Can German wine cooperatives compete on quality?

Abstract

The paper analyzes how German cooperative wineries compete with private (i.e. non-cooperative) wineries regarding reputation, quality categorization and varietal selection. Among the reasons why German cooperatives lag behind in terms of reputation for quality wine are organization principles of cooperatives and the difficulty to manage growers supplying grapes of different qualities. Cooperatives turn their supply of grapes into wine often classified as quality wine without much distinction. Conversely, privately owned wineries growing their own grapes may have more control over quality along their production chain and are able to produce more distinctive wines. In turn, they gain more reputation with final consumers with respect to quality. We analyze data for private and cooperative wineries from Germany. Our objective is to identify key differences in terms of reputation for quality wine production. Specifically, we look at interaction effects based on organizational form (cooperative vs. private) and the German wine quality categorization (i.e. basic quality wine vs. Kabinett, Spatlese, or Auslese) as well as varietal effects. We employ a hedonic pricing model to test the hypothesis that wines produced by private producers receive a reputation premium relative to cooperatives. Moreover, we hypothesize that private wineries receive a price premium relative to coopera- tives for other than basic quality wines and distinct varieties such as Riesling and Pinot Noir. The empirical analysis confirms both hypotheses. The estimated coefficients indicate that cooperatives are unable to gain quality premium for most quality cat- egories and gain price premiums only for non-distinct varieties such as Lemberger and Dornfelder. We can argue that German cooperatives are stuck in the low quality corner of the quality and variety spectrum and are currently not able to compete with private wineries in terms of quality. This result supports the observation that cooperatives typically compete on price with their wines being sold in discount stores.