Climate Change and the Napa Valley Wine Industry
The current competitive landscape of Napa Valley is formed from a multitude of stakeholders of varying sizes. According to the latest data, 529 registered wineries were operating in Napa Valley in 2016 (Hoffman). The overwhelming majority of the businesses are family-owned enterprises with a relatively small production volume – rarely over 100,000 cases per year. An unspecified proportion of the wineries operates on an even smaller scale, with fewer than 10,000 cases per year being produced. The latter are essentially small-scale hobbyists who due to their output are limited in their choice of distribution options. Only the wineries with an output of more than 10,000 cases per year can secure the opportunity of working with a distributor, which provides them with the possibility to market their product in restaurants and wine boutiques.
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However, it should be noted that the modest volume is compensated by the relatively high return on investment generated by the products. As a result, the seemingly negligible proportion of 4% of the total wine produced in California generates approximately 40% of its total revenue (Hoffman). The overwhelming majority of the production is focused on a specific wine variety, Cabernet Sauvignon, which is partially responsible for the high revenues of the valley. However, it also creates additional pressure for the involved parties since such a setting requires maintaining the output above a certain threshold to retain the ability to work with the distributor while at the same time uphold the high-quality standards and, by extension, ensure high profitability of the production. Only a small percentage of wineries, including Clos Du Val, are able to fit within such a narrow margin, whereas the remainder typically produces high-quality goods on a scale of 200 cases per year or less.
The company’s competitive advantage stems from two factors. The first aspect is the availability of the valuable assets in the form of land. Bernard Portet, a professional winemaker hired by the company’s founders, was able to identify the potential of the valley’s location for the production of cabernet sauvignon and, in particular, the suitability of the Stag Leap’s microclimate for growing cabernet sauvignon grapes. The total area available to the company through ownership and long-term contracts is 350 acres. Such a move secured Clos Du Val’s capability for producing high-quality products. The second aspect is the focus on premium-class wines. While such a decision does not allow the company to operate at full capacity provided by the available permit, it grants them the opportunity to generate revenue from the higher price of the goods.
The current business model of the company, introduced in 2014 by Steve Tamburelli, is based on a shift towards a 100% estate winery. The term encompasses a range of practices aimed at the use of grapes from the land owned or otherwise controlled by the company and is associated with an emphasis on quality and exclusivity. In order to attain the status of an estate winery, Clos Du Val significantly scaled down its production volumes so that it could match them to the available resources. The resulting increase in control has led to the improvement of the product’s quality and, by extension, has enabled a substantial increase in the prices of the wines.
The cabernet sauvignon is one of the most widely known and appreciated grape varieties in the world. Its unique combination of characteristics makes it relatively convenient for cultivation and provides excellent flavor qualities and distinct aroma. As a result, it is commonly regarded as a source of the best wines in the world. Such reputation also ensures the high profitability of growing the grape, which is especially evident in the Napa Valley setting, where an acre planted in cabernet sauvignon yields twice the revenue of the same area planted in pinot noir, another highly appreciated variety.
As was mentioned above, the ownership of land in several areas of the valley is considered one of Clos Du Val’s aspects of competitive advantage. The unique set of the Napa Valley’s weather conditions makes it a perfect location for growing excellent grapes. It should also be pointed out that the variety of appellations within the valley with their respective microclimates provides the opportunity for the owners to obtain a selection of distinct harvests and, by extension, to deliver an assortment of wines. From the global perspective, such a scenario presses Clos Du Val to seek ways to adapt to the changing conditions observed in the region in order to retain the possibility of growing the highly profitable grape variety. From the local standpoint, Stag’s Leap, one of the valley’s most valuable appellations, should be considered a priority, especially in the light of the recent transition to 100% estate winery. Simply put, it is in the company’s best interests to preserve the benefits offered by the intricate interconnection of factors responsible for the location’s influence on the grapes’ growth cycle. Thus, adaptation strategies are to be considered a top priority.
Four options are available to Clos Du Val. The first is the preservation of the wine’s alcohol content. This can be done in several ways, each of which has its advantages and drawbacks. For instance, adding oak chips to the wine can alter its acidity and, as a result, decrease the alcoholic content. However, such a solution would also dramatically change the taste of wine, which would be especially apparent considering a rich fruity flavor of cabernet sauvignon (Becca). Alternatively, both reverse osmosis and dilution with water could eliminate excessive strength. However, both options would also impact the wine’s character by compromising its premium status.
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Another option is the introduction of various farming practices expected to mitigate the changing climatic profile of the region (e.g. increased use of pesticides, intensive irrigation, and mechanical protection). Such measures have the advantage of having a negligible impact on the characteristics of the final product as they only indirectly influence the process and do not introduce major changes to the chemical content of the wine. However, such an option requires a significant allocation of human resources and, in some cases (e.g. increased pesticide and fungicide use) may be limited by the existing regulations within the industry.
The third option is the change in the planting strategies. Depending on the magnitude of change, these may range from the adjustment of the vines’ row direction to abandoning the grapes and planting other cultures. In the former case, the strategy would provide benefits similar to those of the adjustments in farming practices. In the latter case, it would allow the owners to minimize the losses resulting from the inability to sustain their winemaking activities. However, it should be noted that the expenses associated with such alterations may significantly undermine the profitability of the endeavor, and the change of the crop would render the main advantage of the company obsolete and is to be considered a necessity rather than a benefit.
Finally, it is possible for the company to change the site of grape growing. This option would allow Clos Du Val to retain its experience and skill and make use of its established reputation. However, such retention is expected to be limited since its current premium status depends on the access to highly favorable conditions in Napa Valley. In other words, such a move will be resource-demanding, and its feasibility is uncertain at best, with the high likelihood of a compromised reputation.
In any case, the early adoption of changes will be beneficial for the company. Regardless of the direction chosen by the company, the transition towards a new mode of operation would require time for implementation and more time for acceptance by the customers. In some scenarios (e.g. the move to a new location), the target audience is likely to assume a cautious stance. The wine industry is strongly associated with tradition, a factor that makes any changes unwelcome, especially those associated with new technologies and processes. Thus, the players who facilitate changes early would gain a competitive advantage of rebuilding their customer base and securing strategic ties with distributors. It is also worth mentioning that the climate change factor introduces an issue of unpredictability since the models are unable to provide definitive time frames. Therefore, it is desirable to engage in the early adoption in order to remain in control of the situation.
Based on the information above, the most feasible diversification strategy for the company would require the adjustment of the farming practices in order to prolong the growth of cabernet sauvignon crops of desired characteristics in the region. Simultaneously, some of the land owned by the company can be used to plant vines of other varieties that would be suitable for the new environment. In this way, the company could both benefit from and sustain its established reputation of the estate winery specializing in a premium-class cabernet sauvignon wine in the short term while gradually introducing the new varieties in the long run. The quality of the newly introduced wines is to be prioritized over volume similar to the approach currently adopted by the company, which would make the transition more seamless and intuitive.
For the Napa Valley as a whole, climate adaptation implications are largely consistent with those determined for Clos Du Val, with the exception of the premium segment issue. In other words, the introduction of the techniques that change the chemical content of the wines (e.g. oak powder) would pose a greater risk of backlash from the consumers than the adjustment of farming practices and planting strategies. Since the pricing differs widely depending on wineries, it is likely that some of the players will experience a relatively smooth transition. It is also notable that small-scale hobby wineries that comprise the majority of the valley’s producers will likely have less difficulty in adopting costly and resource-demanding changes in planting strategies. Therefore, it is possible to expect that the overall transition will occur more smoothly for the valley as a whole than for Clos Du Val. Thus, the change of the main crop of choice can be considered the most apparent risk for the valley currently associated with the wine business, whereas other options are expected to result in a smooth transition to different pricing segments and, eventually, diversified varieties, in the long run.
Becca. “The Influence of Oak Chips Added at Various Stages of Winemaking on Sensory Characteristics of Wine.” The Academic Wino. 2013, Web.
Hoffman, Andrew. “Climate Change and the Napa Valley Wine Industry.” Harvard Business Publishing. 2017, Web.