The Quebec Wine Industry–Sectoral note
June 7, 2005
Prepared for: Professor Philip McMaster
For the course Sectoral Analysis, 53-467-04
MBA program, HEC Montreal
www.hec.ca
Prepared by:
Rodney D'Abramo (11062215)
Email: rodney.dabramo@hec.ca
Executive summary
The purpose of this sectoral note is to outline and explore the
potential for entry in the Quebec wine-making industry. Wine
consumption contributes significantly to the Quebec economy with over
$1 billion in annual sales. Yet of this, 1.5% is spent on wines grown
and produced in Quebec. This note outlines the sector, discusses the
concept of New World wines and the opportunities presented by shifting
customer tastes, surveys the players in the industry and what it takes
to become a player in the industry, and then examines the dynamics of
the wine industry. The note closes with a recommendation of viability
for entry into the Quebec wine-making industry and suggests a strategic
approach to entry.
Table of Contents
Executive summary. 2
General description of the sector 4
Description and analysis of the market 5
Market/customers. 5
Restaurants. 6
Comparison to cider industry. 6
Icewine. 6
Description and analysis of the environment 8
Demographic conditions. 8
Legal context 8
Characteristics of key players. 11
Vineyards in Canada and Quebec. 11
Suppliers. 13
Purchasers. 14
Indirect competitors. 14
Analysis: rules of the game. 15
Key success factors: 15
Conclusion – the opportunity and positioning. 17
Appendix. 18
Exhibit 1: Preferred tastes. 18
Exhibit 2: Canadian per capita wine sales from 1997 to 2003. 19
Exhibit 3: Quebec alcohol products sales. 19
General description of the sector
The history of wine in Canada goes back for many decades. Grapes were grown in
the Niagara region in the 1820’s for wine making. Development was slow for decades,
but the Prohibition in the U.S. greatly increased demand for alcohol and the Ontario wine
industry flourished: 57 new wineries were licensed in Ontario during Prohibition[1]. Since then,
the Ontario wine industry has had the leading presence in the Canadian wine industry, followed by
British Columbia and Quebec.
New world wines are those wines that are produced predominantly in North America, in regions such
as California’s Napa Valley, Sonoma County, British Columbia’s Okanagan Valley, Ontario’s Niagara
Peninsula and in Quebec’s Eastern Townships. In recent years New World wines have made great
gains in terms of wine quality, complexity, product diversity, and general perception in the
global wine community. Some New World regions such as California and Ontario’s Niagara Peninsula
have established themselves more solidly than other regions. One of the lesser mature regions is
Quebec.
The wine-making process entails growing quality, wine-suited grapes, harvesting the grapes at the
appropriate ripeness, crushing and fermenting the grapes or “must”. Once fermentation is
complete, which can take anywhere from three days to three weeks, the must is transferred to
large storage for a period of at least a few months, then bottled, aged, and sold. Estate
wineries include on one site the vineyard where grapes are grown and the winery where the wine is
produced. The terms vineyard and winery are interchangeable in this note.
Description and analysis of the market
Market/customers: an important market for the Quebec wine industry is the drinking population of
Quebec, notably Montreal. The Quebec wine consumption is growing at approximately 10% annually
(see exhibit 2 in the appendix). In 2004, 110 million litres of wine worth $1.13 billion was
consumed, with only $15 million[2] worth or 1.5% coming from Quebec products. The rest of the
consumption comes from other provinces and countries, notably Ontario and B.C., France, Italy,
Australia, and many other wine producing countries[3]. Compared to Ontario, where Ontario wines
make up 38% of consumption, there is room for Quebec vineyards to gain market share in this
market. Quebecers tend to drink quality wines at least half the time (see exhibit 1 in the
appendix for tastes preferences). 56% of imported bottled wines are AOC wines (appellation
d’origine contollée – a quality designation used in France and Italy similar to the VQA quality
label described later in the quality section of this document. A local quality board sets
standards and tests wine in the appellation). However, of the higher-quality AOC wines, 80% are
imported from outside of Canada, indicating an opportunity for quality Canadian/Quebec wines. The
Quebec domestic market is growing and there is growth opportunity for quality wines.
Restaurants: one way to reach particular market segments of wine consumers is through selected
restaurants. Currently there are a few restaurants in the Montreal area that serve Quebec wines,
and one restaurant in particular serves exclusively Quebec wines. Fourquet-Fourchette is a
restaurant in Chambly with a Neuve-France theme, where all the food and beverages are from the
region, as well as the chefs, style of cooking, and even the entertainment[4]. This restaurant
and others with local appreciation and themes can provide a distribution channel allowing people
to try Quebec wines in a quality environment.
Comparison to cider industry: another group of players in a related sector are the cider-makers,
or vergers. Estate alcoholic cider production entails growing apples in a proprietary orchard,
and in autumn harvesting, crushing, and fermenting the apples and processing into bottles. This
is a similar process and timing with grapes, yet the agricultural requirements are quite
different. Quality wine grapevines require a challenging, stressful environment – soil that is
nutrient poor and well-drained, controlled and limited watering, and lots of sunny hot days.
Apple trees, on the other hand, require richer soil, cooler temperatures and more water, so that
in effect, a good season for grape-growing is a bad season for apples, and vice versa.
Icewine: Canada has perhaps the greatest competitive advantage for producing icewine in the
world. This exquisite dessert wine is marketed as a high-quality exclusive product, with an
associated high price. A 375 ml bottle can range from $35 to $120 depending on the vintage and
point of sale. The production process of “true” icewine requires grapes to be left on the vine
well after regular harvest time (in late September/early October) until the ambient temperature
reaches at least -8 degrees Celsius or colder for 72 consecutive hours. The grapes are then
picked, crushed and fermented as per the usual process. This freezing on the vine concentrates
the flavours and sugars in the pulp of the grape as the water is frozen out. Canada’s, and
especially Quebec’s climate is suitable for this process as we have the combination of weather
warm enough to grow grapes, and cold enough to freeze them, conditions not available in other
major wine-making areas such as France, Italy, Australia, or California. Icewine is an
opportunity closely related to the regular winery business in Canada.
Description and analysis of the environment
Demographic conditions: as the baby-boomer generation approaches retirement age, there will
likely be an increase in the leisure activities such as wine tours and tastings pursued by this
group. This provides an opportunity to vineyards established on the wine route, accessible from
tourist regions and population bases, such as the Eastern-Townships of Quebec.
Social and cultural conditions: Quebec’s historical and culturel ties with France are reflected
in the large proportion of French wine drunk by Quebecers. Almost half of all wine imported into
Quebec is from France and much of it the characteristic bold French red (see exhibit 1 in the
appendix for taste preferences). In terms of Public Knowledge of Quebec Wineries, a survey
conducted by the author revealed that 40% of adult Quebecers are aware that there is wine
produced in Quebec. Only 25% could indicate in what region of Quebec the wineries are located. A
survey of 17 SAQ (Société des Alcools du Quebec) stores revealed that only two stores carried
Quebec wines, or 12%.
Legal context: the SAQ has listing requirements that suppliers (i.e., wineries) must meet.
Suppliers apply to the SAQ and specifically to be listed in the SAQ general catalogue. Once
listed in the catalogue, any of the 400 outlets or 300 agencies (outlets such as kiosk located in
grocery stores in outlying areas) can order product, thus centralising the source of supply.
There are two categories of listings important to Quebec vineyards:
General listing: to be listed in the general listing a vineyard must commit to minimum annual
sales of $300,000. This level of sales can be difficult to achieve for a start-up vineyard.
Specialty product listing: there is no commitment by a supplier to meet minimum sales, but the
SAQ suggests minimum annual sales of $20,000 to encourage repeat purchases. This is an accessible
entry point for a starting vineyard.
Entry barriers: the entry barriers to starting a vineyard include the purchase of land, vines,
and equipment. Alternatively, entire turn-key operations occasionally come on the market for
prices anywhere from $300,000 to $1 million, but this approach entails living with the choices of
the previous owners, which can limit the implementation of the aspiring wine-maker’s strategy.
There are a plethora of non-working farms in the Eastern-Townships region of appropriate size,
roughly 100 acres. Vineyards typically contain 2000 vines per acre, and each vine can produce
between one and ten bottles of wine, depending on the age of the vine, pruning style of the
viti-culturalist, and weather. The current market price for a non-working farm of 100 acres can
be up to a few million dollars, but there are many in the $200,000 to $500,000 range. Other
equipment involved is farm tractor and related equipment, grape vines, and trellis posts and
lines. The general rule for planting costs is $15,000[5] per acre planted before the vines
produce fruit for production. To produce $900,000 worth of wine at $15 per bottle, a vineyard
would require 20 acres under vines, at a capital cost of $300,000. The total start-up costs would
thus be approximately $500,000 to $600,000 for a 20 acre vineyard. However, the vineyard could
grow year by year from an initial farm purchase of as little as $200,000.
Characteristics of key players
Vineyards in Canada and Quebec: there are three significant wine regions in Canada: Ontario,
British Columbia, and Quebec. The Ontario wine industry is worth approximately $400 million per
year, the B.C. industry $200 million, and the Quebec industry $15 million. In Quebec, there are
32 commercial vineyards. Of these, 22 located in the Eastern Townships in the Dunham-Bedford area
particularly along route 202. This area is being promoted as the wine route of Quebec to attract
tourists both Quebecers and those outside Quebec. The advantage of the Dunham-Bedford wine area
is two-fold:
There is a “micro-climate” in that area that makes for a slightly warmer climate than in most
other areas of Quebec. The wineries have capitalised on this by promoting their products the
result of this terroir.
The Dunham-Bedford area is only about 60 minutes drive from Montreal, which makes an easy
day-trip for vinophiles living in Montreal. This is an important point as wine tourism is big
business around the world, and Quebec can establish itself on the wine tourism map due to the
proximity to Montreal. The important factor for the Quebec industry is that the local Montreal
population base can support this growing business and inject funds into the sector other than
through wine product retail sales. Montrealers can visit the vineyards and pay for guided tours,
tastings, lunch, souvenirs, and of course wine. This can be a significant secondary income for
vineyards, as well as an excellent way to market their products and demonstrate their value. This
extra income can be ploughed back into the vineyards to support the growing sector.
The biggest player in the Quebec sector is L’Orpailleur, which means gold-panner, one who
searches for gold in the challenging Quebec climate. L’Orpailleur has been in the wine business
since 1982 and produces some 300,000 bottles per year. Other players include many family operated
vineyards that were converted from farm operations. Often, the new wine-maker does not have
professional experience in wine-making or the wine business. Rather, he is a converted farmer,
applying farming principles to the wine business.
Quality: Quality for growth wine regions is often an issue. Gaining grape growing and wine-making
competencies is a long process and new wine regions often face harsh criticisms in their early
years, some of it warranted as the quality may not yet be attained, and some criticisms may not
be warranted as old-school wine snobs reject what is new in favour of the historical wine regions
such as France, Italy, and Spain. In response to this criticism, progressive wine regions form
quality standards and groups, such as the Vintners Quality Alliance (VQA) in British Columbia and
Ontario. Customers looking for a B.C. or Ontario bottle of wine at the point of sale can look for
the VQA seal as a “seal of approval,” that is, a wine that has been taste-tested and gone through
a series of laboratory tests to ensure it meets certain quality criteria[6]. Affiliation with the
VQA is purely voluntary, so wine-makers can choose to join, or to submit only part of their
collection to the VQA testing and labelling. This quality assurance labelling allows small
vintners to achieve recognition without spending scarce funds on marketing and competitions. VQA
membership is not prevalent in Quebec yet. The most common reason for lack of membership is the
lack of a critical mass in terms of defining standards that are appropriate for Quebec wines.
Although there is a relatively close proximity to Ontario, the Quebec wine style is different
enough to warrant its own sets of standards. For example, Ontario vineyards are mostly planted
with European vitis vinifera varieties such as Cabernet Sauvignon, Merlot, Chardonnay, Riesling,
Cabernet Franc, and others. These plantings are a result not necessarily of the vintners choice,
but of government subsidies in the 1980’s that supported a policy of changing the then less
popular North American grapes such as Seyval with the European style vines. Quebec did not follow
such a policy, and combined with the colder climate, most vineyards have planted vine species
that are better adapted to cold climates such as Seyval and Marechel Foch. Because the grapes are
different, the wines naturally are different and quality standards need to be different. However,
it seems likely that as Quebec wines and markets develop, a quality assurance board will be
established. Membership in a quality assurance organisation is an opportunity for small vineyards
to be recognised as producing quality products without spending large sums on marketing. Also
related to quality, the SAQ requires that all wines to be sold in Quebec be analysed and tested
by the SAQ laboratory on behalf of the Canadian Food Inspection Agency (CFIA).
Suppliers: inputs of vineyard/wineries are of relatively low involvement. The direct inputs are
the grapes grown in the vineyard. Other inputs are minor such as yeast for fermentation, farm
equipment, and trellis equipment. There are many substitutes for these so the importance is low.
Purchasers: the Société des Alcools du Quebec (SAQ) controls the wine market through its position
as the sole legal importer and distributor of wine[7]. As such, the SAQ is in a sense the
purchaser of all wine sold off the premises of vineyards, ostensibly serving the end-consumer.
The SAQ is thus an important factor in the wine business and relations with it must be managed
effectively. For practical purposes there are three distribution channels in Quebec, with two
controlled by the SAQ.
All wine bottled outside the province is required by law to be imported and sold by the SAQ in
their boutiques and restaurant suppler outlets only.
All bulk wine that is produced outside Quebec, but bottled in Quebec (the wine is shipped in bulk
from foreign countries) is also channelled through the SAQ, but these lower-quality products are
sold only through grocery stores and convenience stores or dépanneurs. This is almost an
exclusively Quebec practice, as 99% of imported bulk wine in Canada goes to Quebec[8].
A third channel, available only to Quebec vineyards is on-site sales. A vineyard can set up its
own boutique on the premises and sell wine to customers who visit the vineyard. Tax is still
collected on behalf of the SAQ.
Indirect competitors: other non-spirit alcoholic products such as cider and beer could offer a
low threat to wine. Ambient factors such as environmental temperature could cause consumer to
switch to a cold beer over a bottle of wine on a hot day. However, wine is still the preferred
alcoholic beverage in Quebec (see exhibit 3).
Analysis: rules of the game
The requirements for entry into the Quebec wine industry are outlined above. All players must
have the appropriate size of land, knowledge of how to manage the vineyard, and some wine-making
skills. As well, the right types of vines need to be planted on the land, and the vintner needs
to know how to manage the vineyard to achieve the delicate balance of maximum quality and maximum
yield. Recent developments in vine technology especially those suited for northern climates are
encouraging for vineyard operators in Quebec.
Key success factors:
Good site location: important factors include soil quality, sun exposure, average temperatures
through the year, rainfall, snowfall, proximity to markets and tourist accessibility.
Quality wine-maker: wine-maker consultants offer services such as advice on harvest times,
different fermentation techniques to achieve different styles, yeast selection, blending, and so
on. Hiring a wine-maker, particularly for certain key times of the year late in the season is key
to achieving a quality wine. The good consultant will teach the winery owner for future years.
Access to good consulting services is key.
Distribution intensity: it is important to deliver the final product to the customer, yet there
are two forces to this key success factor, the push and pull forces. The products must be
available in as many outlets and restaurants as appropriate. As well, intensity can be increased
if clients ask for a particular wine brand by name.
Multi-tasking entrepreneur: A broad skill set is required, including at different times of the
year how to drive and repair a farm tractor, plant vines, proliferate yeast cells, perform
laboratory tests on soil and grape content, recruit and train temporary employees for the
harvest, sell the wine to restaurants, cooperate with other wineries to promote the region, and
deal with bureaucrats at the SAQ for sales and licensing. The entrepreneurial winery
owner/operator will also be in-tune with market tastes and opportunities, such as the growing
icewine market. The successful winery owner/operator will survey and exploit these market
opportunities. The wine business is different from the farm business as the former is a
differentiated product, and the later a commodity. Solid business knowledge coupled to hands-on
ability in the vineyard positions the well-rounded winery owner/operator favourably.
Conclusion – the opportunity and positioning
The wine industry is a very old one, yet it is still dynamic and growing as people’s appreciation
for quality increases. New wine-making regions bring new wine styles which also drive change and
growth in the market, and Quebec is well positioned to exploit the New World wine market.
Development of new vine species specific to Quebec that can survive harsh winters to produce fine
wines is in progress. As these new styles strengthen in quality and popularity, there will be
growing demand for Quebec wines, both within the province and across the country. This sectoral
note proposes that there is an opportunity to enter the Quebec wine industry. The strategy to
enter would be to begin with purchasing a non-working farm in an area of Quebec that has a
relatively warmer climate, and then to build up the vineyard acre by acre as constrained capital
allows. An alternative strategy is to buy a turn-key vineyard and take over the operations from
the established business. The first approach is favoured for the coinciding learning curve and
reduced capital requirements. Solid business knowledge and hands-on experience in the vineyard
and making wine are key success factors for on-going success in the growing Quebec wine industry.
A critical success factor is strong entrepreneurial spirit reflected in a broad skill set from
working in the dirt to selling a selective high-quality product to networking for resources and
expertise.
Appendix
Exhibit 1: Preferred tastes
Most Popular Appellations in Quebec, 2000
White wine
Red wine
1
12.5% Muscadet
10.3% Bordeaux
2
12.4% Bordeaux
5.6% Montepulciano d'Abruzzo
3
9.5% Colli Albani
4.4% Valpolicella
4
7.7% Alsace
4.3% Cotes-du-Rhone
5
5.2% Orvieto Classico
3.7% Valencia
6
5.0% Bourgogne Aligote
3.5% Brouilly
7
3.6% Chablis
3.2% Costieres-de-Nimes
8
3.3% Trebbiano d'Abruzzo
3.2% Chianti
9
3.3% Cotes-du-Rhone
3.1% Languedoc
10
2.8% Castelli Romani
2.9% Cotes-du-Ventoux
Exhibit 2: Canadian per capita wine sales from 1997 to 2003
Exhibit 3: Quebec alcohol products sales
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[1] http://archives.cbc.ca/IDD-1-69-1041/life_society/canada_wine/
[2] Personal correspondence: This figure corresponds with an independent research carried out by
Anthony Carone, owner/operator of Vignoble Carone, on April 24, 2005.
[3] http://www.saq.com/img/ent/rapport04/en_pdf/Trends.pdf
[4] http://www.fourquet-fourchette.com/
[5] Hienricks, Geoff. A Viticultural Primer for Investors and Growers. Prince Edward County
Economic Development Office, Prince Edward County, Ontario, 2001.
[6] http://innovation.ic.gc.ca/gol/innovation/stories.nsf/vengss/ss01112e.htm
[7] http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr-79764e.html
[8] http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr-79764e.html
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