PART III
Institutional Innovation: Regional Appellations
CHAPTER 4 ARGUED that buyer-driven commodity chains in Britain failed to establish strong brand names as they had been able to do with many other foods and beverages. This was caused by the major volatility in wine quality, which was accentuated by vine disease; concerns of widespread fraud and adulteration; and the difficulties in establishing cheap impersonal exchange mechanisms to allow high sales volume, rather than relying on the personal reputation of wine merchants and the associated low volume and high margins. This section examines the response of traditional producer-driven commodity chains to the growth in market opportunities after 1860, and the demands by growers to establish collective regional brands for claret, champagne, port, and sherry. Three major characteristics were present in each of these regions: a limited supply of high-quality land; the concentration of production or exports in the hands of a few houses; and the presence of thousands of small producers of grapes and wines of very different qualities. It was the response of these distinct groups to the opportunities opened by trade and the problems associated with adulteration and fraud, together with the nature of political institutions, that would determine how the industry was reorganized and rents distributed from the turn of the twentieth century.
The areas where fine wines could be produced in each of the regions were strictly limited, but they were surrounded by much larger areas of vines that were used to produce lesser-quality wines. Claret, for example, was a term that applied equally to the exclusive wines of Château Lafite and to those of the Palus region, although prices differed by a factor of at least ten. Furthermore, as production costs and prices in Bordeaux for cheap clarets were double those of the Midi, there was a major incentive for local growers and merchants to blend their own wines with those from outside the region and sell them under the Bordeaux brand. A similar situation existed with the other wines described in this section. The declining collective reputation of claret, champagne, port, and sherry in the British market and elsewhere directly threatened the local producers of the cheaper wines, and indirectly even the brands of the leading firms.
Trade was highly concentrated. Many of the major houses were already established before 1840, and their names continue to be important today, although not necessarily as independent houses. In Jerez, the leading three houses were responsible for 23 percent of all exports to Britain in 1848–52, a figure that reached 36 percent with the top five houses. Market concentration was even greater with port, at 32 and 46, percent respectively.1 In the Champagne region, a few large houses, such as Krug and Moët & Chandon, also dominated, and even in Bordeaux before 1860 the leading estates often preferred to use the major shippers, such as Johnston, Schröder, and Schyler, to add an additional guarantee to their brand.2 The market dominance of these leading producer-shippers was achieved by the combination of their control of the wine produced from the limited area of high-quality land; their ability to draw on large quantities of capital to stock and mature fine wines; and the marketing and commercial connections that they enjoyed in the key British market. In all cases it was recognized that brands of a respectable producer-shipper added value to the wine.3
Both sherry and port were fortified dessert wines, and this allowed exporters not just the possibility of creating a product that would withstand transportation and poor handling by retail merchants, but also of producing a homogenous product in sufficient quantities each year that was relatively easily branded. The leading champagne firms also carried significant stocks of “house” champagne, and in this case the nature of the drink implied that it could be exported only in bottles, usually under the brand of the manufacturer. In Bordeaux the leading châteaux were relatively small, producing a fraction of the wine sold by the champagne houses, for example. However, the 1855 classification institutionalized a marketing structure that had developed over the previous half century or more, allowing consumers to select their wine by the geographic location of a specific estate or village. Fine claret also required large quantities of capital, as a producer’s reputation was linked to the spectacular quality of a particular vintage achieved only once every four or five years. Therefore Bordeaux merchants encouraged the sale of fine claret under the proprietary brand of the wine estate, not just because it created a luxury item in short supply that they were best placed to sell, but also because they themselves were very often the owners of the leading estates or benefited from exclusive contracts with them.
The economic incentives for the established export houses to cheat on the quality of fine wines were small, as any short-term profits would not compensate for the long-term decline in value of the brand.4 However, after Britain reduced tariffs in the early 1860s, the established export houses could both compete in the market for expensive fine wines as well as use their distribution channels to sell in the potentially much larger market for commodity wines, where price was the decisive factor rather than quality.
The manipulations of wine by merchants that led to a sharp drop in quality and the hostile press comments on the supposed widespread adulterations created a critical situation for the small producers in these regions. Local growers had long claimed that claret, port, champagne, and sherry constituted collective trademarks for a wine made only from grapes produced in these specific regions, and from 1900 onward they were vociferous in their demand for regional appellations. Appellations, they argued, would improve consumer information about wine quality and guarantee that only local wines would be sold. Critics, by contrast, claimed that appellations would simply create local wine monopolies and shift rents to growers, and one contemporary compared this to a return to the provincial monopolies of the ancien régime.5
While growers were united in their opposition to outside producers appropriating the local name, they faced formidable organizational problems in creating a regional brand. The sixty thousand or so growers in Bordeaux in 1900, for example, might agree not to make wines from raisins or to sell cheap Midi wines as claret to maintain the region’s collective reputation, but few would have been willing to make the sacrifice if they believed others would continue to cheat.6 Only when growers believed that a system could adequately identify and punish cheats were they likely to respect the rules themselves. This required government legislation and was opposed by those growers living outside the appellation, and by the merchants who looked to strengthen their private brands and demanded the right to purchase and blend wines from wherever they considered necessary to sell cheaply in the highly competitive international markets.
Defining the characteristics of wines such as claret or champagne also caused problems. If claret came from within certain boundaries in the Gironde, did that mean that all wines produced within the geographical area could be considered as claret, regardless of their quality? And how were wines to be classified that had been grown in one village, then crushed and fermented into wine in another? Could champagne be made with grapes grown in the Marne but crushed in Germany? Or with grapes grown in the Midi and mixed with wine from Épernay to make champagne? These questions led to bitter conflicts, as merchants argued that a wine’s reputation derived from their own wine making and blending skills. By contrast, growers believed that the reputation of a wine was located in the terroir and not the winery, and therefore only wines made from grapes produced in certain designated areas should carry the collective regional brand. Finally, establishing an effective regional appellation might allow legal acceptance at a national level, but the process of international recognition in some cases was not achieved until the end of the twentieth century.
The following chapters consider in detail the nature of cooperation and conflicts in each of the four wine regions—in particular the response first to phylloxera and later to the collapse in wine prices after 1900—and explain why some regional groups (growers, merchants) were more successful than others in establishing new market-supporting institutions. As noted, the costs and benefits from regulation were unequally distributed, and this created incentives for individual groups to capture “rents” at the expense of others. However, while the thousands of small growers in Bordeaux and Champagne were able to use their political influence to create advantageous institutions for themselves, such as regional appellations, the situation was often less favorable in those countries with “elite democracies.” In Spain, for example, authorities routinely dismissed the demands by small sherry growers in Jerez for a regional appellation or local bank, which would have made them less dependent on a handful of powerful Spanish shipping families. By contrast, in Porto, the small vine-growers found a considerably more sympathetic state, and a regional appellation was reestablished. The foreign nationality of most of the leading port shippers placed them at a distinct disadvantage when negotiating with the Portuguese state, although it did allow them to negotiate successfully with the British government the Anglo-Portuguese Commercial Treaty Acts of 1914 and 1916.
1 Calculated from Shaw (1864:192, 235, tables 12, 13) Quantity did not imply quality, however, and Ridley’s, February 1878, p. 49; March 1878, p. 89, ran a campaign that succeeded in 1878 in stopping the publication of these annual shipping lists.
2 Salavert (1912:66). See chapter 5.
3 Shaw (1864:17) suggested that brands could add up to 50 percent to the value of the wine. Ridley’s, January 1884, p. 3, argued that consumers were willing to pay higher prices for branded items because of the greater security that they were not adulterated. A reputation could also be ruined, as noted in 1882:
Too much of this cheap Wine has unfortunately been shipped and put into bottle as the veritable article, and it is to be feared will not in the results tend to advance the name of Port in popular estimation. During the past year we have had occasion particularly to notice a large parcel forwarded to London by one of the best know and oldest established firms at Oporto, the shipping price being, we believe, £18 free on board, and the importers an equally well known firm in this city. As a specimen of “Port Wine” it was perhaps as bad as anything ever so misdescribed, but for all that, it has figured, in lots of ten, fifteen, or twenty pipes at a time, month after month, in catalogues of Public Sales, very prettily marked, boldly put forward as “Port,” of——& Co’s. shipping and sold, on the faith of the name, at a small profit. We humbly venture to caution the celebrated shippers in question that no surer course could be adopted to damage the unquestionably high reputation of their brand, to say nothing of the harm likely to result to the Port Wine trade generally from the distribution of such stuff amongst the consuming public. We are glad to notice that some of the leading shippers, including the firm alluded to, have lately notified their intention of selling these common Red Wines under their true designation
(Ridley’s, January 12, 1882, pp. 6–7).
4 Casson (1994:47) notes that “a firm that has sunk a large amount of non-recoverable capital into the product is far more vulnerable to loss of custom than a ‘hit and run’ entrant with versatile equipment and negligible sunk costs. This is one reason for long-lived firms enjoying a reputation for quality and integrity that start-up firms do not.” Gary Libecap (1992:245) argues that small firms would be more likely to cheat on quality than larger ones, as “producers with large market shares absorb more of the industry-wide losses of a demand shift to substitutes if consumers cannot isolate the violating firms.”
5 See the debate on Bordeaux in chapter 5.
6 Olson (1965:10).