Benchmarking: An International Journal

Wine business performance benchmarking:a comparison of German and Ukrainian wineries

Anatoliy G. Goncharuk,
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Anatoliy G. Goncharuk, "Wine business performance benchmarking:a comparison of German and Ukrainian wineries",
Benchmarking: An International Journal, https://doi.org/10.1108/BIJ-06-2017-0131
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 Wine business performance benchmarking:
a comparison of German and Ukrainian wineries

Structured Abstract
Purpose – The paper aims to evaluate and compare the efficiency of winemaking in Germany
and Ukraine in order to find the controllable factors of wine business performance using
benchmarking tools.
Design/methodology/approach – The models of Data envelopment analysis (DEA) and other
benchmarking tools are used to analyse the efficiency of wineries in two countries. Returns to
scale, scale efficiency, super-efficiency and some other indicators are examined. The research is
based on the sample of 36 German and Ukrainian wineries.
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Findings – The hypothesis of higher winemaking relative efficiency in Germany was compared
with Ukrainian winemaking, then analytically and statistically verified. Relatively high average
scale efficiency score indicates good potential (above 30%) for efficiency growth, due to the
optimisation of a scale of production and sales. Generally winemaking in Germany and Ukraine
has increasing returns to scale. The high-efficient wine business cannot bring great losses. It was
found that the most efficient combinations of size and legal form of business organisation for
wine business are presented in Germany.
Research limitations/implications – The research is limited by a single industry of only the two
countries.
Practical implication – This study provides useful information for researchers, investors and
policymakers enabling them to understand the current state, basic problems, controllable factors
and efficiency levels of winemaking in Germany and Ukraine. It may be useful to wine
producers in these countries for improving their business performance.
Originality/value – This is the first paper that compares wine business performance and
discloses its factors for Germany and Ukraine.
Keywords: performance benchmarking, efficiency, wine business, Data envelopment analysis,
Germany, Ukraine
Paper type Research paper
 Introduction
The world wine market is highly competitive due to the large number of producers.
Traditionally, the wine is made in the southern regions of Europe (France, Italy, Spain, etc.), but
today it is produced on all continents and even in cold countries like Canada or Denmark.
Therefore, nowadays wine is a global product that is consumed in almost all countries of the
world.
As Pomarici (2016) noted, while examining the evolution of international wine trade over
the last five years, the reduced growth rate and the varied performance of suppliers raise many
research questions both at micro- and macro level.
Winemaking is a specific business that differs from producing of other beverages. It
includes the elements of agriculture associated with the cultivation of grapes, the industrial
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elements of processing them into a wine and the trade elements of a wine sale to the consumers.
Therefore, the success of wine business can be affected by many factors.
Nevertheless, wine economists should approach this task with a wide multidisciplinary set
of tools, which is effort-demanding while the results are uncertain.
Previous study (Goncharuk and Lazareva, 2017) detected that the most efficient wine
companies are originated from Germany. However, this study examined only a small number of
German wineries from the international sample, in order to be able to make a valid conclusion.
Are German wineries really the most efficient? Why German wine companies are the most
efficient? What are the factors of their business performance? Until now no one researcher has
answer to these questions.
Thus, we decided to test the hypothesis about the high efficiency of German wineries and
to try to determine the factors of their business performance.
The ancient thinkers argued that the truth is cognized in comparison (Morozova, 2017).
The comparison principle is the basis of benchmarking (Bhutta and Huq, 1999). Hence, to find
the real wine business performance and its factors we compared German and Ukrainian wineries.
Liberalization of foreign trade and introduction of the DC FTA Ukraine-EU can further
weaken the position of Ukrainian wine producers in the domestic market. In recent years,
German wine production and sales have also reduced: during 2000-2014 wine production has
fallen by 13.3 % (Wine Institute, 2016). Ukrainian and German winemakers face identical global
problems: increasing international competition, reducing wine consumption, climate change, etc.
Winemaking companies in both countries, especially small and medium-sized, cannot control
these factors. However, in order to be efficient they need to know the controllable factors. Their
decisions should be based on the knowledge of the influence of controllable factors on wine
business performance.
 However, before analysing the problems of wine industry in Germany and Ukraine, we
briefly described its state.

German winemaking
Defining the role of Germany in the world wine market, Mariani et al. (2012) considered
this country as a large wine-importer alongside with the UK and USA. However, Germany is not
only one of the biggest wine consumers in the world. It is also one of the biggest producers of
wine. Thus, in 2014 Germany has made about 3 % of all world production of wine and now it
holds the 10th position in the world ranking of wine producing countries (Wine Institute, 2016).
Nowadays, Germany has over 100 thousand hectares of vineyards and produces 8-9 mln
hectolitres of wine per year (Deutscher Wein Statistik, 2016).
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The dynamics of wine production in Germany from 1990 to 2014 is presented on Figure 1.

Figure 1. Wine production in Germany in 1990-2014, million hectolitres

Source: Deutscher Wein Statistik (2016) and Wine Institute (2016)

Rheinhessen, Pfalz, Mosel and Baden are traditionally the largest wine-growing regions of
Germany. In 2014 the total share of these regions in total wine production of country was above
77 %. Thus, the wine industry of Germany, in the part of grape processing and wine production,
is mainly concentrated in the Southwestern region of the country near the Rhine River.
The largest shares in the total vineyard areas of Germany are represented by six varieties:
Riesling, Muller-Thurgau, Grauburgunder, Silvaner, Weisburgunder and Kerner. In sum, they
accounted 53.3 % of German vineyards in 2014. During 2013-2014 these six vineyard areas
were showing growing share of Riesling (22.9%), Grauburgunder (5.5%) and Weisburgunder
(4.7%) together with reduction of Muller-Thurgau, Silvaner and Kerner shares (from 20.5% to
20.2%). The traditional leader – Riesling retains the highest share.
Dressler (2013) characterized the German wine business as mature with long standing
tradition but ongoing structural changes. Nowadays, the German wine industry is one of the
most liberal markets with heavy consumption.

Ukrainian winemaking
Defining the role of Ukraine in the world wine market, Mariani et al. (2012) included this
country into a group of small non-traditional importing countries together with other 55
countries. However, Ukraine not only imports wine, it also produces. In 2014 the country made
about 0.7 % of all world production of wine and now holds the 20th position in the world
 ranking of wine producing countries (Wine Institute, 2016).
Nowadays, Ukraine processes more than 200 thousand tons of grapes into wine materials
annually.
While in 2006-2013 the volume of grape processing was quite high and ranged between
300-450 thousand tons per year. In 2014, after the annexation of Crimea, this value went down
by almost 50% - to 229 thousand tons.
The dynamics of wine production in Ukraine in the past nine years is presented on Figure
2.
Figure 2. Wine production in Ukraine in 2006-2014, million hectolitres
Source: Goncharuk and Lazareva (2015)
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Likewise the volume of grapes processing and wine production volumes decreased
significantly in Ukraine in 2014.
Odessa, Mykolaiv, Kherson regions and Crimea are traditionally the largest wine-
producing regions of Ukraine. During 2010-2013 the shares of these regions in total grape
processing have been relatively stable and fluctuated between 3-7% per year. However, in 2014
with the loss of substantial refining capacity situated in the Crimea, the structure of grape
processing changed significantly: over 61% of grapes are now processed in Odessa region, about
20% - in Mykolaiv, about 16% - in Kherson, and only 3.7% in other regions of the country.
Similar changes were observed in the structure of wine production of Ukrainian regions.
Although before 2014 there was not a sole region-leader in the production of wine, in 2014 more
than 97% of wine industry was concentrated in three regions: the Odessa region- more than 60%,
Mykolayiv – 21.4% and Kherson - 15.6%.
Thus, we can assume that the wine industry of Ukraine in the part of grape processing and
wine production is now concentrated in the three neighbouring southern regions, among which
Odessa region is the undisputed leader that accounts for almost two-thirds of the entire wine
industry.
The largest shares in total volume of grape processing in Ukraine are represented by seven
varieties: Aligote, Rkatsiteli, Cabernet Sauvignon, Muscat, Chardonnay, Sauvignon and
Riesling. Their total share was 59-62% in 2011-2014. Among the leading seven varieties for the
whole period (2010-2014) the share of Chardonnay (from 5% to 11%), Cabernet Sauvignon
(from 6% to more than 9%), Riesling (from 3.6% to nearly 6 %) and Sauvignon (from 4.2% to
7%) significantly increased alongside with the reduction of Rkatsiteli share (from 11% to 5.5%)
and of other varieties. The traditional leader - Aligote retains the highest share (12-13%).
We turned to the previous studies in order to determine how well the wineries in Germany
 and Ukraine are operating and how to set the factors of business performance for the wineries.
Literature Review
There are several studies on the wine business performance in the literature.
In some ways, the high efficiency is a sign of success. So, Mora (2006) found two key
factors of success that are common for six Bordeaux wineries. They are: simplified procedures,
integrated functions and desire to move to the final market as close as possible.
Sellers-Rubio (2010) applied traditional profitability and productivity measures and a non-
parametric technique including the data envelopment analysis (DEA) to estimate an efficiency of
Spanish wineries in 2007. He could not define which methodology for efficiency evaluation is
better, but concluded that the future research lines should be directed towards considering the
variables and factors that determine performance.
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Aparicio et al. (2013) showed how an output-oriented version of the weighted additive
model can be used to properly identify revenue, technical, and allocative inefficiencies in
Spanish designation of origin. Toth and Gal (2014) used a two stage model on a panel of major
wine producing countries over the period 1995-2007. They identified factors of the inefficiency
(development of the financial system, the quality of human capital and per capita wine
consumption).
Timofti (2013) developed a methodology for calculating the synthetic (integral) indicator
of efficiency, which can take into consideration the basic indicators of grape production and the
results of their processing.
Barth (2007) used the DEA to determine the retail efficiency of the wine stores and found
that all new-build stores have higher retail efficiency than the older stores, and input reductions
in older stores were unlikely to bring their performance up to the level of the new store.
Coelli and Sanders (2013) explored unbalanced panel data on 135 wine grape specialists
from the Murray and Murrumbidgee River basins in Australia (from 2006-07 to 2009-10) to
estimate production frontiers and efficiency levels of the individual farmers.
Lazareva (2015) identified the efficiency level of 11 wineries in Ukraine using three-
criteria approach (relative, dynamic and structural) and detected ineffectiveness of small
business in the Ukrainian wine industry.
Liu and Lv (2010) analysed the productive efficiency and factors which influence it for 22
winemaking firms in China during 2004-2007.
Le Fur and Outreville (2016) investigate how the market structure of grape varieties affects
the performance of wine companies. Using DEA they examined the export performance of
countries in 2000 and 2010 and analysed the market structure hypothesis applied to grape
varieties and technical efficiency of the market structure of grapes on exports performance.
 Henriques et al. (2009) measured the levels of technical efficiency of a sample of wine-
making farms in the Portuguese Alentejo region. Barros and Santos (2007) found that Portuguese
wine cooperatives are more efficient than their private counterparts.
Vázquez-Rowe et al. (2012) combined implementation of Life Cycle Assessment (LCA)
and Data Envelopment Analysis (DEA), and proved it is a suitable tool for assessing multiple
input/output data in several agro-food systems. They analysed 40 vine-growing exploitations
belonging to the RíasBaixas appellation (NW Spain) in order to determine the level of
operational efficiency of each producer. Analysing technical efficiency of organic high certified
quality farms, producing the Protected Designation of Origin (PDO) wine, Galluzzo (2014)
identified that these producers have poorest level of technical efficiency, because of the level of
agrarian capital and labour force compared to conventional ones.
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Unfortunately, we found only few papers, which compare winemaking efficiency in

various countries. So, Couderc and Marchini (2011), using the data obtained from interviews of
25 French and Italian wine cooperatives, calculated performance indicators based on the balance
sheets of the companies. They found that strategic evolution towards deepening specialization
could be more profitable for their growers-owners than further integration towards packaged
wine sales.
Sellers-Rubio et al. (2016) estimated total productivity change in the winery sector,
decomposing it into efficiency change and technical change using the Malmquist productivity
index. That study showed very low and decreasing efficiency levels for a sample of Spanish and
Italian wineries between 2005 and 2013.
Goncharuk and Figurek (2017) applied four models of DEA to analyse the efficiency of
wineries in Ukraine and Bosnia & Hercegovina and found the high potential growth of efficiency
on Ukrainian (up to 28.9 %) and Bosnian wineries (up to 28.3 %).
Fleming et al. (2014) compared the relative performance of the major 11 wine-producing
countries using the same four performance measures of the transformation of wine grape into
wine output volume and value used by Grant et al. (2015): export market penetration index,
export value proposition index, productivity index and global value proposition index. So they
defined that during 2000-2009 Germany was the only one country experiencing a significant
change in technical efficiency (7.2 % per year). It was also found that over that crisis decade the
Germany and USA had the lowest productivity decline among all observed countries. Thus,
among the five Old World producers, Germany was the stand out performer being the only
country that experienced annual growth in both production and per capita consumption over the
10-year period. Fleming et al. (2014) confirmed, at the macro level, a high place of Germany in
the productivity ranking of winemaking countries.
 Considering the global factors, we should highlight the impact of climate change on wine
industry. Schultz (2010) and Mozell and Thach (2014) describe the specific challenges that
global warming may bring to the production of grapes and wine. Unfortunately, this impact
regards many still unexplored processes. Their solutions need additional studies in the field of
agricultural sciences. Therefore the extent of the impact of climate change on efficiency of
winemaking is still unknown.
However, Smith and Bentzen (2011) demonstrated some positive impact of climate change
on wine business in cool countries. They concluded that climate changes and innovation have
already made it possible to produce wines in Danish cool climate area with a relatively short
growing season. Moreover, the continuation of the global warming and the development of new
wine varieties are expected to be even more favourable for the Danish wine production.
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Barth (2007) using DEA showed that location and size can be important factors of wine
retail efficiency.
Considering the size of the winery as a possible factor of its efficiency we can cite Dressler
(2013), who noted that the German wine industry is characterized by small and medium players.
Despite their small size, wineries are generally highly integrated — from growing to harvesting,
from producing to sales and marketing. Wineries, hence, generally need managerial competence
and attention to all value chain steps, also with regard to possible change and innovation.
Using the data from the wine producing areas of South Africa and the DEA Townsend et
al. (1998) found that most of the wine grape producers operate under constant returns to scale.
These authors disapproved a widely held view about the inverse relationship between farm size
and productivity.
Sellers and Alampi-Sottini (2016) analysed the influence of firm size on the economic
performance on the sample of 723 Italian wineries for 2013 and showed that size has a positive
influence on the economic performance of wineries. In contrast, Vidal et al. (2013) analysed the
efficiency of Spanish wine sector for the 2008, 2009 and 2010 seasons and found that the small
wineries always obtain good efficiency scores and there is practically no scale effect. Moreover,
Delord et al. (2015) demonstrated that in the case of France 2005–2007 the size of farm
producing wine has little impact on a performance over the period. However, this is contrary to
the measures of European Commission (2008) aimed at enlargement of farms in order to
increase their efficiency through the economies of scale.
Therefore, the presence of contradictory results encourages us to test the hypothesis about
the influence of firm size on business performance in case of German and Ukrainian wineries.
Besides, Oberhofer (2012) and Mend (2009) argued that the average profitability in
German market is low. However, Goncharuk and Lazareva (2017) found that German wineries
 are the most efficient among a sample of international wineries, but did not detect why they are
so efficient and what are the factors of their efficiency. So low profitability and high efficiency,
how they coexist in the German winemaking? -We could test this.
The other factors of efficiency in literature have managerial nature. Newton et al. (2015)
evaluated the impact of differentiation strategies on profitability and growth on the data of 71
United States wineries for 2006–2010. They found that distribution channel choice-direct-to-
consumer positively impacts gross profit margin and winery growth rates. Supply chain choice-
sourcing estate grapes also positively impacts gross profit margin.
There are some other internal factors, which can be found in the literature. Among them
we distinguish the following. Gallucci and D'Amato (2013), according to the results of analysis
of the performance of 114 Italian wineries during 2007-2010, detected the effect of family power
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on the winery performance (U-shaped relationship). Dodds et al. (2013), on example of New
Zeeland, concluded that a leadership, social responsibility and organizational size are the key
motivating factors, so to improve the efficiency of wineries an environmental management
program should be implemented. This will lead to the cost savings and improved business
operations.
Thus, literature review revealed the papers covering various aspects of winemaking in
various countries. However, there is a lack of studies regarding the efficiency of German and
Ukrainian winemaking and an absence of comparative studies for these countries.
The purpose of this study is to test the hypothesis about high relative efficiency of
winemaking in Germany in comparison with Ukrainian winemaking and to find the factors of the
business performance of German and Ukrainian wineries.

Methodology
The aim of benchmarking is to compare the performance of the companies against each
other, to identify companies operating most efficiently and rank the remaining companies
referring to the efficient ones (Goncharuk and Lazareva, 2017). Performance benchmarking
answers the question of whether a company is efficient compared with others and what practice
is the best suited to learn. International performance benchmarking compares an efficiency of
companies from various countries and shows which of them work more efficiently (the best
practices). Benchmarking detects the best practices, factors and reserves for performance
improvement (Goncharuk, 2011).
Many methods have been developed to measure efficiency and have been used for
performance benchmarking. For winemaking, the following methods are more often being
applied: corrected ordinary least squares, production functions, stochastic frontier analysis
 (SFA), data envelopment analysis (DEA), etc.
The non-parametric methodology of data envelopment analysis (DEA) is used to reach the
purpose of this paper. The DEA idea consists of investigation of the complex object with set of
inputs and outputs and analysis of its activity in an environment of functioning. Efficiency here
is defined as quotient from division of the sum of all outputs by the sum of all inputs. It defines
the value of efficiency for each investigated object named DMU (Decision Making Unit), and
then the comparison of supervision with the use of the method of linear programming alongside
with various basic models and their variants is executed. DEA selects the efficient DMUs from
the whole set via the construction of efficiency frontier, and for others it defines a measure of
their inefficiency. Criterion for revealing efficiency here is an achievement of Pareto efficiency.
The detailed description of history, models and interpretations of DEA method is stated by Zhu
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(2016).
In this paper, only input-orientated DEA models are used because the wineries involved
are subject to market demand and the inputs are under the control of wineries. The methodology
of this paper is divided into four stages.
At the first stage, DEA CRS (Charnes et al., 1978) and super-efficiency (Anderson and
Petersen, 1993) models are used to estimate efficiency of the wineries and fully rank them. The
mathematical form of the DEA super-efficiency model is the following:

min z =θ sup,
subject _ to:
n − sup x ,i =1,2,...,m
∑ xij λ j + si =θ iq
j =1, ≠ q (1)
n +
∑ yij λ j − si = yiq ,i =1,2,...,r
j =1, ≠ q
λ , s−, s+ ≥ 0

where θ sup is a scalar; λj is a weight of DMUj; x , y are inputs and outputs of DMUj; s i− ,
ij ij

s i+ are input and output slacks (Goncharuk and Figurek, 2017).

When efficiency scores are calculated, we separate German and Ukrainian parts and find
the average efficiency for each country. After comparing two countries by their average
efficiency we can make the first conclusion about what country has more efficient wine business.
To test statistically the hypothesis about the higher efficiency of German wineries the
Kruskall-Wallis test (Siegel and Castellan, 1988) will be used.
At the second stage, context-dependent DEA (Morita and Zhu, 2007) are used. The set of
wineries are grouped into different levels of efficient frontiers. Each efficient frontier (on a
 specific performance level) is then used as evaluation context for the relative attractiveness. The
performance of the efficient wineries changes as the inefficient wineries change their
performance. The context-dependent DEA is also used to differentiate the performance of
efficient DMUs. The context-dependent DEA provides finer DEA results with respect to the
performance of all wineries.
At the third stage, scale efficiency is calculated for each winery in order to estimate an
influence of scale of production on the wineries’ efficiency and to define returns to scale for each
of them. Scale efficiency can be defined with the use of the following ratio:

TECRS
SE = , (2)
TEVRS
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where TE CRS is technical efficiency score for CRS model and TEVRS is technical efficiency
score for variable return to scale (VRS) model (for VRS model form see Banker et al. 1984).
At the fourth stage, with a view of division of impact of exogenous and intra-winery
factors on efficiency of the wineries, the efficiency-profitability matrix (EPM) first offered by
Dyson et al. (1990) is used. The basic idea of the given method is the placement of the firms
from the sample in the bi-dimensional co-ordinate, on horizontal axis of which their efficiency
scores are reflected, and on vertical one- the values of profitability are. Thus, the grouping of
their combinations is split into 4 quadrants: "sleeping", "stars ","dogs" and "duds". On the hit of
the firm in this or that quadrant it is possible to judge the general character of influence of
exogenous factors such as government regulation, an environment, a level of business activity
and public income, regional features etc. on its activity. The EPM allows not only to look at
efficiency in two aspects and present it in two-dimensional view, but also enables to receive the
expanded notion about the efficiency of analysed sample of the wineries, about their relative
performance and potential development.

The Data Collection

The sample includes 36 wineries: 15 of them are Ukrainian, 21 – operate in Germany.
German wineries of the sample are mainly located in the traditional wine-growing region
of this country (Figure 1) along the Rhine River - in the states of Rheinland-Pfalz (15 of 21),
Hessen (2), Baden-Württemberg (1), as well as in other regions of the country (3).
Ukrainian wineries of the sample are mainly located in the traditional wine-growing
regions of this country (Figure 3) along the Black Sea coast, Dnipro River and Transcarpathia –
in the Odesa region(8 of 15), Mykolaiv region(2), Kherson region(2), as well as in other regions
 of the country (3).
Due to the annexation of the Crimea by Russia in 2014 the data about the wineries of this
traditional wine-growing Ukrainian region is unavailable. Therefore, the study was conducted
without regard to the winemaking of this region.

Figure 3. Regional Location of Wineries from the Sample in Germany and Ukraine

The material costs, number of employees and fixed assets are used as inputs. These
variables reflect the use of the basic factors of production (materials, labour and fixed capital).
The net sales are used here as an output. This variable displays fully the companies’ output –
volumes of product sold. Small number of variables and significant volume of sample provide
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rigorous results of the analysis and narrows the number of the companies that lie on industry
efficiency frontier.
This set of inputs and output variables is well justified in previous studies, e.g. for
breweries (Goncharuk, 2009) and wineries (Goncharuk and Lazareva, 2017).
Taking into account the fact that results of DEA are sensitive to errors in initial data, the
official annual reports of wine companies for 2014 from electronic database of Bundesanzeiger
(2016) and Ukrainian Agency for Stock Market Infrastructure Development (UASMID, 2016)
were used as sources of information.
The descriptive statistics of a sample of the companies is framed in Table 1.

Table 1. Descriptive Statistics for Wineries’ Sample

Total annual net sales of 36 wineries included in a sample amounted to 1381 mln EUR in
2014: 21 German wineries produced wine on 1254 mln EUR (it is about 27 % of total annual
wine production in this country); 15 Ukrainian wineries produced wine on 127 mln EUR (it is
above 15 % of total annual wine production in this country). Total number of employees was
about 5 thousand people.
All monetary indicators of the Ukrainian wineries were converted from hryvnia to euro at
the average annual official rate of the National bank of Ukraine.
So this sample includes the wineries of all existing size groups (small, medium and large)
from all main wine regions of both countries, and with the confidence level of 0.95 is
representative.

The Results
Stage 1.Estimation and ranking of efficiency
 There are six wineries lying on the cross-country efficiency frontier: all of them are
German wineries. Five of them are located in Rheinland-Pfalz state of the country. All of them
have optimal scale of production and high technical efficiency.
The results of an estimation of super-efficiency scores, efficiency of scale and ranking of
Ukrainian breweries of sample are reflected in Table 2.

Table 2. Super-efficiency Scores for Wineries

The average CRS efficiency score for this sample is relatively low – 0.367. Still if we
consider each country separately, there is a large gap between the average efficiency of the
wineries in Germany and Ukraine: in Germany it equals to 0.641, in Ukraine – 0.168. This
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shows that on average German wineries operate 3.9 times more efficient than the Ukrainian
ones.
Using Stata software we tested the hypothesis about higher efficiency of German wineries
than Ukrainian ones by Kruskal-Wallis test. The results are shown in Table 3.

Table 3. Kruskal-Wallis Test for Efficiency Scores

As seen, the Kraskal-Wallis criterion is highly significant (p = .0001). Thus, the
characteristics of the various experimental groups (German and Ukrainian samples) differ
significantly from each other. The rank sum for Germany up to 3.86 times higher than Ukrainian
one. Therefore, the hypothesis about high relative efficiency of winemaking in Germany in
comparison with Ukrainian winemaking is confirmed.
Further, to analyse in detail these results and to identify the main factors of business
performance for the wineries the context-dependent DEA was conducted.

Stage 2.Context-dependent DEA for wineries

Conducting a context-dependent DEA for cross-country sample enabled to divide all
wineries into 10 groups according to the levels of efficiency (Figure 4).

Figure 4. Context-dependent DEA Grouping the Wineries

To understand the presence of wineries in both countries, the Figure 5 shows their
distribution by the levels of efficiency.

Figure 5. Cross-country Distribution of Wineries on Efficiency Levels

 So there is no Ukrainian winery in the areas of the best two levels of efficiency. Those
levels include 14 German wineries. The highest level for Ukrainian winery is 3 and only 2
wineries from this country are included there. German wineries have efficiency level varying
from 5 to 1. The most of Ukrainian wineries have efficiency level ranging from 5 to 10.
So we can conclude here, that the best Ukrainian wineries operate with efficiency level that
is lower than the average efficiency level of German wineries. Widely, the best 5 Ukrainian
wineries operate on the same levels of efficiency as the worst 7 German wineries.
All this facts confirm the hypothesis about the relatively higher efficiency of German
wineries.
Testing the influence of regional location on efficiency of German wineries by the context-
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dependent DEA levels (Figure 6), it was shown that there is no absolute leader region according
to the level of efficiency in German winemaking.

Figure 6. Cross-country Distribution of Wineries on Efficiency Levels

We found that some of Rheinland-Pfalz and Sachsen-Anhalt wineries have highest

efficiency. Hessen wineries have middle level of efficiency (2-3 levels). Baden-Württemberg
wineries have lower middle efficiency (level 4). However Rheinland-Pfalz wineries have a wide
range of efficiency levels (from 1 to 5). So we can’t say that this region is efficient for
winemaking in whole.
The Kruskal-Wallis test also didn’t confirm the significant influence of regional location
on efficiency of German wineries: chi-squared = 5.576 with 4 d.f.; probability = 0.2331.
Perhaps, to test the hypothesis about the influence of location factor on efficiency of
wineries, we need a special study with a greater sample and a better representation of the various
wine-growing regions.
The same regional analysis for Ukrainian wineries (Figure 7) has shown that there is no
absolute leader region according to the level of efficiency in Ukrainian winemaking. But a looser
region is Transcarpathian region (level 10).

Figure 7. Cross-country Distribution of Wineries According to Efficiency Levels

We found that some of Odessa and Kherson region wineries have highest country
efficiency (level 3). Mykolaiv region and Kyiv wineries have middle level of efficiency (4, 6, 7
levels). However, Odessa region wineries have a wide range of efficiency levels (from 3 to 9).
 So we can’t say that this region is efficient for winemaking in whole.
The Kruskal-Wallis test also didn’t confirm the significant influence of regional location
on efficiency of Ukrainian wineries: chi-squared = 3.775 with 5 d.f.; probability = 0.5822.

Stage 3. Testing a Scale Factors

Using CRS and VRS DEA efficiency scores and ratio (1) we calculated scale efficiencies
and returns to scale for each winery of the sample (Table 4).

Table 4. Scale Efficiency and Returns to Scale for Wineries

Generally, winemaking in Germany and Ukraine are increasing returns to scale. This
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means a positive impact of expanding wine production on efficiency of wine business in both
countries. Such an impact gives the bright prospects for development of winemaking.
However 5 of 36 wineries of the sample (2 German and 3 Ukrainian) have decreasing
returns to scale. Those are the big famous wine companies with 200-600 employees where an
increase of wine production leads to the decreasing efficiency. So, except of those 5 large
companies, the scale factor affects the efficiency of winemaking in Germany and Ukraine
significantly and positively.
Relatively high average scale efficiency score indicates good potential (above 30%) for the
efficiency growth due to the optimising a scale of production and sales. Some wineries like
Vynogradar, Beregovo-Tysa, Dnіstrovsky have absolutely inefficient scale of production. So
scale factor is dominant to their inefficiency. German wineries have higher scale efficiency than
Ukrainian wineries. However, except of 6 efficient wineries, the other have a potential for
efficiency growth due to the scale optimizing. For example, J. NeusWeingutseit 1881 can double
its efficiency due to a scale factor.

Stage 4. Testing Exogenous and Intrawinery Factors

To test an impact of exogenous factors the cross-country matrix of efficiency- profitability
(Figure 8) has been constructed. In it super-efficiency scores (horizontal axis) have been
compared to net profit margins (vertical axis) of the wineries.

Figure 8. The Efficiency-profitability Matrix for Wineries

It is a great lag between efficient and inefficient companies. Hence we can easy separate
them from each other in Figure 8.
 As it is shown in the first quadrant (top left), i.e. in "sleeping" group, there are 15 wineries:
8 German and 7 Ukrainian wineries. This is a largest group. Given wineries have low relative
efficiency, but, owing to a great demand for their production and other positive factors of the
internal and external environment, they have an opportunity to receive positive financial results
shortly and shut eyes to the low efficiency. However, any adverse market changes or
strengthening of other negative factors in the long term can shake their position and shift them
into the quadrant "duds", therefore they should direct the received profit to the development of
manufacture and innovation, capable to raise a current level of their efficiency.
In the second quadrant, i.e. in the group "stars" (top right), there are 8 wineries. All of them
are German companies. Their high profitability is provided by both market factors – stably high
and growing demand for production in the market, and high efficiency. The most profitable of
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them are Josef Drathen GmbH & Co. KG Wein- und SektkellereiSchloss Arras and Sektkellerei
Hans Sartor GmbH & Co. KG. They are medium wineries from Rheinland-Pfalz that produce
mainly sparkling wines.
In the third quadrant, i.e. in group "dudes", there are 10 wineries: 2 German and 8
Ukrainian. The total net losses of two German companies from this quadrant in 2014 exceeded
1.2 million EUR. Both of them are GmbH & Co. KG from Rheinland-Pfalz. One company is a
small business (5 employees) and the other is large business (172 employees). Certainly, this
form of business organization (GmbH & Co. KG) is not efficient for small and large wine
business. All 8 Ukrainian companies from this quadrant were under the negative influence of
external factors – military operations in the Donbass, the annexation of the Crimea, the decline in
consumer purchasing power and losses of a significant part of the internal market. All this has
led to a reduction in sales and an increase in cost of inputs.
In the fourth quadrant "dogs" (bottom right) there are 3 German wineries. The first that is
evident, it is a very small number of wineries in this group and the significant non-profitability in
this kind of business is absent. This may indicate that high-efficient wine business cannot bring
great losses. And despite the fact that the logarithmic approximation shown in Figure 2 is not
quite reliable, however it moderately confirms this conclusion.

Ownership and Management Factors

During the analysis we found the most efficient combination of size and legal form of
business organisation for wine business in Germany:
(1) Small business (under 20 employees) – private ownership (Sole or Family
Proprietorship).
(2) Medium business (from 20 to 100 employees) - GmbH & Co. KG that is a limited
 partnership (KG) in which the general partner (Komplementär) is a limited liability company
(GmbH). The GmbH is fully liable for the GmbH & Co. KG's debts and liabilities. The liability
of the limited partners (Kommanditisten) is limited to their respective share of the partnership
capital. This hybrid form is suitable for entrepreneurs wishing to limit their liability while
enjoying the flexibility of a non-incorporated business. Because of its flexibility, the legal form
GmbH & Co. KG is especially appropriate for medium-sized businesses and family companies.
(3) Large Business (above 100 employees) - GmbH (limited liability company) or AG
(stock corporation). GmbH is the most widely used legal form for corporations. It combines high
flexibility with relatively few obligations. A GmbH is liable to corporate income tax, solidarity
surcharge and trade tax. Setting up a GmbH is easy and uncomplicated and can be accomplished
in just a few steps. A stock corporation (Aktiengesellschaft, AG) generally enjoys a high market
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reputation among business partners. However, the founding formalities and costs of an AG are
relatively high, and the AG is subject to extensive organizational obligations in day-to-day
business. The AG is liable to corporate income tax, solidarity surcharge and trade tax.
This means that if the company size does not match the appropriate legal form of the
business organization, such wine business is most likely to be inefficient and unprofitable.

Conclusions and Discussion

According to the results of comparative study of the wine business performance in
Germany and Ukraine and using benchmarking tools, it is possible to draw following
conclusions:
(a) The hypothesis about higher relative efficiency of winemaking in Germany in
comparison with Ukrainian winemaking was confirmed analytically. We found that on average
the German wineries operate 3.86 times more efficient than the Ukrainian ones.
(b) There is no absolute leader region according to the level of efficiency in German and
Ukrainian winemaking. To test the hypothesis about the influence of location factor on
efficiency of wineries we need a special study with a bigger sample and a better representation of
the various wine-growing regions.
(c) Relatively high average scale efficiency score indicates good potential (above 30%)
for efficiency growth due to the optimization of a scale of production and sales. Generally
winemaking in Germany and Ukraine has increasing returns to scale. This means a positive
impact of expanding wine production on efficiency of wine business in both countries. Such
impact gives the bright prospects for the development of winemaking.
(d) The high-efficient wine business cannot bring great losses. And despite the fact that
the logarithmic approximation shown in Figure 8 is not quite reliable, however, it moderately
 confirms this conclusion.
(e) The most efficient combinations of the size and legal form of business organisation for
wine business in Germany were found: small business (under 20 employees) – sole or family
proprietorship; medium business (from 20 to 100 employees) – limited partnership in which the
general partner is a limited liability company; large business (above 100 employees) – limited
liability company or stock corporation.
Obtained results provide useful information for researchers, investors and policymakers
enabling them to understand the current state, basic problems, controllable factors and efficiency
levels of winemaking in Germany and Ukraine. It may be useful for wine producers in these
countries to improve performance of their business.
The high efficiency of German winemaking suggests that the opening wine business
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namely in Germany is more prospective. If investor wants to open small wine business, the sole
or family proprietorship is the most appropriate, for opening medium wine business (under 100
employees) the limited partnership, in which the general partner is a limited liability company.
And opening the large wine business (above 100 employees) in Germany will have the highest
performance being a limited liability company or stock corporation.
Increasing returns to scale in winemaking in both countries indicate that an expansion of
wine business promises to increase efficiency and profits for its owners. This should encourage
entrepreneurs to invest in the development of wine business both in Germany and in Ukraine.
The further studies should test the hypothesis about the influence of location factor on wine
business performance using a larger sample constructed from the companies of various regions.
It is also advisable to study the best practices with the aim to develop ways to improve a wine
business performance.

Acknowledgements
The author expresses his gratitude to the German Academic Exchange Service (DAAD),
the Geisenheim University (Germany) and personally Prof. Dr.habil. Jon H. Hanf for their
support and collaboration.

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 Table 1. Descriptive Statistics for Wineries’ Sample
Variables Mean Median Stand. dev.
Germany – 21 wineries
Number of Employees 122 70 127
Fixed Assets, 000 EUR 10018 1890 29495
Material costs, 000 EUR 30713 6024 50222
Net sales, 000 EUR 59697 12446 107184
Ukraine – 15 wineries
Number of Employees 162 105 140
Fixed Assets, 000 EUR 4967 2346 5886
Material costs, 000 EUR 5431 2703 6614
Net sales, 000 EUR 8485 2890 10838
Source: annual reports of wineries and author’s calculations
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 Table 2. Super-efficiency Scores for Wineries
Number in Super-efficiency
Winery name Country
rating score
Sektkellerei Hans Sartor GE 1 2.74114
Heinrich Maximilian Pallhuber GE 2 1.90697
Peter Herres Wein- und Sektkellerei GE 3 1.67130
SchlossWachenheim GE 4 1.41302
Wein- und SektkellereiOstrau GE 5 1.30594
RehKendermannWeinkellerei GE 6 1.00563
Rotkäppchen GE 7 0.97859
Binderer St. Ursula Weinkellerei GE 8 0.95051
Moselland – Winzergenossenschaft GE 9 0.89772
Josef Drathen Wein- und SektkellereiSchloss Arras GE 10 0.81442
RüdesheimerWeinkellerei GE 11 0.74717
L.E. Beteiligungsgesellschaft GE 12 0.55837
BrogsitterWeingüter - Privat- Sektkellerei GE 13 0.55564
Sektkellerei Am TurmDeidesheim-Speyer GE 14 0.49771
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WeinkellereiHechtsheim GE 15 0.47584
Kharchovyk UA 16 0.45660
Shabo UA 17 0.44689
J. NeusWeingutseit 1881 GE 18 0.43751
Tsiurupynske UA 19 0.41635
KlosterEberbach GE 20 0.38700
BERNARD-MASSARD Sektkellerei GE 21 0.37473
Weinkellerei Hohenlohe GE 22 0.35083
Wein- und SektkellereiJakob Gerhardt NiersteinerSchloßkellereien GE 23 0.34222
Gebr. Loosen GE 24 0.31333
Kyiv sparkling wines plant "Capital" UA 25 0.30932
Odesavinpom UA 26 0.23785
Koblevo UA 27 0.22806
Limansky UA 28 0.17888
Bolgrad winery UA 29 0.16846
Vіktorіya UA 29 0.16630
Artemivsk winery UA 31 0.15171
Prince Trubetskoy UA 32 0.11766
Odesa sparkling wines plant UA 33 0.11741
Vynogradar UA 34 0.10400
Dnіstrovsky UA 35 0.05354
Beregovo-Tysa UA 36 0.02962
Average on sample 0.367
 Table 3. Kruskal-Wallis Test for Efficiency Scores
Country Observations Rank Sum
Germany 21 529.00
Ukraine 15 137.00
chi-squared = 20.325 with 1 d.f.
probability = 0.0001
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 Table 4. Scale efficiency and Returns to Scale for Wineries
Winery name Country Scale efficiency Returns to Scale
Odesa sparkling wines plant UA 0,659 Increasing
Odesavinpom UA 0,932 Increasing
Koblevo UA 0,903 Decreasing
Vynogradar UA 0,231 Increasing
Bolgrad winery UA 0,921 Increasing
Artemivsk winery UA 0,730 Decreasing
Kyiv sparkling wines plant "Capital" UA 0,961 Increasing
Beregovo-Tysa UA 0,031 Increasing
Vіktorіya UA 0,563 Increasing
Prince Trubetskoy UA 0,557 Increasing
Kharchovyk UA 0,875 Increasing
Tsiurupynske UA 0,857 Increasing
Dnіstrovsky UA 0,054 Increasing
Limansky UA 0,630 Increasing
Shabo UA 0,806 Decreasing
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KlosterEberbach GE 0,998 Increasing

RehKendermannWeinkellerei GE 1 Constant
Moselland - Winzergenossenschaft GE 0,985 Increasing
L.E. Beteiligungsgesellschaft GE 0,907 Decreasing
J. NeusWeingutseit 1881 GE 0,438 Increasing
Binderer St. Ursula Weinkellerei GE 0,970 Increasing
Heinrich Maximilian Pallhuber GE 1 Constant
Gebr. Loosen GE 0,819 Increasing
SchlossWachenheim GE 1 Constant
Weinkellerei Hohenlohe GE 0,746 Increasing
WeinkellereiHechtsheim GE 0,927 Increasing
RüdesheimerWeinkellerei GE 0,892 Increasing
Sektkellerei Am TurmDeidesheim-Speyer GE 0,924 Increasing
Sektkellerei Hans Sartor GE 1 Constant
Rotkäppchen GE 0,979 Decreasing
Peter Herres Wein- und Sektkellerei GE 1 Constant
Bernard-Massard Sektkellerei GE 0,799 Increasing
Wein- und SektkellereiJakob Gerhardt
GE 0,990 Increasing
NiersteinerSchloßkellereien
BrogsitterWeingüter - Privat- Sektkellerei GE 0,859 Increasing
Wein- und SektkellereiOstrau GE 1 Constant
Josef Drathen Wein- und SektkellereiSchloss Arras GE 0,874 Increasing
Average on sample 0,691 Increasing