Tropika company's plan to import Canadian red wine into 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 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.

One problem, though, is seen in the fact that the Hispanic population in Los Angeles today shows a high percentage in poverty -- among two parent families, some 17% are in poverty, more than twice the rate for blacks and whites. The absence of a male parent is also associated with a higher poverty rate at 46%. The Hispanic population increased greatly in the 1980s while the Anglo and African-American populations decreased. The Hispanic population in Los Angeles stands at 40% of the total, with the population spread unevenly through different regions of the city. School enrollment shows the same trend. The huge influx of Hispanics into Los Angeles coincided with the loss of thousands of unionized blue-collar jobs in the area, and this has had an effect on the overall economy. The median income in the state is $36,000, while in Los Angeles it is at less than $31,000. In the state, 12.5% live in poverty, while in the city it is 18.5%. The median income for Hispanics is $28,200, only slightly higher than for blacks (the City in Crisis 34-39).

The cost of any product introduced into this area will determine whether it reaches this part of the community or not. More affluent regions in the city are amore accepting of price variations, though people in those areas may see Canadian wine as inferior simply because it lacks a reputation to defend it. The marketing of the product has to be shaped to overcome any such resistance so as to each the consumer that would be interested in the product and able to pay for it.

Target Market

The target market is defined by the demographics of the city first and the state after that. A wine market is well established in the city and is served by a variety of local liquor stores, high end liquor stores and wine sellers, large retail outlets like Bev-Mo (which sells all manner of drinks in large quantities, from low-priced product to more expensive brands), box stores like Costco and Wal-Mart (now joined by Target), as well as more specialty markets like wine clubs and sales over the Internet (though the latter such sales have encountered a good deal of regulation in recent years). Some areas have been imposing taxes to cut back on the number of establishments selling this sort of product, but it is not clear how effective that effort will be in the near future. In any case, the higher end parts of the market will continue relatively unscathed, while the lower end of the scale will be the most affected by taxation and efforts to reduce sales. The products to be imported by Tropika will fall primarily into a middle range about which there is more uncertainty, except that it is relatively more impacted by certain economic shifts, such as the near-recession now taking place.

Market Entry and Marketing Strategy

Market entry is not a major issue for Tropika, which is already established in the market and is only seeking to distribute a new product to the same distribution system. Marketing strategy is a little more complicated and requires more preparation and planning. The fact that the product is not well-known in the target market means that the public has to be educated, and one way to start this is by taste-testing the product and making it available to wine clubs and wine-tasting events so its virtues can be seen and talked about among the people who would also be the most likely customers for it.

According to the American Marketing Association, consumer behavior is "the dynamic interaction of cognition, behavior, and environmental events by which human beings conduct the exchange aspects of their lives" (Bennett 40). Among the environmental events of import are cultural attitudes and ideas, as well as ideas about social class and status. Consumer decision making can be explained in terms of a cognitive processing model including interpretation and integration, with an emphasis on the interaction among these two processes. Interpretation processes concern how the consumer makes sense of aspects of the physical and social environment, aspects which can be manipulated. Attention concerns how the cognitive system selects stimuli to interpret. Integration processes concern how consumers combine and use information. One type shows how attitudes are formed, and the other concerns the issue of intention to buy. Both offer marketers information as to how the consumer makes decisions and is motivated to action, and the marketer can then provide the stimuli that leads to the desired behavior and that satisfies the needs which will motivate that same behavior (Peter and Olson 51-52).

Marketing also focuses on what are called the four p's: product, price, placement, and promotion. The product is selected but is not known by the public. The price will be competitive with wines of a similar quality. The placement has been discussed above in terms of the types of retail establishment that will serve the product and reach the consumer. Promotion will begin with the taste testing of the product and with advertising to make the product known.

Financials

The development of the unit to import and promote the product is to be undertaken slowly, growing as the acceptance of the product grows. A few hundred thousand should suffice to bring the product to Los Angeles first and to begin the process of getting it tested and known by the public. The existing distribution structure will be adapted to this project without disrupting the flow of existing products to Canada and elsewhere. The stores to be contacted are already clients of Tropika for other products and only need to be convinced that this product will have an appeal to their customers, which can be established with the wine-tasting events and with any buzz that can be started among people in the wine consuming community.

Conclusion

In many ways, this project is a modest proposal that could lead to a much larger operation to distribute Canadian red wine throughout the country. The project is to be started slowly because of the many uncertainties involved in the introduction of an untested product. There are no production costs for Tropika, as the wine is already being made by Canadian wineries and is only being imported as another product for the American market. The product has done well in Canada, and the way Canada imports California wines suggests a similarity in tastes that would bode well for this project over time.