this website, then the decision to participate and bid for for different wineries signal the entrepreneurial market- the best Pennsylvania grapes become easier. Further, ing capabilities of many small and medium wineries. if these data are combined with other PLCB data from Without exception, these sites emphasize brand reputa- individual wineries concerning total grape purchases tion, high quality, high value propositions, and, in a few from individual wineries, then the process of identify- cases, direct distribution channels adapted for interac- ing the true Pennsylvania wine makers versus the free- tive online communication. Further, the websites allow riders, including out-of-state licensees, becomes easier. customers to self-select into different sites based on If incentives to report such data are transparent and if customers’ personal needs. the incentives are written in an easily understandable However, threats and weaknesses from the SWOT fashion, and communicated throughout the sector, then analysis are not adequately addressed in the current this second-generation web interface will the first of its web interfaces. kind in the country, which can claim to have solved the Most importantly, the enforcement of the 75-25 rule public-goods problem. in Pennsylvania has been difficult. Participation has It is possible to identify an entity to develop, imple- been on a voluntary basis, or by those wine producers ment and manage the site, and collect important eco- who also own their grapes. Thus, the 75-25 rule is a nomic data. The website can be managed and improved classic example of a public-goods failure, which can be from voluntary contributions from the wineries and addressed only by developing mechanisms to encour- the fruit growers within Pennsylvania. Since a website age voluntary participation among wineries. There are interface model of this kind has never been developed two additional difficulties that exacerbate the public- or proposed in other states, with the same require- goods problem: provision of licensing agreements for ments, the recommendation concerning this opportunity out-of-state vendors, and the lack of adequate infor- should be considered significant.

8. This issue has been brought up in many of the researchers’ conversations with different winery owners. For instance, many wineries would like to produce elderberry or pear wine. However, information regarding availability or supply sources is not quickly accessible. Similarly, many wineries have had the same source for their grape suppliers and find it difficult to access other varieties, purely because of informational constraints.

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This research was sponsored by a grant from the Center for Rural Pennsylvania, a legislative agency of the Pennsylvania General Assembly. The Center for Rural Pennsylvania is a bipartisan, bicameral legislative agency that serves as a resource for rural policy within the Pennsylvania General Assembly. It was created in 1987 under Act 16, the Rural Revi- talization Act, to promote and sustain the vitality of Pennsylvania’s rural and small communities. Information contained in this report does not necessarily reflect the views of individual board members or the Center for Rural Pennsylvania. For more information, contact the Center for Rural Pennsylvania, 625 Forster St., Room 902, Harrisburg, PA 17120, telephone (717) 787-9555, email: [email protected], www.rural.palegislature.us.

Pennsylvania Wine Industry - An Assessment 19 The Center for Rural Pennsylvania Board of Directors Chairman Senator Gene Yaw

Treasurer Senator John Wozniak

Secretary Dr. Nancy Falvo Clarion University

Representative Garth D. Everett

Representative Rick Mirabito

Dr. Livingston Alexander University of Pittsburgh

Dr. Theodore R. Alter Pennsylvania State University

Stephen M. Brame Governor’s Representative

Taylor A. Doebler, III Governor’s Representative

Dr. Stephan J. Goetz Northeast Regional Center for Rural Development

Dr. Karen M. Whitney Clarion University

The Center for Rural Pennsylvania 625 Forster St., Room 902 Harrisburg, PA 17120 Phone: (717) 787-9555 Fax: (717) 772-3587 www.rural.palegislature.us 1P0313 – 400