Guest editorial

Citation

Couderc, J.-.-P. and Viviani, J.-.-L. (2010), "Guest editorial", International Journal of Wine Business Research, Vol. 22 No. 3. https://doi.org/10.1108/ijwbr.2010.04322caa.001

Guest editorial

Article Type: Guest editorial From: International Journal of Wine Business Research, Volume 22, Issue 3.

To try and edit a special journal edition on “Wine finance: issues and challenges” was, in itself, a challenge as, on one side, marketing questions primarily puzzle both professionals and researchers interested in this highly complicated agricultural sector, and, on the other side, “social” rewards seem to satisfy the industry, much more than (most frequently elusive) “financial” ones!

We therefore would like to thank the Editorial Board of IJWBR, and particularly Ulrich Orth, for letting us have a go at this special “finance” issue.

With the current structural world wine crisis (overproduction, down-pricing consumption, firms hyper-competition), however, economic survival has become a prime priority for a growing part of the industry actors.

Consequently, it is not very surprising that the wine industry ways to improve risk management; strategies geared to reach a critical size and improve financial performances; modelling and/or prospective work for more profitable decision making, either, for example, for brand and pricing management, for entrepreneurial behaviours or for enlightening possible futures also lead to new research questions and finance researchers interest.

Among the proposals received for this special issue of IJWBR, and thanks to an ad hoc team of efficient reviewers, we have retained some particularly relevant, original or exploratory research papers which cover these four issues.

Risk management

The wine industry, similarly to the agricultural sector in general, is facing many different risks[1]. In front of these rising risks, the mechanisms of risk management available to wine companies are relatively limited[2].

Production risks are likely to grow due to increasing demands for quality from the part of consumer and for environmental protection (diminution of the use of pesticides, less irrigation, etc.) and climatic changes. The economic (price) risk will also increase because of the undergoing changes in the European Union agricultural policy, liberalization of agricultural trade and increased competition.

The absence of classical derivatives (used in other agricultural sectors to cover diverse risks) in the wine industry is mainly due to product differentiation, the small number of traders or speculators and potential reluctance of professionals to use these products. The industry actors indeed fear that their introduction could destabilize the market by making prices even more volatile and would disturb the equilibrium between various distribution channels[3].

There are contracts existing between producers and their customers (dealers), but these contracts are unstable because they generate conflicts on profit sharing and compensation for risk. Diversification strategies are difficult to conduct because they generate significant additional costs: investment in equipment and additional loss of economies of scale. Moreover, diversification requires an expansion of technical and managerial expertise which is a long way away from family businesses dominating the sector (at least in Europe).

On another hand, the methods of financial risk management, like the creation of a positive cash flow or the maintenance of unused debt capacity, besides their traditional opportunity costs, have limitations related to the capitalistic intensity needed in this specific sector and the nature of farms (small family companies). The investments and operating cycle needs immobilize large amounts of capital which are difficult to finance through private equity or debt. The storage of wine is a costly strategy in a situation of limited yield. Indeed the constitution of a stock when the harvest is plentiful is made more difficult because of the existence of maximum yield allowed. Agricultural insurance could be developed but the risk of farms only rarely satisfy the conditions of insurability (Skees, 1997; Skees and Barnett, 1999):

• •

  low information asymmetries between the insurer and the insured; and

• •

  risk independence (or weakly correlated) among farms.

Moreover, in the agricultural sector, an important part of risk management stems from the operators, they are not an “act of God.” When the information asymmetry is high between the insurer and the operator, it has two well-known consequences: the self-selection and moral hazard. Most agricultural risks are systemic, as, over a large geographical area, they are highly correlated.

In this context, the development of new risk management tools can be seen as new opportunities for wine companies. Weather derivatives appear to be one of the most promising tools developed recently in this field. Claudio Zara (2010) has presented a very interesting work to show the interest of such contracts for the wine industry. He explains clearly why these contracts are serious competitor to insurance contracts. They are constructed on objective measures (temperature, precipitations, etc.) reducing the problem of information asymmetry. The precise definition of payments reduces the conflict on the actual amount of losses incurred by the farmer. He proposes to use a weather index (the Ribéreau-Gayon index) combining temperature and rain (they are often not combined in the literature on the subject) and adapted to wine production. He then estimates the relation between this index and the production of Pinot Noir in Burgundy (the relation obtained appears to be very good) and construct a suitable hedging strategy.

The main results from a practical point of view are the following: first the strategy effectively protects against climate risk and second the cost of this strategy is acceptable. The work of Claudio Zara is thus a first important step to the implementation of such instruments, demonstrating their objective interest for producers. Now further works must be done on the economic viability of wine weather derivative markets and to get the acceptance of derivatives contracts by producers.

Strategy, concentration and financial performance

Concentration strategies, the case of the Bordeaux region

Does globalization also affect traditional producing regions such as Bordeaux? As underlined by Coelho and Rastoin (2005), the overall degree of the wine industry concentration is rather low, as compared to other food or drinks sectors, and the wine industry can be described as a “fringe oligopoly”. Since the late 1990s, a world-wide process of re-structuration has been going on, including some actors of this leading world wine region.

Jacques-Olivier Pesme, Marie-Claude Belis-Bergouignan and Nathalie Corade (2010) first focus on the methods and theoretical framework used to measure the Bordeaux cooperatives and merchants concentration processes. For the first time in the academic literature, these recent concentration operations in Bordeaux are clearly described and quantified.

They outline the main features of these two actors' categories concentration operations and find that commercial stakes drive the strategic collaborations, take-overs and mergers for both. When co-operatives or merchants are trying to develop brands or are prospecting emerging markets, the firm size and its relative financial capacities count! A comparative analysis regarding strategic options is proposed, stressing the (mostly commercial) motives underlying these differentiated concentration processes. On one hand co-operatives favour mergers in order to enlarge their territorial constraint limits and, on the other hand, for wine merchants, acquisitions first and then mergers dominate.

Some research questions, however, remain: Is this substantial re-structuring of the Bordeaux wine sector really wanted or is it a reaction to the competitive pressure and the problematic failure of some players? Are these strategic moves mostly defensive or are there some offensive objectives leading to these strategic moves?

Strategic movements and performances

The link between strategy and financial performance have been extensively investigated and to a lesser extent, the relation between strategy and finance have been explored since the 1980s with, for instance, the famous debate on the relation between industry competitive intensity and leverage (Brander and Lewis, 1986, 1988; Maksimovic, 1988) while others reach the opposite relationship (Poitevin, 1989; Bolton and Scharfstein, 1990; Dasgupta and Titman, 1998). The paper of Franck Duquesnois, Cãlin Gurãu and Frédéric Le Roy (2010) is part of the first stream of literature cited above.

The factors behind increased demand for tools of risk management are also at work in the strategic changes observed in the wine sector. Duquesnois et al. show that as for risk management, deregulation and hyper-competition are main pillars to explain the strategy of French companies in the wine industry. They add two more pillars, the fact that the French wine industry is a declining sector and the current crisis within this sector. The main interest of their paper is to link crisis perception, strategic movements and firms' performance. They show that, for French companies in the wine industry, only a few strategies (niche, differentiation and relational marketing) lead to avoid a dramatically decreasing turnover in this crisis period.

Performance is a multidimensional concept, with no single criterion being always adequate. A problem that results in a variety of measures emphasizing different performance dimensions (Diamantopoulos, 1998, 1999). In their paper, Duquesnois et al. choose to measure performance with the variation of turnover during the period investigated. Although we recognize the interest of this performance dimension we need to advocate for more specific financial performance measures which are profit related to risk measurements. In these fields, strategic and marketing studies appear to us to be too much concentrated on the impact of strategies on the sales or profit level, neglecting an important financial dimension of financial performance: risk. A strategy can be financially successful if it reduces profit but reduces risk even more.

Prospective and modelling work for more profitable decision making

Brand perception and wine pricing (JL)

One important source of financial performance is the comprehension of the consumer purchasing process. Louise A. Heslop, David Cray and Anahit Armenakyan examine the direct and interaction effects of wine brand and country of origin on perceptions of the personality image, expected price and willingness to engage with the wine. They show that brand is associated with three personality dimensions – sophistication, excitement and sincerity competence – and country of origin is weakly associated with two others – ruggedness and creativity. No interaction effects between brand and country of origin was observed. These results suggest new and more flexible branding strategies across certain countries. A next step is to be accomplished: the impact of such strategies on the global and financial performance of the companies.

Profitable entrepreneurial behaviours

Successful entrepreneurship has been a long time researched question as it owes much to the work of J. Schumpeter in the 1940s. For Knight (1921) entrepreneurship is about taking risk. The behaviour of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture.

This, together with the more recent literature tends to demonstrate that entrepreneurial behaviour should lead to more investment projects and potentially better returns. But what about the size and returns of these projects in the relatively smaller wine businesses?

In this special issue, Armand Gilinsky, Jr, Raymond H. Lopez, Cristina Santini and Robert Eyler question “to what extent does entrepreneurial behaviour impact investment size and the return on that investment in the wine business?” Using data from longitudinal case studies of four representative start-up wine businesses examples in different producing countries, they develop a schematic model crossing routine work-related behaviours with adaptive and somewhat innovative ones when facing investment projects and returns. This model shows that lead entrepreneurs must develop both technical competence and social networking skills to achieve small wins (modest returns on investment).

System dynamics and value creation prospective

Another way to apprehend future risk is to try and build dynamic models which enlighten possible futures. Jay W. Forrester moved in 1956 to the MIT Sloan School of Management, computer simulations to analyse social systems and predict the implications of different models. In the early 1960s he built a computer application called “system dynamics”, which dealt with the simulation of interactions between economic objects in dynamic systems. This innovative computing software rapidly led to the famous Meadows Club of Rome research on growth limits. The Club of Rome, a global think tank that deals with a variety of international political issues, was founded in April 1968 and raised considerable public attention in 1972 thanks to D. Meadows et al.'s report Limits to Growth, which was using Forrester's industrial dynamics simulation tools. Through a study of long-term global trends in population, economics and the environment, the book made headlines around the world, and was first to begin a debate about the limits of Earth's capacity to support human economic expansion, a debate that continues to this day.

Thanks to an in-depth knowledge of the Champagne business and leading firms, Declerck (1994) questions the future of the Champagne exception. Francis Declerck and L. Martin Cloutier (2010), use “industrial dynamics” simulation to show how temporal tensions are central to the decisions made by input suppliers (Champagne grape growers) and processors (Champagne makers), as they negotiate in a context of vertical co-ordination within a cobweb economy. This modelling is well suited to simulation in a critical context, and this is relevant to the Champagne industry: the appellation area is reaching its legal size limit in 2010, while long-term world demand continues to grow.

This type of model is clearly useful for decision makers (Champagne houses and vine growers) because it improves their understanding of corporate value and future value creation, as they must negotiate authorized annual yield and the revision of the appellation.

J.-P. Couderc and J.-L. VivianiGuest Editors

Notes

1. 1.

   See Boehlje and Lins (1998) for a typology of agricultural risks.

2. 2.

   Interesting reviews of risk management strategies available in the agricultural sector are: European Commission (2001), Baquet et al. (1997), Boehlje and Lins (1998).

3. 3.

   The difficulty to design such products is illustrated by the failure of Euronext to create a futures market on Bordeaux wines (see Pichet, 2002).

Further reading

Forrester, J.W. (1961), Industrial Dynamics, Pegasus Communications, Waltham, MA.Meadows, D.H., et al. (1972), Limits to Growth: A Report for the Club of Rome's Project on the Predicament of Mankind, Universe Books New American Library, 1977.