Executive Decision Making & Strategic Analysis Robert Mondavi and The Wine Industry, HBS 9-302-102 (Case 1) Post-Class Analysis Individual Assignment Student: Alvaro Toro I. Executive Summary On May 2001, Michael Mondavi took over the position of chairman of Robert Mondavi Company, as well Greg Evans assumed as CEO. They company was founded in 1966, and has became one of the world’s finest and most innovative winemakers, currently having sales for 480 millions, and firm’s market value about $ 600 million.
The executives estate that, as the competitors spent considerable amount of money pursuing aggressive acquisition strategies, they are doing well on the track of organic growth of its premier brands, as they note increasing pricing of wine properties, as well they believe in the high quality brands of their portfolio well positioned in the market, and because they have an excellent management.
In that scenario, the protagonists (Michael Mondavi and Greg Evans) should figure out how to strengthen the competitive position of the firm considering the increasing competiveness of the wine market, especially in the premium segment where they are focus on.
In this essay we will analyze the industry of premium wines in order to find how competitive it is, and to get some conclusions about the strategy that the executives of Mondavi have defined. For this analysis we will use the Porter’s Five Forces Analysis. II. Industry analysis
In order to analyze the premium wine industry we will follow the guide of the Porter’s Five Force analysis: (1) Suppliers Power, (2) Buyers Power, (3) Barriers to entry, (4) Threat of substitutes, (5) Competitive Rivalry. This analysis will provide us a basis to understand if the strategy stated by the Mondavi’s executives is a consistent choice. 1. Suppliers Power The main supplies for the wine industry are grapes, barrels, bottles, packaging, winemaking, automation systems and labor. Grapes are 50-70% of the costs of goods sold of a producer.
Barrels, mainly made of oak, cost USD 250 to USD 600, and have a typical capacity of 225 liters, wich means about USD 1 or 2 per bottle. In case of super-premium wines, grapes and barrels are about 25% of the price per bottle. Grapes. The quality of the grapes is a key factor for the quality and the unique characteristics of the wine production, thus many wineries are vertically integrated. On one hand we have wineries of France, which are full integrated, and on the other hand the wineries of California that outsourced 70-85% of their grapes.
Usually, growers are small producers, therefore concentration of suppliers is small, and on the other hand, the grapes are highly differentiated, as their quality depends of ground, spacing, weather conditions, position related to sun, etc. That is why this supply is regulated though long term contracts, and usually wineries technically support growers. As the key knowledge is in the wineries, threat of forward integration is relatively low. This analysis shows that this force is relatively low to moderate. Barrels.
Premium wines are made mainly using oak barrels, which means a relatively high cost per bottle, and the quality is also important, which mans that this supply is important for the winemakers. But producers are not concentrated, the threat of forward integration is small, and this market is important for the suppliers, so we can infer that the force of them is relatively small. Other supplies. Other supplies are for example bottles, which are not differentiated, are not concentrated and mean a low part of total costs.
Therefore, other suppliers have small force. The suppliers force. Considering the previous analysis, we infer that the suppliers force is moderate to low, as growers have moderate to low force to wineries, as they rest of suppliers have low force related to vineries. 2. Buyers Power The buyers differ for each market, but in general terms we can consider that the distribution chain follows a three layer model (especially in the case of USA): producers, wholesalers, and retailers. In the case of retailers they are “on-premise” (restaurants, hotels, pubs, etc. and “off-premise” (supermarkets, wholesale price clubs, mass merchandisers and liquor stores). This three tier model was mandatory in USA to avoid organized crime, and is not longer mandatory in several estates, as well as many countries, but this structure tends to exist. Wholesaler distributors. The current trend is the concentration in both wholesalers and retailers. In the case of USA, today the top 5 distributors control 33% of the market, and the top 10 control 45%. This high concentration supposes higher buyer power, as they buy larger volumes.
In this scenario some producers have their own distributors, like Gallo. In other markets, this is also a trend, as Europe, where large firms, particularly the leading breweries, dominate the alcoholic beverage distribution. In this sense, the buyer power is high. Retailers. The current trend, further than the wine market, is clearly the concentration of the “off-premises” retailers. The well known Wal-Mart and others became very large retailers, concentrating as well high bargaining leverage. For example, Costco is currently the largest wine retailer in the
U. S. The same concentration is happening in the “on-premises” buyers, where many large hotels and restaurants chains are purchasing wine centrally rather at locally, increasing their buyer power. Thus, the retailers buying force is also relatively high compared to producers, which means higher pressure to wholesalers, and therefore to producers. Brand identity. The advantage for high quality premium wines is that they are able to build a strong brand reputation, which means many distributors and retailers use this wines for differentiation.
In this segment of consuming is relatively price insensible, which follows the importance of the brand identity and differentiation. This pushes down the buyer force, but on the other hand, pushes up the need of producers to be careful of the brand reputation and marketing. In this way, the trend is massive advertisement of jug wine producers, and channel promotion of premium wineries. Buyers Power. Distribution increasing consolidation, which means they have more force to negotiate with premium wine producers. This trend seems to have even more impact than the positioning and reputation and quality of a brand.
In this sense, the buyer power is high. 3. Barriers to Entry The wine industry have some key success factors, specially related to access to inputs, proprietary learning curve, economies of scales, capital requirements, access to distributors channels and product differentiation. As indicated before, the grapes are a key input to determine the quality of wine production. Usually these grapes are grown in specific lands, and following specific vineyard development. Currently the lands are very expensive, especially in USA and Europe. On the other hand, the development of new vineyards is also expensive, thus capital consuming.
In this sense, we have that the learning curve for vineyard development and wine making is quite long, and so the payback. The access to distribution channels is also a key issue, because they are more concentrated, many of them are owned by some producers, and because the producer needs to create the pull of the demand. Therefore, is a key issue, which pushes up the barriers to entry. The product differentiation and brand construction, as we stated before, is also time and capital consuming, which also pushes up the barriers to entry.
Considering the previous analysis, the barriers to entry are moderate to high, which explains in some way the trend of consolidation of producers, the horizontal integration (breweries), and the entrants which have enough capital and control of distributors. 4. Threat of substitutes On one hand the switching costs of this kind of products are low, as the consumers have not incentive to keep consuming the same wine brand, and they could move to another kind of alcoholic beverage like beer or spirits, or even stop consuming.
In this sense, the threat of substitutes is relatively high. On the other hand, the buyer inclination to substitute is relatively low, as wine consumers tend to continue consuming wine. For example, in U. S. 12% of the consumers drank 88% of the wine (estimated by RMW). In case of premium wine consumers, the quality and brand reputation seems to be the key factor to not substitute the wine and the brand. Considering this analysis, the threat of substitutes is relatively low to moderate. 5. Competitive Rivalry Product.
As we mentioned before, the switching costs of premium wines are relatively low, as the consumer is able to stop consuming, change to substitute or to different brand, which means higher competitive rivalry. But on the other hand, the premium wine is a differentiated product, where the brand reputation is a key factor, thus the consumer, and therefore the distributor, will have some preferences. In this sense we could infer that the competitive rivalry regarding products is relatively low to moderate. Industry. The industry is moderately concentrated. For example, in 1998 in the U.
S. the top 15 brands of wine have 45% of the market share, and concentration is the current trend (in 1990 it was 36%). This is also a global trend; even other countries still are not so concentrated. This aspect pushes the rivalry high. On the other hand, the wine consumption is growing 1-2% per year. In case of premium wine the estimated growth rate is 8%-10% for the foreseeable future, which push down the rivalry. Therefore, we can estate a low to moderate industry rivalry. Competitors. The premium wine market is composed for different kind of competitors.
The direct competitors are focused on the premium segment, as well low-end segment competitors, and beer and distiller spirit producers. All of them are targeting the premium segment through organic growth (especially direct competitors), or acquisition. Direct competitors have also brands with good market reputation, as Kendall-Jackson, Trinchero Estates, Southcorp, and Mondavi, with comparable sales. They are mainly focused on growth on the premium segment, and they are willing to invest money on that (acquisition, ground, etc. ).
The other competitors, low-end segment and beer and distiller spirit producers, are more focused on inorganic growth, where they already have made investment, and they usually bigger companies with strong financial position, and strong distribution and sales force positioning. In this way, we have that the diversity of rivals is relatively moderate to high, considering the differences in size, time in the industry, and growth strategy. In the same way, the strategic stakes are relatively moderate to high, as they are able to get market share increasing, for example, the brand awareness.
Also the exit barriers are relatively high, as the intangible assets are important ones, and the time needed to develop vineyards and product differentiation means that many of the value of the company is just salable as a whole. Competitive Rivalry. Considering the above analysis, we can find that the competitive rivalry is moderate, as we have differentiated products, and growing premium market, even that there are issues that push up the rivalry like competitor diversity and strategic stakes. III. Conclusions. The Five Forces analysis can be summarized in the following results: Force |Intensity | |Suppliers |Moderate to low | |Buyers |Moderate to high | |Entrants |Moderate to high | |Substitutes |Moderate to low | |Rivalry |Moderate | Considering this we can infer a moderate competiveness for the premium wine global industry, which should explain the good returns (even not very good) of the competitors.
If we add the fact of a growing market, we can also understand the interest of new entrants, and who they are. In the current scenario, with increasing competiveness of current and entry actors, with increasing distribution strengthens, shows that need to aggressive continue to develop current competitive advantage like brand quality recognition, as well to continue to create demand (pull), and look forward new strategies for marketing, sales and distribution.
The high capital need, the needs of specific sites, the continuous trade off between quality, quantity, and ground and weather condition, seems to be and entry barrier for this business. So, this together the brand positioning seems to determine the trend of growth in this market trough acquisition. Going back to the strategy issued by the Mondavi’s executives seems to be correct.
They do prefer to continue an organic growth making stronger their premier brands, as the inorganic growth, as the high cost of wine properties is not the best choice for them. In other words, in the current scenario, moderate competiveness, it seems to be time for organic growth. In the case of entrants, the choice to be in this market is through acquisition, as they have enough cash and possible synergies (horizontal integration, economies of scale, distribution channels, etc. ), and the timing is important.
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