Por PHD. Carlos Baradello, General Partner at Alaya Capital

A couple of weeks ago, I had the opportunity to spend a day in Sacramento at the Unified Wine & Grape Symposium (Jan 23-25th 2018). It was a fascinating experience. I have participated in dozens, and possibly hundreds of, conferences and industry trade shows around the world. However, this conference was different in almost every respect.

For starters, all other gatherings I had participated in related to IT — i.e., some emerging technology in telecommunications, information processing — or related applications. Historically, most of the gatherings I have attended reviewed wholly disruptive products or services that rendered prior offerings obsolete. Furthermore, the products or services at these gatherings were almost always “man-made” sans the direct, explicit participation of mother nature. In most cases, the climate at these gatherings was showy––with multiple languages often overheard in the hallways and Wall Street suits visibly present. Most products or services detailed were only a few years old, and anything beyond 5 to 10 years old was definitively a “museum piece”.

Wine, often, gets better and more expensive with age. The industry is only a few thousand years old. Furthermore, the grape and wine business is an important part of the economy, particularly here in Northern California. The wine industry is an important component of the economy. In the US, it is about a $60B per year, and here in California, represents 60 percent, and several hundred billion dollars worldwide. Wine consumption worldwide is growing at a faster clip than the global economy, and the average unit bottle price is shifting to premium brands (over $15-20 dollars per bottle).

Furthermore, while the United States (US) leads in the rankings of wine consumption, other countries lead in production. The table below highlights the top 10 largest producers and consumers of wine[1].

Rank Wine Production (2015) Wine Consumption (2015) Production (Reference Column) v. Consumption
1 Italy (17.4%) USA (13.5%) P
2 France (16.7%) France (11.0%) P
3 Spain (13.3%) Italy (8.3%) P
4 USA (10.5%) Germany (8.3%) C
5 Argentina (4.7%) China (6.5%) P
6 Chile (4.5%) UK (5.2%) P
7 Australia (4.2%) Argentina (4.2%) P
8 South Africa (4.0%) Spain (4.0%) P
9 China (3.9%) Russia (3.6%) C
10 Germany (3.1%) Australia (2.2%) C

The wine industry is also unique in that, while the US dominates most IT (information technology) sectors, European countries (Italy, France, Spain, etc.) not only are the leaders of wine production, but historically have brought forth and advanced the industry’s leading technologies. They have exported their know-how, mostly via emigration[2], to the US and to most of non-European countries, with the exception of China. Wine consumption (and production) in China is a recent phenomenon in part facilitated by globalization and the continued expansion of the country’s middle class. Other emerging countries exhibit the same trend, showcasing a high correlation between middle class enlargement and demand for wine consumption.

Nature dictates the tempo of the industry. Grapes are harvested once a year and wine production is followed by an aging process which may last from a few months to a few years. Tradition and experience dominate this process, while science and technology has played an increasing role in adding value, reducing costs, and increasing quality and efficiencies across the value chain in the last century, particularly in the last several decades, post WWII.

Incremental innovations[3] galore was my first broad impression perusing the booths of the Unified Wine & Grape Symposium trade show. The range of products on display was mind-boggling, from disparate fertilizers and agriculture machines to advanced tools and bottling labeling equipment. Suppliers for every step of the value chain and every imaginable service was on display. My own professional formation (or deformation) was to look for those disruptive forces3 that would have an impact xN (multiples of N>1), and I really had to look much harder to find those.

Identifying these critical emerging disruptive forces, in general, was not a different task from identifying the disruptive forces of any other industries. I have highlighted these below for your review:

  Disruptive Force Impact
1 Disintermediation Selling directly to the consumer is the elephant in the room of the wine industry. This is one of the few sectors within the wine industry growing annually at double digits and commanding an average bottle price pushing $40.
2 Mobilization Dashboards are slowly being adopted across a variety of smart phones across the value chain, from the vineyard to wine making and logistics.
3 Digitalization Grape-growing and wine-making are historically “analog” processes. However, every element of the value chain is shifting and being digitalized. Pumps, flow controls, valves and many other production components are becoming digitally controlled and wirelessly connected.
4 Datafication A direct consequence of digitalization is that data points can be gathered and stored. Mining vast amounts of data becomes possible and new elements of strategic value can be leveraged.
5 Cognification Vast amount of data is transformed in knowledge to improve processes, optimize result, and increase quality.
6 Automation Repetitive processes and patterns are captured in algorithms, and these algorithms become automatically executed with limited or without human intervention. Human capital and capital resources become liberated (free-up) to be re-assigned to higher value-added activities.
7 Robotization Blue-collar and white-collar robots replace human activities with higher performance and lower costs.
8 Anticipation Systems can predict processing issues and human behavior.
9 Personalization Solutions and processes become customized to the unique needs of the vineyard, wine making processes, and markets served.
10 Platformization Complex solutions become open platforms for easier deployment with minimum time and effort. Their open nature enable adopting future applications and processes as they become available.
11 Augmentation Reality is augmented via massive amount of data, connectivity, and processing power.
12 Virtualization Virtual spaces replace physical spaces. User/customer experiences are elevated to new levels of personalization.
13 Demonetization Some elements of the value chain that used to command value become free, while new value is uncovered from new elements of the value chain.
14 Democratization Processes, information, or knowledge only available to a few now are available to many. For example processes only available to large vineyards or wineries, because of their economies of scale, become available to boutique (small) producers and hobbyist.

My observations at the Unified Wine & Grape Trade Show elicited the following disruptive insights:

a) IoT is slowly penetrating different elements of the value chain making possible to start talking of a “connected” vineyard or winery:

  • Precision agriculture is enabling 2, 3, 4 and 6, among others. First examples of managing water, fertilizers, growth rates, etc. are becoming available.
  • Various key building blocks of the wine-making process (such as pumps, sensors, flow meters, et al) are becoming wirelessly “connected,” enabling dashboards and automation; enabling 3, 6, 8 and 11.

b) Software platforms are emerging to enable end-to-end management from the vineyard through production, distribution, and logistics. This is enabling 2, 4, 6, 9 and 10.

c) Direct-to-Consumer (DtC) software and Apps, enabling disintermediation (1), connecting with the consumer directly. Furthermore, this new distribution channel enables a steadfast gathering of information about consumer tastes and preferences (4) to anticipate (8) and personalize (9) the experience, enabling increases in loyalty and revenue. Tasting rooms, wine clubs, apps, et al all play a role here.

d) Work-in-process efficiencies and monitoring. For example, improving the aging process as it becomes dramatically reduced by using new oxygenation technologies,

While we are still a while away from dial-a-wine, nutraceutical[4] wines or a complete synthetic wine home production[5], there is no room from complacency. I say this not because of my expertise on this industry, but because of my conviction of the perfect storm each incumbent will face as global competitive pressures tackle every industry. Each one will likely face its deconstruction and re-construction over the next decade, due to disruptive forces pounding on the incumbents to get hold of their revenues and profits.

[1] www.wineinstitute.org

[2] Italian, French and Spanish catholic missionaries were often the technology transfer agents binging the know-how of growing vineyards and wine-making to new lands across all continents, beginning in the 1600s through the early 1900s.

[3] Incremental innovations expected improvements are about N% while disruptive innovations provide xN improvements (5% versus 5 times better performance)

[4] While the health benefits of wine are widely known, the nutraceutical food and beverage industry is still nascent.

[5] Analog to the way 3-D printing has disrupted the manufacturing, logistics and retail industries.