Free Italian Wine Market Essay Sample
This literature review aims to provide conceptual and theoretical frameworks that have attempted to explain the success of Italian wines. The theoretical frameworks will provide a lens through which to review key empirical findings that address the core factors contributing to the success of Italian wines in the global market. In this respect, the analysis of the identified theoretical frameworks will be helpful in evaluating their validity in explaining the success of the Italian wine sector. The gap identified in empirical research and prior literature serves as a motivation for this thesis.
A Brief Overview of the Prominence of Italian Wines: A Conceptual Grounding
Numerous theoretical explanations have attempted to highlight the factors contributing to the success of Italian wines. Firstly, the theoretical model by Mariani (2011) asserts that the success of Italian wines is attributed to the fact that almost every region in Italy has grapes plantations, with Italy currently having at least one million vineyards under cultivation. In addition, the geographical attributes of Italy make a significant contribution towards the success of Italian wines. Italy has a latitudinal range that favors the growth of vines. In addition, Italy is a peninsular that has a long shoreline, which brings moderate climate to most wine-growing regions in the country. Mariani (2011) points out that Italy has various mountains and foothills that provide the required altitudes for growing grapes and the ideal soil and climatic conditions that boost viticulture. Specifically, Mariani (2011) concludes that Italy is an ideal country for viticulture because it has a mountain climate, with the south wine growing region having a hot and dry climate. Furthermore, Italy has diverse soils and such climate that facilitate the growth of numerous varieties of grapes; as a result, Italy has the widest varieties of grape globally. According to Mariani (2011), Italy has at least 457 varieties of grapes that are mostly red grapes.
Kramer (2006) developed a theoretical model to explain the excellence of Italian wines. According to Kramer’s model, the success of Italian wines is attributed to the involvement of the Italian government in ensuring the competitiveness of Italian wines through the implementation of policies that regulate wine production and ensures quality wine production. Kramer (2006) further claims that such efforts by the government and key stakeholders in the Italian wine sector have played an integral role in guaranteeing quality and service-oriented wine production, which has in turn increased the competitiveness of Italian wines at the global wine markets. For instance, the Italian Ministry of Agricultures passes legislations to regulate the wine sector, and undertakes inspection and controls to enhance the quality of wines. Kramer (2006) cites the role of the Italian policy to enhance the production of quality wines and advance efficiency and value of Italian wines. He focuses on production of distinctive wines and doing away with non-traditional market-oriented wines. Therefore, the Italian government, via the Ministry of Agriculture plays a significant role in advancing the production of high quality Italian wines through the implementation of Wine and Grape Regulations, inspection control and law enforcement. Mariani (2011) asserts that the outcome of the government’s efforts is the production and distribution of wines that are of the highest quality at the global levels. The Italian government intervened in the Italian wine sector in the course of the 20th century, when the sector was embarking on large-scale production of wines. Kramer (2006) affirms that the government intervention was a success because it managed to eliminate the reputation that Italy had in terms of producing low quality wines at affordable prices. At present, Italian wines aim at making significant advances in the competitive global markets through the introduction of new brands.
Brostrom & Brostrom (2009) adopt a historical model to explain the success of Italian wines. The model points out that Italy has had a long tradition of wine production. Brostrom and Brostrom (2009) discuss various advancements in Italian wines since their inception in Italy, with the most recent advancement involving a rebirth of the wine sector in the past three decades. For a long time, Italy has had a reputation of large-scale production of low quality wines at affordable prices, unlike the case of other wine producing countries like France that placed focus on quality production (Seccia, Stasia, & Nardone 2010). The post-war period saw Italy adopt an aggressive strategy aimed at positioning the wine sector in the global wine markets, which helped in the re-launch of Italy as a producer of the highest quality wines such as Barolo, Bunello di Montalcino, Amarone and Passito di Pantelleria. At present, Italy is a coveted wine producing country in the globe, as evidenced by the booming wine exports to global markets and a competitive internal market. The Brostrom & Brostrom (2009) model indicates that Italian wines have witnessed significant advancements in the course of history in terms of production advancements, which have led to its present-day success in the global wine markets. The following section of this literature review analyses the empirical studies that have attempted to explore the factors contributing to the success of Italian wines.
The Role of Research in the Italian Wine Industry
In the recent times, the global wine industry has witnessed a comprehensive process of technological modernization with the main objectives of enhancing distribution, quality, and volume of production. Morrison & Rabellotti (2006) asserts that these changes are taking place at the global level in both traditional wine producing regions like Italy, France and Spain, and emerging wine producing countries like the United States, Australia, Chile, and South Africa. In this regard, there is a consensus that technological renovation in the wine industry has been fuelled by large investments undertaken by emerging wine producing countries that have the goal of strengthening their research institutions. On the other hand, the traditional wine-producing regions in Europe have lagged behind because of their continued reliance on old technologies and production methods because of their path dependency.
Morrison & Rabellotti (2006) assert that technological backwardness and decrease in the competitiveness of the wine industry are not a chief concern, unlike the case of other European wine producing regions. The European Union and national institutions have implemented various programmes and initiatives to address the gap in research and innovation in Europe such as research conglomerates, technological infrastructures, and innovation centers. For instance, at the EU level, the strategies adopted include promotion of research consortia between companies, research institutions, colleges and universities and public agencies. Morrison & Rabellotti (2006) hypothesized the implementation of EU research policy has been instrumental in enhancing the competitiveness and innovativeness of the Italian wine sector. The Regional Government of Piedmont, an important and an established wine producing region in Italy, denote the success of this strategy in enhancing the competitiveness of the wine industry. The regional government enacted a law to encourage the establishment of regional research and an innovation system with the primary goal of identifying guidelines for supporting scientific innovation and research (Ewing-Mulligan & McCarthy 2011).
Morrison & Rabellotti (2006) carried out an analysis of the effectiveness of the wine regional research system in advancing the competitiveness of Italian wines. The analysis took into consideration the structural features of institutions in the region of Piedmont, and their existing interactions. The goal of the study was to establish the relationship between the quality of wines produced and research plus science, and whether research and science have been instrumental in enhancing the competitiveness of Italian wines in the global marketplace. The analysis by Morrison & Rabellotti (2006) on Research and Development projects revealed high levels of cohesiveness and connectedness among all actors. The findings also revealed that the vital characteristic of the wine regional research system is the existence of core organizations having high levels of centrality, which played an integral role in the dissemination of information among key players in the wine sector. The study concluded that the Italian wine sector has already developed regional wine research systems, extension agencies, and Research and Development organizations, which have played an integral role in advancing the competitiveness of the Italian wine industry on the global level. The limitation in this study is that its analysis was based on one wine producing region in Italy to make nation-wide inferences on the state of the Italian wine sector. Nevertheless, it is evident that the study made significant contributions towards understanding the role of research in enhancing the competitiveness of Italian wines, especially through facilitating the production of quality wines. The empirical analysis by Morrison & Rabellotti (2006) points out the high density and connectedness of core organizations in the Italian wine sector, which denotes the significance of relationship between scientific institutions and wineries in ensuring the production of distinctive quality wines.
Taste or Reputation: The Case for Italian Wines
The Department of Economics at Warwick University (2011) initiated a study to compare two alternative specifications affecting the wine industry: taste and reputation. It is apparent that sensorial traits, including the reputation of wines and producers, and objective variables are all significant in influencing the willingness of the consumer to pay. The study concluded that the reputation model is more significant than the taste model, implying that the prominence of Italian wines is better explained in terms of reputation than using taste. In addition, the study suggested that the reputation specification offered a bigger amount of information concerning the formulation of the wine price. Despite the fact that wine is a broadly differentiated commodity, it is difficult to identify the appropriate variables affecting its prices. The relevant attributes that could affect wine prices could include the tasting properties (sensorial variables), such as the aroma of the wine, body, and finish. Nevertheless, there is minimal likelihood that these variables will be recognized because wine is a commodity on demand. This implies that other variables like reputation and observable elements are likely to determine the price of wine and its dominance in the market (Combris, Lecocq & Visser 2000).
The wine price formation has been explained using various theoretical models. The first model evaluates the role of sensorial wine attributes as opposed to observable attributes like vintage, denomination and grape variety placed on the label. This model asserts that consumers recognize observable characteristics easily, implying that sensorial variables play a limited role in influencing the wine price (Department of Economics, Warwick University 2011).
The second model highlights the significance of reputation of wines and wine producers among consumers, and claims that imperfect information could prevail if wine producers achieve a reputation over time in such a manner that the long-term reputation compensates for the perceived wine quality. As a result, the reputation can determine the market prices, and would appear to be economically significant than the existing wine quality measured using sensory quality variables. Applying this theoretical model to the case of Italian wines, the Department of Economics at Warwick University attempted to fill the void and undertake a comparative analysis of the significance of sensory and reputation variables. The strength of the study was that it used a distinctive data set on two prime Italian wines produced in Piedmont region: Barolo and Barbaresco.
An odd characteristic of wine is that quality attributes are not easy to evaluate neutrally, yet they are anticipated to shape customer preferences and market preferences. The first model depends on the hypothesis that the quality of wine is acknowledged to rely on sensory evaluations. Despite the fact that tastes are intrinsically subjective, experts in wine production, assert that limited codified variables univocally influence the wine quality and its price. The codified variables are referred to as the sensorial characteristics. In the light of this view, Combris et al. (2000) used Bordeaux and Burgundy wines data sets to assess the variation in quality and price of wine respectively. The findings of both studies revealed that sensorial variables are significant in determining the quality of wine, whereas the objective attributes placed on the label of the wine bottle strongly influence price. Contrary to the analysis by Bordeaux, the findings of Burgundy analysis revealed three important sensorial variables (fat, acidity, and concentration) that are significant in determining the wine price.
The second model focuses on the significance of the reputation of wines and the producers amongst the consumers, a strategy adopted by Italy through focusing on service-oriented production instead of large-scale production that leads to low quality. A well-established or anticipated wine quality can be attained using long-term relationships common while determining the market prices. In addition, the existing quality of wine could be achieved by sensory quality score measures from published wine guides.
Landon & Smith (1998) evaluated this model and reported that long-term reputation provides a more comprehensive explanation of the consumer’s willingness than short-term quality changes. In addition, the study reported that ignoring reputation indicators in the wine industry could lead to overstating the impacts of the existing quality on the market prices. The Department of Economics, Warwick University (2011) deployed the models jointly on the Italian wine industry in order to assess whether they influence the quality perceptions and the role of reputation in ensuring preference of Italian wines in the global markets. The findings reported that Italian wine producers embarked on establishing their reputation using promotional activities like engagement in wine exhibitions and citations in well-known wine guides.
Appellation of Wines and Consumer Preference
Closely related to the aspect of wine specifications, in terms of taste and quality, is the sociological perspective linked to the construct of status to organizations. Folta et al. (2010) pinpoints three basic conclusions; first, it is a fact that status can be differentiated from visible quality. Acknowledging that status has a high correlation with quality, recent empirical studies have placed emphasis on the criticality of controlling for observed quality to point out that status has a distinct effect from observed quality. Secondly, status attained from social associations creates a higher willingness to pay from consumers and suppliers because it influences the utility achieved from the association or consumption of the commodity. In this regard, Folta et al. (2010) examined how the status of the affiliating partners/regions of a wine producer can determine the quality and pricing of wine. Folta et al. (2010) hypothesized that status affiliations can enable wine producers to overcome barriers associated with market entry since they can eliminate uncertainty and enhance the value of the exchange associations. Thirdly, status leads to significant benefits to the wine producer since it is more costly for high-status others to affiliate than other producers who are less prestigious. The underlying argument is that prestigious partners lose more when collaborating with weak producers, especially concerning the perceived quality. The Italian wine industry offers distinct context for studying the influence of status affiliation on new product introduction. This is because there are significant variations in status across the wine regions because of diverse geography and a well-formulated designation system.
A significant revolution in the Italian wine industry took place in 1963 when the Italian government implemented strategies aimed at improving the quality. The government set up wine appellations with the primary objective of regulating wine production in accordance with geographic boundaries. The appellations aimed at eliminating potential fraud from quality and identity of wines from specific wine producing regions and facilitating commercialization by reinforcing brand recognition and wine classification. The above changes have played a significant role in ensuring that Italian wines move towards the production of high quality wines.
Wine appellations are vital in influencing consumer behavior. Morrison & Rabellotti (2006) assert that a good score in a wine guide facilitates the sale of the whole production of that specific wine in duration of one week since the publication of the guide. It is a fact that all twenty wine producing regions in Italy and appellations within the regions have varying prominence in terms of wine production. Some appellations such as DOCG enjoy a long reputation, whereas others are gradually evolving as vital producers of high quality wine (Bastianich & Lynch 2005).
Regulations in the wine industry require that each wine appellation be displayed on the label of the wine bottle. Morrison & Rabellotti (2006) believe that displaying the appellation plays a key role in enhancing the competitiveness of the wine industry through increasing market share and product price. Bastianich & Lynch (2005) noted that the display of the appellation on the label of the wine bottle establishes a reputation in the market shared by the producers under the label and each of them makes a significant contribution towards a common reputation. Simply stated, a universal reputation depends on the individual performance of each producer irrespective of the fact that the level of visibility of each individual brand name may co-exist with a single label and determines the relevance of the universal reputation itself. Fundamentally, a universal reputation helps in enhancing the individual performance of each brand name. Concurrently, Morrison & Rabellotti (2006) assert that the free riding behavior can increase with a universal label because of the difference associated with the cost of producing low quality wine and selling wine at a price that is consistent with the universal label anticipated by consumers. This has the potential of gradually reducing the reputation of Italian wines. Folta et al. (2010) affirm that the appellations in the Italian wine industry have a continuous effect on the consumers’ perceptions concerning quality and pricing decisions made by a winery.
According to Folta et al. (2010), companies producing new labels in wine appellations with higher status have higher pricing and price thresholds. It is apparent that appellation status has a higher influence on prices than price thresholds since it imposes a significant effect on the introduction of new wine labels. The fundamental hypothesis is that appellations in the Italian wine industry have played a significant role in enhancing quality perceptions by consumers and facilitating market entry in wine markets, which are probable factors contributing towards the prominence of Italian wines in the global market place (Seccia et al. 2010).
Rossi (2011) conducted a theoretical research that aimed at establishing the relationship between branding strategies and financial performance. Branding is vital in any sector, and its significance is increasing in case of the wine industry. The first significant conclusion from the study concerning consumer behaviors in a developed country is that products like wine are often evaluated basing on numerous criteria that may be subjective or objective, intangible or tangible, consumer or product oriented. The study by Rossi (2011) affirmed that consumer preferences depend on images, beliefs and associations with socio-cultural aspects. Perception is the core factor of success in the wine sector. Therefore, the first precise finding is that besides practical changes concerning wine production, it is uniformly important to upgrade the branding strategies by Italian wine producing firms through international and local consumer perception management. The second finding by Rossi (2011) has revealed that business strategic options deployed small wine businesses are limited because of insufficient resources. Theoretically, it is apparent that the prominence of Italian wines can be achieved through government support and collaboration with other sectors. The branding strategies adopted by Italian wines have the potential of enhancing the competitiveness of the sector.
This thesis will be helpful in adding knowledge to the existing literature concerning the prominence of Italian wines. It is evident that prior empirical studies and theoretical literature provide explanations for the quality and competitiveness of Italian wines thanks to applying theoretical models on the case of Italy. To the best of my knowledge, no study has attempted to establish how quality and competitiveness of Italian wines create a perception that they are the best in the world. Therefore, this thesis has effectively used empirical evidence to fill the gap between the theoretical models and the perception that Italian wines are the best in the world.