Canadian red wine business plan for Los Angeles

Canadian Red Wine

This is a preliminary plan for the Tropika company to develop a unit that will import Canadian red wine into the Los Angeles market and establish that product as a viable item for the low to medium priced wine consumer. Canadian wine has a long history, but it is not well-known in the U.S. market. In contrast, American wines, especially from California, are very well-known in the Canadian market and have a good share of the Canadian wine market. California wineries have sought to keep out other wines from the market for some time, but that has less power in a time of free trade and globalization. The consumer does not know Canadian wine and must be educated to its value. The Tropika company is already involved in the import and export of wine to and from California, with an extensive network for the distribution of California wines in Canada. Creating a reverse flow for Canadian red wine is not that difficult, though it will entail a considerable outlay to start the process moving and to market the product and reach the consumer. The industry is affected by a number of forces, from weather that might alter the makeup of the wine to taxation that makes it more costly. Most of these forces cannot be controlled by the distributor, who will have to cope with each of these issues as they become important. Other foreign wines have made in-roads into the American market, notably Australian wine, which has no more reputation than Canadian wine, suggesting that Canadian wine has a good opportunity to make a mark and to gain a market share. Tropika has the opportunity to use its expertise and its distribution channels to create a new market and make it valuable for American retailers and Canadian producers.

Introduction plan is to be developed for the business called Tropika to import and sell Canadian red wine from Canada to Los Angeles, California. In considering the value of such a project, analysis is to be made of the company, the product, the Canadian economy, and the market in Los Angles for imported wine and specifically for Canadian wine, to the degree that a market for wine from Canada can be assessed in this market. One reason why there would be some difficulty in making this latter assessment is that the importation of wine from Canada is a small part of the market today, showing that this particular wine does not have a large following, especially in a market that has concentrated largely on selling California wines and on importing wines from France and to a lesser extent Italy. However viable the Canadian wine industry may be, it is not well-known in California and would be seen as another competitor for the California industry, which might create some opposition. Still, the retail wine business is more independent and will import any wine that can be shown to have a market of sufficient size to make importation viable. Some market can be discerned for wine from countries not known for win production such as Australia and some former Eastern bloc countries. Some of these wines gain a market interested in the exotic nature of some imports, though this would not be likely to apply to wine from Canada. To gain a larger market share, the wine has to be of high quality, perhaps with characteristics not as well defined by other wines, and must be sold at a price that matches the market formed around that brand and type of wine. The market for red wine is healthy in California and could be reached by a new wine with robust qualities that would appeal to the consumer. The analysis of the Canadian brands should consider the characteristics of those brands and how they might be received in the American market.

Tropika

Tropika is a company that came into existence in 1990 as a wine distributor in North America, linking wineries and retailers in the United States and Canada and serving the needs of both markets. The company has been involved most directly in distributing wine from California vineyards to Canadian retailers as part of the larger effort to make wine from California more competitive with established French brands, showing that the wines produced in California match and often exceed the more established French wines for various types of wine. The California wines have gained a strong hold in the market in the last few years, while Canadian wines remain less well-known and not as widely distributed.

Tropika was formed to distribute in both directions, though to date, the main part of the business has been to distribute California wines to Canadian retailers as well as to American retailers across the country. Tropika serves as a distribution center for a number of different wine producers in California, and the growth in the market for that wine has been increasing over the last two decades or so.

Tropika is headquartered in Los Angeles, a convenient location for bringing wines in from the Napa Valley region and also a port for importing French and other wines into the country. Wines are also distributed by ship north to Vancouver for distribution across Canada to different retailers in the different provinces.

The nature of the business changes all the time as the problems involved in winemaking alter the nature of the product available. The complexities of winemaking are such that there is much still not known about why it produces the wines it does, and much is also not known about the many substances that go into the making of wine. The complexities that are seen in production account for the many variety of wines produced. Wine production is primarily an agricultural pursuit, and the vineyards controlled by the different wineries are therefore a vital element in its business and in the success of its products. Production can be affected greatly by weather, leading to a shortage of supply in some years and to inconsistent quality in others. Just as the production of wine differs from that of beer and spirits, consumption of each also differs. It also differs geographically, with the consumption of wine being a daily occurrence in Mediterranean countries, and much less in the United States. Some markets, such as Japan and India, consume little wine. In the United States, wine consumption comes in behind that of beer and liquor, which is also the case in Canada.

The distribution channels for wine are also different, with sales through wine clubs, specialty shops, markets, and with few sales over the Internet because the system mitigates against it except in thirteen states. The market is segmented according to types of wine, brands, and price. Growth in the market has been steady in the United States, rising from $11.7 billion in 1990 to $18 billion in 1999, for instance. Today, the U.S. market ranks third in the world, though in terms of consumption the market only ranks thirtieth. The U.S. is now the second largest market for exported wine and the fourth leading producer of win in the world. The size of the market is considerable but also has a good deal of room for growth. Imports into the United States have also increased, as have exports. Both areas have room for growth. World trade patterns have also changed with the creation of the European Union along with the globalization of world markets, altering the balance of competition for many products. The segmentation of wines from most vineyards is on the basis of quality and price. Companies seek more efficient and effective ways of bringing these products to the market, and Tropika has been seeking ways of improving distribution and of reaching new markets, seeing the quality of Canadian red wine as such that it could be appealing in the U.S. market and could attract people interested in something different.

The company seeks to make adjustments to the distributor network over the next eighteen months or so, shaping its core business to be more effective and to acquire the products that are needed, while products that do not contribute to the synergy sought by the company will be jettisoned. This is a good beginning to shaping a new distribution system, by concentrating on the products that are needed. The company has a good reputation and so a good position in the market. The new products to be brought in from Canada have been proven in that market and need to be tested in the Los Angeles market to see what sort of clientele they can attract, how large the consumer base may be, and what sort of marketing will generate the most business.

Canadian Red Wine

Canada has had an expanding wine industry for some time, with the industry itself extending back some two centuries. Wine first came to Canada with the first settlers, and wineries were built by Italian and German immigrants in particular. Canada now has more than 400 wineries in nine provinces. In 2002/2003 alone, sale of Canadian red wine increased by more than 15% over previous years ("Wineries in Canada" para. 2).

In the domestic Canadian market, Canadian consumers have been drawn to Canadian coolers, but domestic beer and wine have been losing ground to imports, with imported beer and wine products posting an average growth rate of 15.5% and 10.4%, respectively, over the last five years. Red wine has countered this trend to a great degree so that red wine shows a clear dominance over white wine, with 55% of the total volume of red and white wine being red wine. Between 1993 and 2000, red wine increased in sales volume more than did imports, but this trend slowed after that time. For the provinces, only Saskatchewan, Yukon, and Prince Edward Island show higher sales for domestic red wine than for imported brands, as can be seen in the following chart:

Control and Sales of Alcoholic Beverages" paras. 108).

A survey taken in 2004 showed that alcohol consumption in Canada was on the rise as total volume sales of alcoholic drinks increased 4.3% in 2003 and 7.1% in current value terms. This trend was accompanied by the fact that consumers were turning to more expensive, premium products across the board, and the aging of the population was sis shift as older consumers sought more sophisticated premium wine and spirits. Younger drinkers constituted the most dynamic sector of the Canadian market for alcoholic drinks, though, with a growing consumer base of 19 to 35-year-olds seeking more fruit-flavored alcohol and more premium lager, making this group the fastest growing segment of the Canadian beer sector ("Alcoholic Drinks in Canada" paras. 1-3).

Competition in Canada has increased as Canada has become one of the key importers of Australian wine. In 2002, Canada became the third largest wine market for Australian wines, after the U.S. And the UK, with Australian imports rising by 16 per cent in 2001 to around $C1.6 billion and are still rising. To keep this situation moving in the same direction, though, Australian wine producers must maintain quality, value for money, and a consistent supply. Canadian consumers are particularly drawn to the Wolf Blass Yellow Label Cabernet Sauvignon ("Australian Wine Sales in Canada Surge" page).

The Canadian market may be about to change in a way that would alter sales domestically. The market is aging as health concerns are increasing, which may mean that Canadian consumers will also be attracted to the reported health benefits of red wine as well. An increase in disposable income also contributes to a desire for more premium products. Another influence on the market has been the Canada-United States Free Trade Agreement beginning in 1989 after years of negotiation. In 2000, imports accounted for roughly three-fourths of Canadian wine consumption, with approximately 78% of the wine imported into Canada being from the European Union. At the same time, U.S. exports to Canada averaged four million gallons per year out of total U.S. exports of approximately 10 million gallons, and in 1988, U.S. wines represented 12.6% by volume of wine imported by Canada. Canada and the United Kingdom stand as the largest U.S. wine export markets:

This small market share was the reason for the considerable interest in the Canadian market by the U.S. government and California wine producers. In 1987, before CUSFTA, the National Trade Estimate (NTE) on Foreign Trade Barriers (U.S. Trade Representative) estimated the loss to the U.S. wine industry at $20 million to $30 million each year and considered the Canadian market to be worth $100 million to $175 million annually if all existing barriers were removed. Canada is not a large wine producer or exporter. Canada's wine exports to the U.S. In 1992 were 31,000 gallons, worth $260,000. (Heien and Sims para. 5)

Of particular import was the fact that the free trade agreement required the elimination of three specific wine-related discriminatory practices, including "listing practices," referring to the determination of which wines are to be allowed to be sold by the liquor control board in each province; pricing practices on the additional "markup" formulas for imported wines as compared to domestic wines; and new distribution practices requiring Canada to treat U.S. wines as if they were domestic wines. The United States was most concerned about listing practices in the government-operated liquor control boards because of the limited number of U.S. wines available in Canada. The elimination of such barriers also means that it is easier to import Canadian wines into the United States as well.

The changes were seen as most beneficial to U.S. producers, but they may also be useful for Canadian producers now that the Canadian dollar is stronger than the U.S. dollar for the first time in decades.

The American Market

The market has been changing with demographic shifts in the United States and with changing perceptions of alcohol consumption both positive and negative. One interesting development has been the emphasis on wine as a healthful product and as a health aid, in part because of news stories about reduced heart attack risk and other health benefits. Various foreign wines have found a market in the United States, a market that has been growing, and there are signs that these wines are being accepted more and more by the consumer who might previously have turned to French and California wines only.

A survey shows much about the wine-drinking public in America and its preferences. In America, 42% of adults drink wine, and in all 60% sometimes drink alcoholic beverages, some more than one type. America is not usually considered a wine-drinking nation, but these figures are not insignificant. Still, the United States ranks only 29th among the world's countries in per capita consumption of wine. On average, Americans drink 1.8 gallons of wine per year, or 9 bottles per person. The French, by contrast, lead with an average 19.5 gallons per year or 98.5 bottles per person. Most Americans who do drink wine do so only occasionally. In terms of all wine drinkers, each consumes on average a single glass of wine a week, and only 5% of Americans can be called frequent wine drinkers, consuming an average 5.9 glasses, or about one bottle, per week. The data indicate as well that there are demographic differences that are strong. On average, wine drinkers are better educated and earn more money than non-wine drinkers, and frequent wine drinkers climb even higher in these categories. The prototype of the American wine drinker is a female about 45 to 64. She is college-educated and probably lives in a household that is upper income. She typically drinks at home, usually during a meal, and particularly at dinner (Matthews 24).

Wine has a particular image in America as well, a generally positive image when compared with other alcoholic beverages. Acceptance of wine drinking seems to rise with educational level, and this may be related to an increased awareness of health trends and study data. There is a belief that wine can be healthful (Matthews 25), though medical research sometimes supports this proposition and at other times denies it. Even if the issue is not settled, though, the belief that wine has healthful properties is strong and governs the buying decisions for many people. Of course, there is also some belief that red wine is not as healthful as white wine, which would mitigate against the products being considered. Still, the trend is positive. Wine also has an image as a status symbol, which helps explain why its use increases with education and income level. Wine is generally used to facilitate some social interaction in the home, and there is a positive association with sociability (Matthews 26).

American wine-drinking habits generally shift very slowly, and changes are first noted by restaurateurs. They noted in the 1970s when people began moving to chardonnays. In the late 1980s the shift was to Merlot. More recently, a shift has been noted toward alternatives such as Pinot Noir. Chardonnay and cabernet remain the customers' red and white wines of choice. At the same time, there is a growing trend toward value which has brought about a reduction in prices in many restaurants. This does not necessarily bode well for some low-priced wines, however, for some restaurant owners have been eliminating their lowest-selling selections, such as wines from Italy, Australia, and Spain (Heimoff 31-32). This trend as well might mitigate against success for wines from Canada, which are also likely to be in a medium to low price range compared to the better established American brands and the French imports.

Various shifts have been taking place in the U.S. consumer market that would be important for any plan to import wine. U.S. consumer spending for food and beverages was increasing at only about 0.2% per year between 1989 and 1992. Among the reasons for this were changing consumer demographics, a slowing growth of population, shifting buying habits, and concerns about the economy. Economic concerns at the present time also may reduce the appeal of costlier wines. The U.S. population is expanding by less than one percent annually, and immigrants make up one-quarter of this increase. The population continues to age as the size of U.S. households shrinks (U.S. Industrial Outlook 1994 -- Other Consumer Nonendurables 34-15). What might bode well for the importation of wine is the increase in an older population more identified with wine consumption -- the 35-44 age group grew almost 16% by 2000, and the 65 and over segment by eleven percent. Meeting the needs of older shoppers has become more important, as does tailoring products for older and single-person households for all food and beverage products (U.S. Industrial Outlook 1994 -- Other Consumer Nonendurables 34-17).

The way matters can shift in a short time is indicated by a television broadcast on 60 Minutes in 1991. This broadcast included interviews with doctors referring to data on French health and offering explanations as to why the French affinity for fatty cheeses and indulgently heavy sauces still resulted in one of the lowest national rates for heart disease. The explanation offered was the consumption of alcohol in red wine. This statement on one broadcast resulted in a 39% increase in sales of red wine in 1992, following a 4.5% decrease between 1980 and 1990. Other media also covered this story and added to the growing belief in the United States that red wine was healthful, and this contributed to growth in this segment of the wine market (Bullard 48).

The wine market in North America was stopped entirely for a time during Prohibition in the 1920s, and the market continues to be plagued by that legacy in several ways. For one thing, the market gained a certain aura of lawlessness and also of moral decay that persists. This is seen in the way political leaders use taxes on wine and other alcoholic beverages as a form of "sin tax" to penalize those consuming these products.

The industry would suffer for some time after the repeal of Prohibition because of inefficient distribution, something seen in the government monopoly stores that discouraged patronage, in bans on wine sales in supermarkets in soe parts of the country, and in the fragmented nature of the old three-tier system of distribution (producer, distributor, retailer). The rise of supermarkets reduced the power of distributors while increasing the need for powerful brands, and the U.S. wine industry became more and more focused on the needs of its enlarging market. This fact stimulated more research and the development of new products as well as the differentiation of existing ones. The new distribution system that followed also stimulated further advertising and promotion as competitors sought to strengthen their brand image and gain market share, though much of this stopped with a new assault on the "sin" of drink with the banning of television advertising for many of these products. As the industry has continued to develop, the output of common table wines came to exceed the requirements of the market, causing prices to decline to a degree. Growth continued with the intgroduciton of new brands and with more emphasis on the quality domain, leading to intense competition between brands and names, making it more difficult for small producers to maintain their individual identity in the market. Premium quality wines continue to gain market share as sales of ordinary wines decline (Moulton 2-3). As noted, the United States does not have a strong cultural tradition of wine consumption, which is why common table wines are losing ground, while the rise of quality wines is related to certain segments of the population seeking a different wine experience.

At the same time, higher wine prices generally mean lower consumption of wine, with higher taxes contributing to much of this decline as this makes the cost greater for the consumer. Both the U.S. And Canadian governments raise taxes on wine from time to time and so contribute to a decline for the industry. Because the taxes are the same regardless of the quality of the wine, an increase in taxes tends to have the greatest impact on table wines, a sector that is already weak. Wineries producing these vintages are experiencing the most problems. If taxes are calculated on volume rather than value, table wines will be further disadvantaged when compared to quality wines (Moulton 3).

The California Market

In 2003, the devaluation of the dollar caused California wine exports to surge, which could happen again for the same reason as the current economy moves into similar territory. In that same year, the California wine industry exported $643 million in wine, which was a 17% increase, and by volume, the state shipped 96 million gallons in 2003, up 29% by volume compared with 2002. California wines are shipped to 133 countries and show steady increases in the world export market. It was noted at the time that favorable exchange rates had propelled California wine exports to the strongest year since 1999.

It was also noted, though, that the situation could have been better if the industry did not have to contend with so many trade barriers and tariffs, distribution restrictions, and production subsidies given to foreign competitors by their governments. Exports increased at the same time as there was an increase in imports from countries like Australia and Chile. In Germany alone, shipments grew by 126% to give California wines 4.2% of Germany's wine market. Shipments to France, Switzerland, and Norway also increased, while the United Kingdom remained the state's top export market. At the time, Great Britain imported 31,449 gallons of California wine for a 25% increase, and California was the third largest supplier of wine to the United Kingdom behind Australia and France.

WINE EXPORTS markets for California wine by volume, in gallons

United Kingdom: 31,449

Canada: 15,566

Japan: 12,490

Netherlands: 8,906

Germany: 5,149

France: 2,730

Switzerland: 2,054

Belgium: 2,204

Ireland: 2,056

Denmark: 1,675

South Korea: 901

California's Wine Exports Rise 17% in 2003" page).

Los Angeles Market

The Los Angeles Market differs somewhat form that of California as a whole and is centered on different areas of the city where different types of wine are most common. The city has several large wine merchants ranging from high-end stores in areas like Beverly Hills, Encino, Toluca Lake, Hollywood, and West Hollywood to more pedestrian retailers selling lower cost wines in much of the San Fernando Valley, Central Los Angeles, and numerous suburban areas. There are large-scale wine distribution centers in some parts of the city, including discount distribution centers attracting other retailers, party planners, caterers, and some consumers.

The city and the state have also seen a number of large retailers moving into the wine market more fully, notably Target stores as well as Costco and Wal-Mart. This has created some dissension in the city as political leaders see crime increasing in their districts an relate this to increased wine consumption and an increase in liquor stores in some neighborhoods, selling not only wine but other alcoholic beverages. The issue has been complex, with some seeing the selling of wine at large stores like Target as only attracting more people to drinking and the bad behavior that goes with it, while others believe that sale through a store like Target could reduce sales at the smaller liquor stores that are the greatest contributors to the problem (Gougis page). Such stores might be good prospects form the sale of a low and medium prices wine like that from Canada, and sales in these stores would also help get the brands known and increase the likelihood that they would be requested at other retail establishments, leading to an increase in sales across the board.

Management and Human Resources

Tropika is an existing company with an established distribution chain linked between the U.S. And Canada, and more directly between California and Canada. The company already has a trained management staff and can simply create a new unit to handle the importation of Canadian red wine into the Los Angeles area for distribution to retailers in the area. The project will begin with that particular target market in mind, recognizing that Los Angeles serves as an arbiter of taste in some ways so that if the product can gain a good market share in that city, it can then be distributed more widely into the rest of Southern California and then across the nation. Personnel will be needed for the transportation and distribution of the product and for marketing in the early stages, and later for sales and marketing across a wider area.

The market in Southern California is varied, with sizeable populations at all income levels and ethnic backgrounds. This alters the marketing mix to a great degree, though it creates a number of opportunities as well. The Mexican population is largest in the Southwest. Latinos in that area make up a distinct subculture, and there are two distinct elements in this subculture distinguished by legalities, the first the native-born, the second an immigrant population. The immigrant population is further differentiated as legals and illegals, depending on how the immigrant arrived and what his or her status is as far as the government is concerned. Los Angeles served as one of the regions of California with a large Hispanic population from the first, a population held over from the days before Americans came, and the presence of this community was one of the reasons for others moving northward into this area to join that existing society. Another reason for this move was the importance of agriculture in Southern California, and many of the Hispanics moving into this region had been employed in agriculture in their own land. Earlier in this century, the urban regions and the rural, agricultural regions were closer together than they are today because of settlement patterns, meaning that Hispanics could live in the city and commute to the fields. While Americans in general do not have a wine oriented culture such as is found in Europe, many in the Latin community do, though how much they would be attracted to Canadian red wine remains to be seen.