Kentucky Wine Industry Study Essay

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Kentucky Wine Industry Study

Abstract The object of this research is to estimate the economic impact by Kentucky Tobacco Settlement Trust investments in the wine industry, including market structure and pricing. Research methodology is used by the five competitor forces model by Michael E. Porter. Introduction In the last decade, tobacco has been one of the most beneficial crops in Kentucky, the second-largest place where 82% of all tobacco is grown (Brown, May). It has become a majority crop for farmers. However, a number of factors, such as health concerns, have contributed changes in the tobacco industry.

The anti-smoking campaigns and the National Tobacco Growers Settlement Trust were created to reduce the production and sales in tobacco by correcting funds from four big tobacco companies. According to the article posted by Al Cross (2006) in University of Kentucky School of Journalism and Telecommunications web site, “The $206 million invested so far in Kentucky agriculture has helped shake farmers’ historic allegiance to tobacco, encouraged diversification and upgraded the state’s cattle industry, the largest in the Eastern U. S.

” This means the payment from the trust is made directly to improve other Kentucky industries, including wine. However, in order to finance this settlement, those companies have to increase their price to lower the demand of smokers. Under this condition, unfortunately, 60 wineries in Kentucky have to face the budget cut problem. Background Looking at Kentucky wine market feasibility assessment (2002), Kentucky’s wine industry began in 1798 at Jessamine Country by Jean Jacques Dufour. The state had become viticulturally successful.

However, following the Prohibition in 1920, Kentucky’s wine industry had replaced by other crops and was out of business. In the same research, there are currently about 150 wine grape growers in Kentucky cultivating 215. 3 acres of vineyards; 47% of it is planted to visit vinifera varietals. The average price per ton was $1009 in 2001, and today Kentucky’s wine industry is growing up and expected to grow more in the future. Market Structure and Pricing: What economic market structure does the industry most closely resemble?

Market structure is defined the relationship as the organizational and other characteristics of a market (Geoff Riley, Sep2006), it shows the number of firms producing similar prosucts. According to the website: Business Dictionary. com, There are four basic types of market structure: 1. Perfect competition: A lot of buyers and sellers in the market, none being able to influence prices. 2. Oligopoly: A market dominated by a small number of sellers, these large sellers who have some control over the prices. 3. Monopoly: A market has only one seller, single seller with considerable control over supply and prices.

4. Monopsony: single buyer with considerable control over demand and prices. The market structure in Wine industry is very similar like the Beverage industry. Beverage market has a lot of suppliers and brands. Customers can select their favorite brands according to their preferences. New varieties and new brands are increasing every month in the market, the growth of consumer demand is increasing, the size of the market is increasing too. After years of competition and development, the wine market competition becomes more and more intense.

If those companies want to survival and development better, then they must select the correct competition strategy. What ability does the producer have to control price in this industry? 1. Producer can ask to raise the imposition prices of raw materials , to ensure sufficient supply of raw materials , make the raw materials sufficiently supply the market , prevent the shortage of raw materials when there is a lot of production produced. 2. The local government needs strong support to the local wine industry, funding or supply better favourable economic policy.

Reduce the consumption of the industry producers. 3. Several large producers or suppliers can join together, formed a price alliance, directly or indirectly, higher the marketing price. 4. Do a lot research and development of innovative products , then ask market department make more marketing publicity for the product , to improve the awareness of new products in the market so that attract consumers continuing interest in the new varieties , the advent of the new products will inevitably bring prices continue to rise for a long time.

Research methodology Bargaining Power of Supplier •Bargaining power is the ability to influence the setting of prices. •The more concentrated and controlled the supply, the more power it wields against the market. •Monopolistic or quasi-monopolistic suppliers will use their power to extract better terms (higher profit margins or) at the expense of the market. •In a truly competitive market, no one supplier can set the prices. (Levy, March 2005) Bargaining power is a relative ability of the various aspects of balance and impact with each other.

If the two sides interact in the direction of equality, then their bargaining power will be equal. Like in a very perfect system of competition market or in a two similar monopoly parties. Bargaining Power of Customers The market will become more competitive when small buyers have fewer purchasing powers. The strong buyers put enormous pressure in to the industries. Since Buyers has a lot of powerful, compare to suppliers. Buyers will take a large advantage in the market trading. For instance, consider the location of small farmers producing Wine.

They are contracted to supply the large wine industry and so give another bigger parts of their produce to such contracts. And then, if the raw material does not meet the standard or customers’ Demand for standard, their risk will be greatly enhanced. In this situation, the purchasers’ sides are too larger to exert pressure on the suppliers. Threat of New Entrants The Threat of new entrants to the wine industry in Kentucky has been estimated as high because products are undifferentiated from other competitors, and Kentucky wine is not well known as Napa Valley wine in San.

Francisco, California. However, the awareness of Kentucky wine drinkers is of low demand; the Kentucky wine market feasibility assessment research “indicates that more than one-third of wine drinkers in Kentucky and adjacent states are willing to buy a bottle of $20 Kentucky wine, especially if it is made from an obscure varietal(2002). ” Accessing distribution channels is identified as easy, especially the access to the raw materials like grapes because agriculture products are not differentiated. So the wine industry would be easily accessible for new entrants.

Also, there are advantages of companies that already operate in the wine industry, such as experiences, high demand selling locations, and technology. These are things that new entrants have to take into their consideration. On the other hand, according to Kentucky wine website, the wineries in Kentucky have been growing up from 15 to more than 60, though the impact of budget cuts from the University of Kentucky college of Agriculture to the wine department will slow new competitors trying to enter.

Without the majority of funds, Kentucky wineries will have problems with developing wine product because grape growers need to improve their grape quality and reduce a failure rate for new growers. The Kentucky wine industry needs those improvements to increase quality and make the difference from other competitors. Threat of Substitutes Because there are many types of wines in the market, there is range of price of varieties so customers could choose one brand over the others, even though there are significant differences among wines in terms of quality, taste and cost.

In the book “Competitive strategy” (Porter, 1998), the definition of the threat of substitute is the availability of a product that consumers can purchase instead of the industry’s product. According to the research, the wine industry is a high risk situation for substitutes. According to the research Kentucky wine market feasibility assessment (2002), the result of comparing the wines that are produced in Kentucky, such as “Cabernet Sauvignon, Seyval Blanc, Vidal Blanc, and Traminette”, the average price is “$12. 26”. Perhaps product from other firms would be substituted because of brand, price, quality, or other factors.

Moreover, the effectiveness of the Kentucky Tobacco Settlement Trust’s investments in alternatives to tobacco will slow Kentucky’s wine industry improvement because there is a lack of winemaking skill, and knowledge is another issue beside technological improvement. Existing Rivalry According to Porter, “Rivalry occurs because one or more competitors either feel the pressure or see the opportunity to improve position”. The wine industry of Kentucky haven’t had good image in the market. The Napa Valley wine in San Francisco and California was well known in the market for the best wine in whole United States.

But competition is growing in this industry when compared to the previous years. According to the wine institute, the “competition was higher in the wine industry last year than it has been in a decade”. Besides that the foreign made wine became more affordable for the consumers in US because of the exchange rate being stronger for dollar compared to the other currencies. Porter also stated that “Foreign competitors often add a great deal of diversity to industries because of their differing circumstances and often differing goals”. Suggestions Different kinds of grapes have been used to make variety of wines.

Almost all types of grapes are cultivated in Kentucky itself. The quality of wine depends on many things such as quality of the fruit, cultivar and the prowess of the winemaker. Developing or making good wine from grapes is an art or passion of wine makers. In my point of view, the farmers should carefully learn about the costs and the situations. The capital is needed for preparing the field for cultivation of grapes and buying the planting materials and good plants. As per the studies conducted by the University of Kentucky, “Assumed plant cost varied according to the variety planted: $3.

50 per vine for American and hybrid varieties, $4. 50 per vine for European varieties, and $ 3. 25 per vine for table grape varieties”. For production, University of Kentucky recommends “cultural practices were followed in these budgets”. The cost for the fuel for the machinery depends on the fuel industry. As per the study by the university, the labour cost ranges from $8. 50 to $15. 00 per hour. Besides that, there are some fixed costs also there, which include bird and wildlife pet control, refrigeration and irrigation.

But traditional way of making wine would also cost almost the same because what the big factories spend on machineries is spent on the other side for labor charges. Conclusion In a nut shell, wine producing farms are good for rural development. The Tobacco Settlement has encouraged many farmers to produce grapes for making wine for good profit. In the past few years, the wine Industry became more popular and grew tremendously because of the hard work of the farmers. As per the evidence mentioned above, the development will be more than what is now.

The article from Bizquest also supports the fact that, “This is business that has proven itself successful through the worse economy since the depression with consistent growth through this time”. The wine industry faced lots of threads because of the above mentioned reasons. The investment from the Tobacco Settlement did not help Kentucky’s wine industry much. On the whole, these were the findings and conclusions that we came across through our study on Kentucky wine.

References 2011. In BusinessDictionary. com Retrieved August 30, 2012, from http://www.businessdictionary. com/definition/market-structure. html#ixzz24m5OSJv3 Admin. (September15, 2010) Wine Industry Research Paper Retrieved from http://www. customwritings. com/blog/sample-research-papers/wine-industry-research-paper. html Brown, L. E. (May). www. nass. usda. gov. Retrieved from http://www. nass. usda. gov/Statistics_by_State/Kentucky/Publications/Pamphlets/tobacco06. pdf Cross Al. (2006). Top tobacco states spend tobacco settlement differently. Lexington, KY : University of Kentucky School of Journalism and Telecommunications.

Retrieved from http://www. uky. edu/CommInfoStudies/IRJCI/tobaccoreport. htm Dees,J. A, (2010) Wine Distribution Opportunity: Tap into $30B USA wine Industry & 17yrs growth http://www. bizquest. com/buy-a-business-for-sale/wine-distribution-opportunity-tap-into-30b-usa-wine-industry-and-17yrs-growth/1082618. html Kentucky wine market feasibility assessment. (2002). Motto Kryla Fisher LLP, St. Helena, CA Retrieved August 16 2012 from Http://www. agpolicy. ky. gov/kcade/market%20developm ent/020709_wine_exec_summary. pdf. Levy Y. ( March, 2005). Michael Porter’s.

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