The French Paradox and Increased Winery Profitability

Readers of Wine East are familiar with the "French Paradox," a report that aired on the CBS television news program "60 Minutes" on November 17, 1991. The report suggested that the lower per capita heart failure of French people with diets similar to Americans may be explained by their greater levels of red wine consumption. The reaction to the broadcast in the United States was dramatic. Over each of the next five four-week periods, sales of red wine increased by an average of 40 percent over prior year's sales. Although a large consumer response to a "60 Minutes" story is not uncommon (e.g., the Alar apple story of February, 1989), a large body of medical research conducted and/or published after the "60 Minutes" story has continued to support the belief that moderate levels of alcohol consumption provide health benefits (1). On November 5, 1995, "60 Minutes" aired a follow-up segment on the French Paradox in which results from the Copenhagen City Heart Study were discussed (2). This 12-year study by Danish researchers followed the health of over 13,000 men and women of ages 30-79. A significant finding was that abstainers of alcohol had a 37 percent higher risk of dying (from any cause) than moderate drinkers. The specific types of alcohol consumed by participants in the Copenhagen City Heart Study are examined by M. A. Gr nbæk et al. in the British Medical Journal in 1995 (3). This study found that subjects who consumed three to five glasses of wine per day experienced a significantly lower mortality rate (49 percent) than those who never drank wine. A number of possible protective compounds present in red wine also were discussed. Economic theory suggests that the demand for red wine may continue to increase because of perceived health benefits associated with its moderate consumption. If managers of wineries are to take advantage of these changes, they must have specific information for business planning and decision making. The purpose of this paper is to examine the effect of a phenomenon such as the French Paradox on small-sized to medium-sized wineries in the eastern United States. Mathematical programming procedures are used to investigate the sensitivity of profitability and production decisions to alterations in the marketing environment such as those resulting from the French Paradox. Model and Data The economic decision model employed in this study is typical of the business and technological environment facing an established, representative southern winery/juice production facility. The model is formulated and solved using mathematical programming techniques. It employs data from previous research, surveys and opinions of industry experts (4). The winery sizes investigated represent six levels of annual fermenting capacity in gallons: 5,000; 10,000; 20,000; 40,000; 80,000; and 100,000. The model maximizes winery net returns obtained by subtracting variable and fixed production costs from revenues associated with wine, juice and blended juice production and sales. Variable costs include those associated with grape production, harvesting, processing and purchases, apple juice purchases, labor, maintenance and repairs, insurance, advertising and interest on operating capital. Fixed costs include interest on capital and land, property taxes and depreciation on building and equipment. The model also includes twenty-two constraints. They are of three types: production, processing and sales balance equations; resource availability controls; and sales volume and varietal mix constraints. The production, processing and sales balance equations insure that: 1) grape production is less than or equal to available acreage times yield; 2) grape harvest is less than or equal to available production; 3) grape processing is less than or equal to harvest plus grape purchases; and 4) sales are less than or equal to the amount processed. A time index is included in the processing constraints because it assumed that no grapes are stored, that is, grapes are processed as soon as they are harvested and/or purchased. Expert opinion and unpublished data are used in the model (5). The resource availability controls insure that capital (plant and processing equipment) and labor use are less than or equal to capital and labor availability. Labor is a non-continuous variable and all units of labor are for full-time yearly employees. The sales volume constraints restrict wineries to a predefined maximum proportion of retail wine and/or juice sales by volume. Ideally, a winery would prefer to sell 100 percent of production at the retail level. However, large wineries rarely have the ability to do this because of local market saturation so upper limits are placed on retail sales volume. Similarly, certain varietals of grapes produce higher value wine and juice products. However, due to the differing tastes and preferences of wine customers, it is necessary