Effects of Supply Chain Structure on Grape and Wine Quality

We analyze how cooperatives compete with private wineries regarding product quality and producer reputation. We distinguish private wineries that buy in grapes from grape growers and those that only use own grown grapes and we... [ view full abstract ]

We analyze how cooperatives compete with private wineries regarding product quality and producer reputation. We distinguish private wineries that buy in grapes from grape growers and those that only use own grown grapes and we also analyze the effect of specific regional denomination rules (e.g. DOC, IGT). Compared to private wineries growing their own grapes, cooperatives and wineries buying in grapes face the challenge to raise wine quality through appropriate incentives that induce individual growers to supply high quality grapes (e.g. quality management in the vineyard or grape pricing schemes that reward quality). The quality reputation of a winery with consumers depends crucially on its winemaking skills. Wine regions differ with respect to climatic conditions and quality denomination rules. Assuming similar climatic conditions within a wine region as well as winemaking skills between firms, incentive schemes to induce individual growers to supply high quality grapes and quality denomination rules remain crucial determinants of wine quality and winery reputation when comparing different regions and firm organizational forms.

We analyze a data set for wineries from the Italian wine region South Tyrol. The data allows to differentiate local cooperatives and private wineries that buy in grapes or not. We have information on retail prices, wine quality evaluations, indicators for winery reputation and denomination rules. We employ a hedonic pricing model in order to test the following hypotheses: First, cooperative wines suffer a significant reputation and wine quality discount relative to wines from private producers that also buy in grapes. Second, private wineries that buy in grapes suffer a significant reputation and wine quality discount relative to private wineries growing their own grapes.

Our results are mixed, but we can reject the hypothesis that suffer a significant reputation and wine quality discount relative to wines from private producers that also buy in grapes for South Tyrol. However, private wineries that buy in grapes do not suffer a significant reputation and wine quality discount relative to private wineries growing their own grapes.

We analyze the effects of supply chain organization on grape and wine quality. When cooperatives are able to implement incentive schemes to raise grape quality as typically done in South Tyrol, they may also gain a significant wine quality and reputation premium in the market. Distinguishing private wineries that buy in grapes from grape growers and those that only use own grown grapes, highlights the significance of our result.