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Patterns of Innovation in the Okanagan Wine-making Cluster[1]
By
Caroline Hickton[2]
Timothy Padmore[3]
Presented to Innovation Systems Research Network Annual Meeting
Vancouver, Canada, May 13, 2004
Abstract
The astonishing growth of the Okanagan wine industry in the past 10 years owes much to innovation. However, the industry in its present form is very new. Some features of classic successful clusters, such as proximity to substantial and sophisticated institutions for advanced research and training, are not present. The story of this paper is how the industry managed to innovate successfully and form the kinds of linkages that sustain successful clusters.
Innovation turns out to be essential and pervasive: The fundamental process (centuries old) of matching technique and product design to extremely particular micro-scale patterns of weather, soil and topography requires huge amounts of new knowledge. The industry is well networked, a prime driver of innovation. We also found gaps in the innovation system.
Introduction
This research was performed under the umbrella of the Innovation Systems Research Network (ISRN) an interdisciplinary and multi-centre research project studying industrial innovation in Canada. The work described here was funded as a three-year Major Collaborative Research Initiative by the Social Sciences and Humanities Research Council of Canada. The SSHRC funding supports (at last count) studies of 27 different clusters. Two are wine-making clusters, one in the Niagara peninsula in Ontario and one in the Okanagan Valley in British Columbia.
This paper deals with the wine cluster in the Okanagan. It characterizes the patterns of innovation and relates the patterns to the current and possible future competitiveness of the industry. Some the work on the Niagara peninsula has already been presented (Mytelka & Goertzen, 2003a; Mytelka & Goertzen, 2003b), and we draw some comparisons between the Okanagan and Niagara. The two studies took a somewhat different tack, with the Ontario study focussing more on technical innovations and the regulatory environment, and the British Columbia study emphasizing networking and marketing issues. Nevertheless, thanks to the common framework developed for the ISRN project, there are many points of contact between the two studies.
1 The Setting and the Research question
The setting
The most important fact about the Okanagan is its location and climate – important because details of soil and weather make the difference between the ordinary and the extraordinary in wine making.
The region is in the province of British Columbia in Canada. It straddles Okanagan Lake, which lies in a valley stretching approximately 200 kilometres north from the United States border. The climate is attractive, with dry and sunny summers and moderately cold winters with occasional light snowfalls. The sparse “rain-shadow” pine forests in the cooler north give way to grassland in the central valley, which transforms to a pocket desert at the international border. Agricultural activity, supported by major irrigation projects, has overlaid a human-created landscape of orchards and vineyards. The wine industry was concentrated early on in mid-valley, but the centre of gravity has moved steadily south, seeking the sun.
The geography of the region has attracted settlers for 150 years. With the construction of a modern highway system in the 1950s and 1960s, the region became a prime destination for tourists, as well as for people seeking permanent homes and a better or cheaper life than they could have in the metropolitan region to the west (the Lower Mainland, centred on the city of Vancouver). Compared to the rest of the province, the Okanagan has more elderly people and children, and fewer young adults. The population picture is consistent with a view of the region as a magnet for retirement and a popular place to raise young families.
The region includes several Indian Reserves. These First Nations communities generally have economic development strategies, recently including large land developments for grape growing.
Kelowna is the commercial heart of the region, the centre for business services and manufacturing. The city of Vernon in the north and Penticton, Oliver and Osoyoos in the south are secondary centres threaded on the ribbon of the north-south highway 97. The communities are closely interrelated, with many people living in one community, working in another and sometimes shopping in a third. We will see that, the same perception of the valley as a single community shapes the structure of the wine cluster.
The valley economy is quite diversified with recent growth driven by construction and tourism. The Okanagan has more manufacturing, business services and wholesale trade than other non-metropolitan areas in British Columbia. Most firms are small, however, and there are many home-based “micro-businesses.”
Less than half the labour force is employed full-time throughout the year. The region attracts both skilled and unskilled labour and very few companies report difficulty recruiting. The high incidence of part-time work, self-employment and small firms all contribute to reported incomes that come in below the provincial norm, but close to the average for Canada.[4] In short, the labour force is flexible, available and offers a useful mix of skills.
Agriculture is the most visible industry in the Okanagan. Orchards and road-side tree fruit stands are the essential visual symbols of the Okanagan for generations of travellers. However, for the generation born in the 1990s, there will be a competing symbol: vineyards, wineries, wine shops and wine tasting at dozens of small and large winemakers.
The question and the (brief) answer
The astonishing growth of the wine industry in the past 10 years owes much to innovation, which is the subject of our study. However, the industry in its present form is very new. Some features of classic successful clusters, such as proximity to public institutions for advanced research and training, are incomplete. The story of this paper is how the industry so far has managed to innovate successfully, for example forming the kinds of linkages that sustain successful clusters.
Before undertaking the field research, we outlined four hypotheses (Padmore & Hickton, 2003).[5] Our exploration of the first of these is the subject of this paper.
Hypothesis I: In the Okanagan wine cluster, innovation is idiosyncratic, individual and incremental, refining and re-interpreting an ancient industry. There exists an innovation system in the Okanagan. It is effective and has high connectivity. Some of the traditional “high tech” drivers for cluster development are weak or missing, and others are present or dominant. The vigour of the innovation system is one of the compensating elements. The industry, although innovative, is not yet competitive.
The hypothesis is a statement about the nature of innovation in the Okanagan wine industry. It was developed using the results of a focus group held about three months before we undertook the main data collection, which comprised a series of interviews using the basic ISRN questionnaire, modified somewhat to suit the regional industry. The hypothesis is also an evaluation of the role of innovation in the competitiveness of the region.
Our data largely support the hypothesis. Innovation turns out to be essential and pervasive: The fundamental process (centuries old) of matching technique and product design to extremely particular micro-scale patterns of weather, soil and topography requires huge amounts of new knowledge. However, we found gaps in the innovation system that may ultimately prove limiting as this new industry cluster matures. The industry is not yet internationally competitive, but is doing well in its domestic market. Saturation of the domestic market in the future may be a “disruptive event” that stimulates a fresh wave of innovation.
2 Theoretical frameworks
Most analysis and monitoring of industrial competitiveness have been done at a national level. This partly reflects the relative abundance of data available at a national scale and the greater resources available to national governments. However, the emerging appreciation of the role of regional industrial groupings has increased demand for analysis at the regional level. The ISRN was established to examine systematically innovation and innovation’s impact on industrial development at a regional level in Canada, where relatively little work had been done.
We define a cluster as “a concentration of firms that prosper in part because of their interaction, whether that is through competition or cooperation, or by serving as suppliers or customers in a value chain.” Our concept of clusters goes back to Marshall (1920), who identified three factors that tended to concentrate firms in a region: the efficiency of a pooled market for workers with specialized skills, the availability of material inputs at a low cost, and easier information flows when firms are physically close together. Michael Porter (1990) established the word cluster in its current incarnation and the importance of clustering for economic success in a global environment.
Clustering is a real phenomenon, which occurs beyond what is needed to be near final consumers or basic inputs (Ellison & Glaeser, 1994; Head et al, 1994). Clustering is related to the ease and availability of linkages that allow people to form personal relationships of trust, cooperation, and competition (Lorenz, 1992). Linkages can be either vertical, moving from supplier to client, or horizontal, among similar firms or between firms and various forms of economic infrastructure (Hanson, 1994).
The principal framework for analysis used in this paper, the GEM model, was developed to assess cluster competitiveness in regions. An extension of Porter’s “diamond,” it has been applied in the UK, principally in a consulting context (Inverness & Nairn Enterprise, 1994), and in Canada (Western Economic Diversification, 1996). It is described more fully in early work done under the ISRN banner (de la Mothe & Paquet, 1998). While the method is diagnostic and can be used for quantitative benchmarking, we will use it in this paper primarily as a descriptive framework that will allow us to see how the factors supporting innovation in the Okanagan contribute to the overall competitiveness of the wine industry in the region.
Here is a brief summary of the six determinants that make up the GEM.
Supply Factors (Groundings)
The supply determinants are the inputs to the productive process.
1. Resources: Resources are natural, inherited or developed endowments available within the region. These include natural resources like forests, mineral deposits and fish stocks as well as land, a labour supply that is skilled, flexible and reasonably priced, strategic geographical location, financial capital and, not least, technology.
2. Infrastructure: Infrastructure consists of physical structures and institutional arrangements that facilitate access to resources and support other business functions. It includes physical infrastructure like roads, ports, pipelines and communications as well as intangible infrastructure like business associations, research laboratories, training systems, tax and regulatory regime, national monetary policy, financial markets, business and labour climate, quality of life (housing, crime, etc.).
Structural Factors (Enterprises)
Structure is how production is organized.
3. Supplier and related industries: The cluster uses the goods and services of other enterprises within the region, i.e. suppliers. Success factors include diversity, quality, cost and proficiency, as well as the quality of the buyer-supplier relationships. The other issue is related firms that use similar technology, transferable human resources, similar specialized infrastructure, or that serve common markets. Success factors include the number and quality of these related firms, and the existence of formal and informal linkages between them and the cluster firms.
4. Firm structure, strategies and rivalry: These are the core value-chain firms. How well are they organized, how secure are they, how confident, how nimble? What are their competitive and growth strategies?
Demand Factors (Markets)
5. Local markets: Important are the size of the market, market share, growth and prospects, extent of local sourcing by purchasers, standards and quality expected, distinctiveness of local demand, and willingness of buyers to work with the local cluster. Our preference has been to restrict the notion of “local market” to the region itself. In the case of the Canadian wine cluster, a more helpful distinction (which we will adopt) is to define “local” to mean “provincial.” This is largely because of the monolithic provincial distribution systems, which regulate even direct sales to individual consumers, creating a provincial market which is quite homogeneous.
6. Access to external markets: In principle, regions face a more or less common set of external markets. What differentiates among regions therefore is accessibility of external markets. Issues include closeness of markets, their size and growth rates, global market share for the cluster, characteristics of end users, existing market relationships, barriers to entry, trade and export barriers.
The GEM assessment is meant to be exhaustive, a more or less complete inventory of the determinants of cluster competitiveness, adaptable to clusters of all kinds: traditional resource industries, manufacturing and service industries, high tech and low tech industries, industries located either in the private or the public sector. We are focussed on innovation and have measured only a subset of all the factors that determine competitiveness. The advantage of the GEM is that it provides a broader context for what we learn and alerts us to non-innovation-related issues that are also important to cluster success.
Other descriptive and diagnostic schemes have been proposed that take a more targeted approach, what we could call “key factors” schemes. The idea is look for enablers of cluster success and to strengthen the enablers through collective actions, both public and private. The advantage of the key-factor approach is that it involves less measurement and, if the key factors are well chosen, provides an effective template for public action.
The second theoretical framework is of this latter type. Specifically, we have chosen a list of “key success ingredients” used by the National Research Council of Canada (NRC) (Smith, 2002). This list was developed for use in technology-intensive clusters like biotech or telecommunications.
Clearly the context is different from that of a farm-based manufacturing industry using a basic technology discovered by the Greeks, a product concept originating in Roman times, and an industry structure established in the mid-1500s (when the “Little Ice Age” shut down wine making in England and gave birth to thriving export-dependent industry in France and Spain). The wine industry, at first blush, is quite different from high tech.
On the basis of this history, we wondered how similar, in terms of innovation patterns, the wine industry in the Okanagan would be to more conventional New Economy, technology-based clusters. The NRC checklist below is the way we chose to answer.
Key success ingredients for Community Based Technology Clusters
•World class R&D capacity in key technologies
•Access to highly qualified personnel
•Partnership with important R&D players - governments, industry, universities, international organizations
•Resources to invest in collaborative R&D
•Sources of technology, knowledge and skills
•Industry partnership facilities (incubators) for start-up companies
•Technology outreach services (IRAP, CTN, regional development organizations)
•Linkages to national & global knowledge infrastructure
Each of these “success ingredients” is viewed by the NRC as particularly important for technology-based development. In the language of the GEM, most of the key ingredients are things found under Groundings, that is, resources and infrastructure.
3 Data and Methods
Interviews
Our principal dataset is the record of approximately 30 structured interviews[6] with companies, suppliers, government officials, and persons responsible for various infrastructure organizations, some of which were public agencies and some industry-sponsored. The interviews were all conducted on site and in person, in most cases with both authors present and sharing the work of asking questions and recording results. We did not tape-record the interviews.
The ISRN collaboration developed a common set of interview guides, with the expectation that Principal Investigators would modify the guides to suit the character of each particular cluster. We did so. A copy of the modified company questionnaire is in Appendix 1, along with notes on what changes we made and why. The principal difference is the addition of a question where principals were asked to physically mark on a map of the Okanagan Valley the linkages to other firms, infrastructure, suppliers and clients that were most important to the firm’s ability to innovate.
Our raw data consist of one or two sets of interview notes for each company (depending on whether one or both of us were present) and the marked-up maps that were produced in response to the question on most-important linkages. No companies have been re-interviewed, but in a few cases we have posed follow up questions by phone, email or in person to clarify information from the primary interviews. We approached all but a few wineries operating in the Okanagan valley and interviewed every one that agreed to provide time for the interview. The interview subjects were usually the chief executive or one of the founders of the company, except in the case of infrastructure organizations, where we spoke to the person most involved with the wine industry in the Okanagan. Our results would have a distinctly different flavour if we had targeted our interviews to winemakers. A winemakers is a close equivalents to the chief technology officer in a high tech firm. In small firms, the winemaker and the CEO are often one and same. Nevertheless, our emphasis on CEOs brought out aspects of non-technological innovation and, more importantly in our view, served to tie innovation activities in to the strategic evolution of the firm. One probable bias of our approach is that it brought marketing innovations to a more forward position.
As soon as possible after each interview, one of us summarized his or her notes in electronic form, in some cases adding clarifying material or interpretation based on our memories of the interviews and review of documents provided by the firm. Each summary was reviewed for accuracy by the other member of the team. The summary texts are a mixture of verbatim quotations and paraphrase. No interpretation was attempted at this stage.
We obtained satisfactory and comparable interview data for 18 wineries, distributed evenly on a geographical basis and representing small, medium and large wineries. We gathered information on other wineries based on partial interviews and other sources. However, except where otherwise specified, the sample for aggregate analysis is the N = 18 core group.
Table 1: Distribution of wineries interviewed
|Sub-region |Interview sample |Universe* |
|Kelowna area |2 |9 |
|Mt. Boucherie |2 |4 |
|Summerland to Peachland |1 |6 |
|Naramata Bench |4 |15 |
|Okanagan Falls area |2 |6 |
|The Golden Mile |4 |9 |
|Black Sage Road |2 |5 |
|Osoyoos Lake |1 |3 |
|Total |18 |57 |
* The total number of wineries in the sub-region as counted by Schreiner, 2003.
The choice of sub-regions follows Schreiner (Schreiner, 2003). While somewhat arbitrary, the names reflect usage in the region. Schreiner comments that his names are “not intended to impose an appellation system on British Columbia, since it will take another generation or two to define appellations . . . (the arrangement is) conveniently arranged for wine touring as much as for the similarity of the local terroir.”[7]
Because of confidentiality undertakings required by the ethical approval process at the University of British Columbia , we do not identify individual wineries by name, except where the information is in the public domain, or where we have obtained explicit permission. Map locations are approximate, for the same reason.
Focus group
Prior to conducting the field interviews, and before finalizing the questionnaire, we conducted a focus group in the Okanagan with industry leaders. We asked them to discuss what innovation means in their industry, where they get information and expertise, how they see the future of the industry, whom we might wish to interview and what questions we might ask. It was after the focus group but before the interviews that we crystallized our hypotheses.
Documentation
We have a modest collection of publications and information related to the wine industry in British Columbia. These include annual reports of public agencies, consultants’ reports, corporate information, and magazine and newspaper clippings. One particularly valuable source is a new book on the history of the wine industry in the Okanagan, written for oenophiles (wine lovers) by John Schreiner (2003), a British Columbia wine writer. Published in 2003, it profiles virtually every winery in the province. The profiles do not go into much depth, but provide some useful material on business connections and family relationships as well as some some innovation anecdotes. From our point of view, the merit of this source is its virtual 100 per cent coverage of Okanagan and BC wineries, which we were not able to achieve.
Methods
The interview responses, as recorded in the summaries, were entered into the ISRN database at Simon Fraser University (Smith, R., 2002). Because some of our questions are different than in the model questionnaire, it was necessary to make some arbitrary decisions about where to “file” the responses. In our view, this process did not significantly degrade the data. In the analysis that follows, we used liberally the ability of the database to aggregate responses to different questions.
The map data was transferred from the raw paper maps sketched out by interviewees to Power Point and Excel files. The visual displays in this paper are built up from the Power Point maps, and the networking analysis uses the Excel files, which record the linkages among wineries and between the wineries and research institutes, agencies, suppliers and localized customers. The methodology used to analyze the numerical data is Social Network Analysis following selected methods recommended by Wasserman and Faust (1994).
Industry history and current standing: Okanagan and Niagara
The wine industry in Canada is nearly 200 years old, but for much of that time the industry bore little resemblance to its form today.
Early settlers tried, and failed, to grow European varieties. They were more successful with native varieties that were frost-hardy even though they could not match the flavour characteristics of the European wines.
In the Okanagan, the first wine-making activity is attributed to a French Oblate priest. Father Charles Pandosy planted a small vineyard to make sacramental wine. Winemaking continued as a private and personal activity for half a century, a production mode that was given a boost by Prohibition. British Columbia passed Prohibition legislation in 1917, and repealed the law in 1921.
The first wine made in commercial quantities in British Columbia was made on Vancouver Island, from loganberries, starting at about this time. The best-established loganberry winemaker, Growers’ Wine Company, switched to grapes from the Okanagan when they became available in quantity a few years later.
Okanagan winemakers began producing in commercial quantities in the late 1920s. Calona Vineyards, with its winery in Kelowna, has been making wine from Okanagan grapes since 1935. Ontario had a more or less parallel history (Mytelka, 2003a).
According to the Canadian Vintners Association (Canadian Vintners Association, n.d., Modern History Section, para. 3): “Table wines made from these native-based grapes had a peculiar taste, often described as foxy which, to those more tolerant, tasted like boiled strawberries, and to the more critical, like a throat-catching pitch.” When fortified into sherry- or port-styled wines, the CVA continues, the flavours were passable, the products were affordable, and their purchase accessible. There was even an export market, for a time, which saw large quantities of Ontario wine shipped to Great Britain.
Some “New World” wine areas[8] had better grapes to work with. (The excellent “Vinifera” varieties[9] from Europe that had taken root in California proved invaluable for restocking European vineyards when a nasty root disease swept through Europe’s vineyards in the late 1800s and early 1900s.) However, throughout the New World, industry structure was adapted to producing large quantities of low-cost alcohol-rich wines to serve domestic markets. In both Ontario and British Columbia, a few large firms dominated their regional markets. The structure was supported by regulation that reflected the political and cultural norms, notably a moral taint afflicting all forms of beverage alcohol.
This was the state of the industry throughout the Americas. The industry continued in this state until the 1960s, when consumer tastes began to favour less sweet, lower alcohol table wines. Tastes shifted towards more complex European styles of wines suitable for drinking with food and for aesthetic enjoyment. The lingering temperance attitudes that had led to Prohibition were fading, although not altogether gone.
The process of transformation proceeded at different rates in different places. It was easier to grow the Vinifera varieties in some of the New World areas (California, Chile, Australia) and early commercial success led to earlier perception of the industry in these regions as worthy of public support. A critical form of support was to establish major public research centres at universities and special institutes, which gave these New World competitors an edge against the established European industry. Research brought better technologies in wine growing and wine making and increased access to finer grape varieties and disease-resistant clones. This research transformed the technical base of the industry, increasing the quality/cost ratio and reducing risk. Large amounts of private investment flowed in to establish new vineyards and new wineries, and many small and medium-sized operations emerged that were able to compete effectively with the established players by being nimble, innovative and targeted on a higher range of price and quality.
The Canadian regions were late-comers by a decade or so, due in part to what were then seen as marginal growing conditions, but equally to structural issues (smaller market, tighter control of distribution, restrictive supply-management regimes). This was as true in British Columbia as in Ontario. However, we can now see the two Canadian clusters recapitulating the transformation that has occurred in other successful New World wine regions.
In the 1970s, a few businessmen in both Ontario and British Columbia were able to persuade their provincial governments to open the door – and lay out a welcoming mat – to new smaller and more creative players. In Ontario, Donald Ziraldo and Karl Kaiser convinced the Liquor Control Board of Ontario to grant them a licence to produce and sell wine, ending a moratorium of more than 40 years on new wine-producing licences in Ontario. In the Okanagan, Harry McWatters and others persuaded the provincial Liquor Licensing Branch to establish a new category of Estate Winery, requiring a minimum 20-acre investment in vineyards and with a ceiling on production, but offering a guaranteed place on the shelves of the government-monopoly liquor stores and favourable pricing relative to imported wines. McWatters bought one vineyard and planted another, the latter with 100 per cent Vinifera grapes. Shortly, there were four Estate Wineries in the Okanagan,[10] but relatively little further development occurred for another decade -- until the North American Free Trade Agreement changed the world for the Canadian industry.
Attitudes to alcohol vary with time and place, but nowhere is it a commodity like others. As a recreational drug, it stirs moral passions, and as an agricultural product it is affected by market-management schemes designed to protect farmers from vicissitudes of weather and trade. Consequently, politics and regulation have an important impact on both the pace and direction of industry development.
For example, a critical difference between Ontario and British Columbia is the operation of the supply-management regime for grapes. A precipitating event was the 1988 North American Free Trade Agreement, together with a ruling under GATT (the General Agreement on Tariffs and Trade) that meant Canada had to abandon the protection it offered its wine industry. The changed trade environment put pressure on the industry to lower costs and increase quality to meet competition from American imports, which became progressively cheaper as lower tariffs were phased in. A substantial sum of adjustment money, provided by the federal government, was used to support a changeover to Vinifera varieties and upgrading of growing and winemaking plant and equipment. In British Columbia, the result was an almost 100 per cent changeover to new varieties in only a few years, and the collapse of an already weak grape marketing board. In Ontario, a much stronger marketing board, sustained by tensions between growers and producers, persists to this day: price fixing persists, inferior grape varieties are protected, and the industry has not moved as quickly to the new paradigm. (We will present a fuller discussion of government policy and its consequences in a subsequent paper.)
The paradigm of the 1990s in British Columbia was frantic investment, a profusion of small wineries, and soaring land prices reflecting belief that making wine in the Okanagan was or soon would become very profitable. The area planted to vines at first fell, with the pullout program, and then increased steadily, surpassing the original area in the middle of the decade, and the area planted to vines continues to grow briskly. The late 1990s saw the beginning of consolidation, with some of the best properties being bought by eastern Canadian and international companies such as Vincor.
When premium wines began to appear in British Columbia, they were all white. It was believed that the summers were too short to ripen the classic red wine varieties, and the winters too cold for the tender vines. However, Vinifera reds began to appear in considerable numbers in the early 90s, and by the late 90s, the quality had become more consistent and wineries were evolving marketable styles of red wine.[11]
In both BC and Ontario, a certification system (Vintners Quality Alliance, or VQA) was established. The label certifies that a VQA-labelled wine meets standards for varietal character and achieves a basic level of quality, i.e. “absence of flaws.”
In terms of quality, Okanagan wines were arguably behind Ontario wines at the beginning of the 1990s, and neither region had any profile internationally. Both regions have advanced. In recent years the Okanagan has dominated competitions involving the Canadian regions. For example, Okanagan wineries won 24 categories in the Canadian Wine Awards in 2003, compared to 13 for Ontario (of which 7 were for fruit wines, where Ontario remains dominant) (Wine Access, n.d.). Canadian wineries have won gold medals at many international competitions,[12] but such events are still seen as remarkable and are reported in Canada with a tone of surprised self-congratulation.
Data in the following table, produced by the British Columbia Wine Institute (BCWI 2002), are evidence of progress. We do not have a breakdown of the medal totals between the Okanagan and the rest of the province, but our own check of individual competitions indicates that a very large majority of the BC medals went to the Okanagan cluster as we define it below (section 4.4 on Firm Structure and Strategy).
Table 2: Medals and awards for British Columbia wines
|Year |Gold |Silver |Bronze |Total |Gold/Bronze |
|1994/95 |14 |37 |59 |110 |24% |
|1995/96 |15 |49 |86 |150 |17% |
|1996/97 |23 |51 |108 |182 |21% |
|1997/98 |40 |97 |165 |302 |24% |
|1998/99 |68 |141 |205 |414 |33% |
|1999/20 |91 |231 |255 |577 |36% |
|2000/01 |127 |266 |316 |709 |40% |
|2001/02 |169 |378 |403 |950 |42% |
British Columbia Wine Institute
The figures show strong growth in medal totals in the seven years up to the time of our field work.
Medal counts are an unreliable indicator of quality; the purpose of wine competitions is marketing rather than science. Some of the increase is undoubtedly due to the increasing total number of medals awarded in the world, and some may also be due to increased effort by Okanagan wineries. Participation in wine competitions is viewed as a strategic marketing activity and medals are often profiled as a selling point for individual wines and sometimes to support marketing efforts for other products made by the same winery.
To try to extract a more reliable measure of relative quality, we calculate a “quality ratio,” ratio of gold to bronze medals, which indeed shows a strong trend of improvement.
Innovation in the Okanagan: a sampling
As expected, the innovations identified in our interviews by industry actors were mostly incremental rather than radical. None were revolutionary. One winemaker began by saying he did nothing that was innovative, that the technology was hundreds of years old, but he conceded that wine-making has changed in the last 20 years. He cited numerous techniques for handling grapes more gently using bladders, screws and gravity flow, and proudly described how he has installed state-of-the art systems in his small winery.
The business models are similar to those developed over the last 30 to 40 years in other New World wine/tourism regions, especially California. Both Canadian regions enjoy tourist traffic independent of the wine trade, and both piggy-back on this traffic by offering tourist-type experiences, including winery tours, captive restaurants to showcase product, and sometimes bed and breakfast accommodation.
Opportunities for bottle tasting are universal in the Okanagan and the details of these tastings are often reported as innovations. For example, one Okanagan winery offers paid as well as free tastings. Charging for what is essentially a sales pitch is innovative and might be, at first glance, counterproductive but the program is said to work well: clients get a more elaborate and personal introduction to the products and appear to value it the more for having paid a modest sum for the experience.
In our interviews, we asked respondents to identify product or process innovation in the last three years, and to indicate whether these innovations were firsts for the firm, for the region, or for Canada. Unless asked (and we rarely were) we allowed respondents to define themselves what was meant by the word innovation.[13] We did not verify the three-year time frame, although we dropped a (very) few nominations because they clearly fell well outside the three-year time frame.
Our questions typically elicited more than one innovation. Analyzing the responses[14], we counted 50 reasonably separate innovations among the 18 firms. Firms often could not say what was their most important innovation; those who saw innovation as important most commonly said the important thing was that they “innovate continually.”
We were able to classify the innovations in four categories:
Growing (that is, related to the propagation, growing, cultivation and harvesting of grapes, what is usually referred to as viticulture);
Making (that is, related to the manufacture of wine, including crushing, fermentation, finishing and packaging)
Marketing – product design (that is, referring to that aspect of marketing where firms attempt to discover consumer needs and desires and design products to fit)
Marketing – selling (activities including distribution, wholesale and retail sales, advertising and promotion, and public education)
The innovations were almost equally divided amongst the four categories. The Growing and Making innovations were mostly technical, technological or scientific in nature. The marketing innovations were more heavily on the product design side, indicating an effort to expand the horizontal reach of the product. No innovative business processes were cited. In a few cases, a respondent mentioned a business activity that the respondent had not named as an innovation. We would say: “That sounds like an innovation to us.” If, on reflection, the respondent agreed, we added the innovation to our list.
Table 3: Distribution of Innovations by Type and Degree of Originality
|Category |Firm first |Region first |Canada first |World first* |Total |
|Growing |8 |3 |4 |0 |15 |
|Making |5 |7 |1 |2 |15 |
|Marketing – product design |3 |4 |2 |3 |12 |
|Marketing – selling |2 |3 |3 |0 |8 |
|Total |18 |17 |10 |5 |50 |
*The category “world first” was not proposed in the interview guideline, but was proudly offered by the interviewee in a few cases.
The “degree of originality” information was not top-of-mind information for most respondents, many of whom struggled to rank their innovations. Innovating was not seen as giving them a competitive edge on other wineries in the region, but rather as bringing them up to speed with external competition, namely imported wines from outside Canada. This is a logical business perspective as long as the industry’s penetration of the domestic market remains low.
The wine industry in the Okanagan valley, in its present form, is barely 20 years old and most of the firms are less than 10 years old, dating from the post-NAFTA development spurt. In this situation, we would expect a high rate catchup technology adoption. We thus expect more first-for-the-firm and first-in-the-region innovation and less industry-first innovations. This is what we see. Seventy per cent of reported innovations are either first for the firm only or first for region.
Viticulture innovations were very common (30 per cent of the total reported). Most Okanagan wineries are vertically integrated to some extent, that is, they grow at least some of their own grapes. It is a regional mantra that “good wine is made in the vineyard.”
There were clear differences between the large wineries and the smaller players. The large wineries and winery-groups routinely use technology-intensive methods and equipment, supported by their capacity to invest heavily in new operations. What they reported as innovative, however, was more often market innovation than technical innovation. We interpret this as reflecting a greater concern among large players with competition for market share, and greater exposure to a mass market with less-educated tastes.[15]
Comparison with Niagara
Our results are qualitatively similar to those of Mytelka, 2003b for the Niagara region. She finds a similar widespread adoption of marketing innovations, with a notable emphasis, compared to the Okanagan, on collaborative marketing initiatives (Winery to Home marketing group, Icewine Niagara online sales, Wineries on the Lake tourism marketing group). In the Okanagan, only one innovation was cited with respect to distribution channels, a small program of Internet sales. Nevertheless, both regions have similar channels available: negotiated shelf space in government liquor stores, industry wine stores, direct sales to restaurants and agents, and direct sales to end users.
The Okanagan wineries reported important innovations in on-site retail sales, which are the highest margin channel and, for many smaller wineries, the largest volume channel as well, in apparent contrast to the Niagara region where farmgate retailing innovations were not as frequently reported.
Mytelka’s list of technical innovations is very similar to those encountered in our interviews, We noticed one exception: ecologically sound growing techniques were widely cited as innovations in Ontario (five wineries), but proposed as innovative by only one Okanagan winery.
Cluster characterization
Our first task was to decide the geographical scope of the cluster. We did this both to circumscribe the data-gathering and also set the frame for description and analysis. The GEM distinguishes internal and external actors; what is ‘external to the region’ depends on the definition of the region.
What defines the size of a cluster is the density of linkages among its members (Padmore & Gibson, 1998). Without linkages, there is no cluster. Should we count as part of the Okanagan wine cluster the 22 wineries on Vancouver Island (Schreiner, 2003), three hundred kilometres to the west and across the Strait of Georgia? What about the Lower Fraser Valley, or the Similkameen Valley, which is only about 20 kilometres as the crow flies from the Okanagan Valley? There are links between these regions. Many of the wineries buy grapes from the Okanagan, some of the owners and workers once lived in the Okanagan, and the body of knowledge they draw on was partly developed in the Okanagan . . . not to mention Niagara.
Preliminary advice from a long-time industry observer was that Vancouver Island and Lower Mainland wineries are not strongly connected with the Okanagan. To confirm this we reviewed the narratives in British Columbia Wine Country (Schreiner, 2003), which support the advice. Moreover, we decided on the basis of this review to shrink the clustery boundaries even further, and eliminated the northern part of the Okanagan Valley (from Vernon north). There are few wineries in this area, they do not report many connections to the Okanagan networks and they describe themselves as “off the beaten path.”(Schreiner, 2003, p.62) Finally, in our interviews, we encountered few outward linkages to BC wineries outside the cluster as defined. Our final identification of the cluster is the Okanagan Valley from Winfield, a community 30 kilometres north of Kelowna, to Osoyoos, on the USA border. The sub-regions involved are identified in Table 1.
In the rest of this section, we will look at several dimensions of the innovation system in the Okanagan wine cluster and, more broadly, at the determinants of cluster competitiveness. We will use two evaluation frameworks: a global methodology that in principle scopes the array of internal and external resources, infrastructure, organization and markets that have been found to determine the competitiveness (profitability, market share) (Padmore & Gibson, 1998b) of various clusters; and, a key-factors framework developed by the National Research Council (Smith, 2002). (See section 1.2.)
1 Resources
“If we could grow grapes in Alberta, we’d go there,” –Okanagan winemaker
The land
The principal and essential resource for a wine-producing cluster is a source of high quality grapes. In principle, the source of grapes could be outside the region. However, for economic, technical and social reasons, this is very rare. We would say that all important wine clusters, and especially the most innovative clusters, have grown up geographically coincident with a strong grape-growing region.
So to get the basic resource we need to back up a step: to the land. Topography, soils and climate (none of which can yet be much influenced by capital, labour or technology) are the basic endowment, without which achievement will be limited. We identified five particular factors which have made the Okanagan cluster possible and, potentially, provide a decisive advantage. Roughly in order of importance:
Arid climate: significant reduction in grapevine diseases
Consistent warm summer weather moderated by large lakes the valley
Well-drained soils with appropriate mineralization.
Benchlands, which rise 50 to 100 metres above the lake shore, so that cold air drains off the bench vineyards, extending the safe growing season.
Scenic values, attracting customers to the valley as tourists.
The Okanagan land resource is not, however, perfect. Winters are hard. Routinely cold winters are a constraint on the styles of wine that can be produced, but with modern techniques and technologies (such as waters sprays to protect plants from frost) a large variety of red and white wines can be produced economically.
In the past, particularly harsh winters have devastated vineyards. The last decade has not seen such a winter and some of our interviewees worried out loud that some of the newly established wineries are not prepared, technologically or financially, should one occur. Global warming may bless the Okanagan cluster by turning 10-year events into 100-year ones. Or it may not.
Hard frosts convey a small business advantage by routinely enabling production of ice wine. The first minus-eight-degree-Celsius night will do the trick, if there are grapes left on the vines.
Human resources
The Okanagan Valley is in transition. Twenty years ago, it did not have a stock of people with the winemaking, grape growing and business experience to make product that would compete on the world market -- neither at the bottom of the market nor at the top. Twenty years from now, it might. Certain specialized human resources are plentiful in the valley today; wineries can often find vinyard and winery workers with experience in the Valley. The poaching of winemakers is increasingly common. We noted several winemakers who had spun off to set up their own business. However, the trade in winemakers will run a substantial deficit for some time.
We heard of a few experienced winemakers who have recently moved from the valley to other New World wine regions, which we read as a sign of depth of talent in the region. By far the biggest cross-border flow continues to be inward: graduates of the great wine schools in other countries, experienced wine makers from well known regions, business expertise from Canadian economic centres. In this flow, the key enabler is again land. Because of the attractive climate, scenery, and recreational opportunities, top-grade human resources can be “mined” worldwide for a reasonable price. But there is no substitute indigenous expertise. Imported human capital cannot operate at full potential until it has been in place for some time.
However, low-skilled labour in the valley, while plentiful, is relatively expensive by world standards, which contributes to the relatively high cost-to-quality ratio of Okanagan wines on the world market.
Investment capital
Statistically, people in the Okanagan do not have money burning a hole in their pockets. The high incidence of part-time work, self-employment and small firms contribute to reported incomes that come in below the provincial norm, although close to the average for Canada.[16] By far the most common source of start-up and venture capital reported to us is own-capital, family and friends, and occasional angel investors. Development capital comes from operations, debt and (more recently) direct investment by parent companies.
In practice, we did not see much evidence of a shortage of capital. The industry has grown rapidly and is on track to absorb most of the suitable land in the valley over the next decade. Land prices are high – in the best spots, close to $100,000 an acre, which is comparable to prices in the Napa Valley in California – reflecting expectations of handsome returns.
Knowledge, technology:
Making good wine is knowledge intensive. In the past and for the present, the most important knowledge for making fine wine is knowledge of the “terroir”, the very particular local conditions of micro-climate, soil, and slope, and how these interact with the many variables in winemaking. Research, training and technology create new ways to exploit terroir. Research, training and technology can speed up the learning of terroir, and the technology can be spread as codified knowledge. Nevertheless, terrroir knowledge must be learned anew in each location and painstakingly accumulated. Long-established wine regions have a leg up because they have a stock of terroir knowledge to draw on. The Okanagan is not long established, is in fact very new in its orientation to making fine wine.
While there is a only a beginning knowledge of fine-grape terroir, there is a base of general agricultural knowledge and experience, for example frost protection and irrigation technology.
Points of comparison with Niagara
The Okanagan and the Niagara peninsula are very similar in respect to the basic land resource and their status as cool-climate growing regions. Niagara recently suffered an exceptionally cold winter that killed many vines. The Niagara area is flatter, offering fewer variations of sun angle and air drainage, which can increase the impact of an adverse event. It is not as dry as the southern Okanagan, an overall disadvantage. As in the Okanagan, cold-protection technology, first developed by the tree-fruit industry, is available to shelter budding and fruiting plants from harmful frosts.
Proximity to Canada’s financial centre, and generally higher incomes, mean investment capital is more available in Niagara. There are more large firms, including the parents of some of the Okanagan firms.
2 Infrastructure
“Big wineries were not interested in VQA until the VQA proved itself. Now they are very interested.” -- wine making consultant
Physical systems
Infrastructure facilitates access to resources. A critical piece of infrastructure in the Okanagan is an extensive water management system involving reservoirs, canals, aqueducts, pumping and distribution. Access to water makes possible the use of otherwise prime land, especially in the near-desert south of the valley.[17] A water management system and major portions of the infrastructure were put in place a century ago: an early provincial mega-project using a combination of private and public investment to open up the south Okanagan for the booming orchard business (Wilson, 1996).
We were told the current system does not have much spare capacity but it is seen as adequate for the immediate future, and there is ample scope for conservation measures.
The VQA system
The VQA system was launched in 1988, in Ontario, where the trademark is owned. BC adopted similar standards under the same name in 1990. Discussions continue about formalizing a national program.
There is some controversy over whether VQA (Vintners Quality Alliance) should do more (or less) but there is no question it has given consumers additional confidence in the labelled product. The label certifies that a VQA-labelled wine meets standards for varietal character and achieves a basic level of quality, i.e. “absence of flaws. At the heart of the standard are expert tasting panels, who do blind tastings of wines submitted by individual wineries. The measurement remains a qualitative one, although efforts continue to improve consistency and eliminate bias.
Only a small minority of wine produced in Canada was VQA-labelled at the beginning of the decade, but the market share of VQA wine has grown rapidly and consistently. We estimate that VQA wine accounts for more than half of all wine produced from BC grapes. VQA wine production is about a quarter of production of all “BC wine,” [18] which counts the import-component of blended wines (KPMG, 2001), and VQA sales are about 15 per cent of provincial wine sales, which counts imported bottled wine (BCWI, 2002).[19]
Institutional infrastructure
There is considerable institutional infrastructure related to the regional innovation system. We list here the institutions where we interviewed and which, we believe, are the most important to the industry.
Association of British Columbia Winegrowers (ABCW). A networking and marketing group based in Naramata, comprising mostly small wineries. The association has at times taken an advocacy role and has sometimes found itself at odds with the BCWI, for example over the VQA system, which some ABCW members dislike. (Association of British Columbia Wine Growers, n.d.)
BC Wine Information Centre in Penticton. The centre is a storefront drop-in operation that has wine reference material and staff who offer visitors and locals information on valley wineries and advice on wine touring. It shares space with a VQA retail store operated by the BCWI.
British Columbia Wine Institute (BCWI), headquartered in Kelowna, an industry association directed at marketing, advocacy and sectoral research initiatives, funded by membership fees. It sponsors the VQA system in British Columbia. Most Okanagan wineries are members. (British Columbia Wine Institute, n.d.)
Ministry of Agriculture, Food and Fisheries. At the time of our interviews, there was one person stationed in Kelowna, whose job was to monitor the wine industry for the government and, secondarily, to provide some liaison with government agencies for the industry. There were no provincial funding programs specifically for the wine industry at the time. The Kelowna functions have subsequently been taken over by a ministry department in Victoria.
Okanagan University College, Kelowna campus.[20] The college offers technical training for winery and vineyard workers. It does not have an oenology program. It has one research scientist, a chemist, working on aroma precursors, aiming to help growers know when to harvest grapes to achieve particular flavour characteristics.
Okanagan Wine Festivals Society. The Festivals Society is industry-supported. It organizes four wine festivals in spring, summer, fall and winter (ice wine focus). The society has close links with the Thompson-Okanagan Tourism Association, a tourism industry group. (Okanagan Wine Festivals Society, n.d.)
Pacific Agri-Food Research Centre. One of 18 research centres that comprise the Research Branch of Agriculture and Agri-Food Canada. PARC, has two facilities, one at Summerland and one at Agassiz. The Summerland facility has a wine and grape growing specialty, greatly strengthened in the past five years. PARC gets support from the BCWI for research and to operate the VQA tasting panels. Original research includes a detailed mapping of soils, microclimate, vineyards, varieties and the linking of patterns to wine medals and other quality indicators. (Pacific Agri-Food Research Centre, n.d.)
University of British Columbia Wine Research Centre. Located on the UBC campus in Vancouver, the centre is relatively new. It is closely linked to the biosciences disciplines at the university, includes industry development in its mandate and has research projects involving several Okanagan wineries. Original research includes enzymes to degrade cancer-linked chemicals in wine, and a yeast that doesn’t make the red-wine chemicals that give many people headaches. Services include chemical testing and a wine library (comprehensive wine cellar) for BC Wines. (Wine Research Centre at University of British Columbia, n.d.)
Interviewees were asked to identify the organizations with which they had had “the most important and fruitful exchanges of ideas, knowledge and know-how that have helped you innovate.” Most of the organizations listed were other firms, but every company identified at least one infrastructure organization. We also asked firms to identify linkages that were particularly important to their ability to innovate. Only four of the linkages to infrastructure organizations were deemed “particularly important.”
Table 4: Linkages from Firms to Infrastructure Organizations
| |PARC |BCWI |Wine Festival |OUC |ABCW |UBC Wine |Wine Info |MAFF |
|Reports of fruitful innovation linkages |14 |11 |6 |4 |5 |3 |1 |0 |
|Importance of links* |15 |12 |7 |5 |5 |3 |1 |0 |
* An importance score of ‘1’ was assigned for each organization mentioned by a firm, and importance of ‘2’ was assigned to links that the firm identified as particularly important. The tabulated number is the total importance for the 18 firms for which we have data.
One industry organization and one public research institute dominated in both number and importance. The BC Wine Institute touches the industry in two ways that are critical to innovation: marketing and research. Members pay a “research levy” to the BCWI so they have a very immediate interest in the quality and usefulness of the research projects that the institute support. The VQA program, established by BCWI, is generally seen as a successful marketing initiative, and because it also binds on the wineries when their products are unsuccessful, its activities are closely watched.
PARC appears to be a remarkable success story. Until 1994, there was a single scientist at the centre responsible for projects in viticulture (wine-grape growing). The tone of the specific research activities was academic, rather than industry-oriented. Then, in a corporate retrenchment, the ministry eliminated the scientist position, and the scientist moved to Ontario. The Okanagan industry was stirred to action. They protested the cut and proposed new directions for research and promised money. From the ashes, there is now a new scientist, a graduate of the famous wine school at the University of California at Davis, supported by four to six technicians and students. The research projects involve many of the local wineries, which appear to have considerable input into the choice and conduct of research. The BCWI is heavily involved as most of the industry funding is channelled through it. An industry-led research committee oversees the process.
A major gap in the Okanagan cluster is the absence of a university-level training/research institution. The Okanagan University College (OUC) capability is small and low-level. The University of British Columbia wine centre in Vancouver is more ambitious, better founded and funded, and headed by an internationally respected researcher; but, it is hundreds of kilometres away and, unlike the international wine schools at Davis, Geisenheim, or Bordeaux, it does not train winemakers. It is also very new. It has a chance to assume an important position and will be helped by the access it provides to sophisticated testing facilities, and by the prestige that will accrue to successful fundamental research on the chemistry of wine. We note that, in March 2004, the provincial government announced that OUC would become a campus of the University of British Columbia, which will lead to a more substantial research presence in the valley, with viticulture and oenology being an obvious opportunity.
The importance of directed research was proven in the Okanagan with the so-called Becker project in the late 1970s, which demonstrated that if Vinifera were cropped at lower-than-standard levels, high quality wines could be made in the region. Most of the successes were obtained with white wines from northern Europe, setting a pattern for development which continued until the 1990s era of experimentation with more southern varieties, both white and red.
Regulation and government programs
There are currently no government funding programs specifically targeted at the wine industry in British Columbia.[21] Some public money has flowed through research facilities, for example to create the wine library at UBC. Federal adjustment funds to adapt to NAFTA in the early 90s were very important.
Regulation continues important. Since the 1980s, there has been a gradual liberalization of regulations governing production and distribution. Today, there are a half dozen distinct channels for distributing wine: retail sales at the winery, sales from industry-operated wine stores, sales from stores associated with pubs or hotels,[22] sales from several types of government liquor store, and sales to restaurants and other businesses that serve liquor by the glass. The industry is well adapted to the existing regime, but many of our interview subjects remarked the complexity and cost of compliance.
There is no supply management system in British Columbia. A grape marketing board existed formally until the late 1990s, but had little influence on the industry. Since free trade, most grapes prices have been freely negotiated between growers and wineries.
Points of comparison with Niagara
In 1997, the Cool Climate Oenology and Viticulture Institute (Cool Climate Oenology and Viticulture Institute at Broch University, n.d.) became the first research centre in the world dedicated to growing grapes and making wine in cool climates. CCOVI offers a Bachelor of Science degree in oenology and viticulture and has a two-year certificate program for returning professionals. Although young, it is the kind of research facility associated with major wine growing regions. The UBC Wine Research Centre is much more specialized[23] and is unlikely to develop in the same fashion. We have heard it suggested in both regions that CCOVI could serve as a core high-level training institution for the entire Canadian industry. The Okanagan industry and public policy makers will have to decide if the economies compensate for the distance from “intellectual ferment” that is best enjoyed with the nose close to the wine glass.
Like British Columbia, Ontario has a complex regulatory system designed to balance industry interests, consumer interests and the presumed public interest in limiting the social and health impacts of alcohol consumption. Mytelka and Goertzen, 2003a, detect strains within the Ontario system due to historic tensions between grape growers and wine makers, aggravated by a supply management regime that has been unable to balance the interests of growers, grower vintners, VQA producers and non-VQA producers.
3 Related and Supplier Firms
“All this paled compared to the knowledge we got from the consultant working hands-on in our winery.” -- winemaker
Tourism
The most important related industry in the Okanagan is tourism. The region is a tourism destination independent of the wine business. In fact, tourism sales in the valley dwarf those of the wine industry. In the past, it has been the sunshine, the lakes and the orchards that attracted tourists. They still do. Roadside sale of in-season tree fruit was a traditional attraction. It still is. Now, however, farmgate wine sales may be a more seductive attraction (Thompson Okanagan Tourist Association, n.d).[24] Wine itself has a much higher percentage of value added compared to fruit. Tourism spending by wine tourists (visitors seeking a farm and/or wine tourism experience) was estimated as $72 million in 2000. Many other tourists admire the vineyards, soak up the wine imagery, and buy Okanagan wine at a liquor store during their stay or drink it in local hotels and restaurants. According to an industry survey, farmgate sales[25] totalled $22 million in 1999, almost half of all sales of VQA product (KPMG 2001). There is a synergy between tourism and wine. In Australia, 10 per cent of all visitors visited wineries in 1996; in British Columbia, the proportion was estimated at 2 per cent, suggesting growth potential. (All these tourism figures are from KPMG 2001).
From the perspective of the wine industry, the tourism sector is not ideally constructed. Based as it has been on family tourism in search of bargain fruit and free sunshine, the tourism infrastructure is not of high quality overall. In the 1990s, motel and campground spaces greatly outnumbered quality hotel or bed and breakfast accommodation.[26] Opportunities offered by wine tourism to reach a high-end market of more affluent vacationers have brought new investment in food and accommodation services. Wineries have established gourmet restaurant and B & B services on their own premises, partly because of the dearth of such facilities nearby. However, it will take years to renew and upgrade food services and perhaps decades to renew or substantially replace the existing stock of accommodation.
Comparison with Ontario
Because of the proximity of the international border and tourist attractions around Niagara Falls, general tourism on theNiagara peninsula stands in the same dominant relation wine tourism in the Okanagan Valley
Grapes
The critical input to wine is grapes. As outlined in previous sections, the supply of grapes is good and likely to remain so for the foreseeable future as the amount of land planted to grapes – good quality grapes – has expanded rapidly, and will continue to expand rapidly for several more years. Grape prices are set on the open market, providing appropriate incentives to growers.
Grapes and juice are imported from the USA and Chile. They cannot be used in VQA wine, but are important to the economics of non-VQA BC wine. Through most of the 90s, consumers could not tell how many if any BC grapes were in a bottle of wine labelled “product of Canada.” The problem was generally recognized and the industry more or less voluntarily changed the labelling to say “cellared in Canada,” a process that was largely complete at the time of our research. Some labels go even further, specifying countries of origin, e.g. “blend of British Columbia and Chilean grapes.” This change will help domestic growers and should not unduly crimp the blending wineries.
In the Okanagan, despite an apparently well-functioning market for grapes, there is much vertical integration. We did not encounter a winery that does not grow at least some of its own grapes. Owning the grapevines provides intimate control over vineyard strategy and tactics: what is planted, how it’s managed, what testing and experimentation is done. In 1999, there were three times as many independent growers as wineries, but 60 per cent of the acreage planted to vines was owned by wineries, and that percentage has almost certainly increased due to large developments in the south of the valley (KPMG 2001).
We learned that wineries often sell grapes from their own vineyards to other wineries in the Okanagan on a regular or occasional basis. The trade appears to be part of the generally collaborative nature of the cluster in its present form. The ready exchange of grapes allows wineries to experiment with new varieties and techniques.
The graphic (Figure 1) shows the innovation linkages related to grape suppliers. (We have omitted links to suppliers outside the region, principally in the USA and Chile.) Recall that the arrows count linkages, not grapes. They represent flows of knowledge important to innovation, not tons of fruit. Whereas grapes are concentrated in the south, and tend to flow north, the search for innovation is more democratic. New wineries in the south can expect to have something to learn from established growers and grower-wineries in the north. Northerly wineries have been eager to establish supplies in the south, even to make investments in the newly developing vineyards,[27] where there is much to learn together of the new terroirs. (The graphic is geographically to scale, although the precise locations of suppliers and buyers have been blurred.)
Figure 1: Geographical Display of “Most Fruitful” Linkages to Grape Suppliers
In examining the grape supplier linkages,[28] it is possible to pick out the same mini-clusters that show up more clearly with the peer-to-peer linkages (see section 4.4 below). In part, this reflects the fact that wineries are also growers and few wineries use all the grapes they grow exclusively for themselves. A typical innovation strategy is that a winery thinking of a new product, say a gewürztraminer wine benefiting from more careful canopy management, will not wait until they have producing gewürztraminer vines but will experiment with grapes from a trusted grower, or a peer winery with whom they have a good working relationship. They may use an outside supplier to begin penetrating a market niche. They may maintain the supplier relationship indefinitely, amending it from time to time.
Points of comparison with Niagara
In Ontario, wineries are compelled by the provincial Wine Content Act to include a minimum of 75% Canadian grape content in wines in order to use the Product of Canada label and a minimum 30% Canadian grape content for a Cellared in Canada label. Mytelka and Goertzen note that this has not settled the issue with growers, who “regard the large wineries with derision due to the Wine Content Act.” The sun is slowly setting: no wineries licensed after 1993 are allowed to import blending material. (Mytelka 2003a).
In Ontario, there is less vertical integration. Three quarters of the grapes made into wine are purchased from a second party, while in BC the figure is only about 40 per cent (Mytelka, 2003a; KPMG, 2001).[29] It is not clear why this should be, except for historical inertia, as vertical integration would seem to offer a way around the constraints of the grape market controls.
Consultants
Consultants play a special role in the Okanagan system of innovation. As discussed under Resources (section 4.1) and Infrastructure (section 4.2), the region entered the 1990s without a corps of experienced and well-trained winemakers and viticulturists, nor with the means to quickly train more. Moreover, the uniqueness of climate, microclimate, soils and topography (terroir) in the region means that the full value of a new hire with outside expertise cannot be quickly achieved. Non only that, the cost of a full-time winemaker or viticulturist is beyond the means of many start-ups and equally impractical for deliberately small-scale operations (some founders choose for personal reasons to keep their operation relatively small).
There is, therefore, a market for the wine gun-for-hire and there are five to 10 active consultants in the valley[30] with excellent credentials and substantial local experience in general agriculture, grape growing, food processing and oenology. We interviewed three of them to understand better their role, but we already knew from company interviews that their services are often very important to establishing new products and improving existing ones.
A chief reason the consultants are important in a developing innovation system is that they are conduits for information flow. Relationships with clients are typically quite informal and not inhibited by confidentiality agreements. Such agreements would not be of much use since each winemaker is dealing with differing grapes grown in differing circumstances and with varying objectives, so the methods of handling the crop, fermentation and aging will also vary. “We advise based on the collective experience we have from similar areas. It is very difficult to exclude information from your thinking so it is all thrown into the mix,” said one.
So the consultants, in effect, function as extra links, and if a consultant is linked to one winery, he or she in effect links that winery to the consultant’s other active clients. In the next section, we look in some detail at the “most fruitful” linkages among wineries themselves. One of the indexes we calculate is the number of other wineries to which each winery is connected resulting in an inward flow of information, the so-called “in-degree” in actor-network terminology. The average number of links for our sample of 18 wineries is 2.72.
We did not invite companies specifically to nominate consultants when we asked the “most fruitful” question. Two consulting firms were named, nonetheless. To incorporate and estimate the networking effect of links with consultants (as opposed to peer firms) we calculated all the secondary linkages induced by the consultant contacts – that is, we counted all the two-step linkages mediated by the named consultants.[31] Counting only the interactions of these two consultants (for whom we identified a total of 10 clients) the mean number of two-step linkages increased by 0.9 per winery (this is the number of linkages that would not exist in the absence of the consultants), from 6.8 to 7.7.
We argue that this measure understates the impact, because two-step linkages involving a third winery as intermediary are not as effective as consultant-mediated linkages . Consultants have a mandate, training and experience in intermediating! If the two-step consultant contacts are combined on a equal footing with one-step winery-to-winery contacts, the 2.72 average increases to 4.1. This is very important indeed. On the other hand, if the consultants are no more effective than a peer winemaker, the correct comparison is the 0.9 increase in two-step contacts from 6.8 to 7.7, which is modestly useful but not striking. The truth, we suspect, is in between.
Other suppliers
The Okanagan lacks a web of supporting firms. Equipment, bottles, labels, instruments, rootstock, chemicals and other staples of the industry are usually imported from the USA or Europe. There are some exceptions. One winemaker bought bottles, caps and labels locally but also remarked he “could buy cheaper elsewhere.” A bottle maker in Vernon was used by some. Companies often noted the high cost of buying and shipping specialized equipment from overseas. Business services were generally available in Kelowna, with some professionals (accountants, lawyers) who regularly work with the local industry.
The only strong local reference was to a stainless steel fabricator in Summerland, who was mentioned by a half dozen wineries as a supplier of tanks and who was cited three times in answer to the question about “most fruitful” linkages in support of innovation. The result underlines the importance to a cluster of local suppliers of complex or custom items.
4 Firm Structure and Strategy
“The Okanagan region has mostly new people in the industry and as a result must learn through experience and rely on other people in the industry as teachers.” – note from the focus group record
It is necessary to distinguish two kinds of production in British Columbia, conveniently distinguished as VQA wine and Other wine. Most Other wine is produced in large quantities, often with imported wine as a component, and is mostly sold by large operators at relatively low price points to compete with low-priced imported table wine.
In 2001/2002, VQA wines had 14 per cent of the British Columbia market, up from 10 per cent the year before and zero per cent at the beginning of the decade, with sales of $70 million. (BCWI 2002). Imported bottled wine has about 50 per cent of the market, with the difference accounted for by a shrinking but important share of Other.
Our focus in this paper is on VQA wine, since the innovation content is generally higher than for Other wine. However, the interaction between the two categories is important, as they compete not only for customers but for grape supply and investment capital. So far, VQA seems to be winning.
Firm structure, ownership and capital investment
Wine companies in the Okanagan span a range from very small up to medium large, by global standards.[32] There are a good many “mom and pop” wineries and growers where the proprietors supply most of the capital, skills and labour. In 1999 there were a dozen wineries and almost 100 growers with fewer than 5 acres of vines.[33] There are no wineries of the scale of industry giants such as Gallo in California. There are some wineries that are subsidiaries of large parents and a few partnerships involving large established European makers. The company demographics are typical of a new, rapidly developing region.
For some small operations, the strategy is to remain small. In some cases, the operation is driven by lifestyle rather than business goals. In others, it is preference for a particular business model: local and hands-on and emphasizing the pleasure of the product.
Typical also is a recent pattern of consolidation, with weaker operations being bought out or bought up to join a family of wineries owned by a common parent. Profitability remains elusive for many smaller wineries. An industry survey in 1999 found 9 of 12 large and medium wineries that claimed to profitable, compared to only 3 of 10 small wineries. About half the independent growers said they were profitable. (KPMG, 2001)
Outside ownership was regarded with apprehension when the first takeovers occurred. To date, however, it appears that the outside owners have had a hands-off approach to what might be termed “creative direction” while offering stable financing and in-house technology. There are hints, however, that this form of consolidation may weaken some of the networking effects analyzed in the following section (two large wineries that are aggressively pursuing higher end wine products were described by a consultant as “very protective” of their information.)
Capital investment in the valley was heavy in the 1990s with many “greenfields” developments. The KPMG study (KPMG, 2001) estimates that between 1993 and 2000, four large wineries invested $155 million and 67 small and medium wineries invested $109 million.
Notable is the rumoured $50 million spent by Mission Hill on a spectacular hilltop winery with a 12-storey bell tower, graceful arcades and vast cellar. The expenditure was not in expectation of a handsome return on investment from wine shop sales, but rather to create a marketing image and an “experience” that would infect the imagination of visitors and that they could pass on. It was also to make a personal and social statement in the community. The value of the monumental architectural statement for the image of the whole Okanagan wine cluster is readily acknowledged by Mission Hill’s competitors.
Points of comparison with Ontario
Ontario’s industry remains larger than British Columbia’s, and with readier access to capital. Ontario firms have made a number of important investments in the Okanagan, in Ontario, in the USA and Australia. Vincor directly owns three wineries in BC and is involved in two joint ventures: It is developing the Osoyoos Larose wines in partnership with Groupe Taillan, of Bordeaux, France; Nk'Mip Cellars in partnership with the Osoyoos Indian Band -- the first Aboriginally owned winery in Canada. Inniskillen, a Vincor subsidiary, and Peller Estates are also involved in BC.
Industry “champions” have been important in both regions. Harry McWatters, founder of Sumac Ridge, was by far the most often mentioned[34] industry leader. Don Ziraldo, founder of Inniskillen, played a similar role in Ontario. Both are well-known national figures, and each have influenced events in both Canadian regions.
Networking
The focus of this section will be not be not so much on the organization of the firms, but on the organization of the cluster, specifically the extent and nature of networking. The innovation literature has consistently found that networks have a high marginal impact on innovation and that the most innovative firms have the most variety of linkages to other parts of the innovation system, in particular to other firms (Amar, Landry & Ouimet, 2003; Feldman, 1999, p. 5-25). We found a high degree of networking and information sharing in this cluster. The fact was one that people seemed generally proud of. Also it was a situation regarded by some as ephemeral, reflecting auspicious factors that may not be present in future.
Our first step in the analysis was to make Power Point pictures of the data, using swooping arrows to point to information sources “most important and fruitful for innovation” for each of the wineries where we interviewed. The maps were done with an underlaid map of the Okanagan with approximate locations of the subject wineries, peer wineries that they cited, and important infrastructure and supplier organizations. We suppressed the map and individual identifiers to simplify the presentation and increase confidentiality. The pictures remain to-scale geographically, extending from the Kelowna area in the north to the Osoyoos-USA border area in the south. The pictures therefore convey important geographic information, as well as relationship data.
Here is a composite diagram that shows all the peer linkages (i.e. linkages to other winemakers). Each arrow indicates a “go-to” relationship, with information flowing back to the tail of the arrow. (It was clear from the interviews, however, that most relationships involve two-way flows.)
Some of the arrows are more heavily drawn, indicating a relationship that the subject viewed as unusually important or even critical to the winery’s ability to innovate.
Figure 2: Geographical Display of Peer to Peer “Most Fruitful” Linkages
Several geographical realities are immediately evident. The whole cluster is tied together with important innovation links. There are also many important innovation links that extend outside the Okanagan region. Within the Okanagan cluster, there appear to be three mini-clusters with a increased communication of innovation information within the mini-clusters. There are robust North-South connection bundles, many extending the long diameter of the cluster, about 100 kilometres. The pattern of peer linkages recollects the community structure of the valley (section 1.1) and pattern of everyday life.
The bulk of the external linkages are of two kinds: arrows going east to Ontario and the Niagara cluster, where parent companies reside, and arrows going west to Vancouver. Most of the latter are to Vancouver offices (head offices, marketing departments) of large Okanagan firms. A very few arrows are to other British Columbia wineries, supporting our conclusion that the Okanagan cluster defines itself as we described at the beginning of the GEM discussion above. In particular there are no northward arrows emerging from the top of the cluster, toward the handful of wineries at the northern end of the valley, or to the neighbouring Similkameen Valley to the south and west. That is not to say that there are no links of any kind to these areas, but simply that none were raised in our interviews as “most fruitful and productive for innovation.”
The possibility of mini-clusters is interesting and worthy of further investigation. Reflecting the tentative nature of our identification, we denote the three candidate structures as the Top, Middle and Bottom clusters. They can be described in terms of wine author John Schreiner’s wine areas as follows:
Table 5: Mini-clusters suggested by
|Mini-clusters |Local names* |
|Top Cluster |Kelowna area Vinyards, |
| |Mt. Boucherie |
|Middle Cluster |Summerland and Peachland, |
| |Naramata Bench |
|Bottom Cluster |Golden Mile, |
| |Black Sage Road |
| | |
|Weakly involved |Okanagan Falls, |
| |Osoyoos Lake Bench |
* From Schreiner 2003.
The Top Cluster includes the oldest established wineries, and three of the four pioneers in use of Vinifera grapes – the original Estate Wineries – not to mention Father Pandosy’s primordial monastery vineyard. Kelowna was the commercial centre of the valley, providing a ready market and access to larger ones. The Top Cluster includes two of the largest wineries. It reaches out to affiliates in the south of the valley, and also reaches outside the region to marketing offices and other parts of the corporate family. The large wineries also have relatively more links to international suppliers and research institutes, although these do not show on the graphic, which exhibits only peer linkages.
The Middle Cluster comprises two parts, a large number of new, small wineries that are clustered on a bench of land [35] around the town of Naramata, which looks across lake Okanagan to the main tourist highway. Soil and microclimate have turned out to be highly suitable for Vinifera grapes, and the bench now sports some of the highest land prices in the valley. To the west of the lake, on the main north-south highway, are several older wineries, including the first estate winery, established in a legislative window that the proprietor had lobbied for in the 1970s. While the bustle of information-sharing on the Naramata bench is evident, there are clear links across the lake to businesses that, we learned, had played the role of mentor and champion for new wineries seeking to make high quality wine.
The Bottom Cluster is distributed on benches on either side of the Valley. The Golden Mile is named for gold mines that flourished briefly 100 years ago, Black Sage Road for the sage brush that characterizes this near-desert area. The Golden Milers to the west sing praise for the well-drained clay and glacial gravel of their bench.[36] Black Sage is an ancient beach, “three hundred feet of sand” in the words of the first big investor, but with water and fertilizer it can grow almost any kind of grape. As a result, the Black Sage area is still searching for a wine identity. In our interviews, we noticed that contacts are frequent and mostly informal: for example, during two interviews, winemakers from other wineries came by borrowing or returning equipment, and swapping news for a few minutes. One of our interviews took place in a coffee shop that is a local haunt for winemakers and growers.
Actor-Network Analysis
The numerical analysis in this section was inspired by recent work by Elisa Giuliani (2004) that used actor-network theory to examine the structure of wine clusters in Chile and Italy. Because our data are not as detailed and structured as Giuliani’s, the points of contact are limited, but we are able to make some general comparisons. We also examine more critically the idea of clusters-within-clusters.
For data, we again rely on the map question about “most fruitful” interactions. Unlike Giuliani, we did not offer firms a roster of all other firms in the cluster. We were specifically asking for the most productive contacts rather than all contacts, and we did not prompt as to what these might be.[37] Because of the restrictive nature of our question, we presume that the contacts identified by Okanagan firms are at least as highly valued as in the Italian and Chilean examples.
We tabulated the results in a matrix, coding a link to winery as a 1 and its absence as a 0. We could have attributed values 1, 2, 3 , etc. . . to the links, similar to what we did in the spatial networking diagrams where thicker arrow shafts indicate “strong” and “critical” relationships. In this case, we did not. With valued relationships, the actor-network measures become more complicated and difficult to interpret. There were, in the event, few cases of especially strong links, and only one critical link. The data are not, we think, robust enough to add another level of complexity to the analysis. Because of the way we asked the mapping question, we believe that the “normal” links reliably capture significant information flows in the regional innovation system.
We filled in a 39-by-39 square matrix, with all the interviewed wineries, and all the peers that were named as contacts (the core set of 18 plus 10 non-interviewed wineries), the eight infrastructure organizations (all interviewed), two consultants (one of whom we interviewed) and one supplier (not interviewed). By manipulating parts of the matrix, we derived a number of standard measures (Wasserman 1994) illuminating the network structure. Note that in this network analysis, all physical distances are suppressed: all that is recorded and all that matters are the social connections and the social distances (number of degrees of separation).
One measure of the role of firms is “in-degree centrality,” which in this context (and similar to Giuliani) is the number of “most fruitful” links by which information flows “in” to a winemaker. Peer in-degrees in our sample range from 0 to 8, with a mean of 2.72 and a standard deviation of 2.1. That is, our core wineries had had “most fruitful” innovation contacts with, on average, 2.72 other members of the core group of wineries that were interviewed. Note that the handful of firms with zero in-degree centrality are not completely isolated. These firms all reported fruitful peer links that reach outside the Okanagan cluster. These firms still receive useful innovation knowledge, just not much from their Okanagan peers. From the interviews, there were two reasons: personal style and history, and corporate structure, viz. large and with an international orientation. There remains the possibility that these outward looking firms may function as technological gatekeepers, which feed knowledge into the cluster. More on this in a moment.
The degree of connectedness in the Okanagan cluster seems to be as high or higher than in the small Chilean and Italian clusters examined by Giuliani, although we have to allow for the different way the question was asked. They found more isolated nodes (their sample size was 32 in each case) and their more thorough search for linkages did not turn up many more than in the Okanagan.[38] The network density[39] is 0.151 in the Okanagan cluster, considering only the 18 firms interviewed. In Chile, with N = 32, the network density was 0.098, which seems comparable to the Okanagan, allowing for the differences in methodology, and in the Italian cluster it was 0.036, which is distinctly lower.
We examined the question of subclusters by calculating the ratio of the average number of linkages within the subgroup (normalized to the number of possible linkages) to the average number of linkages from subgroup members to outsiders (normalized once more to the number of possible such linkages). A ratio greater than 1 flags a denser web of relationships within the sub-cluster. The results were as follows:
Top cluster (N=4) 1.69
Middle cluster (N=5) 1.58
Bottom cluster (N=8) 0.99
We also calculated weighted averages, attributing values of 1, 2 or 3 to the reported interaction strength. The results hardly changed. The numbers support the existence of the Top and Middle clusters, but not the Bottom cluster. These numerical results are not especially robust. For example, dropping the most-linked winery from the Middle cluster reduces the ratio to 1.1. Our qualitative impression, based on the interviews, was slightly different: the hypothesis of Middle and Bottom clusters seemed better supported than for the Top cluster; the relatively larger wineries of the Top group presented themselves as reaching throughout the valley, and beyond.
When we come to consider pairs of wineries with more than one-degree of separation, the cluster appears even more connected. We calculated who was connected to whom by fruitful links through an intermediary: another of our interview subjects, or one of the 10 other wineries they mentioned as sources, or one of the two consultants that were mentioned as sources. When two-step links are added in, the mean number of connections rises from 2.72 to 13.2, with a standard deviation of 5.1. We are not sure how much information flows through two-step links,[40] certainly less than through a direct link, but it is evident from the numbers and from the interviews that there is a strong sense of community, which is strongest in the mini-clusters and still palpable for the whole Okanagan cluster. Also, see the previous section for more on the role of consultants.
The notion of a gatekeeper role for firms that are mostly outward looking is partly answered by comparing the in-degree and out-degree centralities. Two of three detached firms were mentioned two to three times each as sources of “most fruitful” information by peers. However, to qualify as gatekeepers they need both a high level of “go-to” interactions and also that they have special access to external sources of knowledge (Giuliani 2004). In fact, the rest of the population appeared to make similar use of research organizations, infrastructure organizations, trade shows and conferences.
More generally, we calculated a measure of “prestige” for each firm, namely the difference between the out-degree centrality (O) and in-degree centrality (I).
P = O – I
The distribution of values for P suggests a democratic society: For about half the firms, the absolute value of P was 0 or 1; the extremes were 3 and –3. We calculated group-in-degree centrality (Wasserman 1994), a measure that reflects the collective asymmetry of the linkages, that is, the degree to which one or a few firms dominate the network. The calculated number, 0.329, is rather small.
And what of the impacts on innovation? Our data allow only a suggestive analysis. Our questions on innovations elicited a large number of specific examples from individual firms. These are summarized in Appendix 2. We did our best to count how many distinct innovations were mentioned by each firm. The number of innovations per firm is a rather flawed[41] but still interesting proxy for innovation success. Define a measure of firm connectedness,
C = O + I (sum of inward and outward linkages)
Then calculate the correlation of our crude measure of innovation success, i.e. number of innovations, with prestige, P, and with connectedness, C:
Table 6: Does Networking Support Innovation in the Okanagan?
| |Prestige |Connectedness |
|Correlation of innovation with . . . |- 0.131 |0.585 |
|R-squared of the relationship . . . |0.017 |0.342 |
The result is a clear enough signal that it pays to both give and receive. With respect to our crude measures, the arithmetic says that connectedness explains a substantial part of innovation performance while salience as a go-to centre, as measured by our prestige variable, matters not at all. [42]
The numerical analysis supports the qualitative impression that the cluster is well networked. Almost all firms have numerous fruitful interactions with other firms in the valley. There are no dominant players in this process (gatekeepers), which is in contrast to what Giuliani found in the two small wine clusters she studied in Chile and Italy. Firms seem eager to share, and they view sharing as a normal way of doing business. Interactions take place frequently, through a visit to a neighbour’s premises, coffee at Tim Horton’s, a breakfast meeting held by a supplier of agricultural chemicals, participation in an industry organization, or contact at a wine festival
The model seems a natural one in the context of a rapidly growing industry with frequent family ownership and a rural setting. Whether this structure is permanent, of course, is another question. A metaphor used by one focus group participant was that the industry will evolve like competitive sports: in the early days, relations are friendly and help is offered directly, but with time and as performance and rewards are pushed to higher levels, relations become more competitive and less collegial, and helping relationships such as occur become more formal and institutionalized.
Points of comparison with Niagara
The structure of the Niagara and Okanagan clusters is broadly similar. A few large wineries more or less monopolized the industry until the late 1970s. Then a few startups, the Estate Wineries, got their foot in the door by similar processes of political lobbying. A combination of social change and industry pressure kept the door open until free trade came along, with impact comparable to a “disruptive technology.”
A common federal adjustment program provided a common response, which resulted in much planting and replanting and the entry of many new smaller players and a parallel upgrading of the product by both large and small wineries. The differences, such as they are, are in the details. The industry in British Columbia was less dependent on supply management when the disruption occurred, and made a collective and conscious decision to focus the federal funds on replanting, while in Ontario the funds were spread more evenly over a variety of capital requirements (plant, equipment, etc). More effort was made to protect producers relying on the old varieties. The result is what Mytelka characterizes as “two-track” development: those who “grow wine in the vineyard” and those that make and market wine in the cellar and do not disdain wine and grapes from any source where the price is right. Both exist in British Columbia, but the tensions between the two camps appear much stronger in Ontario.
Today, the two clusters are a mix of small, technologically innovative firms focussed on higher quality wines, and larger market-innovative multi-product firms. The large Ontario firms are dominant in Canada, and they are major investors in British Columbia, but the reverse has not occurred.
While anecdotes show that there is effective networking among smaller firms in Ontario, the Niagara does not seem to have as much networking ferment as the Okanagan. Both Ontario and British Columbia industries have split over aspects of government and industry policy, but the Ontario policies are more interventionist and, perhaps as a result, the splits seem deeper in Ontario.
5 Domestic Markets
“It’s important to be close to the natural flow of traffic,” small Okanagan winery
For purposes of the GEM analysis, “domestic markets” means markets within British Columbia.
Direct retail
The most attractive outlet in the domestic market is retail sales at wineries. The outlet is important because wineries obtain the maximum unit profit from sales from their own premises, and they have complete control of shelf space and other promotional decisions such as tasting sequences.
According to an industry survey (KPMG, 2001) retail sales at wineries totalled $22 million in 2000, of which a remarkable $6 million was at the smallest wineries. The $22 million was almost half of total VQA sales in the province. The amount of sales is growing rapidly and the growth may well outlast the growth in grape production (seen to level off around 2010) because farmgate sales have an additional driver in the growth of wine tourism. This is an attractive possibility for the small, regionally oriented wineries, most of whom struggle for profitability.
Penetration of the regional market is not particularly high, as consumer tastes still run to beer rather than fine wine. The main urban centre in the Okanagan is Kelowna, population 148,000. Table 7 shows the distribution of sales (by litre) at liquor stores in Kelowna, compared with the main provincial liquor store in Vancouver. The consumption of all types of wine is half that of Kelowna’s presumably more sophisticated urban rival, and more similar to the 10 to 15 per cent typical of small-town liquor stores elsewhere in the province.
Table 7: Mix of Beverage Types in Two Urban Centres (How Cool is Kelowna?)
|Beverage type |Spirits |Wine |Beer |Cider/coolers |
|Flagship Vancouver store |11% |33% |51% |6% |
|Average Kelowna store |12% |16% |62% |10% |
BC Liquor Distribution Branch annual report 2002-2003
However, personal experience incidental to this study has convinced the authors that VQA penetration of the wine lists of decent restaurants in the Okanagan is quite high, and clearly higher than in Vancouver, which turns a more international face to the world. In the long term, the “demanding customers” valued by Porter’s cluster model (Porter 1990) are being created, but do not currently exist in large numbers.
The rest of BC
Outside the Okanagan, the major mode of distribution is the provincial liquor stores, followed by sales to licensee establishments.
The official liquor stores give disproportionate shelf space and good placement to British Columbia wines. NAFTA price adjustments are now in place, eliminating most of the price advantage for Okanagan wines against US wines (transportation and transaction costs remain higher for imported wine) but wines from other countries face higher duties and taxes as well. The LDB provides very little shelf space to Ontario wines, relative to their share of the Canadian market.
Restaurant wine lists invariably include British Columbia wines, at relatively attractive price points, and some lists are specialize in the domestic product as a conscious marketing tactic.
Overall BC wine is nibbling market share from bottled imports at about 1 percentage point a year (BCWI 2002) with most of the benefit falling to VQA wine. The absolute share of wine consumption for BC Wine (including a component of imported blending wine) is approaching 50 per cent. VQA sales are about 15 per cent of provincial wine sales. There is a huge, but un-quantified domestic market in the form of customer-brewed wine (U-Vin) for which there are no reliable figures but which is probably about the same volume as sales of bottled imports. U-Vin grapes are sourced inside British Columbia and internationally. Therefore the potential domestic market is very large. As a result, the strategy of most producers is to improve penetration of the domestic market.
The BC Wine Institute notes that the five-year sales growth rate of 100 per cent BC wines is about 14 per cent. If the industry were simply to maintain this rate, sales would reach approximately 9 million litres in five years. That, the institute calculates, would still be below the predicted 2006 production levels by five million litres (BCWI 2002). One industry observer told us that there will be enough supply to serve 40 per cent of the British Columbia market, almost three times the share at the time of our study, but he said that will only happen if consumers can be persuaded to pay a premium for the home product.
Pressure to absorb growing amounts of higher quality wine will put pressure on the industry to find new products and new outlets for them. The pressure will be greatest on wineries with large outputs. Many small wineries with niche products and a loyal clientele sell out early each year and with careful marketing, they should continue to do so.
Points of comparison to Niagara
The two regions are very similar in the nature (tourism-driven) and importance (high margins) of the direct retail market, and in the preferences offered to domestic wines.
6 Access to External Markets
“It’s been a honeymoon here to not have to look beyond the BC market at the world market.” – Okanagan winemaker
Outside British Columbia, there are many barriers to access.
The rest of the World starts with the rest of Canada. Non-VQA Okanagan wine appears in products sold throughout Canada, often blended with imported wine. The higher quality VQA wine has hardly penetrated the Canadian market. VQA sales to the rest of Canada were 440,000 litres in 2002/2002, about 12 per cent of VQA production, amounting to less than 1 per cent of consumption in the rest of Canada. Some wineries, however, have been successful in marketing to other provinces: percentage sales to Alberta were 20 to 50 per cent for some wineries; one medium-sized winery targeting the central Canada market said their sales to Ontario will soon exceed those to Alberta.
There are no institutional barriers, in principle, as provinces have subscribed to an inter-provincial free trade agreement. But there are practical ones: trusted contacts need to be developed, customer recognition fostered, and political foot-dragging countered.
About 4 per cent of VQA sales are exported outside of Canada. Most of this (and by far the largest amount by value) is icewine. Canada has been successful in promoting the icewine franchise worldwide. (It is, after all, easy for foreigners to associate ‘Canada’ with ‘ice’.) It has been harder to penetrate the table-wine market, despite reasonable success in international competitions.
To date, international buyers judge that the quality available is not worth the price, and that it is difficult to promote unknown Canadian wines. In some ways, the Okanagan is a high-cost region (need to amortize high land costs, lack of domestic equipment suppliers, relatively high wages). However, these factors are equally true of the California wine regions, which export successfully. Experience and recognition probably count for more.
Patient (and innovative) market development will be required.
Points of comparison with Ontario.
The official provincial distribution system gives very little prominence to British Columbia wines, not very different from the way British Columbia stores discriminate against Ontario wines. Restaurant wine lists show a similar, but not so consistent bias against the other Canadian region.
The Canadian Vintners Association sees strong growth for wine in Canada as a whole, and suggests that the VQA part of the industry “can expect to grow by 10 percent annually until 2010 or so,” as new vineyards come into production. Compare that to the BCWI estimate of 20 per cent annually until 2006 for British Columbia.
How to mop up the extra capacity (in the face of worldwide capacity growth) is a preoccupation of both regions. From Mytelka (Mytelka 2003b) and at a workshop she organized in Niagara on the Lake on the two cluster studies, we heard quite often that one strategy would be to develop and market a “Canadian” style (or styles). We did not hear this idea much in the Okanagan, where the focus was more on developing a series of regional styles based on local terroir, e.g. “Black Sage Road reds.”
Key-factor analysis
This section will be much briefer than the previous one. Here, there is no attempt at a comprehensive analysis. We simply review, and subjectively rate, the Okanagan’s situation with respect to the National Research Council’s key success Ingredients for community-based Technology Clusters. The result: a poor fit, which belies the sustained growth and good reputation of today’s product.
1 World class R and D capacity in key technologies. Rating: weak but improving
There are two research institutes. One (the UBC center in Vancouver) only began operation at the time of our study, and therefore had had no impact on the region. The other, a unit of the Pacific Agri-Food Research Centre, had been effective only since the mid-90s, and remains a modest operation although with a strong strategic awareness of industry needs at this point in the industry’s development.
Many of the wineries do their own R and D, but it is small scale.
2 Access to highly qualified personnel. Rating: fair/good
As elaborated in the “resources” and “infrastructure” sections, the region finds it relatively easy to attract highly qualified technical personnel, and is building a modest stock of these human resources that wineries can bid for. As the reputation of the region grows among experts (which will precede recognition by consumers) recruiting will be easier. Highly qualified personnel with marketing and management skills are not so easily attracted to the Okanagan, which does not offer many opportunities for top-level people in these areas.
3 Partnership with important R and D players – governments, industry, universities, international organizations. Rating: weak
There are very few of these partnerships. We note the joint ventures with some of the new wineries in the south, and the potential for research partnerships with the UBC center. Most firms do not have the capacity to finance significant research partnerships.
4 Resources to invest in collaborative R and D. Rating: weak
Collaborative R and D is not a traditional model in this industry.
The industry contributes modestly to collective research through research levies to the BC Wine Institute. Government does not. The industry is cash-flow short. There is the potential but no precedent for the related industry, tourism, to contribute: a very long shot.
5 Sources of technology, knowledge and skills. Rating: fair but improving
There are many innovative firms. Larger players now moving in have captive technology capability but no great willingness to share it. Tacit knowledge is thin, because the industry and its understanding of the “terroir” is so new. There is CCOVI in Ontario, which is useful because of its cold-climate specialization, but distant.
6 Industry partnership facilities (incubators) for start-up companies. Rating: not applicable
No. It is hard to see incubators as a useful model for this industry.
7 Technology outreach services (IRAP, CTN, regional development organizations). Rating: medium/good
This is the strength of PARC. The community is currently engaged in a formal cluster building exercise, including the wine cluster, from which a number of outreach initiatives are likely to emerge (Okanagan Partnership Collaborating for Sustainable Prosperity, n.d.). IRAP is present and has been involved with the industry for many years.
8 Linkages to national and global knowledge infrastructure. Rating: fair
At present, most of the winemakers have international experience and roots. Growers mostly do not. We noted many “off-the-map” connections for both large and small firms. There were fewer connections to Niagara (other than cross-ownership) than we would have expected. The region remains off the beaten path from both the artistic (wine critics) and the technical (industry pilgrims) points of view.
Conclusion
The Okanagan wine cluster – at least, the part of the industry producing VQA and other wines of comparable quality and interest – boasts 10-year growth and innovation rates that most high tech sectors would be quite satisfied with. Yet, the cluster is a poor fit with the NRC key factor indicators, and it presents with some important holes in the GEM competitiveness framework.
The key-factor list was developed with a view to understanding high technology economic development in the context of the New Economy. The fit will likely improve with time, especially as to technology development, but it is entirely possible that the dynamics of this cluster – ultimately based on a primary resource, the land – will never fully mirror that of New Economy/High Technology firms. Certain elements will apply: collegial relations in the early stages, development of deep tacit knowledge, willingness to compete at the highest quality levels. Others may not. The industry is small and too distant from big centres to support major collaborative initiatives. The advanced research/training competence is already established in Ontario and is likely to stay there.
The GEM model gave us a broader picture. The picture that emerges from the GEM analysis is of an industry that is structurally weak with a shortage of capital and a surplus of energy, excellent fundamental resources, limited R and D capability, and a fringe market position. The cluster is well networked. Collaboration appears to have spurred innovation and allowed the industry to improve its products and the marketing of them at a rapid rate. There are threats on the horizon, the most important being the need to deal with incipient over-capacity
Because of the (relatively) large Canadian market in which this relatively small wine region is embedded, the future looks reasonably positive. Saturation of the domestic market in the future, however, may be a “disruptive event” that stimulates a fresh wave of innovation. It is not possible to say that the cluster is yet competitive on a world level -- and it is only marginally competitive in a Canadian context. Just as the disruptive nature of the Free Trade Agreement stimulated effective policy responses by both government and industry, the next disruptive event may trigger further fundamental changes in the regional innovation system and business strategy. We hope that our and other researchers’ attempts to understand how the Canadian clusters got to where they are today, and the experiences of other wine regions that have made a similar transition, will illuminate the path.
Appendix 1
The Company Questionnaire
We made a number of modifications in the model questionnaires provided by ISRN. The company questionnaire that we developed is displayed below, along with some notes in italics on how and why it deviates from the ISRN model. We incorporated, sequentially, some changes made by Mytelka for the Ontario questionnaire, insights from our pre-interview focus group, our understanding of important and unimportant issues for the wine industry, and our experience in the first few interviews.
We did not modify the other questionnaires (research institutes, community agencies) but found considerable difference in which questions turned out to be most relevant, depending on the institution involved.
Part A: Company Background
1. What events stimulated the founding of this company? Who were the individuals and organizations inside and outside the company who played a key role in its development?
2. Are there any other companies in this region and/or province that your company is associated with, such as a strategic partnership?
Have you spun-off any companies from your firm?
This question refers to common ownership, now or in the past; a group of ex-employees; or significant IP or product relationships.
3. Why is your company located in this region and this specific location? Would you ever consider relocating, and why?
One question, asking about the relation to a possible corporate parent, was dropped, as we always obtained this information in the answer to question 1.
Two questions dealing with location were combined in question 3. Location was not revisited, as wine making is not very mobile.
Part B: Research Strategy and Innovation
4. During the last three years, did your company offer new or significantly improved products (goods or services) to your clients, or introduce new or significantly improved production/manufacturing processes? Please provide a brief description of your most important new or significantly improved product or production manufacturing process during the last three years.
5. Was this most important innovation
" a world first?
" a first in Canada?
" a first for your firm?
6. I’m going to read a list of possible sources of innovative ideas for your product, service and process development. Briefly, on a scale of 1 to 5, where 5 is very important and 1 is not important, indicate a score for each one.
R&D unit (in-house) Production engineering staff
Marketing department Management
Suppliers Customers
Competitors’ products University researchers
Fed or Prov. Agencies or research institutes Consultants (academic or professional)
Venture capitalists or other financial services
7. Which of these sources are local?
These two questions replaced two more detailed questions that requested ratings of local and non-local sources, separately, on a five point scale. In practice, many respondents were reluctant to provide even one set of ratings at this level of detail.
8. Where did you learn viticulture techniques? Winemaking?
9. How would you describe your winemaking style. If necessary, probe: French, Italian, Australian, Canadian or other?
Questions 9 and 10 are two new questions, added in the Ontario study, which we adopted.
10. Do you consider yourself innovative mainly in technical processes or mainly in business processes (marketing, financing, training, distribution, etc)? Explain. We need to make sure we are picking up non technical innovation.
A new question to evaluate the importance of non-technical innovation.
11. Please indicate on the photocopied map of the valley the other organizations (wineries, other businesses, institutions) with which you have the most important and fruitful exchanges of ideas, knowledge and know-how that have helped you innovate.
A new question to obtain directly geographic and topological information about the innovation network.
Part C: Relationships, Suppliers and Customers
12. Where are your key customers located – locally (within 100 km), in the rest of the country, North America or the world? How important is it for you to be located close to them?
A supplementary question on possible relocation was dropped as this is almost never an issue in this industry. A question on differences between local and non-local customer relationships was dropped, as there is no basis for comparison of local customers (tourists) and non-local ones (firms and agencies).
13. What are the most important inputs to your company (resources, raw materials, components, services)? Are your key suppliers (e.g. of grapes, crushers, presses, corks) located locally (within 100 km) or non-locally? How important is it for you to be located close to them? Specialized service providers?
This question was asked only when adequate data were not obtained from question 11 (the map question). Another question on local and non-local supplier relationships was dropped, as firms have limited choice in the matter.
14. Who are your primary competitors and where are they located? What is their comparative size and market share? Is it important for you to be located close to them as well?
15. How does your company keep track of competitive products, services or process innovations?
Part D: Locational and Human Resource Factors
16. What are the most important factors in the local/regional economy that contribute to the growth of your firm? What factors inhibit your firm’s growth?
(The list below is for interviewer’s reference, let the interviewee come up with their own answers).
2. Co-location with other firms in the same industry
3. supply of workers with particular skills
4. physical, transportation or communications infrastructures
5. availability of financing
6. specialized research institutions and universities
7. specialized training or educational institutions
8. presence of key suppliers and/or customers
9. government policies or programs OR industry programs
10. other
This open-ended question combines two questions, one asking for the factors and the other for the most important factors.
17. Where do you get your employees and what type of training and experience do they have? Which employees got their specialized training outside the region?
This is a simplified form of the model question, which asked for a matrix of sources and employee types.
18. Tell us about employees who have left your company within the last three years; how many have been employed by other firms within your region/locality? (Prompt: competitors, partners, other firms within your industry sector). If your key employees were to quit, how easily could you replace them from within your local region?
A question on the existence of unique knowledge and skills in the local labour force was dropped as not appropriate to the structure of the labour market in a rural area.
Part E: Role of Research Institutes/Technology Transfer Centres
19. How frequently do you or others in your company interact with public research institutes or technology transfer centres (local or non/local), including federal or provincial government institutes, universities and colleges to gain access to new sources of knowledge? Try to make sure these get on the map.
20. What types of knowledge exchange are you (or others in your company) involved with?
(The list below is for interviewer’s reference, let the interviewee come up with their own answers).
11. formal collaborative research projects
12. university faculty working in, or consulting with the company
13. participation in research consortia
14. licensing or patenting of public research inventions
15. development or adoption of new technology
16. development of specialized training program with a college or university
17. company personnel working with a college or university
21. What primary benefits do you derive from these relationships?
(The list below is for interviewer’s reference, let the interviewee come up with their own answers).
leveraging R&D expenditures lower overhead costs on research
access to technical expertise access to equipment and material
source of new product ideas problem solving
information about the knowledge frontier market credibility
improvement of in-house R&D procedures
connection to larger research community hiring and retention of employees
These two questions, being open-ended, serve to replace five questions that asked for specific elaborations.
Part F: Local Cluster Characteristics/Social Capital
22. Do you consider your company to be part of a network of interacting and related firms in your region/locality, i.e. a cluster? Explain. Check that the map adequately represents the network.
23. What associations to you belong to? How important are they? Are there any “informal” groups? We should look for some VQA discussion here if we haven’t already covered the issue.
23. Are there any key business, community, or government leaders who played an important role in the development of your local industry or cluster? If yes, explain.
27. Did conferences, trade fairs, festivals etc lead to any of your present relationships with suppliers, customers, collaborators, or research institutes?
This section was considerably shortened (in the model questionnaire, it comprises 11 questions), taking advantage of the large amount of networking information gathered in the mapping question (question 11).
Information on government programs invariably came out in the questions on history inhibiting/helping factors. Financing issues were covered in the history question (question 1).
Part G: Future
28. What are the key trends (challenges or opportunities) that will most influence the success of your business in the next five years? How do you define success?
The question on “most important challenges” was dropped as interviewees mostly had already answered it.
29. What can government to do support the industry in the future? What can the industry do collectively to help itself?
This is a more specific policy question than the ones asked in this model questions.
30. Of the linkages that you identified on the map, are there any that you would say have been or will be critical to the success of your firm? Explain.
This question is here for a technical reason. It provides for a nice conclusion to the interview, and also is a way for the interviewee to briefly rethink their answers to the important map question (question 11) in the light of the intervening discussion.
Appendix 2
Summary of Recent Innovations in the Okanagan
|Innovation |Number |Type |First in |Winery |
|Total |50 | | | |
|Canopy management (hedging, pruning). Experiments |3 |Growing |Canada |W107 |
|with pruning and hedging. Root stocks and clones | | | | |
|for unique location | | | | |
|Daily moisture monitoring technology |1 |Growing |Canada |W115 |
|Sustainable farming practices |1 |Growing |Firm |W102 |
|Matching terroir to variety, yield management |2 |Growing |Firm |W103 |
|Irrigation sensors (technology from Ontario parent |1 |Growing |Firm |W109 |
|company) | | | | |
|Starving the vines of water to increase quality. |1 |Growing |Firm |W113 |
|Moisture probes to adjust watering cycle |1 |Growing |Firm |W117 |
|Mechanical harvesting and “smart work” practices |2 |Growing |Firm |W118 |
|Old grapes (26 years) are rare in the valley, |1 |Growing |Region |W108 |
|therefore an “innovation” | | | | |
|Bluebird nesting houses (discourages starlings) |1 |Growing |Region |W109 |
|Crop yield management using new Okanagan GPS atlas.|1 |Growing |Region |W115 |
|Mobile bottling plant serving several wineries |1 |Making |Canada |W117 |
|Pressing whole bunches, in-tank crushing, |4 |Making |Firm |W103 |
|underground tanks, building designed after best | | | | |
|practice Oregon benchmarks | | | | |
|New technology to produce “Okanagan style” reds |1 |Making |Firm |W111 |
|demanded by market | | | | |
|Fermentation using naturally occurring yeasts |1 |Making |Region |W102 |
|Holding white wines to let them age |1 |Making |Region |W105 |
|Crush platforms, floating tank fermenters. |2 |Making |Region |W109 |
|Conveyor belt for culling individual grapes |1 |Making |Region |W110 |
|(European design, locally made) | | | | |
|Floating-top tanks, pioneer cold fermentation |2 |Making |Region |W117 |
|Developed new equipment to make fruit wine, used |2 |Making |World |W106 |
|new enzymes | | | | |
|Introduced Pinotage wines (South African varietal) |1 |Marketing – product |Canada |W112 |
| | |design | | |
|Vinsanto, an Italian-style dessert wine, served |1 |Marketing – product |Canada |W116 |
|with biscotti | |design | | |
|Odyssey reserve line (2002) including sparkling |2 |Marketing – product |Firm |W108 |
|wine. Latitude 50 in 1990 is biggest selling VQA | |design | | |
|wine. | | | | |
|2004 release of upper end merlot |1 |Marketing – product |Firm |W118 |
| | |design | | |
|Single, blended wine product: |1 |Marketing – product |Region |W101 |
|the approach France has taken for hundreds of years| |design | | |
|Spectrum of all-Bordeaux-style wines |1 |Marketing – product |Region |W103 |
| | |design | | |
|Introduced zinfandel wines (California varietal) |1 |Marketing – product |Region |W111 |
| | |design | | |
|First bottle-fermented sparkling wine |1 |Marketing – product |Region |W117 |
| | |design | | |
|High-end fruit wines, each one is something that |3 |Marketing – product |World |W106 |
|hasn’t been done anywhere. Cherry port wine, Fuji | |design | | |
|ice wine. | | | | |
|Monumental castle-on-the-hill winery: “winery as |1 |Marketing -- selling |Canada |W113 |
|an experience” (Mondavi model) | | | | |
|Paid testing room |1 |Marketing – selling |Canada |W109 |
|“Adopt-a-row” customer loyalty program (European |1 |Marketing – selling |Canada |W116 |
|model) | | | | |
|Yearly competition to design a new label |1 |Marketing – selling |Firm |W104 |
|Reserve tier of wines (2002) called “Qwan Qwmt,” |1 |Marketing – selling |Firm |W114 |
|which means“to achieve excellence” in the Okanagan | | | | |
|language. | | | | |
|Mini disc to promote the winery, internet sales |2 |Marketing – selling |Region |W105 |
|Enhanced self guided tour with information on the |1 |Marketing – selling |Region |W118 |
|growing region (Ontario model) | | | | |
References
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-----------------------
[1] This research was performed under the umbrella of the Innovation Systems Research Network, an interdisciplinary and multi-centre collaboration studying industrial innovation in Canada. The work described here was funded as a three-year Major Collaborative Research Initiative (MCRI) by the Social Sciences and Humanities Research Council of Canada. The MCRI supports (at last count) studies of 26 different clusters. Two are wine-making clusters, in the Niagara peninsula in Ontario and the Okanagan Valley in British Columbia.
[2] Masters student, Centre for Policy Research in Science and Technology, Simon Fraser University, Vancouver, Canada, email cdh@sfu.ca
[3] Adjunct professor, Centre for Policy Studies in Higher Education, University of British Columbia, Vancouver, Canada, email tim.padmore@ubc.ca
[4] Information in this paragraph is from Central Okanagan Community Profile, 1995, Kelowna Canada Employment Centre.
[5] Hypothesis I: In the Okanagan wine cluster, innovation is idiosyncratic, individual and incremental, refining and re-interpreting an ancient industry.
Hypothesis II: The stock of human capital is modest but the rate of investment is high. Human capital moves freely.
Hypothesis III: Social capital, especially family linkages, was important to industry development in the 1990s and currently.
Hypothesis IV: Government policy in the late 1980s and early 1990s had a substantial, positive effect on the structure and competitive prospects of the cluster, contrasting with the Ontario experience.
[6] Mostly in late 2002, some in 2003 and early 2004.
[7] Terroir comprises the local conditions of micro-climate, soil, and slope, and how these interact with the many variables in growing grapes and making wine from them.
[8] A term used to describe major non-European wine areas that have mostly developed in the 20th centurty, the most important being Chile, Australia, New Zealand, California, and South Africa.
[9] Vinifera varieties include the now-familiar Chardonnay, Riesling, Sauvignon Blanc, Pinot Gris, Gewurztraminer, Pinot Noir, Cabernet Sauvignon, Merlot, Cabernet Franc.
[10] The Canadian Vinters’ Association (n.d. Modern History, 1970s Section, para. 3): “In the late seventies, and early eighties, pioneer producers in Ontario such as Paul Bosc (Chateau des Charmes), and Len Pennachetti (Cave Spring Cellars), among others, went against the tide of prevailing opinion that scoffed at the planting of the more tender Vinifera grapes. In BC, George Heiss (Gray Monk), Robert Shaunessy (Tinhorn Creek) and Robert Combret (Domaine Combret) did the same by taking calculated risks to prove the naysayers wrong. Today these innovators have some of the oldest Vinifera vineyards in Canada.”
[11] Canadian Vintners Association (n.d. Modern History, 1990s Section, para. 1): “Canadian vintners continued to demonstrate that fine grape varieties in cooler growing conditions could possess complex flavours, delicate yet persistent aromas, tightly focused structure and longer aging potential than their counterparts in warmer growing regions of the world.”
[12] For example, the 2004 Chardonnay du Monde competition in Burgundy, France, produced 15 medals for Canada (8 Okanagan, 7 Niagara) including three gold medals (2 Okanagan, 1 Niagara), out of 369 total medals and 68 gold medals awarded.
[13] The Oslo manual definition (OECD, 1996) is restrictive for a wine cluster, as it excludes subjective and stylistic improvements, which are central to what actors in the industry see as innovative.
[14] A table summarizing the innovations and their degree of originality by winery (coded names) is included as Appendix 2.
[15] This is not to say that there are not sophisticated tastes in Canada, but relatively few urban shoppers have done even the limited comparative evaluations offered by the tasting room of a winery shop. Opportunities for critical tastings are rare enough that they remain an “experience,” a concept that is, after all, the foundation of wine tourism.
[16] Information in this paragraph is from Central Okanagan Community Profile, 1995, Kelowna Canada Employment Centre.
[17] The Bordeaux-born proprietor of Domaine Combret describes () his search for a location for a wine operation. What he needed was “desertic, very dry. . . . Under such conditions, most grape diseases are avoided. But, in order for grapes to survive in a desert, access to irrigation water is required [emphasis added], which narrowed down possibilities to essentially two regions in the world: Chile and the Columbia River basin shared between the interior of Washington State and the southern interior of British Columbia where the Sonoran desert ends, i.e. the South Okanagan. I finally selected the South Okanagan. This area enjoys very dry climatic conditions with annual precipitations of around 13 inches and relative humidity between 5% to 30% from April to October. The South Okanagan is Canada's only desert.”
[18] A large but undocumented portion of non-VQA wine produced from BC grapes is blended with imported wine to make what the British Columbia Liquor Distribution Branch classifies as “other BC wine.”
[19] Sales and production are not the same as some wine is held for aging. In an environment of increasing output, production will run ahead of sales.
[20] Firms also mentioned the Penticton and Oliver campuses as training/technical sources.
[21] A modest “quality enhancement program” to reduce the cost VQA wines was ending at the time of our interviews (2002-2004).
[22] Under recent changes to the regulations, so-called cold beer and wine stores no longer need to be associated with pubs and hotels, but still need official approval to operate.
[23] It could even be said to be a kind of spinoff as its founder was recruited from CCOVI, where he was a senior scientist.
[24] As a measure of the forward importance on wine to the tourism industry, see the web page for the Thompson Okanagan Tourist Association, where the lead category on the home page is now “Wine and Culture,” and the lead photo image is of vineyards overlooking an Okanagan lake.
[25] Including sales to locals.
[26] Visitors survey conducted by the Kelowna Visitors and Convention Bureau, 1996
[27] “It was a huge, huge gamble,” when a Summerland winery decided to plant 115 acres on Black Sage Road. (Richard Cleave, in Schreiner, 2003).
[28] For clarity in this illustration, we have not shown linkages that go outside the Okanagan cluster. Most of the larger wineries also buy grapes from the USA and Chile.
[29] We used Table 4 (Mytelka, 2003a) to calculate the percent of grapes grown for own use. The BC figures are derived from KPMG (2001), and refer to vinyard acreage, and so are not exactly comparable.
[30] Consultants are sometimes imported from outside British Columbia, but we do not consider them part of the regional innovation system, and they do not appear to have the same impact on the commercial success of the cluster.
[31] This can be done efficiently by a straightforward matrix multiplication as per the methods in Wasserman and Faust (1994).
[32] Until 1998, there were three categories of wineries distinguished in part by size: farm wineries producing up to 5,000 cases a year, estate wineries producing up to 20,000 cases, and unrestricted major wineries. New regulations define a single category of licence, providing only that production is at least 4,500 litres annually, a very modest hurdle. Nevertheless, the old categories serve as a reasonable definition of “small”, “medium” and “large” in British Columbia.
[33] KPMG (2001) cites the following sources; BC Wine Grapes Acreage Survey, British Columbia Wine Institute, 1999, and Regulation Impact Report, Prepared for British Columbia Grape Marketing Board by Coletta Consultants, August 31, 1998.
[34] Answers to: “Are there any key business, community, or government leaders who played an important role in the development of your local industry or cluster? If yes, explain.” (Appendix 1, question 23.)
[35] A raised, vaguely level ridge paralleling the lake, remnant of an ancient river bank. These benches, which offer excellent air drainage and good sun exposures are found in many places paralleling the long, narrow lakes that characterize the valley, and the streams and canals that connect them.
[36] One winemaker chose his spot, even down to the sunrise: “It is always advantageous to be exposed to the sunrise side rather than to the sunset. In many varieties, this produces more flavours.” (Schreiner, 2003.)
[37] This difference biases our sample in different ways, on balance serving our needs. A roster will tend to elicit all contacts. We obtained “top of mind” responses, which helps ensure that the contacts were in fact important to the firms. On the other hand, some subjects were more garrulous than others, and we expect that the garrulous subjects may have identified relatively more of their actual contacts. Garrulity is related to social intelligence which is related to networking success, so we are content to accept this bias too.
[38] One region had mean out-degree centrality of 1.0 and the other of 2.9. Both samples were N = 32, compared to our N = 18.
[39] Average number of links as a fraction of the maximum possible number of links.
[40] We explored the extent to which consultants are effective intermediaries (they are – see the section on “suppliers”) but did not specifically ask firms about their role in relaying information.
[41] Aside from the arbitrariness of deciding what constitutes a “distinct” innovation, the number of innovations cited is also likely to be a function the ego and eagerness of the interview subject and other confounding variables arising from an interview format. Moreover, we made no attempt to adjust for the importance of the cited innovation, e.g. by weighting according to whether the innovation was a first for the firm, for the region, or for Canada. Although these data were available, we did not think the idea a very robust analytic decoration.
[42] A recent article by Flynn in the Academy of Management Journal says the same pattern holds inside organizations: helping others makes people popular, but productivity is highest when people both give and receive. See for a web-accessible version.
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