Andrew Peller: From Vine to Wine
By: Lauren Fong & Isabella Lu
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Planting the Seeds
For over 90 years, Andrew Peller has rooted itself deep in Canadian history as a leading wine company. Engaging in all parts of the wine-making process, the firm harvests, presses, ferments and ages a plethora of wine and craft alcoholic products. From vine to bottle, Andrew Peller offers both premium ice wines and affordable products, distributed across liquor boards and retail stores around the world — yielding a 14 percent international market share by volume. Domestically, the company is one of the largest players, maintaining a 37 percent market share.
Headquartered in Grimsby, Ontario, Andrew Peller operates many vineyards in the Niagara and Okanagan regions, as well as Nova Scotia. Alongside owning the well-known Peller Estates winery, they boast 16 additional labels, including Sandhill, Trius, and Wayne Gretzky Estates. The company’s diversified portfolio of products has garnered appeal from casual to affluent adults, valuing strong aromas and deep flavour profiles. Such a selection has allowed Andrew Peller to compete against larger names in the space, including Corby, Arterra Wines Canada, and Molson Coors.
From 2011 to 2019, the Canadian wine industry has grown by over 70 percent, valued at upwards of $11 billion. Over 600 wineries sprawled across the country contribute $5 billion annually to Canadian tourism, provincial tax and liquor board markups, and the overall economy. Recently, the Canadian government has made an investment of over $166 million into the Wine Sector Support Program, which will continue to support the expansion of Canada’s wine exports over the next two years. Further, while the Canadian wine industry is poised for growth at an annual CAGR of 6.1 percent, the market also displays signs of consolidation among top players, who are competing in a space with high barriers to entry. High upfront costs associated with obtaining acreage, harvesting machinery and fermentation equipment all contribute to lower margins for smaller firms, while larger brands (such as Andrew Peller) are able to achieve economies of scale. Hypothetically, this gives Andrew Peller an immediate advantage over many of the local or regional wineries in both Niagara and British Columbia — however, recent challenges have worked their way up the grapevine.
Dining With Climate Change
While international discussion and debate surrounding climate change began as early as 1988, the phenomenon has only recently begun to influence the wine industry. Now, as the average annual temperature in Canada rises by twice the global mean, fluctuations are rippling into grape production. Compared to other agricultural products (eg. wheat, rice), the wine cultivation process is highly sensitive — as factors such as elevation, air moisture and climate all influence the taste and aroma of the end product. For example, average growth temperatures for lower quality “table wines” have wide temperature acceptance ranges near 18°F (10°C). Conversely, a high-quality Pinot Noir only grows well within a temperature range of 3.6°F (2°C). Many wineries have experienced volatility in temperatures throughout the growing season, prompting reduced outputs in some wineries by as much as 75 percent of anticipated grape yield. Climate change has hit various geographic regions in different ways, at varying capacities — influencing global production output.
Unlike many local wineries scattered across the country, Andrew Peller has prominent operations on both the West Coast (Okanagan Region) and the Niagara Region. Larger wine companies tend to own brands that are more independent, increasing fragmentation and reducing the need to prepare for varying cross-country climates. To save costs as a larger company, these players also tend to produce less of their own wine, opting to outsource production. This is true of Andrew Peller’s largest competitor, Arterra Wines, which owns hundreds of wine brands but only eight wineries, whereas Andrew Peller owns 17 brands and over 10 wineries. This effectively places the company at a crossroads: contending with multiple climate challenges sourced from different regions. Specifically, Andrew Peller deals with challenges associated with frost damage to grapes and smoke taint from forest fires.
Frozen Grapes, Frozen Profits
During the growth and harvesting phases, all grape varieties are subject to acclimation — and are able to, typically, adjust to changes in climate so long as they are gradual. Wineries choose to grow different varieties during various seasons of the year, taking advantage of ideal climates and healthy growing conditions.
Sustained growth conditions veer away from the ordinary with climate change — as volatile climates and harsher winters evoke significant damage to the production process. Unable to acclimate to steep and sudden temperature drops (primarily between 12am-7am), many grapes in the Niagara region are freezing during harvest periods. As a result, grapevines that take a full three years to grow from initial harvest are experiencing frost, damage to branches, and a loss of crops. At some stages, the plant must be replaced in its entirety — halting production outputs. Ideally, since the Niagara climate is bounded by Lake Ontario and the Niagara River, temperatures are typically moderated. Andrew Peller’s flat topography, however, has exacerbated the impacts of extreme cold during early morning hours. While ideal temperatures differ by grape variety, temperatures below -22°C are largely considered unhealthy. Andrew Peller’s Vineyard Operations Manager, Wade Stark, commented “The vines were less hardy going into the winter, then we had multiple nights where temperatures were anywhere from -19°C to close to -28°C”. With respect to the bottom line, frozen grapes imply less production. Average loss rates to overall production could range from 10-15 percent, with Niagara reaching as high as 50 percent due to location and temperature. While seasonal crop loss is still new, the looming effects of climate change are expected to increase in severity moving forward — calling upon capital-backed wineries, such as Andrew Peller, to look toward solutions.
What Pairs Well With Smoke?
Coupled with frost damage on grapes, wine quality could also be damaged by smoke taint from forest fires. Andrew Peller’s British Columbia wineries continue to be at an elevated risk for wildfires, with the province recording record high forest fire rates over the past ten years. While the fires themselves are a danger to vineyards, the exposure from the smoke of surrounding fires destroys the flavour of the grapes — fostering a bitter taste that renders the wine made from these grapes unsellable.
The unpredictable nature of smoke taint adds an additional ingredient to the harvesting process: uncertainty. Although counterintuitive, the proximity of the forest fire to the winery is not indicative of where the smoke would affect the grapes. Since smoke gets carried by the wind, it could get blown away from vineyards close to the fire and, interestingly, settle on grapes further away.
While long-lasting effects on the Canadian industry are yet to be measured, researchers could look to the Australian bushfires for a glimpse of what may come. So far, there have been up to A$300 million (C$276 million) lost in their wine industry due to bushfire smoke. Similar financial losses may incur in Canada if the industry does not push for a solution.
Smoke taint is created by volatile phenols, a class of compounds linked to the aroma of smoke. These compounds enter the grapes when ripening, and are detoxified immediately through a process called glycosylation — causing the compounds to lose their signature scent, and the smell of smoke to disappear. This makes the detection of smoke taint an issue in itself — often, it cannot be detected until after the wine ferments. In fact, recent evidence suggests the volatile phenolic-glycosides only metabolize when engaged with the bacteria in our mouths, meaning the smoke taint could go undetected until it reaches an unsuspecting drinker.
Smoke taint in wine is a critical issue, bringing forth extensive losses to product production. Substantial long-term revenue losses from wasted production time, paired with losses of the wine itself, make for a rather bitter financial aftertaste.
Cheers, to Precision Farming
Andrew Peller’s issues are rooted in two climate causes, requiring a two-pronged solution under one umbrella; precision farming. Precision farming is a technological capability utilizing GPS guidance, drones, sensors, soil sampling and precision machinery to assist with agricultural growth. This technology could be applied to the winery’s two issues, mitigating losses from climate change.
To proactively combat frost damage, Andrew Peller should first consider installing wind machines in their vineyards. These would be able to moderate the temperature of the vines, preventing freezing. Proof of concept has been observed in various high-capital wineries across Germany and Italy. However, North American adoption to date has been limited, as these machines require significant upfront investment and recurring operating costs. Preliminary calculations drawing on Andrew Peller’s AIF and Annual Report displayed 349 vineyards affected in Niagara, with year one upfront investment and recurring wind machine costs researched at $1.15 million ($30,000 investment per machine, $3,000 annual operating costs, and approximately 35 machines required for the area). Therefore, the estimated 50-75 percent freezing loss brings the $1.15 million investment into context as a feasible, worthwhile investment. In this way, Andrew Peller could use precision farming to detect when temperatures drop below -1℃, turning on the wind machines only when necessary.
Precision farming applications also extend to detecting smoke taint in the company’s grapes. Currently, there are no direct strategies to detect which grapes have been tainted — but the use of sensors in precision farming would serve as an effective method for understanding when volatile phenols enter the grapes, and which region of the vineyard is affected. Research has shown that remote sensing and pattern recognition machine learning algorithms could detect smoke taint with 96 percent accuracy. These patterns would be detected through infrared thermal image analysis, one of precision farming’s core capabilities. While many approaches to removing smoke taint exist, researchers and wine experts have accepted activated carbon as one of the most feasible solutions. Activated carbon is a carbon-rich chemical product, currently being used for water filtration and treatment. This powder-like substance is known to absorb various undesirable organic contaminants which, in this case, would be volatile phenolic-glycosides — the driver behind the wine’s bitter taste. At a proportionately low cost of $82,000 compared to the firm’s gross revenues (given the firm produces 14 million L of wine and requires 2g of carbon per L of wine), saving the 30 percent grape loss effectively positions precision farming as a theoretically worthwhile investment. As a result, Andrew Peller would be able to confidently administer activated carbon to affected wines only — avoiding excessive resource spend while conserving what would have been thrown out.
Overall, precision farming gives Andrew Peller the tools to remain sustainable in the face of climate change — permitting the firm to age well for many years to come.
