OREGON WINE CLUSTER:

WINE INDUSTRY IN USA

INTERNATION BUSINESS - B

Anish Khandelwal PGP/18/009

Kunnel Anubhav PGP/18/027

Prakhar Yadav PGP/18/097

Shubhi Jindal PGP/18/051

Sourav Pattanayak PGP/18/110

Wine in Oregon

Wine has been produced in Oregon territory even before the state was established residents

started planting grapes as early as 1840 however the significance of wine making has gathered

steam in early 1960s only.

The first cultivation of grapes was started by Henderson Luelling, a horticulture in 1847.He and

his son in law won a medal at California State Fair in 1859 for a wine made from Isabelle grape ,

a Labrusca X Vinifera.

By 1850s, Peter Britt a well-known music festival organizer, is known to have grown wine

grapes as his Valley View Vineyard. A census of 1860 reveals the statistic that Oregon's wine

production was some 11,800 liters (2,600 gallons), but not every wine was Vitis vinifera.

In the Willamette Valley, Ernest Reuter had built the reputation by 1880s for his Klevner wines;

Reuter is purported to have won a gold medal at the St Louis World's Fair of 1904. Reuter's

grapes were planted on Wine Hill, also known as David Hill, west of Forest Grove in

Washington County, at the present site of the David Hill Winery.

Wine in Modern Era

The Oregon wine industry started with small scale producers trying to produce wine of superior

quality. The above effort is unique with different set of patterns and structure for the Oregon

wine industry than other major producers of wine in US. The California industry started by

producing very cheap wine for domestic use by the missions and immigrants .The California

wine industry has gone through several boom and bust periods during the said time.it is now a

dominant source of domestic wine in all the price categories by volume in all of the United

States. The state of Washingtons industry was established primarily by bridging the market gap

of competitive mid-priced wine and was boosted significantly by both large direct investment

and conversion from mid-scale to large scale agribusiness. California, New York and

Washington all have substantial Economic Impact of Oregon State - non-wine grape industries,

unlike Oregon. States such as Virginia and Missouri are almost fully dependent on local market

and are dependent on small scale wine production.

Although Oregon has witnessed dramatic growth in both production and value, the industry is

still primarily small to medium sized production based primarily in Oregon. The largest three

wine producers in Oregon would rank 52nd

, 53rd

and 76th

in California. As the majority

production is held by small scale industry and the production is high, Oregon is unable to supply

majority of the wine consumed in the United States.

Oregons unique positioning has been successful as it can be seen by both increase in acreage

and number of wineries. In 1970 there were just five bonded wineries and 35 recorded acres. The

winery count by 2013 had risen to 605 (including using custom-crush facilities), and there were

nearly 24,000 acres planted in wine grapes.

Winegrowing Regions in Oregon

Oregon contains several distinct regions for winegrowing, which differ in climate, soils and

topography. The northwest portion of Oregon is best known for its cool-climate grape In early

2005, the Southern Oregon appellation was federally authorized as a larger viticultural area.

Willamette Valley

Willamette Valley is located south of Portland, and bordered by hills to the south and west and

mountains to the east, the Willamette River is the central feature of this 100-mile long, 60-mile

wide valley. The majority of Oregons wineries are established in this area, as they try to

capitalize on both the international fame of its Pinot noir and the easy access to Portland. the

Willamette Valley's climate is perfectly suited to certain grape varieties that dont demand strong

sun and heat to ripen, typically varieties originating in Northern Europe such as Pinot Noir and

Chardonnay (of French Burgundy fame); Riesling and Gewurztraminer (from Germany and

Alsace) and Pinot Blanc and Pinot Gris (prominent in Alsace and Alpine Italy) as it has coolest

temperature in the wine region.

Willamette Valley is also very famous for it wine tourism in Oregon as it has easy access to the

urban population and travel destination of Portland ,Oregon.

Umpqua Valley Region

Umpqua valley has a number of valleys and undulating hills. The climate of this region is drier

and warmer than the Willamette valley wine region to the north but cooler than the Rogue and

Applegate wine regions to the south .In short it has features of both the regions. Therefore this

valley is cool enough to produce classic Oregon varieties like Pinot noir, the leading varieties

and it is also warn enough to grow Bordeux verities like Merlot and Cabaret Sauvignon . Some

wineries have pioneered the cultivation of Southern French and Spanish varieties such as

Tempranillo etc. with great and promising results.

Rogue Valley and Applegate Valley

The overall region is warmer and dryer than the Willamette Valley, especially in the east. This

climate has encouraged plantings of Cabernet, Merlot, Syrah and Viognier, but it is still an

important source of Pinot noir and Pinot Gris. This area is known for its diversity in wine

production. This area is also a critical source for Pinot Noir and Pinot Gris used in blends

representing the overall Oregon appellation due to its higher yields and reliable ripening. There

is a good amount of tourists visit in the southern area from Medford and Ashland area.

Columbia Gorge

The Columbia river valley has an increasingly warm climate as one goes upriver and some

vineyards benefit from the "Banana Belt" effect of west-facing valleys protected from cold

winds. The Columbia Gorge appellation is located on both the Oregon and Washington sides of

the Columbia River, Pinot noir, Pinot Gris, and Chardonnay are important in the Columbia

Gorge, but it also produces Cabernet and Syrah due to the influence of Washington D.C. Apart

from above Wines it has also found recent success in Walla Walla appellation for red Rhone and

Bordeux varieties again due to its close proximity with Washington D.C. . Although it uses both

bulk wine from other regions as well as Oregon, substantial investment has been made in

production and tourist facilities in the region.

Portland Metro Area and Urban Wineries

Urban wineries are new emerging trends of the industry. Their sale is mostly direct, and most of

them have bar, cafe, food and pub facilities. First winery was opened in 2001 but now the city

boasts over 12 different wineries. As Portland has no vineyards, the grapes are shipped in from

across Oregon and Washington and processed within city limits.

Distribution of Acreage in Oregon

Region

# of wineries Acreage Main produce

North Willamette

Valley

545 15259 Pinot Noir,

Chardonnay, Pinot

Gris, Riesling

South Willamette

Valley

102 1978 Pinot Noir, Pinot

Gris

Rogue/Applegate

Valleys

140 2582 Pinot Noir, Pinot

Gris, Syrah,

Cabernet Sauvignon,

Merlot

Columbia Valley

and other

94 1754 Pinot Gris, Syrah,

Cabernet Sauvignon,

Pinot Noir, Merlot,

Riesling

Umpqua Valley 70 2382 Pinot Noir, Pinot

Gris, Riesling,

Tempranillo

Political

Wine industry is important from the point of view of political scenario as it contributes $63

million in tax and licensing revenues from the state government. Apart from that $64.9 million

comes from local property taxes.

Therefore government has set up Oregon Wine Board that promotes the development of wine

industry. It also coordinates the exports with other countries.

Apart from that there are regulations to ensure the quality of the wine, sales and distribution.

Economic

Economic growth of the country is highly dependent on the wine industry. To prove it we have

some following facts as per the data in 2013:

605 Oregon wineries or wine companies bottled 2,780,237 nine-liter cases of wine.

Revenues from the industry were over $363 million from the sale of packaged wine.

Exports to other states/countries generated $127 mn excluding direct to consumer

shipment which was around $52 mn

Retail sales of wine in Oregon from all sources were $816.6 million in 2013.

It also helped other industries such as tourism, wine related tourism contributed to $207.5

million in revenues to the Oregon economy.

Social

The Oregon wine and wine grape industries contribute an estimated $11.3 million annually to

charities.

Direct employment support 9,837 jobs within the state of Oregon and generate nearly $225

million in gross payroll.

Technological

Wine industry is capital-intensive industry. In 2013, companies in Oregon have spent around $7

million on purchasing new equipment or maintaining the existing one. But most of this

equipment is not manufactured in the state because of which they have to import which in turn

affects the economy.

Environmental

The substantial portion of industry is adopting number of sustainable and organic methods of

production that reduces the carbon footprint and also decreases the inputs that require non-

renewable energy.

Also these methods help in decreasing pollution from chemical/oil resources in production of

synthetic pesticides, fertilizers and fungicides.

Wine in the Economy

The wine is a consumer product, produced capital intensive and requires a wide range of work

and services to reach consumers. This impact is reflected in wages, income, taxes and spending

on technology and agricultural supplies and production. Associated industries such as

distribution, tourism and retail sectors benefit greatly from the Oregon wine industry. There is

also the multiplier effect created by purchases by industry suppliers and service companies, as

well as the expense of wages paid by industry in the economy of Oregon. As a final consumer

product, wine normally adds more value and retains more of its profit into the state's economy

than many other agricultural products. Most agricultural products are exported from the region of

production or sold to processors in its raw form. Many of the processors in turn sell their

products in international markets in bulk, which tend to be highly competitive with low margins.

The final products can pass through many entities and brands out of state before reaching the

consumer. As a result, a relatively small amount of the profits remain in the local economy. The

Oregon winemakers retain more of their income stream locally. They crush the grapes and

produce wine, but also do the packing, marketing and sales to wholesalers and foreign importers.

In addition, the wine maintains the highest margins in the distribution system than most other

foods and beverages. Some of the channels of distribution (fine wine shops, restaurants,

wholesalers specialists on site) are labor intensive. Note that the wine consumed in the state of

Oregon (not only wine produced in the state) provides income from which restaurants and retail

shops owners and their employees are paid. Wine distribution producer level through the layer

wholesale retail / restaurant level offers additional wages and employment. Each layer also

contributes taxes. The romance and appeal of wineries and vineyards wine regions make a strong

attraction for tourists. The demographics of luxury wine consumption in ensuring that many

tourists came spend more than the average visitor, increasing revenues of restaurants and hotels

in the wine regions.

Foreign investment

Success and Oregon fundamental qualities have not gone unnoticed, and a number of major

companies in the wine industry have invested or increased their stakes in Oregon in recent years.

The following are the most prominent examples:

Kendall Jackson: Great purchased Moraine, vineyards Zena Corona in January 2013; Kendall

Jackson winery Solena bought in May 2013;

Precept Yamhela vineyard wines purchased in May 2013; Kendall Jackson bought Maple

Grove vineyard in May 2013;

Louis Jadot bought Resonance Vineyard in August 2013;

Domaine Drouhin bought Roserock vineyard in December 2013;

Foley Family Wines bought the brand and vineyards Four Thank March 2014;

.. Ch Ste Michelle Willakia bought the vineyard in March 2014; and Mo-Camuzet bought the

winery Bishop Creek in September 2014.

The positive effects of this trend may include additional investment in equipment wine making;

renovations or improvements of facilities and equipment; Additional staffing of the winery and

vineyards; expanded distribution outside Oregon Oregon wines and newcomers to leverage their

distribution networks and sales force; and possible reinvestment of proceeds from the sale by

local or state owners. All this is captured in this report for 2013, but not 2014. The potential

negative effects of purchases include the repatriation of profits out of state owners previously

reinvested in the state, and the possible transfer of administrative and sales / marketing and

management positions elsewhere. So far there have been few signs of economic benefits

transferred out of state. The money invested in the vineyards will not be profitable making wine

for a couple of years due to production lead time. Vineyards purchases by domestic firms were

largely intended to provide additional grapes Oregon wineries, while the Burgundians (Meo-

Camuzet, Jadot, Drouhin) are developing all the different brands of Oregon.

Economic Impact vs. Revenue vs Profitability

While profitability and return on investment of vineyards and wineries are outside the scope of

this analysis, the differences between them and the economic impact should be clarified.

Delivery time and capital-intensive nature of the wine industry long gives significant economic

impact in relation to sales revenues. However, these factors may also limit the profitability and

return on investment. The analysis of Tony Correia (The Correia Company) and Nat DiBuduo

(Allied Grape Growers) found that many wineries and vineyards do not earn an operating

reasonable risk-adjusted return on real estate or transaction typical asset's record capital prices.1

open companies in the wine sector is generally poor and these companies often end up going

back into private hands. Although yields have increased recently, Tony Correia pointed out that

this is in large part due to the low interest rates that allow leverage of equity investors, but the

rates of return of the company in general are low. 1 Some of the factors to consider when

evaluating profitability and revenue in the wine business include:

The difference between the economic impact (which is the sum of all spending and investment)

and benefits (which is the difference between costs and revenues). It is possible that an industry

with high economic impact and growing (typically a growth industry) have fairly low, current

profitability and net cash flow and investment in production and the ability to move ahead of the

income.

There is a weak relationship between bottle price and profitability. In addition to higher

production costs, higher prices mean lower volume bottles and therefore less total revenue to

support fixed costs. Expensive wines competing in a highly fragmented market in which there

winery achieved high market share.

The economic impact accumulates like wine travels through the distribution system. However,

different levels of profitability are the industry tends to vary independently of each other. The

low prices of grapes can be bad for farmers, but increase the margins of the winery. Oversupply

of wine from other states or countries can increase wholesalers and importers of sales and

margins, but sales weaken Oregon winery. In the last recession, they increased sales and profits

for many retailers offsite while restaurants suffered significant declines in traffic and trading in

wine sales.

The wine industry holds a very long supply chain - it takes five years for a vineyard to achieve

mature yields and wine normally spend 1-3 years aging in the inventory. So wineries have very

high inventory costs compared to many agricultural products. In addition, the grape industry and

wine production have their own something independent of economic cycles and business cycles,

since the supply and demand balance change.

Warehouses are capital intensive, partly because much of their specialized equipment obtained

a single use or just a few laps a year, unlike breweries, distilleries, or most food companies.

Similarly, the vineyards give one crop a year, in contrast to market crop rotation or table.

How does it fit into Oregon?

The Oregon wine industry originated with small producers with the aim of producing high

quality wines. This is unique and has established a pattern and different structure for the industry

Oregon other major wine-producing states. California industry originated in the supply of cheap

wines for local use by missions and immigrants and has gone through several periods of boom

and bust. Now it is the dominant source of domestic wine overall volume in the United States,

competing in all price categories. The state of the industry in Washington was established

primarily by providing competitive wine average price and was boosted significantly by both

business investment and conversion of large-scale agribusiness. California, New York and

Washington all have substantial

grape wine industries, unlike Oregon. States like Virginia and Missouri, although they tend to

wine production on a small scale, depend almost entirely on the local market. Despite the

spectacular growth in the production of wine from Oregon and value, the industry is still largely

in the hands of small to medium-sized producers, mainly based in Oregon. The three largest

producers of wine in Oregon would classify 52a, 53a and 76a in California. The predominance of

small production and property, as well as high production costs, Oregon media can not provide

most of the wine consumed by the state. Unique positioning of Oregon has been a success,

stimulating growth, both on the surface and the number of wineries. In 1970 there were only five

recorded bonded warehouses and 35 acres. This had grown to 34 wineries and 1,100 hectares of

1980. By 2005, the number had increased to 247 wineries and plantations reached 13,700

hectares. Counting the cellar in 2013 it had increased to 605 (including the use of facilities

tailored crush), and there were about 24,000 acres planted in wine Grapes2. The Oregon wine

sales increased from 1.29 million and $ 157 million in revenue winery cases in 2004, to 2.68

million cases and $ 362 million in revenue in 2013.

Porters Diamond

1. Factor Condition

In contrast to other types of crops, grapes can be grown in diverse climates and soils.

The French concept of terroir states that the composition of grapes produced in a specific

growing region will be influenced by the local environment, which will carry through to the

wines of the area. This concept also includes as an element minimal intervention in modification

of the growing environment so that the terroir may be evident. Thus, in contrast to other

agricultural commodities, wine is marketed by the geographical location of production, and

quality is associated with minimal vineyard inputs or manipulation.

The California wine cluster is endowed with large parcels of relatively flat land that rely

more on capital-intensive operations to produce large quantities of wine at low production costs

despite relatively high land prices, ranging from $8,000 to $150,000 per acre.

Science and technology played a vital role in bridging the quality gap between European and

California winemakers. Traditionally, European vintners had relied heavily on feel and time-

tested practices. California winemakers of the 1960s and 1970s began using quantitative analysis

and new techniques to produce higher quality, more consistent wines. Innovations flowed rapidly

among the states vintners, especially in Napa, where most of the major wineries were located

side-by-side along State Highway 29 and its eastern parallel, the Silverado Trail. Though much

of the innovation took place at the wineries themselves, U.C. Davis helped introduce several new

technologies such as mechanical harvesting, drip irrigation, and field grafting.

2. Demand Conditions

The continued growth of the U.S. wine industry faces increasing challenges as retail

sales and wholesale channels continue to consolidate and foreign wine producers target U.S.

markets with growing inventories, government support, and saturated home markets. Per capita

U.S. wine consumption ranks 38th

in the world. Imports of wine to the U.S. market have risen

consistently over the last decade. The share of U.S. wine market represented by wines made in

the U.S. declined from 81.6 percent in 1998 to 73 percent in 2005.

Imports now represent more than 27 percent of wine consumer in the U.S. to regain its

share of a growing market. Continuing investment in quality and value as well as further

opportunities to access the consumer market are need by the American wine industry. Attracting

and retaining consumer attention in this extremely fragmented market demands expensive and

specialized marketing and merchandising skills. Wines in all segments of the market face pricing

pressures and price erosion even as winemakers and growers face relentless pressure to improve

quality and distinctiveness.

Alcoholic beverages are the only industry in America with their own constitutional

amendment. The 21st amendment, which signaled the end of prohibition in the U.S., led to a

series of complex regulations and structures which vary by state for the sale of wine, wineries to

sell to licensed distributor which ten sell to retail and restaurant outlets. The vast majority of

wineries in the U.S. sell most of their wine directly from winery to consumers, wither tourists

visiting a tasting room, festival or farmers market, or to members of their wine clubs and mailing

lists. Many wineries lacking distributor also market their own wines directly to local retailers and

restaurants. Maintaining winery direct-to-consumer and self-distribution is critical to the survival

of Americas small wineries and to the efforts to revitalize many struggling rural communities.

3. Related and supporting industries

According to Michael Porter, this determinant spotlights the value of how internationally

competitive home-based suppliers create advantages in downstream industries in several ways.

First, they deliver the most cost-effective inputs in an efficient early, rapid, and sometimes

preferential way. In the case of industries based in natural resources tend to agglomerate in

certain areas because of the cost advantages given by the natural resource endowment.

From a winery perspective, both the wine and tourism industries suffer from a lack of

sectoral linkages that has resulted in a lack of cohesion and inter-organizational co-operation. On

the other hand, the barriers to the wine industry may stem from a lack of experience and

entrepreneurial skill regarding tourism, particularly amongst smaller wineries and that tourism is

often seen as a secondary or tertiary activity in the wine industry. Conversely, these barriers can

be seen in relation to the tourism industry that has a lack of understanding of viticulture practices

and the demands of winemaking and, on occasion, a conflicting demand for scarce resources.

The difficulty in developing relationships between the wine and tourism industries is most likely

the consequence of a number of factors specific to these industries rather than how they manifest

in regional settings. It is important to note that differences between these industries include

structure, their breadth, degree of collaborative behavior and the level of innovation and

knowledge sharing. These cluster pre-conditions are important when considering their impact on

cluster behavior, both passive and active.

Clusters in wine-tourism bring with them the intricacies of these different industries and

cluster types and provide insight into the interaction between clusters in distinct industries that

often geographically overlap.

Innovation in wine industry products and processes can be better achieved if

improvements are also made in other areas impacting the wine cluster. To better compete

globally, wine industry stakeholders need to invest in R&D and devote particular attention to

adding diversification and value to the wine industry value chain. The creation of national

awards recognizing quality and innovation in the industry value chain will enhance the overall

visibility of the industry.

4. Firm strategy, structure and rivalry

According to Porter, the context for firm strategy and rivalry refers to the rules,

incentives, and norms governing the type and intensity of local rivalry. Economies with low

productivity demonstrate little local rivalry. Most competition comes from imports.

Even the wine production can be considered as a light industry; the competitiveness

of this industry oblige to all the stakeholders involved in the production reach a high level of

professionalism. In that sense, it is important to flourish the human resources capacity involved

in the wine industry, making it more competitive and comprehensive according to the new

demand and complexity that they should come up with.

In that sense, the industrial force regarding the wine industry is expressed in the three key

levels of the workforce; the management, oenologist/production managers and field

workers.

The creation of management studies and specific training courses in strategic and

international management are indispensable to promote the ideal mix between competition and

cooperation, essential to internationalization. On the other hand, specific industrial and chemical

training is essential to improve oenologist, production and management knowledge that will

allow the improvement of quality and differentiation of the wine, but also the development of

healthy and environmentally clean products.

Future

Currently, Oregon is the No. 3 wine grapeproducing state in the country. The focus right now, is

on growing lesser-known grapes for the interested buyers, marketing bottles of wine beyond

Oregon state boundaries, and promoting Oregon as a quality producer of higher-priced wines. In

Oregon, wine manufacturing, shipping, and sales support 11,000 workers, with most of the jobs

being centered around Willamette Valley. According to the Oregon Craft Beverage Council,

Oregon Breweries make up 6,500 jobs, Oregon Distilleries make up 350 jobs, and Oregon

Wineries make up 13,500 jobs.

Anne Root, founder of EdenVale Winery in Medford says Our wine industry is growing and

making a contribution to our region with higher-paying jobs and a different agricultural product

that enhances pears and other fruits businesses here. Future success according to her, depended

on a statewide effort to promote the already respected Oregon brand, rather than on the Rogue

Valley Region. There is already a lot of good traction for Oregon wine overall she says.

For new producers, or entrants into the business, the focus stays on the bottom line. Also, they

want to hear more about grape varieties that are economically viable, and not necessarily the

well-known types. Little known grapes that ripen consistently are finding a place in the market

too. Smaller vineyard producing better grapes are also being encouraged. With increasing

awareness, growers are focusing more on grape types that can be sold to wineries, or sold in their

own tasting rooms, rather on grapes that the owners themselves like.

Currently, UCC has embarked on an educational program that will blend the wine industry and

community involvement into an opportunity for regional economic growth. According to an

economic impact study, Southern Oregon has the potential to realize a ten year growth factor of

5000 additional wine cluster related jobs and $115 million in added income to the labor market.

According to Lee Paterson, President of the UCC Foundation Board, An investment in the

Southern Oregon Wine Institute is an investment in the future of the region. SOWI will be the

catalyst that accelerates the growth of an exciting industry capable of transforming the economic

fortunes of communities throughout Southern Oregon.

With the competitive nature of the global wine market increasing, U.S. wineries will have a

greater challenge competing in both the domestic and export markets. The formulation of the

"WineVision" initiative was for the purpose of helping US wineries address export market

related strategic issues. A large number of wineries and winery associations support WineVision.

It is developing an approach thatll help non-exporting wineries to become exporters while

improving the effectiveness of the ones that are currently exporting. Additionally, it has also

managed to identify the lack of urgency on the part of said wineries, about the threat posed by

globalization and other competitive forces.

Thus, there are critical issues that still exist regarding the success of Wine Visions involvement

in causing a renewed commitment on the part of present US wineries. Top individuals in such

organizations, are facing the challenge of determining how to most effectively influence the

overall US wine industry, and whether they should focus on just raising awareness about

competitive forces, while serving as a feeder ground for information regarding expertise,

innovation, and connections.

References

1. http://www.cityofroseburg.org/files/4913/0869/2983/SOUTHERNOREGONWINEINSTI

TUTE.pdf

2. http://www.mailtribune.com/apps/pbcs.dll/article?AID=/20130824/BIZ/308240301

3. https://en.wikipedia.org/wiki/History_of_Oregon_wine

4. http://www.capitalpress.com/Oregon/20150305/oregons-wine-industry-emerges-as-an-

outsized-ag-force

5. http://www.northwest-wine.com/Oregon-Wine-history.php

6. http://oregon-wine.com/wp-content/uploads/2015/02/full-glass-wine-economic-impact-

oregon-1-2015.pdf

7. http://www.statesmanjournal.com/story/life/food/victor-panichkul/2015/01/26/oregons-

wine-industry-packs-growing-economic-punch/22385391/

8. https://en.wikipedia.org/wiki/Oregon_wine

9. http://liveinc.org/