Journal of Wine Research

ISSN: 0957-1264 (Print) 1469-9672 (Online) Journal homepage: http://www.tandfonline.com/loi/cjwr20

Service Innovation in the Bulgarian Quality Wine

Export Networks: Network Migration at a Macrolevel
Dr Tony Kinder & Prof. Milanka Slavova
To cite this article: Dr Tony Kinder & Prof. Milanka Slavova (2009) Service Innovation in the
Bulgarian Quality Wine Export Networks: Network Migration at a Macro-level, Journal of Wine
Research, 20:2, 95-109, DOI: 10.1080/09571260903169449
To link to this article: http://dx.doi.org/10.1080/09571260903169449

Published online: 30 Sep 2009.

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Journal of Wine Research, 2009, Vol. 20, No. 2,

pp. 95109

Service Innovation in the Bulgarian Quality Wine

Export Networks: Network Migration at a Macro-level

TONY KINDER and MILANKA SLAVOVA

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Original manuscript received, 01 August 2008

Revised manuscript received, 03 June 2009

ABSTRACT Using a network analysis tool, the paper analyses the history and potential of the
Bulgarian wine industry, arguing that shifts between volume and quality make sense in the light
of the sectors changing environment, an environment that currently favours boutique production for
export, coupled to boutique and volume production at home.

1. Introduction
It is tting that one of Bulgarias ancient treasures, the seventh-century goblet of
Kubrat, Khan of Great Bolgary, is a vessel for drinking wine. Since the early Bronze
Age, Bulgarians made a wine in Thrace that Homer praises in the Iliad. Bulgarias
long association with winemaking is evidenced in a second-century law protecting
vineyards, in a ninth-century prohibition law and in its early medieval monastic
wine cellars (e.g. Pliska, Perusal and Turnoff). Winemaking prospered even during
the Ottoman period (Stavrianos, 2000), especially sweet white wines.
This paper follows many tracks. At one level recent developments in Bulgarian
winemaking represents the determination of a whole people/country to engage in
modernisation processes. This is also the story of transition from a Soviet planned
economy to a globalised market economy; shifting from quantity to quality and from
closed to open markets. At an iconic level, it is the story of national product repositioning from cheap and cheerful to premium and boutique. In the story, heroic actors
and determined people feature alongside EU quotas, tariffs, quality standards and
branding campaigns. In short, the success story of Bulgarian winemaking is multidimensional. This paper analyses these changes using an institutional perspectivenetwork theory.
One important dimension is the understanding of how viticulture, vinication and
wine sales operate as a network and how networks migrate from producer and national
goals and governances towards a market and international orientation. Network here is
Dr Tony Kinder, Management School, University of Edinburgh, Edinburgh, UK (E-mail: t.kinder@ed.ac.uk).
Prof. Milanka Slavova, University of National and World Economy, Bulgaria (E-mail: milanka.slavova@
mbox.bol.bg)
ISSN 0957-1264 print/ISSN 1469-9672 online/09/020095-15 # 2009 Taylor & Francis
DOI: 10.1080/09571260903169449

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TONY KINDER AND MILANKA SLAVOVA

a purposively interconnected group of businesses and their partners enjoying un-traded

interdependencies in the form of network externalities (Hakansson, 1989). Supply
networks presume a value upon relationships (including knowledge ows and costs)
that exceeds the transaction costs of network participation (Lamming, 1993; Kinder,
2003). This paper references Fishers (1997) classication of traditional (functional)
and innovative supply networks as a key concept to analyse changes in the Bulgarian
wine industry. As Spekman et al. (1988) point out, increasingly competition is between
sets of networks: this is clearly visible in wine sales.
Industrial clusters are a particular type of network (Kinder and Molina, 1999). They
are characterised by a shared paradigm guiding searches for solutions (technological or
social); are composed of organisations open to learning (especially from each other);
enjoy institutional thicknesssupporting capacity and competences (Storper, 1997;
Amin and Thrift, 1992); and often benet from being spatially proximate, forming territorial production systems (Stohr, 1987). Bulgarias wine industry is not a cluster
though clustering occurs in localised settings, led by major companies. Bulgarian viticulture, vinication and associated logistics do not share a technological paradigm
(some rms are highly mechanised, others labour intensive). Firms vary greatly in
their preparedness cooperatively to diffuse learning amongst other Bulgarian wine
industry rms (some are secretive and uncooperative). These rms are dispersed
throughout the country, often lacking institutional thickness, especially in access to
marketing expertise, risk capital and export services. This paper therefore does not
use the clustering framework of analysis. It conceptualises the wine sector in Bulgaria
as a loose industrial network: loose in the sense that, whilst there are shared interests
(EU quotas, scal policy), such is the differentiation between innovative and traditional rms and sub-sectors (wine quality, type, target market or price) that the
network has been and remains loose.
There is little academic research on recent change in the Bulgarian wine sector.
Whilst referencing the sector, Zaharieva et al. (2003) focus on privatisation processes
rather than business change and organisation within the sector. Davidova et al.
(1994) is an informative piece on governance shifts in the sector, illustrated by procurement. Their analysis uses a transactional, rm-to-rm approach, which though commenting upon the wider strategic and organisational issues facing the sector, does
not focus upon them. Bainbridge and Roe (1994) and Bainbridge (1999) draw upon
a dated data set and though incisive cannot inform current business strategymaking. Our paper draws freely on the detailed exposition in Noev and Swinnen
(2002) and Noev (2006). The strength of Noevs papers is meticulously rigorous
research. They are not however as strong in presenting an analytical framework
giving causal relationships suitable for prediction and strategy-making.
Taking an institutional perspective entails using network analysis to examine causal
connections that feed into practical business strategy-making and to a lesser extent
public policy-making. Signicant changes in technological processes have occurred
in Bulgarian winemaking since 1989; the network approach captures these and organisational change (especially changes in service and relationship models), locating them
within an evolving set of institutional arrangements (law, nance, labour markets,
regulatory regime), each of which features in our analysis.
Table 1 indicates the basic structure of our network analysis. We are looking for
evolving network boundaries and deepening of relationships with the Bulgarian wine
network.
As complex a story as that of the Bulgarian wine network is one in which numerous
moments or events might be seen to characterise new phases. The time-framing of our

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97

Table 1. Characteristics of the networked organisation

Parameter

Network organisation characteristics

Control/ownership
Governance
Purpose and goals
Hierarchy
Leadership
Functional
integration
Products

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Ecology
Trust
Risk

Possibly shared ownership and assets with the network?

Interdependency of systems and process with network including cross-institutional
arrangements, e.g. public-private?
Explicit, shared and collective goals?
Structures: at, facilitating discourse and unmediated communications?
Led by specialists with the knowledge and ability to envision, communicate and
operationalise change
Functionally integrated and user-orientated, avoiding vertical integration and uses
commitment-based human relations?
Project rather than programme focus creating customised outcomes, targeting
emerging markets and stakeholders?
Inter-relationships between communities of practice?
Long-term trusting relationships based upon mutual advantage and including
knowledge ows?
Risk syndication via networks encouraging and supporting high risk taking

Source: Kinder (2007).

analysis is dictated by the use to which the analysis is put: to comment on the future
strategy of the network. In Figure 1, we give a general overview of events and
changes affecting the network. Our analysis, however, is structured in three phases:
the period before 2003, the period after 2003 and the future. The year 2003 is
chosen as a signicant business disjuncture since, as we shall show, at this point previous
decisions began to crystallise into results and market opportunities altered. It is also
sufciently close to the present to be relevant to current business strategy.
Organisational change challenges leaders to identify, communicate and put into
operation novel strategies, which they then drive/inspire by mobilising the organisations resources. Such organisational change processes are often difcult to achieve
in hierarchies with command and control over resources. Organisational change is
potentially more problematic for networks whereto use Schons (1963) phrase,
the displacement of concepts (new goals and ways of working)involves creating new

Figure 1. Basic timeline of recent Bulgarian wine network.

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TONY KINDER AND MILANKA SLAVOVA

communities of practice (expectations, participation costs and benets) and a new

inter-network ecology of communities. Transparency is critical to organisational
change that requires the active engagement of actors and, as Table 1 illustrates, such
change for networks requires attention to a wide range of characteristics. As Toumis
(2002) analysis of the Linux network illustrates, user-led change in networks is challenged, even where all participants choose to participate on the basis of shared goals
and ways of working (especially virtual ways of working). User-led change (see for
example, von Hippel, 1988; Leenders and Blenkhorn, 1988) often inspires change in
suppliers, however the organisational dimensions of change are often much more difcult to achieve than simply the adaptation of new technologies. Kodamas (1995) point
is that new fusions of technology and services invariably result in both inter-organisational and intra-organisational change, involving functional re-engineering and,
especially, as Nonaka (1988) points out in new international communities, new
approaches to service demand articulation. In short, network organisational change,
requires change within participating organisations, between them and between networks. For clustered producer supply networks, such as those featuring in this research,
there is the added challenge that the learning and knowledge ows (Cohen and
Levinthal, 1989; Kinder and Lancaster, 2001) necessary to change occurs in a milieu
heavy with inherited social patterning and responsibility for social welfare in addition
to commercial success. Invariably a new ecology of communities of practice involves
cross-cultural and cross-governance negotiation around the complex of parameters
shown in Table 1.
The papers overall intention is to illustrate the relevance of network analysis to an
understanding of network migration and to contribute towards strategy-making. In
particular, we hope to show why and how the Bulgarian wine network has evolved
since 1989; the extent to which it has become an innovative rather than traditional
network and to suggest what this may mean for its future strategy.
Section two of the paper sets out our method. In section three, we present a case
study of the Bulgarian wine network, which we analyse in section four and from
which we draw conclusions.
2.

Method

Our paper uses data from three semi-structured sets of interviews conducted by Prof.
Slavova, two of which are anonymous (one works with a major boutique wine seller
and the other in a government agency). Our third interviewee, Eleonora Negulova,
has owned and advised wine businesses in Bulgaria for some two decades. Other
data derives from Kapital and Dnevnik (weekly business publications), and (cited)
public documents from the Ministry of Agriculture and by the Centre for Economic
Development. Analysis by the authors followed the usual academic rigor: reection,
iteration and mutual criticism to agree a narrative triangulating with previous literature and research.
3.

Development Prior to 2003Quantity

Most regions of Bulgaria, which measures 11 million hectares (42,823 square miles),
enjoy favourable conditions for viticulture. The north, bounded by the Danube,
Dobrudzha Valley and Serbia/Montenegro grows both red and white grapes; the
local Gamza along with Cabernet Sauvignon and Merlot; Chardonnay, Riesling
and Sauvignon Blanc. Eastwards towards the Black Sea coast mainly white grapes

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99

Table 2. Size and distribution of vineyards and wine production in 2003

Vineyards in ha (hectares)

Grapes (tonnes/1000 kgm)

Wine in ha/l (hectolitres)

35,850
58,900

68,210
177,900

514,300
1,035,000

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Northern regions
Southern regions

are cultivated including the local Misket and Diamiat varieties. Microclimates in the
south-eastern valleys, in which the Slavjantzi winery is located, grow local varieties
such as Sunguriare Misket, Sunguriare Eau de Vie. Towards the south, near the
border with Greece, Mediterranean conditions especially in the Tracian valley
favour mainly reds: Cabernet Sauvignon and Merlot. Finally, towards the border
with FYR Macedonia in the southwest (home to the famous Damianitza winery),
along the Struma valley, Cabernets ourish alongside local varieties such as Melnik.
Table 2 shows the size and distribution of vineyards and wine production in 2003.
3.1.

Purpose and Goals

Before 1989, Bulgarian wine served the domestic and Russian markets with highvolume, low quality and low cost products. In total, production in post-Soviet transition states was 10% of world output and Bulgaria, like other transition states,
viewed wine as an exportable product, capable of generating hard currency (Noev
and Swinnen, 2002). Wine was also a stable domestic beverage, but sales proved
volatile and declined dramatically during the 1990s. There are several reasons for
this including: declining real incomes; black market production; rising excise duties;
higher prices and a shift to beer, especially amongst poorer people. Another factor
was declining grape quality and yields: vine-massif had been labour intensive and
cost pressures further eroded viticultural quality. Many vineyards were (and are)
30% below pre-1989 grape yields. Only with the planting of new vineyards and modernisation of vinication (coupled with rising incomes) did volume (domestic) sales rise
towards the turn of the century. Exports based upon low price branding proved ckle,
bottled wine exports into Russia stalled in 1998 with the nancial crisis in that country,
rejuvenating only after the turn of the century (Davidova et al., 1994).
3.2.

Control, Ownership and Governances

For the 46 years of the Soviet period, the Bulgarian wine industry was controlled by
state agencies for domestic production (Vinprom) and export (Vinimpex). In the
late 1970s Vinprom realised that obtaining hard currency meant shifting some production from quantity (table wines) to quality and allowed three wineries to become
independent (Perushtitza, Targovishte and Septemvri). Nevertheless, in 1989,
Vinprom continued to control 80% of wine production. Immediately Vinprom was
disbanded in 1990, it resurrected itself by offering contracts to all wineries, in effect
becoming a private (supply) monopoly. Wineries became recipients of hard currency
and foreign buyers sought to buy grapes direct. However, this UK-led export drive
was short-lived as consistency of quality proved difcult. By the mid-1990s, this
model was over.
By 2000, the state had divested most agricultural land in Bulgaria into small individual parcels or co-ownership (40%). Buying or leasing land is therefore a complex, costly

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TONY KINDER AND MILANKA SLAVOVA

and time-consuming task. Zaharieva et al. (2003) report one case in which the builder
of a 228 ha vineyard had to negotiate with 680 landowners. In no country are property
leases and planning consents as easy as leasers or purchasers wish. The extent of the difculties remains an important constraint on building new vineyards in Bulgaria.

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3.3.

Hierarchy and Leadership

Vinprom established a regional network of wineries, cross-subsidised to keep the less

efcient open, and established quality standards (the French Appellation dOrigine
Controle ranges) from AC (highest) through country wine to table wine. Bainbridge
(1999) wrongly suggests that the Bulgarian Controliran system has three categories:
reserves, country wine and table wine. In fact, there are ve categories: reserve (oak
aged); controlled appellation origin (2% output, dened vineyard and sugar); declared
geographical origin (70% of quality wine); regional or country wines (cf. vin de pays
18% quality wine output); and wine without declared origin (5% output; declared
quality or brand). This framework was established in law and adopted in 1999,
helping the later re-entry to EU markets, this time with premium products: the
result of pressure from the Association of the Producers and Merchants of Wines and
Spirits of Bulgaria.
3.4.

Products and Functional Integration

Post-Soviet Bulgarian wine inherited the high-volume, low cost model of the Soviet era
and was temporarily successful in marketing the Bulgaria brand internationally as cheap
and cheerful, selling varietal wine (country rather than vineyard designation). The
varietal model continues to be used by some wineries in the US, Australia and New
Zealand. In these three countries, grape quality was more assured than proved the
case in early-1990s Bulgaria. During the decade older vineyards have been withdrawn
from the value chain (reducing over-capacity) and new ones planted. By 2001, 3% of
vines were young (under ve years old), 13% are 5 10 years old, and 22% are between
10 and 15 years old. Many of the newer vines are local grapes, for premium-priced boutique wines. Still, in 2001, 62% of vines were over 15 years old and the ratio between
the uprooted vineyards and the newly planted around eight to one.
The Ministry of Agriculture and Food Supply (2006) indicates that of 351,468 tons
on grapes produced in 2005, 312,808 tons were processed, some 182,800 by commercial
concerns. They report a 7% decrease in yields. In parallel with industrial restructuring,
capacity in Bulgarias wine network was also reduced by lowering grape yields and
growth of (black market) non-commercial wine production.
3.5.

Network Ecology

In 1980, seeking hard currency from exports, Vinimpex established the Bulgarian
Vintners Company (BVC) in London to promote exports under the value-for-money
Bulgarian brand using Cabernet Sauvignon grapes. The 95,000 cases exported in
1982, rose to 1.5 million by 1989 (Bainbridge and Roe, 1994). By 1990 exports to
the EU had halved.
Margarit Todorov, as BVC manager, used his position to encourage the import of
vinication technology from Australia and the US and to shift production away
from sweet table wines to above-average price Cabernet Sauvignon to become the
fourth largest exporter of wine into the UK. Despite reducing the need for state

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101

subsidy and funding some investment in vineyards, the discounters position is always
precarious and short-term. In this case, disruption came from an unexpected source:
suddenly, in 1989, as a consequence of anti-alcohol campaigns, BVCs activities were
curtailedthough Todorov later formed the successful Domaine Boyar company.
Todorovs insight, that shifting to new markets, with premium products (relative to
Bulgarias home markets) backed by marketing initiatives, remains apposite (Vintellectual News, 2006). With exports slumping (even further with the Russian economic
downturn) and domestic demand waning, Bulgarian wine effectively withdrew from
the ecology of international wine networks.
By the end of the 1990s, restructuring within the internal Bulgarian wine network
was discernible. All wine-processing assets were private property, though the stream
of foreign direct investment commenced only later. Domaine Boyar and VinpromRousse Seabord merged to create Boyar Estates, establishing a quality standard and
best practice example for both logistics and the coupling of production with marketing.
By the end of the 1990s much of the over-capacity was taken out of the network as
vineyards and wineries ceased to trade. Boyars four large wineries used advanced
vinication technologies setting competition standards for other producers.

3.6.

Trust and Risk

The period between 1989 and 2003 (when domestic and premium export sales began to
strengthen) was difcult for much of the Bulgarian winemaking industry: many of the
new viticulture and vinication rms, faced with rising indebtedness, negative protability, withdrawal of subsidy and declining quality, simply withdrew from the
market. Only after a process of restructuring had eradicated over-capacity, and
infrastructure and institutional arrangements had improved, did foreign direct
investors invest in the Bulgarian wine network, beginning at the turn of the century
and strengthening by 2003. Beginning in the late 1990s, the European Regional
Development Fund (ERDF) actively supported network restructuring, providing
loans (unavailable from private sources) for replanting, mechanisation investment
and in some cases land purchase and fertilization. In some cases (e.g. Damjanitza),
ERDF gave credit secured against future income streams, though this was exceptional.
Private investors held back until the legal framework for investment improved,
over-capacity reduced and infrastructural investment begun.
Thus, the withdrawal of traditional network support arrangements (subsidy in one
form or another) exposed Bulgarias wine network to risk and many vineyards and
wineries did not survive. Those that did, after 2000 and certainly by 2003, face a
more auspicious future with rising domestic and international demand for premiumpriced high volume and niche products.

4. Migration After 2003

After 2003, the Bulgarian wine network began to benet from its migration from a
discount to a premium-price provider in export markets and high volume supplier to
a strengthening domestic market. In this sense, the turnaround for the Bulgarian
wine network happened a year before accession (2007), making it well-placed to
meet the challenges posed by accession.
Production in 2005 at 1,857,000 hectolitres of wine was 29% higher than the 2003
gure, with penetration of premium (relative to domestic prices) products into

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TONY KINDER AND MILANKA SLAVOVA

Russia, Poland, China and Eastern Europe (CEE, 2006). Export volumes remained
static, whilst unit value rose.
4.1.

Purpose and Goals

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The Bulgarian wine network entered 2003 sufciently strong for the challenge of
meeting three market needs.
. The rising volume but low-price home market, where at 2.49 Leva per bottle (E0.51)
volume is critical, especially exploiting the growing supermarket distribution channels. Overall alcohol sales in Bulgaria are projected to increase by 15% by 2011
(Industry Outlook, 2006);
. A growing premium priced market, both at home and abroad (especially the UK
and Germany), including niche products from local grape varieties and small wineries and high-value sales in Bulgarian restaurantsthe favoured strategy of Bulgarian oenologists, local grape viticulturalists, boutique winery owners and vintners.
. The medium price range export markets in the former Soviet countries and China.
Having spent the 1990s restructuring, the Bulgarian-wide network faced the challenges
of EU accession with self-condence. Though the Golden Rython (highest award) at
the 2006 Vinaria exhibition went to Sakar Luibimetz for a Cabernet Sauvignon
Merlot, most gold medals went to small wineries using newly planted local grapes.
4.2.

Control, Ownership and Governances

Production increased after 2003; by 2006, grape output was 302,076 million tonnes
(MT), over 20% up on 2005, with quality improving every year. For example, 23%
of grape production was Merlot, whilst Cabernet was only 16%. In whites, the
largest output was Misket, 33,000 MT, followed by Rkatziteli, 32,000 MT and
Muscat Otonel, 20,000 MT. The number of operational wine producers had declined
to 174, creating 171 ML in 2006up 11% from the previous year. Of this, 11.2 ML
were quality wines20% up from the previous year. Though most of the 73,000 vineyards in 2006 are over 20 years old (135,600 ha), 7200 new vineyards were planted that
year (often using the E34 million EU aid via SAPARD). (It is not our aim here to
analyse SAPARDs impact, though many in the industry believe its overall impact
in Bulgaria has been to constrain change, since some of the new vineyards are
ctitious.)
There is an increasing effort by the industry to nd its own new unique market niche
on the global and EU market. For this reason, new wineries prefer to invest in local vine
varieties that are not grown in other countries, such as Rubin, Mavrud, Melnik,
Gumza and Shevka seeking to establish branded labelling.
Land ownership fragmentation continues to haunt those building new vineyards.
The alternative for wineries is sourcing grapes from the farms of others: some 90% of
grapes are externally sourced.
4.3.

Hierarchy and Leadership

LVK Vinprom Targovishte AD remains the market leader in Bulgaria with 12%
market share supported by its sophisticated distribution network and quality standards. Other large wine companies include Domain Menada Sp zoo and Vinprom

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103

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Yambol. Vinprom Yambol and SIS Industries are strong in lower priced wines.
Domain Boyars Sinite Skali plant in Sliven is a state-of-the-art automated, modern
operation.
As Bulgarias wine networks self-condence has increased, its leaders increasingly
follow the lead of oenologists by using local grapes to create lower-volume, highquality boutique wines. Production in 2005 exceeded 1.5 million ha/l some 1.5% of
wine sold, though gures are uncertain and the segment is expanding rapidly and,
at boutique prices, amounts to 20% of sales by value.
. An example of a boutique is Todoroff Winery in Brestovitsa, branded as Teres and
Todoroff Galery, which now produces 440,000 bottles per year and is listed on the
Bulgarian bourse (offering 25% of shares in an IPO to invest in new vineyards). It
has two cellars, 2000 decares of vineyards and specialises in the Mayround grape
favoured in premium restaurants.
. Bessa Valley in Ognianovo village is branded as Enira and run by a French wine
entrepreneur. It produces 1000 tonnes annually and retails at between E7 and E30.
Winemaking is a patient investor business, with most of the cost up front. The E600,000
necessary to create a boutique winery making 200,000 bottles a year, is unlikely to give
a return on investment for around seven years, with payback at double that time.
Nonetheless, this is a low market entry cost for a premium and long product
life-cycle product. Other players are entering by buying existing wineries (e.g. the
Bobokovi brothers, who trade wine under the Levent label). Existing players, such
as Domain Boyar are seeking to move upmarket into higher quality products.
Boutiques are targeting export markets, with the costs/risks associated with market
entry and marketing. Bulgaria itself has few outlet channels for boutique wines (e.g.
specialist wine stores).

4.4.

Products and Functional Integration

Like all industrial sectors in Bulgaria, the wine network is beneting from infrastructure improvements to roads and telecommunications that support modern logistics.
For the wine network, in some cases, this helps break the historic links between local
vineyards and wineries.
Distribution channels inside Bulgaria of on-sales are beneting from the growth of
hypermarkets, discount stores, supermarkets, specialised wine stores and chains, and
specialised wine bars and wine restaurants.
In 2007, some retail chains introduced customs bottling at certain EU cellars to
reduce nal cost. Another import into the domestic wine network is the use of PET (terephthalate) packaging. Much less expensive than glass bottles, the experience from the
US and UK (Sainsburys) is that PET cartons and bottles lower costs and increase
sales. Some 50% of red and 40% of whites are sold in PET packaging in Bulgaria.

4.5.

Network Ecology

Total wine exports in 2006 were 113.3 ML (E130 million) up from 114.5 ML in 2005
(E95 million). Russia remains the largest export customer, with 73 ML, followed by the
EU with 33.5 ML (often higher priced products). Bottled wine exports have risen from
2004 (70,555), to 88,964 in 2005 and 90,958 in 2006.

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TONY KINDER AND MILANKA SLAVOVA

Self-condent networks invariably reach outwards and play wider roles with other
networks. One result of renewed exports into the US is a succession of awards,
especially for local grape wines.
The major alteration in the network ecology facing Bulgarian wine since 2003 has
been EU accession. Two areas (quality and quotas) featured in SWOT threats boxes
before 2007.
EU regulations governing quality, sanitary conditions and hygiene (HACCP) are a
major issue for all access countrys food chains. There are few wineries in Bulgaria certied to EU standards, although a large part of the production of wine is exported
there, and there is no agreement to delay compliance. To date, quality certication
is based on a non-inspected, Bulgarian government accreditation. Developing locally
competent training and accreditation centres remains an important challenge for the
Bulgarian wine network. EU quotas appeared problematic and the subject of negotiation around relevant base year and levels of subsidy in existing member states.
Former Soviet states were given the option of agreeing tariff bindings above actual
tariff levels (EU level is E32/hl) and Bulgaria chose 40% E80/hl level, reducing
over time to 25% E51/hl. In part, Bulgaria chooses this course to speed up its accession into the WTO. This means that, in some cases, competition in EU markets works
against wineries enjoying national government subsidy. A further effect is persistence of
black market importation. Domestic sales in Bulgaria have long been distorted by
heavy reliance on black market wine in outdoor markets and independent stores,
which had been spurred on by a negative response amongst consumers to the countrys
excise laws.
4.6.

Trust and Risk

As institutional arrangements and the business outlook improves, both international

and domestic investors have an increased propensity to invest in Bulgarias wine
network. By 2000, the food sector as a whole accounted for some 30% of all FDI
into Bulgaria, some E120 million into the wine network; the sector is additionally
helped by FDI into the retail sector. The Invest Bulgaria Agency cites as examples
of FDI in the wine network, Boyar UK E50 million alongside Carlsberg, Kraft,
Nestle and Interbrew. In 2005 2006, four new wineries launched their lines onto
the market, including Edoargo Miroglio Winery and Bessa. There are currently 112
foreign companies from 22 countries operating within the Bulgarian wine network. Bulgaria is now one of the worlds top-15 wine producers, with 50 high quality bottling
cellars, producing 173 ML a year, 65% of which is exported. It is the second largest
exporter of bottled wine to France and has more vineyard hectares than California.
5.
5.1.

Analysis and Current Challenges

Purpose and Goals

Like many industries in former Soviet states, the transition of the Bulgarian wine industry has featured unforeseen events (anti-alcohol campaign, Russian crisis, and EU
accession). In the last 20 years, industrial restructuring has touched the lives of
many individuals, families, rms and communities. How clear today are the purposes
and goals of the Bulgarian wine industry? To what extent is this loose network capable
of migrating into a tighter cluster? Is the oenologists boutique strategy likely to
succeed? To what extent is the current mix of traditional and innovative rms going

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to remain or, alternatively, will rms and a tighter networked organisational form
emerge committed to innovation?
Over the last 20 years, Bulgarian wine has responded to rather than shaped events.
Given the powerful nature of some of these events (e.g. break-up of the Soviet Union
and EU accession), it may be that the clearest strategy for the network in 1989
would have made little difference. One of the rst issues facing the wine network is
the extent to which is can become a cluster. Clustering offers opportunities to deepen
relationships and their value to everyone inside. There are no obvious bodies to act
as a governance focus for a cluster, since many of the foreign and new companies are
outside of the Association of the Producers and Merchants of Wines and Spirits and
no single company is large enough to lead all of the others.
Since 2003, the boutique strategy has enabled Bulgarian vintners to re-enter premium
EU markets often with high-quality local grape products. International markets for wine
are intensely competitive, especially outside of the niche channels in supermarkets. One
challenge for the boutiques is the heritage branding of Bulgarian wine in the EU as cheap
and cheerful. Creating new brand recognition is expensive and time consuming. It also
presumes a tighter shared purpose (cluster) than the current loose network. Separating
brands, between and within networks is more difcult in an era of Internet sales, unless
products are clearly differentiated. This may be possible but unpalatable: Bulgarian
cheap, Enira reassuringly expensive? Whilst Bulgarian Mavrud and Melnik grapes
undoubtedly produce excellent wines, so too do Bulgarian Cabernet Sauvignon and
Merlot; Chardonnay, Riesling and Sauvignon Blanca further brand differentiation,
resolved in other counties by using generic naming (Rioja, Riesling).
To what extent is the current mix of traditional and innovative rms going to
remain, or alternatively will rms and a tighter networked organisational form
emerge committed to innovation?
5.2.

Control, Ownership and Governances

Invariably before foreign direct investors make an investment, they secure their supply
chain, seeking vertically integrated control over services and materials that are system
critical. The larger Bulgarian wine makers too have sought vertical integration, particularly by owning and planting their own vineyards (90% of grapes remain outsourced, often from micro-businesses). Land ownership and the market for vine
bearing land is a major barrier to vertical integration. The alternative of improving
yield and quality in micro-business vineyards is also problematic. Insecurity of
supply is a cause of concern both to potential inward investors and to nance providers.
This is one of many advocacy issues that a restructured Bulgarian wine network faces:
to agree with government ways of overcoming these barriers to growth.
One aspect of small-sized rms is their inability to provide professional service inhouse (Kinder, forthcoming) a barrier identied in numerous EU reports (e.g. EU,
2001) and in Bulgarias Vintellectual News (2006). In particular, professional competences in marketing, nance, logistics, training and design are critical in the growth
path of small to medium sized enterprises (SMEs). For rms in less favoured regions
of Europe, this issue may be exacerbated by an absence of these professionals (who
are drawn to cities). Elsewhere in Europe, for example Andalucia, industrial networks
have taken the lead in offering professional services and information to SMEs and instituting locally based training for SME managers. Training in HACCP and ISO 90002,
for example, is an urgent need for many small wineries as is serious marketing advice.
This is another example where a reconstituted wine network can contribute towards

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eradicating barriers to growthin this case either by lobbying or (more likely to be successful) offering professional services from the network.
Small businesses can be the engine of growth in an economy, what Schumpeter
(1939) called a large and turbulent population of innovators. As Cannon (1991)
and Malerba and Orsenigo (1994) point out, family-owned and lifestyle businesses
can be risk-averse and act as a barrier to innovation and productivity improvement.
Unsurprisingly, SMEs have a different perspective, especially where small rms are
inherent to inherited social structures and local traditions. Enriched networking is
one way of avoiding making a choice between large or small rms as the most innovative/barriers to innovation. In the case of Bulgarian viniculture, a national network
enrolling large and small rms may become a vehicle to secure mutual advantage:
another of the insights of Margarit Todorov as BVC manager.

5.3.

Hierarchy and Leadership

Todorov and others, including farsighted foreign direct investors, have offered leadership at important moments to the Bulgaria wine network. Business everywhere now
uses networking models to promote efciency and innovation. Japanese supply,
Linux, Nokia, Zara, Marks and Spencer are some obvious examples. Undoubtedly,
cultural proclivities mean that social and industrial networking is a stronger part of
heritage in some areas (e.g. Andalucian associationism, Swedish software). It may be
that Balkan culture is averse to such models of networking. It would be impertinent
to suggest who, how and in what form the Bulgarian wine network might come
together in a deeper way than the current loose network. Nonetheless, our analysis
suggests that this is a critical strategic task facing the industry: Todorovs example
remains an illustration that rich networking can be successful in Bulgaria.

5.4.

Products and Functional Integration

We indicated above some of the dual-branding issues associated with the export of
boutique and economy wines in export markets. The boutique strategy is also increasingly relevant in the domestic market, as restaurants and other premium outlets
ourish. One result of the growth in boutique winemaking is a shortage of vine
stocks (and the associated land and capital issues discussed above). One of Porters
(1985) insights is that innovative rms need a strong home base, populated by discerning customers, in order to continually innovate products and improve quality. This
links supply to customers, with product integrity values owing from the beginning
to the end of the value chain. Nobody knows the extent of the market for premiumpriced wines inside Bulgaria, such is the extent of the informal economy. It is,
however, clear that the purchasers of E0.50 bottles of wine are unlikely to be the discerning customers that Porter envisaged as necessary to stimulate products for export
markets.
Within living memory Bulgarians have suffered a 40% decline in living standards
(1989), ination at 122% (1994) and economic crisis (1996). Naturally, increasing
prices of wine products will not be popular. Yet, without increased investment much
of the countrys wine sales are in a low-quality equilibrium. These are important wider
socio-political issues, beyond the scope of this paper. However, moving more of the
wine network up the international value chain clearly has implications for domestic
pricing.

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5.6.

107

Network Ecology

The limited reach of the Bulgarian wine network is clearly evidenced in the case
study, yet with EU accession and growth in Russian, Chinese and US markets,
coupled with wider distribution channels at home, the network could extend this
reach. One qualier condition will be the diffusion of HACCP and ISO 9002
standardsthe implications of which include a more systematic supply of life-long
learning. In September 2006, the EU threatened to cut future spending allocations
by 25% if the country did not accelerate implementation of EU standards in the
agricultural industry As living standards rise, it may be that some of the wine sales
in the informal market migrate to formal outlets and in turn strengthen distribution
channels. Rising quality standards in boutique wines (currently 10% of output)
appears as the best key to open further international network connections for Bulgarian
wine.
The UK, once a successful outlet for Bulgarian wines, is an example of a market currently with low penetration (1.5% of total sales). At E15 billion a year, 1250 ML volume
and with an average bottle price of E12 (90% light wine), this is an important export
target for premium-priced Bulgarian wines (Key Note, 2006). Some 65% of UK
adults purchase wine, often inuenced by branding (producer or vineyard), with an
average marketing spend of E750,000 per brand per year. Volume sales are in supermarkets and wine shops43% off-trade and 57% on-trade. Boutique Bulgarian wines are
unlikely to penetrate important large markets such as the UK (outside of niche sales)
without some concerted branding effort and a network capable of negotiating with
large supermarket buyers.
5.7.

Trust and Risk

A clearly established principle in social network analysis, is that in bad times networks
contract and reduce in mutual trust between members, whereas in good times networks
expand and increase in trust (Kuchnast and Dudwick, 2004). Given some of the challenging times the Bulgarian agricultural communities have come through, it is hardly
surprising that network strength and trust is diminished. Trust is the least expensive
form of relationship, provided that exposed vulnerabilities remain unharmed. Trust
in business networks is crucial since network resources are held in common and whatever
a networks governances, they will stop short of command and control. It may be that
some of the larger wine producers are the rst to display trust towards smaller wineries
and vineyards by (for example) helping them secure HACCP accreditation or exchanging knowledge. Trust is a willing acceptance of exposure to risk; it is also the most
efcient way of leveraging widespread support for a set of goals.
6. Conclusions
The paper illustrates the relevance of network analysis to understanding how the
Bulgarian wine network has evolved over the last 18 years. In some instances, disjunctures are explicable by obvious events (Russian crisis, etc.). Other instances, using local
grapes to successfully produce boutique wines, are more complex and relate to opportunities and barriers both inside and outside of Bulgaria.
Little has been published on the strategy of the Bulgarian wine network and our aim
has been to show that an institutionalised approach has benets for business and policy
strategy-makers, rather than to prescribe a detailed change agenda.

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TONY KINDER AND MILANKA SLAVOVA

Our essential conclusion is that shifting from a loose network towards a network
capable of advocacy, service delivery and stimulating new forms of partnering, is an
urgent need. In particular, if the boutique wines are to move from niche products to
mainstream, the barriers to volume at quality require addressing. These include
land, capital, access to professionals, compliance with standards and product quality
and price in the home market.

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