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1 by Rolf A.E. Müller and Susanne Stricker Department of Agricultural THE GERMAN WINE INDUSTRY: RIPE FOR E-COMMERCE? by Rolf A.E. Müller and Susanne Stricker Department of Agricultural Economics Christian-Albrechts-University Kiel, Germany www.agric -econ.uni-kiel.de/Abteilungen/II/II_Home.htm [email protected] Presented at the AIC Wine Workshop October 25, 2000 1 INTRODUCTION Recently one of us visited an exhibition about the Romans north of the Alps. In their time the Romans were "globalizing" the ancient world: They spread their language, virtues, vices, their technologies, and their law all across the Mediterranean and western Europe. Drinking wine was one of the Roman vices and, fortunately for Germany, the Romans brought viticulture to where they settled and built bases. The Romans are long gone but viticulture took root and is flourishing in Germany. We are experiencing another wave of globalization whose core technology is the Internet. This technology is beginning to transform the German wine industry. Early signs of the transformation abound. Wine makers who may not have changed the style of their labels for decennia, suddenly add email addresses to their catalogs and promotional brochures. Also, some have built web sites where they tell the story of their vineyards, cellars, and wines, and where they proudly show pictures of their property. Are this the activities of a small number of technophiles or are they the forerunners of a new development in the industry? Who are the early adopters, what elements of e-commerce do they adopt and with what success? Are the early adopters too early for their own good or is the German wine industry ripe for e-commerce? What can we learn from e-commerce in the wine industry that is relevant for the rest of agriculture? We, that is a couple of my students, Dan Sumner and I, have recently started a research project on the adoption and impact of e-commerce in the wine industries of California and Germany. For several reasons the two wine industries are excellent candidates for a comparative case study of the early transition of agriculture towards e-commerce: (1) Wine is a highly differentiated, internationally traded experience product. (2) Early adoption of e-commerce occurred in the wine industry soon after the Internet was opened for commercial use. For example, Virtual Vineyards opened its web site as early as 1995. E-commerce is therefore likely to be more advanced in this than in other agricultural industries. (3) The industries are characterized by a mixture of small and large producers and marketing channels differ. California's more than 740 commercial wineries are predominantly family owned 1 and operated businesses. A small number of large wineries have established brands that are well known at home and abroad and they market their produce through established retail channels. Many of the small wineries are unknown but to a small band of cognoscenti and they sell directly to consumers. The wine industry in Germany is also characterized by many small wine producers, who often market their wines themselves. In contrast to the industry in California, however, there are no large wineries with well-established brands. Furthermore, in contrast to California where sales of grapes and juice are common, this practice is rare in Germany. (4) The regulatory environments differ. The marketing activities of the small wineries in California, which do not have extensive distribution channels, are obstructed by wine shipment regulations of most states in the US and only 12 states allow free trade of wine over state borders. In Germany, in contrast, the production of wine is subject to elaborate EU and national regulations but trade in wine is free within in the EU. (5) There are likely to be significant differences in the e-commerce readiness of the wine industries in the two countries. In particular, the California wine industry is likely to benefit from the head start in Internet diffusion that the US enjoyed over other countries. As is appropriate at an early stage of research, we are currently assembling basic facts about the two industries and the e-commerce activities within them. In my presentation I shall report on what we have found out at this stage about e-commerce in the German wine industry. Because I am speaking at a wine workshop and not at an e-commerce event, I emphasize in my presentation aspects of the Germany wine industry. Keeping in mind the time constraint, I first present a few basic facts about the German wine industry. Then I identify some factors that can be expected to affect the adoption and diffusion of e-commerce in the German wine industry. 2 THE GERMAN WINE INDUSTRY 2.1 Production Wine production in Germany has more than doubled over the last thirty years and now stands at about 12 million hectoliters or 1.2 million tons. On average production of wine has grown by 15,500 t per year compared to 38,000 t in the USA. Figure 1: Development of wine production 1961-1999 3000 2500 2000 USA Germany Australia 1500 1000t Linear (USA) Linear (Germany) 1000 Linear (Australia) 500 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 Year source: FAOSTAT, Food and Agricultural Association of the United Nations (FAO) *Wines of fresh grapes of all qualities, including sparkling, fortified and dessert wines. 2 Wine is grown in Germany as far north as 52° latitude and Germany's wine growing regions are among the most northerly ones in the World. Advantages of growing wine this far north are a long growing season and moderate summer temperatures. The disadvantages are lack of sunshine in some years, and variable wine quality. Scarcity of sunshine also explains why viticulture in Germany, with the exception of Saale-Unstrut and Sachsen in the east, is concentrated in the southern and southwestern parts of Germany, where spring starts early and which are favored by climate and topography. Figure 2: The 13 wine growing regions in Germany. Wine is produced in thirteen vine growing regions defined by law. The regions are: 1. Ahr 2. Mittelrhein 3. Rheingau 4.Mosel-Saar-Ruwer 5. Nahe 6. Rheinhessen 7. Pfalz 8. Hessische Bergstrasse 9. Baden 10. Württemberg 11. Franken 12 Saale-Unstrut 13. Sachsen A brief description of the areas is given in the appendix. Total vineyard area in Germany is slightly above 100,000 ha with an average yield of 10.8 t/ha of must. In Germany production of white wines dominates the production of red wines by far. The proportion of wines of basic quality is about equal to the share of higher quality wines. The share of table wines, the lowest of the qualities, in total production is negligible. 3 Table 1: Vineyard area, must production, and composition of wine production in the wine regions of Germany, 1999. % of total % of total Proportions of wine quality categories Must production Vineyard area Must yield White Red Wine Growing regions must vineyard Table Quality wine Quality wine with [1000 t] [ha] [hl/ha] [%] [%] production area wines [%] [%] special attributes [%] Rheinhessen 316 26 25442 25 124 0.2 39 61 87 13 Pfalz 270 22 22504 22 120 0.4 46 54 79 21 Württemberg 158 13 10856 11 145 0.2 43 57 42 58 Baden 157 13 15311 15 103 0.2 42 58 68 32 Mosel-Saar-Ruwer 154 13 11336 11 136 0 54 45 98 2 Franken 72 6 5843 6 124 1.5 64 34 92 8 Nahe 47 4 4457 4 105 0.7 33 66 90 10 Rheingau 33 3 3130 3 107 0.6 38 61 88 12 Mittelrhein 5 0.4 554 0.5 97 0 38 62 93 7 Ahr 5 0.4 510 0.5 105 0.3 19 81 18 82 Hessische Bergstraße 5 0.4 443 0.4 104 0 26 74 92 8 Saale-Unstrut 4 0.3 545 0.5 77 1.6 85 13 82 18 Sachsen 2 0.2 342 0.3 61 0.8 54 45 92 8 Germany 1228 100 101273 100 108 0.5 45 55 79 21 Quelle: BMELF 2.2 Consumption Wine is consumed by about two thirds of all German households and per capita consumption stands at about 23 l per year. The shares of the wine regions in domestic consumption roughly reflect their shares in production, with the exception of Rheinhessen and Pfalz: Rheinhessen is Germany's number one wine producer in most years but the Pfalz is the number one region in terms of domestic wine consumption. Figure 3: Shares of the wine regions in consumption of German wine, avg. 1997-1999. Other 5 Rheingau 2 Nahe 4 Franken 6 Württemberg 11 Baden 11 Mosel-Saar-Ruwer 12 Rheinhessen 23 Pfalz 26 0 5 10 15 20 25 30 Percent 4 Although Germany produces mostly white wine and the share of red wine in domestic production is only about one fifth, the share of red wine in domestic consumption has been growing during the last years and is approaching the share of white wine. Obviously, most of the red wine consumed in Germany is imported. Figure 4: Shares of red and white wine in domestic consumption, Germany, 1995-1999. 100% 9% 8% 8% 8% 8% 80% 37% 40% 43% 44% 45% 60% Rose Red White Share [%] 40% 54% 52% 49% 48% 47% 20% 0% 1995 1996 1997 1998 1999 Year 2.3 Sales outlets Major sales outlets for German wine are discounters which sell about two-thirds of the wine bought in Germany; the next most important outlets are food retailers (24%), wineries and producer coops (19.3%), and specialist wine shops (7.4%).
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