Can Sula continue to produce over 10 Million Bottles of Wine per annum?
How unexpected rainfall is disrupting India’s largest wine producer’s supply chain!
Sula Vineyards, India’s largest wine producer who created and dominates the domestic market with over 65% share, is facing a disruptive supply chain threat. Nashik, India’s wine capital and Sula’s home, traditionally experiences heavy rains (‘Monsoon’ season) from June to October. Over the past few years Nashik has experienced increased variability in weather, particularly earlier than expected heavy rains and hail.
30% of planted grapes were harvested early in 2015, nearly half of which were unusable. Moreover, grapes account for ~90% of the input value in the winemaking process, emphasizing the severity of this challenge.
This is a major problem for agricultural producers as grapes fall early from the vines – prior to fully ripening and developing aromas, depleting yields and altering grape composition. This severely impacts the quality and consistency of the wines.
Moreover, the supply chain disruption impedes the winemakers ability to optimize planting and harvesting schedules, hire temporary labor for the production season, stock optimal inventory, forecast supply and SKU varieties and most importantly meet customer demand for popular varieties.
Importing wine grapes is also not an economically or environmentally viable solution due to:
- High duties on importation of agricultural crops.
- Domestic cost advantage due to lower labor costs than traditional wine regions such as Bordeaux & Napa.
- Transportation time reduces the freshness and aromas of the grapes, highlighting the need for local suppliers.
- Further carbon emissions from transportation.
- Proud to be ‘Made in India’ a core marketing message since founded in 1998.
Recognized as a ‘pioneering’ and ‘cool’ company in India, Sula’s management has continued to innovate by implementing solutions to limit the climate change disruption:
- Diversification of wineries in other regions – Sula expanded its grape harvest capacity by 25% outside Nashik between 2013 & 2016. Sula also purchased Heritage Wineries in Karnataka, India’s second largest wine producing state, in 2017. Sula’s investment in local viticulture training illustrates their long-term mitigation strategy, although maintaining quality and consistency will be critical!
- Planting Riesling grapes in the winter harvest (conventionally a dormant period) – Riesling has traditionally grown in cold climates, originating in the German Rhine. Critics perceived Riesling would not grow in the warm Indian climate, however by harvesting the grapes early in winter, Sula launched a new grape variety and eliminated the risk of early rains. Moreover, Sula Riesling has won multiple awards for producing a unique blend of acidity from the cool nights and sweetness from the hot afternoons. The viticulturists are experimenting with other grape varieties suitable to Nashik winters.
- Double utilization of tanks – given the winemaking inputs are arriving early, Sula is using tanks and barrels twice in one season, significantly boosting return on assets.
- Limiting Supply of Premium Wines – to ensure quality control, Sula limited quantity or in some cases restricted varieties for the entire season if the grapes were sub-standard. They created exclusive and highly priced ‘Reserve Vintages,’ strengthening their luxury portfolio’s brand appeal.
Sula should also be prepared for other climate change disruptions and leverage best global practice on innovative solutions. For example, the Australia Wine Research Institute set up forecasting tools and analysed big data sets to accurately predict weather trends. Sonoma Valley in California also faced heavy flooding in 2017, leading to soil erosion – effecting long-term crop yields and risk of landslides. Sula should regularly maintain its drainage systems; ditches, pipes and inlets.
Sula also operates two other business units:
- Distribution of International Wine & Spirits (over 50 brands) across India.
- Hospitality / Wine Tourism – operates 2 hotels, a 10,000 people annual music festival and attracts over 300,000 winery visitors per annum.
Yet these two business units make up a small share of turnover. My recommendation would be to invest further in these business units to diversify away from winemaking, which is most subject to climate change. Furthermore, both Distribution and Hospitality act as critical marketing channels that grow awareness of wine and build the lifestyle brand.
Sula also has scope to boost profitability in Distribution as it’s been investing in its national sales force over the past two decades. Wine & spirits are largely sold through informal retail channels in India – road side ‘liquor’ shops. The distribution challenges create high barriers to entry for international players. Stores keep low inventory and purchasing is heavily influenced by local distributor relationships, which Sula can now leverage.
We’ve touched mostly on the impact of unexpected rainfall on grape harvesting, however there are many other potential climate change disruptions that Sula must consider. For example, wineries in Napa have experienced warmer and drier climates, resulting in disease bearing insects spreading fungi on the vines.
Lastly, is climate change the only existential threat? The Indian wine industry has grown rapidly partly due to protectionist trade policies, however The Government of India has been reducing tariffs on competing international wines!
(797 words)
Sula Vineyards, Nashik, Maharashtra, India
References
“Climate Adaptation – The Australian Wine Research Institute”. 2017. The Australian Wine Research Institute. https://www.awri.com.au/industry_support/climate-environment/climate-adaptation/.
“India’s Growing Success | London Business School”. 2017. London Business School. https://www.london.edu/faculty-and-research/lbsr/india-s-growing-success.
Mozell, Michelle Renée, and Liz Thach. 2014. “The Impact Of Climate Change On The Global Wine Industry: Challenges & Solutions”. Wine Economics And Policy 3 (2): 81-89. doi:10.1016/j.wep.2014.08.001.
“Sula Buys Heritage Winery In Karnataka”. 2017. Indianwineacademy.Com. http://www.indianwineacademy.com/item_2_726.aspx.
“Sula Vineyards Pvt. Ltd. – Taste The SULA Life”. 2017. Sulawines.Com. https://www.sulawines.com.
“The Wine Industry’S Battle With Climate Change”. 2017. Hcn.Org. http://www.hcn.org/articles/wine-in-the-wests-changing-climate.
van Leeuwen, Cornelis, and Philippe Darriet. 2016. “The Impact Of Climate Change On Viticulture And Wine Quality”. Journal Of Wine Economics 11 (01): 150-167. doi:10.1017/jwe.2015.21.
Zucchetti, Pietro. 2017. “The Environmental Impact Of Soil Erosion On A Permaculture Vineyard In Piedmont, Italy. – The Permaculture Research Institute”. The Permaculture Research Institute. https://permaculturenews.org/2016/09/06/environmental-impact-soil-erosion-permaculture-vineyard-piedmont-italy/.
Thanks, Aditya. Agreed, changes in climate have definitely affected agricultural output the world over. I worked with reinsurance companies for a couple of years (insurers of insurance companies), and one key data point that was widely understood was the rise of sea surface temperatures over the past couple of centuries (see fig. 1: https://www.epa.gov/climate-indicators/climate-change-indicators-sea-surface-temperature). Warmer sea surface temperatures meant higher chances of natural disasters such as hurricanes and tropical storms, which can have meaningful impact on agricultural output. Great that growers like Sula are working to mitigate the consequences of climate change, but I believe growers should unite with executives in other industries to fight the root causes of climate change, thereby avoiding further damages to crops.
The article left me wondering if maybe the future of wine making simply does not lie in India. With the effects of climate change expected to become worse over time, the current situation of grape supply will probably get even worse. I agree with you on the point that the company should try to diversify and maybe even shift its attention to other countries. Like French manufacturers have, it could start growing crops in other climates and then import its own “house brand” as part of the portfolio of international companies, taking advantage of the image its brand has in India while ensuring grape quality through international sourcing.
Like Bettina above, I too wonder how effective Sula can possibly be in mitigating the impact of climate change on their vineyards in India. I agree that geographic expansion – inside or outside of India – seems like a logical strategy to diversify their climate risk.
For improving yields on existing vineyards, I wonder if Sula could experiment with new breeds of grapes that could maintain consistency despite weather fluctuations. Horticulturalists have engineered, for example, cross-breeds of grapes that are hardier in cold weather [1]. Similarly, Sula should continue trying to innovate technology on their vineyards that can protect their grapes from the elements.
[1] http://www.hort.cornell.edu/reisch/grapegenetics/winehandout.html
The question that I had as I was reading this was, that isn’t this true for all wine-growing areas? Considering that the weather conditions required for a good crop of wine are exceptionally specific, I thought even France would be facing similar issues. I was surprised when I came across this article: https://www.npr.org/sections/thesalt/2016/03/21/470872883/an-upside-to-climate-change-better-french-wine. This says that global warming is actually helping French wine. But, for how long? And once that happens, would wineries move from France?
I believe diversifying areas to grow wine grapes is a good idea for Sula. I am not sure if I would advise them to diversify its business itself. I do think that if they find the right areas to grow wines, it can be a promising business for India.
Great article and I certainly hope Sula can find solutions to the rainfall issue in Nashik or at least successfully diversify in other regions / states within India. To answer your question, I do inherently believe that climate change is the majority of the threat, at least in Sula’s case. It’s impressive that the company enjoys a 65% market share within the country, and if that is largely driven by the fact that the wine is made domestically, then Sula will simply be at the mercy of variable weather patterns. An interesting parallel is with the recent wildfires in the Napa / Sonoma regions in the U.S.; these are arguably the best (and only) meaningful wine producing regions in the country and there is a limited supply of land which has now been destroyed.