I. Introduction
The European wine sector is the largest wine producer in the world, but it is currently facing numerous challenges due to globalization, the entry of New World countries (Chile, Australia, South Africa, and Argentina) into the global wine market over the last decade, and, more recently, inflation combined with low economic growth. The wine market is highly segmented, and understanding profitability factors helps producers to recognize customer needs and adapt the product range accordingly, increasing sales and market share. The steady decline in the total number of wine companies in Europe, while the number of large companies is increasing, makes it necessary to adapt the policy to the market’s current needs. The European Union is promoting the wine sector and the need to increase the competitiveness of small businesses by making the regulations simpler and more effective (Katunar et al., Reference Katunar, Vretenar and Kaštelan Mrak2020), as they play an important role in the economy, in the development of rural areas, and in the competitiveness of the tourism sector.
The main goal of any company is to be profitable and competitive in the long term. European wine producers face many challenges from New World countries’ competitors, who generally have larger plantations and wineries, lower labor costs, and consequently lower production costs (Katunar et al., Reference Katunar, Zaninović and Katunar2021). Identifying and analyzing the factors influencing the profitability of wine companies is crucial, enabling companies to monitor them and to adapt activities to increase profitability and remain competitive.
This article investigates the profitability determinants of European wine companies using dynamic panel data analysis. While profitability factors are widely studied, research focused solely on the wine industry is limited. This article advances the field by taking into account the specificities of the industry in the choice of explanatory variables and includes a much broader range of profitability factors. In addition to financial variables, this study includes nonfinancial, macroeconomic, and institutional quality factors, offering a deeper understanding of profitability dynamics in this sector.
Secondly, this article analyzes the wine industry in 14 European countries using a sample of 1,025 companies, that is, wine producers, while similar studies were focused mainly on a single country or even a region. Third, in addition to analyzing the whole sample, separate analyses were conducted for SMEs and for LVL, considering their significant differences in profitability. This contributes to the literature by addressing the relationship between firm size and profitability.
The findings show that firm-specific variables, macroeconomic variables, and institutional variables should be taken into account when explaining firm profitability. Thus, the firm-specific variables, including financial ratios, size, age, and legal form, are significant determinants of profitability, as are the macroeconomic and institutional variables. Furthermore, the results also show that the determinants of profitability differ depending on the size category.
The study of profitability determinants is important scientifically and practically for wine producers, especially in Europe, where wine production is a traditional activity, mainly carried out in small family wineries and mostly passed down from generation to generation. Given rural depopulation, labor shortages, high costs, and a new global competitor, our findings can guide producers in developing business strategies by identifying key financial and nonfinancial variables to monitor and manage.
The article is divided into five sections: introduction, literature review, description of the variables, methodology and sample characteristics, empirical results, and conclusion and discussion.
II. Literature review and description of the variables
Since this article focuses on the profitability of companies in the wine industry, the literature review is directed toward return on assets (ROA) as a selected measure of profitability and its determinants. In this sense, it includes both firm-specific or internal variables (financial and nonfinancial) and external variables. Studies dealing with determinants of firm profitability often use ROA as a measure of success, as it shows how efficiently a company utilises its assets to generate profits. Therefore, it is suitable for analyzing the performance of companies in the same industry.
ROA is either used as the sole measure of profitability (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Burja, Reference Burja2020; Capasso et al., Reference Capasso, Gallucci and Rossi2015; Kryszak et al., Reference Kryszak, Guth and Czyżewski2021; Özkaya and Yaşar, Reference Özkaya and Yaşar2023; etc.) or in addition to other profitability indicators (Bava and Di Trana, Reference Bava and Di Trana2016; Blažková and Dvouletý, Reference Blažková and Dvouletý2017; Bui et al., Reference Bui, Nguyen, Tran, Hoang, Pham, Tran and Bui2020; Elorz and Castillo Valero, Reference Elorz and Castillo Valero2022; etc.).
Based on previous studies, the following variables were used to explain corporate profitability: debt ratio, cash flow to operating revenue ratio, firm growth, investment, inventory turnover, collection period, credit period, net asset turnover, and labor productivity. Age, size, legal form, and SME category were used for the nonfinancial variables. GDP growth was used as a proxy for economic activity, and the rule of law was used as a variable for institutional quality. There is a consensus in the literature on the expected impact of financial variables, GDP growth, and the rule of law on profitability. However, given the specificities of each variable, an explanation for the divergent results is provided. On the other hand, the effects of variables reflecting the age, size, and legal status of a company on profitability are still points of contention.
The impact of the capital structure and, thus, the level of indebtedness on profitability has drawn attention among scholars for decades. Many studies confirm that a high leverage ratio decreases profitability (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Burja, Reference Burja2020; Dakić et al., Reference Dakić, Mijić and Jakšić2020; Dimitropoulos, Reference Dimitropoulos2018; Habibniya et al., Reference Habibniya, Dsouza, Rabbani, Nawaz and Demiraj2022; Kryszak et al., Reference Kryszak, Guth and Czyżewski2021; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023; Özkaya and Yaşar, Reference Özkaya and Yaşar2023; Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022 etc.). This is because higher debt increases the risk of financial distress and bankruptcy of a company, limiting possible future innovations that require significant financial resources. On the other hand, some studies suggest that the impact of leverage on profitability could be positive (Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018; Sala-Ríos, Reference Sala-Ríos2023), arguing, for example, the benefits of the tax shield that debt provides (Habibniya et al., Reference Habibniya, Dsouza, Rabbani, Nawaz and Demiraj2022; Pervan and Mlikota, Reference Pervan and Mlikota2013; Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022).
The cash flow to operating revenue ratio is expected to positively impact profitability, as it is empirically confirmed through many studies (e.g., Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019; Stevanović et al., Reference Stevanović, Minović and Marinković2021; etc.), even though there are some variations in the calculations of the cash flow variable (Dimitropoulos, Reference Dimitropoulos2018; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023). Higher cash reserves have a positive effect on profitability because they provide security and are particularly important in times of recession when many companies struggle with collecting receivables (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019). Higher cash flow is also beneficial in industries with seasonal fluctuations in demand for their products/services, as companies operating in these industries may suffer from discrepancies between their inflows and outflows.
The positive effect of revenue growth on profitability is undisputed and confirmed in many studies (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Dakić et al., Reference Dakić, Mijić and Jakšić2020; Özkaya and Yaşar, Reference Özkaya and Yaşar2023; Prša, Reference Prša2020; Zouaghi et al., Reference Zouaghi, Hirsch and Garcia2016; etc.). Consequently, growth, measured by a relative increase in revenue, is expected to positively impact profitability. However, a possible explanation for the negative impact could be the significant increase in selling costs, for example, when a company expands into a foreign market, and an increase in revenue is accompanied by an increase in associated costs, resulting in lower profits (Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022).
Investments in tangible assets are essential, but finding the right type, value, and timing is crucial for optimal profitability. Overinvestment can put a financial strain on the company and lead to lower profitability, while increasing investment to meet market demand can lead to higher profitability (Liargovas and Skandalis, Reference Liargovas and Skandalis2010). Loderer et al. (Reference Loderer, Stulz and Waelchli2016) argue that the more a company invests in existing assets, the lower its ability to innovate. Therefore, some studies report that investments have no statistical impact on profitability (e.g., Bui et al., Reference Bui, Nguyen, Tran, Hoang, Pham, Tran and Bui2020) or that they only have a positive impact on small companies (Kryszak et al., Reference Kryszak, Guth and Czyżewski2021).
Inventory management influences profitability in several ways. Lower inventory turnover increases storage, insurance, obsolescence, and deterioration costs, and opportunity costs increase as funds are tied up in inventory and cannot be used for profit-enhancing activities (Özkaya and Yaşar, Reference Özkaya and Yaşar2023). Also, insufficient inventory, that is, higher inventory turnover, can have a negative impact on profitability as it limits the ability of companies to respond directly to market demand and price fluctuations (Prša, Reference Prša2020). Therefore, when analyzing the impact of inventory turnover on profitability, the characteristics of the production process and products should be taken into account in addition to industry and market-specific characteristics. Some studies (Özkaya and Yaşar, Reference Özkaya and Yaşar2023; Tekin, Reference Tekin2022) even find no significant impact of inventories on profitability (measured by ROA).
The collection period refers to the period during which the company waits for payment from its debtors, and a negative impact on profitability is expected (as in Deloof, Reference Deloof2003; Lessoua et al., Reference Lessoua, Mutascu and Turcu2020), as extending the collection period reduces liquidity and increases the risk of nonpayment by customers (Özkaya and Yaşar, Reference Özkaya and Yaşar2023). However, Deloof (Reference Deloof2003) argues that allowing customers delays in payment can increase sales, which can lead to higher profitability (which Özkaya and Yaşar, Reference Özkaya and Yaşar2023, partially confirm). In this sense, industry characteristics and market concentration also matter, as granting payment delays to customers can increase market share and, in turn, profitability.
Unlike the collection period, a longer credit period has a positive effect on profitability, as it allows a company to spread its payments over time (Özkaya and Yaşar, Reference Özkaya and Yaşar2023). Adjusting liquidity by delaying payments indirectly increases profitability. However, there are studies (e.g., Deloof, Reference Deloof2003; Prša, Reference Prša2020) whose results confirm that not utilising the discount that comes with early debt repayments can reduce profitability. An important aspect of the possibility of delaying payments is also the legal limits in the respective country, which influence the behavior of companies toward their creditors. In this sense, it is possible that in one country there is no statistical effect of this variable on profitability, while in another country this effect is negative (as in Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022).
Net asset turnover, as a measure of productivity, is expected to positively influence profitability, since this measure indicates how effectively the assets have been utilised to generate revenue, that is, higher values indicate that there is no excess production capacity (Pervan and Višić, Reference Pervan and Višić2012). This positive effect has been empirically confirmed (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019; Kryszak et al., Reference Kryszak, Guth and Czyżewski2021; etc.). However, some studies show that there is no impact of net asset turnover on productivity for the whole sample (Pervan and Mlikota, Reference Pervan and Mlikota2013; Tekin, Reference Tekin2022) or for a group, that is, one of several analyzed countries (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019).
A company’s profitability is directly related to its costs, and labor is one of the necessary production inputs, resulting in a correlation between profitability and labor productivity. Namely, regardless of its main objectives, each company endeavours to increase its revenues and reduce its costs, so the positive effect of this variable on profitability is expected and confirmed in various studies (Burja, Reference Burja2020; Lönnstedt and Nordvall, Reference Lönnstedt and Nordvall2004; Raguž Krištić et al., Reference Raguž Krištić, Družić and Logarušić2020; Sellers and Alampi-Sottini, Reference Sellers and Alampi-Sottini2016, etc.). In some industries, reducing the number of employees lowers costs and improves the revenue-to-employee ratio, but it can also affect the quality of products/services, leading to decreased demand and, consequently, lower revenues and profits.
The empirical results on the impact of a company’s size on its profitability are not uniform. Larger firms may have direct financial advantages due to economies of scale, more accessible access to finance, or even indirect financial benefits because they can attract employees more easily due to their brand strength (Ada et al., Reference Ada, Korolchuk and Yunyk2023). However, smaller companies may be more flexible (Bramley et al., Reference Bramley, Ouzman and Thornton2011), leading to higher profitability. Consequently, some studies point to a positive effect (Dimitropoulos, Reference Dimitropoulos2018; Pervan and Mlikota, Reference Pervan and Mlikota2013; Sala-Ríos, Reference Sala-Ríos2023), negative impact (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018; Loderer and Waelchli, Reference Loderer and Waelchli2010; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023), no impact (Dakić and Mijić, Reference Dakić and Mijić2020), and the mixed effect of size on profitability (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019; Özkaya and Yaşar, Reference Özkaya and Yaşar2023).
As for the measure of a company's size, similar studies on the determinants of profitability mainly use total assets (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Dakić et al., Reference Dakić, Mijić and Jakšić2020; Dimitropoulos, Reference Dimitropoulos2018; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023; Pervan and Mlikota, Reference Pervan and Mlikota2013; Zouaghi, et al., Reference Pervan and Mlikota2016) or sales volume (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019; Özkaya and Yaşar, Reference Özkaya and Yaşar2023; Sala-Ríos, Reference Sala-Ríos2023). Carchano et al. (Reference Carchano, Carrasco and González2025) examined the relationship between internal and external drivers and proactive environmental strategy moderated by firm size in the wine industry, while Khafagy and Vigani (Reference Khafagy and Vigani2023) examined the magnitude of productivity of agriculture firms and found that the impact of external finance varies across different sizes of farms, businesses, EU regions, and farm types.
Similar to size, the age of a company is a nonfinancial determinant of profitability that can have both a positive and a negative impact on profitability. Companies that have been operating for a longer time may have higher profitability due to the establishment effect and the accumulated learning that leads to a strong market reputation. In contrast, younger companies may be more profitable because their managers and employees are more flexible and inclined to use advanced technologies and innovations in production processes or marketing strategies. In this sense, there are studies that show a positive impact of age on the profitability (Pervan et al., Reference Pervan, Pervan and Ćurak2019; Sahabuddin and Synthia, Reference Sahabuddin and Synthia2020; etc.), a negative impact (Loderer and Waelchli, Reference Loderer and Waelchli2010; Sala-Ríos, Reference Sala-Ríos2023, etc.), no impact (Bava and Di Trana, Reference Bava and Di Trana2016; Jantyik et al., Reference Jantyik, Balogh and Török2021), and a mixed impact in the same industry but in different countries (Dimitrić et al., Reference Dimitrić, Tomas Žiković and Arbula Blecich2019).
A company’s legal status might also affect its profitability, but standpoints on this issue are not uniform. Public limited companies are expected to have easier access to capital, which indirectly can increase their profitability. Additionally, they need to operate transparently, and customers might regard a firm’s public status as a sign of quality, resulting in their willingness to pay more for their products (Allee et al., Reference Allee, Badertscher and Yohn2020). However, public firms face costly regulatory requirements, and sometimes increased disclosure requirements expose sensitive operational information (e.g., margins) to competitors. The complexity of the ownership issue is underlined by the findings of Sikveland et al. (Reference Sikveland, Tveterås and Zhang2021), as they analyzed public and private companies separately. Their empirical results suggest that these companies do not differ significantly in terms of return on equity. However, the sources of their profitability differ between these two groups of companies. In this sense, the ownership issue should be observed carefully, considering country and industry characteristics, as well as the methodology used.
The GDP growth rate is a common macroeconomic explanatory variable in studies on profitability, as it reflects general macroeconomic conditions where rising demand for goods and services during economic growth directly increases company sales and profitability (Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022). Conversely, falling GDP growth rates are expected to have a negative impact on company profitability due to falling sales. In this sense, a positive effect of this variable on profitability is expected (as in Arboleda et al., 2022; Sahabuddin and Khan Synthia, Reference Arboleda, Bermúdez-Barrezueta and Camino-Mogro2022; etc.). However, statistically insignificant effects (as in Bui et al., Reference Bui, Nguyen, Tran, Hoang, Pham, Tran and Bui2020; Prša, Reference Prša2020; etc.) could also be theoretically justified. The influence of the GDP growth rate could be more important, that is, more significant, for larger companies due to their sales volume, as smaller companies are forced to struggle for their market position by differentiating their products and services and trying to build a market niche that is more resistant to external changes such as a recession.
The rule of law is one of the six dimensions of governance (The Worldwide Governance Indicators), which indicates the degree of unpredictability and riskiness of the business environment observed at the country level. Better governance outcomes are expected to have a positive impact on a company’s performance as they reduce exchange rate risks (Athari and Bahreini, Reference Athari and Bahreini2021; Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018; Kafouros et al., Reference Kafouros, Aliyev, Piperopoulos, Au, Ho and Wong2024). However, Kafouros et al. (Reference Kafouros, Aliyev, Piperopoulos, Au, Ho and Wong2024) state that industry-specific boundary conditions with regard to technology and market dynamics can lead to different results. This explains studies (Demirgüç-Kunt and Huizinga, Reference Demirgüç-Kunt and Huizinga1999; Eldomiaty et al., Reference Eldomiaty, Apaydin, El-Sehwagy and Rashwan2023) that point to a negative effect of a more favourable governance index on profitability. In addition, it is sometimes used as a subindex of another variable (Athari and Bahreini, Reference Athari and Bahreini2021; Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018) and/or as a separate dependent variable in the analysis of profitability determinants (Athari and Bahreini, Reference Athari and Bahreini2021; Eldomiaty et al., Reference Eldomiaty, Apaydin, El-Sehwagy and Rashwan2023; Kafouros et al., Reference Kafouros, Aliyev, Piperopoulos, Au, Ho and Wong2024).
The definitions of the firm-specific, macroeconomic, and institutional variables considered in the model estimation are listed in Table 1.
Table 1. Variable description
Source: Authors
III. Methodology and sample characteristics
a. Methodology
Dynamic panel data analysis is used in model estimation because most economic variables exhibit dynamic behavior. The difference Generalized Method of Moments (GMM) estimator proposed by Arellano and Bond (Reference Arellano and Bond1991) and the System GMM estimator developed by Arellano and Bover (Reference Arellano and Bover1995) and Blundell and Bond (Reference Blundell and Bond1998) provide consistent and unbiased parameter estimates and overcome endogeneity problems arising from the relationship between dependent and independent variables by using the lags of the endogenous variables as instruments.
Like most economic variables, ROA exhibits dynamic behavior, which means that the company’s current profitability depends on past values. A linear dynamic panel data model used to explain firm profitability can be expressed as follows:
\begin{align}{y_{it}} = \mu + \gamma\ {y_{i,t - 1}} + \beta\ {X_{it}} + \lambda\ {Z_{jt}} + \delta\ {W_{jt}} + {\alpha _i} + {\varepsilon _{it{\text{ }}}}; \ {\text{ }}i = 1, \ldots N,{\text{ }}t = 1, \ldots ,T, \nonumber \\ {\text{ }}j = 1, \ldots {\text{ }}J\end{align} Here, i = 1,…N represents the index for individuals (firms), j = 1,…J is the index for countries, and t = 1,…T denotes the index for periods (years). 
${y_{it}}$ is the dependent variable (ROA for firm i in period t), while 
${y_{i,t - 1}}{\text{ }}$is the lagged dependent variable with parameter 
$\gamma $. The parameter 
$\mu $ is the constant. 
${X_{it}}$ represents firm-specific variables that vary across individuals and time, 
${Z_{jt}}{\text{ }}$is a macroeconomic variable that changes across countries and time, while 
${W_{jt}}$ stands for a legal institutional quality variable. 
$\beta ,{\text{ }}\lambda $ and 
$\delta $ are parameter vectors estimated by a linear panel model. 
${\alpha _i}{\text{ }}$is the individual effect or specific error for each firm, while the remaining part of the error term 
${\varepsilon _{it{\text{ }}}}\sim N\left( {0,{\text{ }}\sigma _\varepsilon ^2} \right){\text{ }}$is normally distributed, assumed to be orthogonal to the exogenous variables, and uncorrelated with the lagged dependent variable 
$E({y_{i,t - 1}},{\text{ }}{\varepsilon _{it{\text{ }}}}) = 0$.
Since the dependent variable has a dynamic behavior, which means that the current values of the return on equity depend on past values, the inclusion of the lagged dependent variable as one of the explanatory variables leads to problems due to the correlation between the part of the error term 
${\alpha _{i{\text{ }}}}{\text{ }}$and the lagged dependent variable. To address this problem, Arellano and Bond (Reference Arellano and Bond1991) suggested using the first difference (1) of the equation to cancel out individual effects as follows:
\begin{align}{y_{it}} - {y_{i,t - 1}} = & \ \gamma \left( {{y_{i,t - 1}} - {y_{i,t - 2}}} \right) + \beta \left( {{X_{it}} - {X_{i,t - 1}}} \right) + \lambda \left( {{Z_{jt}} - {Z_{j,t - 1}}} \right)\nonumber \\& + \delta \left( {{W_{jt}} - {W_{j,t - 1}}} \right) + \left( {{\varepsilon _{it{\text{ }}}} - {\varepsilon _{i,t - 1}}} \right);{\text{ }}i = 1, \ldots N,{\text{ }}t = 1, \ldots ,T,\nonumber \\&{\text{ }}j = 1, \ldots {\text{ }}J{\text{ }}\end{align}In addition, the lagged values of the dependent variable are used as instrumental variables to account for the correlation between the differenced lagged dependent variable and the differenced error term. However, when the dependent variable is highly persistent, the difference GMM (diff) has certain weaknesses. To overcome these limitations, Blundell and Bond (Reference Blundell and Bond1998) proposed the system GMM (sys) estimator, which uses both the equation in first differences (2) and the equation in levels (1), making it the preferred estimator for empirical analyses. The Hansen J-test was used to test the instrumental variables’ validity, while the model estimates’ consistency is assessed using the Arellano-Bond autocorrelation test (AR(2)).
b. Sample characteristics
The sample for the analysis was obtained from the Orbis Europe Moody’s database, which contains financial information on companies across Europe. This database was used to collect data on all public limited companies, private limited companies, partnerships, or sole traders operating in NACE Rev. 2: 1102—Manufacture of wine from grapes. The sample consists of wine companies from 14 European countries (list of countries is in Table 2) that traditionally produce wine.
Table 2. Distribution of wine firms according to the country of origin and size
Source: Authors calculations based on Orbis Europe Moody’s data.
Note: SME—small and medium wine firms, LVL—large and very large firms.
The observed period covers financial indicators and company information from 2015 to 2021. Companies that did not have data on total assets, fixed assets, operating revenue, ROA, cash flow to operating revenue, depreciation and amortization, and current and noncurrent liabilities were excluded from the sample. The companies had to have at least 5 years of data, which is a prerequisite for conducting a dynamic panel analysis, resulting in a final sample of 1,025 companies. Table 2 shows the distribution of wine companies by country of origin and size.Footnote 1
Italy (62.2%), France (13.3%), Bulgaria (7.7%), and Croatia (7%) make up the majority of wine firms in total number of firms, while the Slovak Republic and Serbia make 3% and 2.6% of total wine firms, respectively. Most wine firms in Bulgaria, Croatia, Serbia, and the Slovak Republic are small and medium-sized, while in France, more than half of the wine firms belong to large and very large categories.
IV. Empirical results
The panel analysis was carried out based on data from 1,025 wine companies in the period from 2015 to 2021. ROA was used as the dependent variable to measure the company’s profitability. In addition to the commonly used firm-specific variables, we also analyzed the impact of macroeconomic variables representing economic activity and institutional quality variables on firm profitability.Footnote 2 To control for the potential outliers common in firm-level data, observations below the 1st percentile and above the 99th percentile are replaced with their winsorised values.
Table 3 shows the results of the determinants of the profitability of wine companies for the entire sample (Model 1) and separately for different firm size categories (small and medium-sized wine companies (Model 2), very large and large companies (Model 3)). The model diagnostics are evaluated using the Hansen test and the Arellano-Bond test for the second-order serial autocorrelation. The results of the Hansen test indicate that the overidentification restrictions are not rejected in any of the models, which confirms the validity of the selected instruments. Furthermore, the results show that the null hypothesis for the absence of second-order serial correlation in the differenced residuals (AR(2)) is not rejected.
Table 3. Profitability determinants of wine firms
Note: Statistical significance is indicated by asterisks:
* at the 10% level, ** at the 5% level, and *** at the 1% level. Numbers in brackets are z-statistics, while robust standard errors are in parenthesis. Models also include temporal and country dummy variables.
Source: Authors’ calculations.
The lagged dependent variable exhibits a positive and statistically significant effect in all model specifications, indicating that past profitability influences current profitability. For all firms, the lagged ROA coefficient (0.284) implies that around 28% of profitability persists from 1 year to the next, with this persistence being slightly lower for SMEs (0.208) and higher for large firms (0.345). The positive and significant coefficient of the variable representing the relative efficiency of wine firms indicates that more efficient wine firms achieve a higher return on equity across all size classes. An increase of 0.1 in the debt ratio reduces ROA by approximately 0.36 percentage points for all firms, with an even stronger negative effect for SMEs (−0.44) and large firms (−0.51). This result is consistent with the research of Aytac et al. (Reference Aytac, Hoang, Lahiani and Michel2020), Capasso et al. (Reference Capasso, Gallucci and Rossi2015), Burja (Reference Burja2020), and Bava and Di Trana (Reference Bava and Di Trana2016). As expected, results show that more indebted wine companies have lower profitability, as higher debt causes higher interest costs and consequently reduces profitability. Numerous studies have confirmed this phenomenon (Aytac et al., Reference Aytac, Hoang, Lahiani and Michel2020; Burja, Reference Burja2020; Dakić et al., Reference Dakić, Mijić and Jakšić2020; Dimitropoulos, Reference Dimitropoulos2018; Habibniya et al., Reference Habibniya, Dsouza, Rabbani, Nawaz and Demiraj2022; Kryszak et al., Reference Kryszak, Guth and Czyżewski2021; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023; Özkaya and Yaşar, Reference Özkaya and Yaşar2023; Pervan and Mlikota, Reference Pervan and Mlikota2013; Zambrano Farίas et al., Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022). There is a statistically positive influence of the ratio of cash flow to operating revenue on the profitability of wine companies, which is in line with Dimitrić et al. (Reference Dimitrić, Tomas Žiković and Arbula Blecich2019), and Stevanović et al. (Reference Stevanović, Minović and Marinković2021). Companies with a higher cash flow to operating revenue ratio tend to have higher cash reserves, allowing them to cover expenses, reinvest in their business, and have a safety net, which is particularly important in times of recession when many companies struggle to collect receivables. Firm growth, measured by a relative increase in revenue, is another variable that has a statistically positive effect on the profitability of wine companies of all size categories, which is also confirmed by Aytac et al. (Reference Aytac, Hoang, Lahiani and Michel2020), Dakić et al. (Reference Dakić, Mijić and Jakšić2020), Özkaya and Yaşar (Reference Özkaya and Yaşar2023), Prša (Reference Prša2020), and Zouaghi et al. (Reference Zouaghi, Hirsch and Garcia2016). An increase in growth of 0.1 increases the ROA by about 0.25 percentage points, while an increase in investment of 0.1 leads to an increase of 0.89 percentage points if all companies are taken into account. Sales growth is crucial for the expansion of a company because it increases the market and ultimately makes the company more profitable. In line with Liargovas and Skandalis (Reference Liargovas and Skandalis2010), it has been shown that investments in tangible assets have a statistically positive impact when the entire sample is considered and when small and medium-sized (SME) wine companies are taken into account. This implies that it is of utmost importance for small and medium-sized wine companies to invest in fixed assets to meet market demand and increase profitability. Contrary to expectations, working capital management, which includes the management of inventories, receivables, and payables, did not prove significant when analyzing wine companies’ profitability. The only exception is a receivable collection for LVL, where companies with a longer receivable collection period achieve lower profitability. The negative effect of extending the collection period reduces liquidity and increases the risk of payment defaults by customers (Deloof, Reference Deloof2003; Özkaya and Yaşar, Reference Özkaya and Yaşar2023). On the other hand, a statistically positive effect regarding net asset turnover is found for the entire sample and only for the SME wine firms. This confirms that companies with a higher asset turnover utilise their assets more effectively to generate revenue, which leads to higher profits, and this is particularly important for small and medium-sized wine firms. The profitability of a company increases in parallel with the growth of asset utilization, which is supported by Pervan and Višić (Reference Pervan and Višić2012), Dimitrić et al. (Reference Dimitrić, Tomas Žiković and Arbula Blecich2019), and Kryszak et al. (Reference Kryszak, Guth and Czyżewski2021). Although labor productivity is not significant when analyzing the whole sample, there is a significant and positive impact of labor profitability when SME and LVL wine firms are considered separately. It can be concluded that both groups of firms are sensitive to labor productivity, as higher productivity enables them to produce more goods and services, achieve higher sales volumes to meet greater demand, and expand into new markets, while offering competitive prices and achieving higher profit margins. A positive effect of labor productivity on profitability is also confirmed in many studies (Burja, Reference Burja2020; Lönnstedt and Nordvall, Reference Lönnstedt and Nordvall2004; Raguž Krištić et al., Reference Raguž Krištić, Družić and Logarušić2020; Sellers and Alampi-Sottini, Reference Sellers and Alampi-Sottini2016; etc.).
To test whether there are significant differences in profitability between the different size categories of firms, a dummy variable is added to the entire sample to control for size, and the reference dummy for LVL is omitted. The results show that firms belonging to the group of small and medium-sized wine companies (SME) have, on average, a lower return on investment than large and very large wine firms. Larger firms can benefit from financial advantages such as economies of scale and easier access to funding, and a strong brand makes it easier for them to attract employees. As this is empirical evidence of significant differences in the profitability of firms of different size categories, the analysis is also carried out separately for different size categories.
When the firms are analyzed separately by size category, the relationship between company size, measured by the natural logarithm of assets, and profitability, as well as the relationship between age and profitability, only appears statistically significant and negative for LVL wine companies. When the analysis was conducted for large and very large wine firms, the results showed that younger and smaller wine firms within the LVL group achieved a higher ROA than older and larger firms within the underlying size category. These results are consistent with the findings of Aytac et al. (Reference Aytac, Hoang, Lahiani and Michel2020) in the same industry and many others from different industries (e.g., Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018; Loderer and Waelchli, Reference Loderer and Waelchli2010; Neves et al., Reference Neves, Baptista, Dias and Lisboa2023), and can be explained by the inertia of the large wine firms in contrast to the more flexible smaller wine firms within the category of LVL.
There is also a significant difference in profitability when it comes to the legal form of a company. On average, public limited companies and private limited companies are more profitable than wine companies registered as partnerships or sole traders (reference dummy). This can be explained by the fact that these companies have easier access to finance and better negotiating conditions than partnerships or sole traders. The only difference occurs when only the SME firms are analyzed, where the private limited companies are not significantly more profitable than the partnerships or sole traders within the SME wine companies. In that sense, the obtained results are partially in line with those of Zambrano Farίas et al. (Reference Zambrano Farίas, Valls Martίnez and Martίn-Cervantes2022), showing an insignificant impact of legal status on ROA.
GDP growth as a representative of economic activity only has a positive impact on profitability at a 10% significance level when it comes to LVL wine companies. Consequently, LVL wine companies have, on average, a higher profitability in prosperous times when there is an increased demand for goods and services (Arboleda et al., Reference Arboleda, Bermúdez-Barrezueta and Camino-Mogro2022; Sahabuddin and Khan Synthia, Reference Arboleda, Bermúdez-Barrezueta and Camino-Mogro2022; etc.). However, there is no significant impact when only SME wine companies are considered. This is in line with the findings of Bui et al. (Reference Bui, Nguyen, Tran, Hoang, Pham, Tran and Bui2020) and Prša (Reference Prša2020), who observed that GDP growth significantly affects larger companies due to their sales volume. On the other hand, smaller companies often struggle to secure their market position by differentiating their products and building niche markets that are more resilient to external changes, such as a recession. Small wineries have a smaller organizational structure that allows them greater flexibility in adapting to change, as they can react quickly to market changes or adjust their strategies, whereas large corporations often have slower decision-making processes.
The rule of law represents a certain degree of unpredictability and risk in the business environment at the country level and proves to be a significant profitability factor (at a 10% significance level) when small and medium-sized wine companies are taken into account. It indicates that the rule of law significantly influences the profitability of small and medium-sized wine companies but has no measurable impact on large firms. This means that confidence in law enforcement and the quality of contracts play an important role and have a positive impact on the performance of SME companies by reducing uncertainty and business risk (Athari and Bahreini, Reference Athari and Bahreini2021; Banalieva et al., Reference Banalieva, Cuervo-Cazurra and Sarathy2018; Kafouros et al., Reference Kafouros, Aliyev, Piperopoulos, Au, Ho and Wong2024). This can be attributed to the greater vulnerability of SMEs to institutional weaknesses, as they rely on a predictable legal framework, contract enforcement, and business risk mitigation. A strong rule of law improves their operating environment by reducing transaction costs and uncertainty, which has a positive impact on their performance. On the other hand, large companies tend to be less sensitive to institutional quality as they often have greater internal resources, stronger networks, and established mechanisms (e.g., internal legal teams or lobbying power) that enable them to manage institutional risks more effectively. As a result, they are less dependent on external legal and institutional frameworks compared to SMEs.
V. Conclusion and discussion
This study employs panel models to examine profitability determinants of 1,025 wine companies in the period from 2015 to 2021, using ROA as the dependent variable. In addition to the firm-specific variables, we analyzed the impact of macroeconomic and institutional quality variables on firm profitability. The study includes three different models: for the entire sample, for SMEs, and a third that focuses on LVL companies.
On average, SMEs have lower profitability than LVL companies, which benefit from economies of scale, easier access to finance, and stronger brand appeal. Past profitability, leverage, cash flow to operating revenue, and growth are statistically significant for all firm categories (all firms, SMEs, and LVL), while other variables depend on firm size. Indebted wine companies have lower profitability, while cash flow in relation to operating income and company growth has a significant positive impact on profitability for all companies. Investments in tangible assets have a statistically positive effect for the entire sample and the SME, but not for LVL companies, where investments have a lower impact on product recognition. LVL companies have a more stable market and a more conservative pricing policy. These conclusions are extremely important for decision-makers in SMEs. Similarly, higher net asset turnover positively impacts profitability for the whole sample and SMEs, while there is no significant impact for LVL companies due to the fact that the cost of technology is not proportional to the size of the company, the size of the plantation, or the capacity that the equipment can handle. As a result, the technology is relatively more expensive for SMEs. Thus, effective equipment use has a stronger impact on SME profitability. Working capital management does not have a significant impact on the profitability of wine companies, while laborlabor productivity has a positive impact on both SMEs and the LVL category, as higher productivity enables them to achieve higher sales volumes to meet increasing demand, expand into new markets, offer competitive prices, and secure higher profit margins. Younger and smaller wine firms within the group ofLVL achieved a higher return on assets than older and larger companies, reflecting greater flexibility versus inertia. Finally, public limited and limited liability companies are more profitable as they generally have better access to finance and more favorable negotiating conditions than partnerships or sole traders.
GDP growth positively affects LVL wine companies’ profitability, but has no significant effect on SMEs. SME wineries are less affected by GDP fluctuations as they focus on niche markets, premium product positioning, and have smaller operations, resulting in a more stable but less GDP-sensitive profitability. The rule of law strongly impacts SMEs’ profitability, while LVL firms, due to their size and organizational complexity, are able to implement a robust legal process and collection system even with a weaker rule of law.
The results are valuable for policymakers in shaping measures to boost wine sector growth and competitiveness. Policymakers can focus on improving access to finance and technology, designing fiscal policies tailored to SMEs or LVLs, and developing training and education programs for the skills required in the wine sector. The results of this research are also important for wine producers when it comes to making strategic business decisions, such as the optimal size of a company, investment decisions, optimal use of resources, and planning a sales and distribution strategy in the domestic and foreign markets, depending on the current size of the company.
The main contribution of the study is the inclusion of wine producers from 14 European countries, unlike most previous research, which was limited to single-country analysis and a smaller sample. Alongside financial variables, we also included nonfinancial, macroeconomic, and institutional variables. Future research should extend to non-European countries, especially the New World countries with evident comparative advantages. Future research should also incorporate government variables, as government regulations regarding production, subsidies, distribution and sales, tax, and trade policies can significantly affect the profitability. Climate change already has a significant impact on the profitability of wine producers, but its consequences are hardly considered in scientific research, so greater scientific attention is needed.
Data availability statement
The data that support the findings of this study are available from the corresponding author upon reasonable request.
Acknowledgements
The authors thank an anonymous reviewer and the editor for valuable and constructive comments that improved this article. This article was partially supported under the project line ZIP UNIRI of the University of Rijeka, for the project ZIP-UNIRI-2023-4 and by the University of Rijeka project uniri-iskusni-drustv-23-295.
Ethics statement
The authors have nothing to report.
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