Issue link: http://read.dmtmag.com/i/123973
nnovation is often a necessary ingredient for success in the business world. Innovative companies such as Amazon and Facebook are usually financially profitable. This relationship between profitability and innovation is widely known, so it's not surprising that companies often use innovation, in addition to quality/status, to differentiate themselves from their competitors. We applied these methods of differentiation to the wine industry, using distribution channel as a measure of innovation, and the source of grape supply (estate or non-estate) as a measure of quality/status, in order to empirically determine if innovation in the wine industry leads to greater profitability and growth. Direct-to-consumer (DTC) sales via websites, tasting rooms and wine clubs is a relatively recent innovation in the U.S. wine industry. DTC is a high-margin sales channel: Wineries normally sell products to distributors and wholesalers at 50% of the final retail price, but are able to sell products direct-to-consumer at the full retail p r i c e . H o w e v e r, DTC sales present both advantages (e.g. full markup, positive and ongoing customer rela+ Innovation in business is tionships) and often linked with financial drawbacks (more success. complicated mar+ For a winery, distribution keting, tracking and channel innovation can be shipping logistics). defined as selling a high perFor purposes centage of wines directly to of this study, we consumers. defined innovative wineries as those + It's a common perception that distribute that direct-to-consumer more than half of sales lead to greater profits their wine via DTC for wineries, but until now, channels. there was no data to prove it. We differentiat+ Sonoma State University ed degree of qualiresearchers used actual clity/status by dividing ent data from Silicon Valley the sample into Bank's Wine Division to put estate wineries and that perception to the test. non-estate wineries. Estate wineries AT A GLANCE w w w. v w m media.com generally use grapes grown on the estate as their source of supply. Non-estate wineries generally use purchased grapes as their supply source. These definitions mean that innovative wineries in our sample will be those estate wineries with more than half their distribution coming from DTC channels. THE WINE INDUSTRY DIFFERENTIATION MATRIX We divided the wine industry into four categories based on the quality of the source fruit and the fraction of total sales that are DTC. The resulting matrix is shown in Figure 1. FIGURE 1: The Wine Industry Differentiation Matrix High "Classics" "Pacesetters" "Reactives" "Image Makers" Degree of Quality / Status Low Low Degree of Innovation High Key Degree of Quality/Status: High means >50% of cased goods volume sourced from estate-grown fruit. Degree of Innovation: High means >50% of cased goods volume sold direct-to-consumer. On one end of the continuum, the "Pacesetters" are those firms that promote change and innovation in order to achieve competitive advantage and compete aggressively on quality with other firms to create sustained performance advantages. At the other end, "Reactives" are those wineries that can be characterized as: 1) being averse to risk, 2) exhibiting low levels of innovation, 3) following defensive routines and 4) reacting slowly to environmental changes. In between these two extremes lie the "Classics" (wineries that emphasize quality and status with little innovation) and "Image Makers" (wineries that seek to improve image and gain status by using innovation). The data used in this analysis was available thanks to a close working relationship between the M a y - J u n e 2 0 13 | V I N E YA R D & W I N E RY M A N A G E M E N T 91