The United States wine industry is a 12 billion dollar industry and is composed of 7,000 wineries and around 1,800 different companies. The three major companies within the industry are Constellation brands, E&J Gallo, and The Wine Group Inc. The industry has made its way through the economic crisis at a better rate than some of the other U. S industries however in order for them to continue to see any type of growth it is important that they acknowledge their issues and find ways in which they can rectify them.
The majority of the issues among the industry are problems that cannot be directly controlled by individual wine companies. Therefore it is imperative that wineries find away to use these issues to their advantage, since they are impossible to just ignore. The four most crucial obstacles the industry is currently faced with are the economic state, the climate changes, the price of gas, and the CARE Act of 2010. All four of these obstacles affect the production of wine and as an end results affect the consumer.
These obstacles cause the cost of wine production to increase and therefore wine companies have to increase the price at which they sell their wine to consumers in order to offset the extra money that was put in to the manufacturing of the good. The industry should also focus on their weaknesses amount the five forces, which include threat of substitutes, threat of entry, and threat of rivalry. If the industry can focus on lowering these threats, and concentrate on the value of their customers then they will be able to face the issues that they cannot control with a stronger hold on the market.
Overview of the United States Wine Industry The United States Wine industry is composed of over 7,000 wineries and about 1,800 different companies. The wine industry is highly concentrated which means about 80% of the industries’ sales come from the top 50 companies within the industry. The U. S wine industry accumulates about 12 billion dollars in revenue a year. In 2009 alone 767 million gallons of wine were consumed in the United States, which shows a gradual increase in the consumption of wine from previous years. Each year the consumption of wine in the United States continues to increase regardless of outside factors.
Last year 707,084,113 gallons of wine were produced in the United States, of which 631,575,325 gallons came from California alone. The 3 top firms in the industry consist of Constellation Brands, E&J Gallo, and The Wine Group. Although the industry as continued to see a steady increase the production and sales of wine there are still major problems that they are forced to face. The following analysis will discuss; major products and cost of production, the major firms in the industry, industry competition/rivals, SWOT analysis, major problems in the industry, and finally recommendations to the problems they are facing.
Products and Pricing The wine industry is composed of one major product, and that is wine. There are numerous different types of wine, with a variety of different price ranges. Some of the most common types of wine include but are not limited to; White Wines including, Riesling, Chardonnay, Sauvignon Blanc, and GEWURZTRAMINER. Red wines include, Pinot Noir, Syrah, Zinfandel, Merlot, and Cabernet Sauvignon. Each of these wines has a different flavor that is captured from a certain grape in a certain manner.
However, in order for winemakers to create their large variety of wines they are in need of a large variety of grapes. Some wine companies choose to own their own vineyards where they grow their own grapes. However, some wine companies buy their ingredients from other vineyards, the main reason being that growing grapes is a very arduous process and therefore they want to focus their energy on the production of the wine itself. Wine is produced in all 50 states throughout the United States, and in 2009 the United States produced more than 707 million gallon of wine.
The production of wine in California and Washington were by far greater than any other states through the U. S. Not only does the U. S. produce wine to be sold in the U. S. but last year they exported around 403 million liters of wine, the majority was exported to Canada and the United Kingdom. The price of grapes depends based on how the grapes were treated prior to being sold. This has an effect on how much it cost to produce the wine, but it also affects how much the wine will cost to the consumer.
There is a price different between fresh grapes and grapes that have been processed. In 2009 the average price for one ton of grapes was around $505. When examining the cost of producing wine there are many factors in which you have to look at. Factors many include but are not limited to, the grapes, the process of fermentation, the storage, the labor and time, the bottling/packaging, and of course the shipping of the products to the customers. The total cost of wine in California in 2009 was around 1. 7 billion dollars, which included the production of 3. million tons of wine grapes. The pricing for the products themselves are harder to approximate. There are many factors that go into deciding the price for a certain type of wine, with a certain name, from a certain company, containing a certain type of grape, that was processed a certain way. Many wine companies throughout the US have a high end wine and a low end wine. This allows the company to enter the market at all angels. Especially with the down turn of the economy, many companies have had to focus their energy on the production of the low end wines.
Many companies in the past years are seen an increase in their sales is retail stores as opposed to sales in restaurants. However, because of this there has been an increase in wine that sell of 20+ in the store, since the consumer is still wanting that high quality wine that they get when they go out to eat, but they want to be able to enjoy it in their own home. As you can seen in Figure 1. 1 in appendix A there has been about a 22% increase in the sales of table wine over 20 dollars. The interesting thing to notice is that yes there has been an increase in sales but there has also been a decrease in price.
Therefore, consumers may want that high quality over 20 dollars wine but yet that still trying to find a good deal. There are wines out there that sell for as cheap as $3. 99 and then there are also wines that go for $500 a bottle, that is the great thing about the wine industry, even though they are essentially focusing on only one particular product, that are still able to create this products at leaves so that it is attainable for all consumers, allowing them to increase their market share and have the ability to expand into new markets.
Geographical Implications. The wine market is highly concentrated, and majority of the production in the United States take place in California. Around 90% of wine production in the United States takes place in the state of California. Washington and Oregon have the second highest number of Wineries, followed by all of the other states which only have a small percentage of the U. S. wineries. There are over 110 did different wine grapes that are grown in the state of California which is part of the reason as to why they are the largest producer of wine in the U. S. Also, due to their climate, size of their tate, and the diversity among their soils this has allowed them to continue to hold the number 1 spot in wine production through the United States. Factors such as climate and soil are to major reason and implications that can affect the production of wine throughout the U. S. In October of 2009 California had rain that concerned many of the vineyards that produced merlot on their vines, this goes to show that the climate, and everyday whether changes can have a huge effect on the harvest and cultivation of the grapes that are necessary for the productions of wine.
Since these external factors play such a huge role the wine industry at times can be very unstable, not to mention uncontrollable by human forces. We are unable to predict the weather on a day to day basis, and therefore sometimes there are changes and wine producers have lost crops, and money due to some of these changes. The thought of an external factor constantly effecting your productions is one of the reason companies stay out of the wine industry all together. Today, wine is produced in all 50 states, see figure 1. in Appendix B for a glimpse at the number of wine companies in a few of the states. Major Firms in the Industry The U. S wine industry has 50 major firms that make up the majority of the industry, however below we are going to focus on the 3 top producers of wine in the U. S. These firms include, Constellation Brands, E&J Gallo, and The wine group. The top 5 companies of the industry sell over 10 million cases of wine a year, and the top 2 companies sell over 55 million cases. For the last 3 years Constellation Brands and E&J Gallo have continuously competed for the number one spot within the industry.
Constellation Brands Constellation Brands was founded in 1945 under the name Canandaigua Industries Company by Marvin Sands in Canandaigua, New York. The company started out as a small family owned business with only 8 employees. In the beginning they sold wine in bulk in barrels to different bottle companies. In their first year of business they sold approximately 200,000 gallons of wine and made about 150,000 dollars. In 2000, the company changed their name to Constellation brands, Inc.
Since day one the company had decided that they were going to handle business with their core values in mind and they believe that is what has created their success. Today their headquarters are in Victory, NY and they are the lead wine producers in the world, and the leading premium wine producer in the United States. The current President is Robert Sands, and in 2009 that turned over 3. 7 billion dollars in revenue. To see a selected amount of financial highlights for the company thus far in 2010 see appendix C, figure 1. 1 E&J Gallo E&J Gallo was founded in 1933 by brothers, Ernest and Julio Gallo. The company is located in Modesto, California, and is the largest exporter of California wines. Gallo’s produces, markets and sells wine all of the United States and globally as well. Gallo’s continues to be the largest family owned wine company in the country, and currently they still have 15 family members that work within the company. Ernest and Julio started the company with only 6,000 dollars and learned the process of winemaking through pamphlets from University of California post the prohibition period.
Although their company name is E&J Gallo they also make wine under 15 other names as well, also offering 2 brands of low end wine in order to meet the needs of their customers. They currently own 7 wineries and over 15,000 acres of vineyards across the state of California. In 2009 E&J sold over 66 million cases of wine in the United States alone and 76 million cases globally. Last year they had annual revenues of 1. 9 billion dollars, and are currently operating in over 90 different countries.
The Wine Group. The Wine Group is located in San Francisco, California and was founded in the 1980’s when a large amount of beverage conglomerate such as Coca-Cola were divesting wine companies that they had acquired. The Wine Group is mostly know if their concept of boxed wine, Franzia being the main brand that sells boxed wine. Giuseppe Franzia entered the wine business in 1893 when he immigrated to California from Italy. It was then that he started his family vineyard. Unfortunately in between the 1920s and 1930s he had to put a hold on the business due to prohibition.
It wasn’t until 1981 that he was bought by The Wine Group. The Wine Group consists of many brands such as, Franzia, Corbett Canyon, Mogen David, Tribuno, and Lejon labels. The Wine Group is the third largest wine producer in the world, and they continue to find innovative ways to bring wine to the public. In 2009 the company had annual sales of 44 million cases throughout the United States. Competition/Industry Rivals The U. S Wine Industry has one major competitor and that is exports. The global market for wine is huge compared to the U. S. ine industry and every though we now have companies within all 30 states wine is still being imported in from other countries. The U. S wine industry creates a lot of its business through restaurant and hotels, and unfortunately these are the 2 sectors that tend to buy these imported wines. For some upscale restaurant and hotels it is important to their business and their reputation to have imported certain wines in from certain parts of the world in order to satisfy their guests. Although there is a large amount of competition within the industry itself, the largest focused should be put on trying to get the U.
S. wine companies to appeal to restaurants, hotels, and large consumers of wine. Along with wines from numerous different countries the wine industry also faces competition from beer and liquor companies. Although these beverages are sometimes not looked at on the same level as wine they still pose a threat. Often times a consumer may purchase beer or liquor instead of purchasing and wine and therefore has cost the wine industry a sale. Five Force’s Analysis (See Appendix D, Figure 1. 1) Through the Five Forces Analysis there were multiple conclusion made. Figure 1. briefly states a few reasons as why the face or are able to avoid a certain threat. In this section we will discuss ways in which the industry can try to get rid of some of the threats that face them. Threat of Entry- The industry has a high threat to entry because there is not a strong amount of brand loyalty, unless you are a wine coinsure. Therefore the industry could work on implementing customer relationships, in order to strengthen their customer loyalty. However, since there is high start up costs associated with this industry, due to the production of grapes being a vigorous process.
This helps decrease the threat an entry slightly but not enough to ignore the possibility of new companies entering. Threat of Buyer Power- Since wine is sold at a variety of different venues from directly to the customers to restaurants and distributors; there is a low amount of buyer power. The consumer does not have a large affect when it comes to negotiating pricing since companies within the industry are able to find a certain venue for each of their different pricing points Threat of Supplier Power- Supplier power is high to the extent that new vineyards are not able to be created overnight.
Therefore is takes a lot of time in order to produce good quality wines that are then transformed into wine. However, the current suppliers of grapes producers to the wine industry do hold a large amount of power to the smaller vineyards since they may not have as much initial capital in order to bargain better prices with their suppliers. In order to try to reduce the supplier power for the smaller companies could adopt the use of new technologies in order to create a more effective way of placing order to their suppliers and therefore decrease the amount of inaccurate or redundant shipments.
Threat of Substitutes- Amongst the wine industry there is a high threat of substitutes again because there is a low amount of customer loyalty among wine brands. Also, it is easy for consumer to switch from one brand to another. Companies can decrease this threat by staying close to their consumers, and creating some sort of loyalty program or subscription that will keep that to your brand and will make it harder for them to switch. Threat of Rivalry- in the U. S. alone there are a large amount of wine companies and then they have to worry about the threat of wine companies from outside the U. S. Aside from competition among the industry, there is also competition out of the industry. In order for companies to try to lower the threat of rivalry they will need to find a focus, whether it is a certain segmented market or a price component that distinguishes them from the rest. Major Problems in the Wine Industry When it comes to analyzing the major problems throughout the wine industry there are 4 important ones that need to be examined. They include climate changes, the downfall of the economy, the prices of diesel and regular gas and the CARE act.
The following section will include a brief analysis of each the 4 major problems that are directly affecting the U. S. wine industry. Climate Changes Since the production of wine is dependent upon the production of grapes, the climate outside plays a huge role in whether or not your harvest will cultivate. This past year the industry experienced heavy periods of no rain, and an extremely harsh winter. These dramatic climate changes affected the grapes that were in the process of growing and also delayed the process of cultivating new harvests of grapes.
The climate does not only affect the production of wine, but in return in affects the price of wine. If the vineyards are unable to produce the same amount of grapes that they usually do then they have to charge companies a higher rate for the grapes. Then the wine company has to sell their wine at a higher price in order to make up for the money they lost when purchasing the grapes or any other ingredients that are necessary for the production of their wine. Unfortunately when it comes to solving this problem there is not much that can be done. The weather is unpredictable and therefore climate changes in unpredictable.
Economy. The economy is a problem that the majority of the industries within the U. S have been suffering from, and although wine industry has continued to see an overall growth in their sales, they have been affected in other areas. As the economy took a downtown in the U. S. individuals decided that they were not going to eat out as much. As a result the wine industry has seen + a decrease in their wine sales to restaurants, since not as many consumers are eating out they are therefore not purchasing wine in restaurants. However, since consumers are choosing not eat out as often the industry is seeing a rise in their sales at retail stores.
There are 2 categories of wine that are selling very well among the wines sold in stores. Those 2 categories include cheap wines, and wines that are priced over 20 dollars in retail stores. The reasons for these two trends are as follows; since a vast number of consumers are choosing not to go out to eat in restaurants as much anymore they are still interested in consuming a good quality wine. Therefore since they have chosen to sacrifice their restaurant dining experience they do not want to give up their good quality wine that they would have otherwise consumed while dining in a restaurant.
The other trend that the industry has experienced is the increase in sales of cheaper priced wines sold within retail stores. With the unemployment rating reaching so high, and individuals having to cut back on their “wants” and focus on their “needs”, they are finding themselves purchasing the cheaper wines when need be. Price of Gas As the price of gas increases so does the price of wine, due to the cost to transport wine and the production process of wine.
Some wine companies produce their own wine through the process of running their own vineyard; however there are still some companies that choose to purchase their grapes from other vineyards. Therefore, if the price of gas continues to increase then the cost of transportation of these wines increases as well. If a wine company has to increase their production costs than the only way they can bounce back from that is to increase their final price to the consumer. In the long run the consumer may or may not choose to by the products and therefore the end results could be a decrease in revenue in the U. S. wine industry. CARE Act The CARE Act of 2010 or the Comprehensive Alcohol Regulatory Effectiveness Act would give states the power to regulate the interstate distribution of alcohol. This bill was introduced to congress from states that had very few wineries or winemakers at all. This bill could end direct shipping of wine across the U. S, which is of great threat to the smaller wineries across the country. Therefore shipments that were made across state lines would be greatly affected, and as a result the industry as a whole would be greatly affected.
The allowance of direct shipping to states throughout the country has provided a stream of revenue, which has also helped in the event of state taxes. Not only was direct shipping a good thing for the consumer but of course it worked out for the wineries as well. The states are not the ones that are suffering from the allowance of direct shipping; it is the middleman, the wine distributors. Since 6 of the largest wine distributors control about 50% of the total alcohol sales, small wineries do not have any other option that direct sales.
This act will results in the closure of many small wine production companies and in the long wrong will only affect the overall revenue that is generated by the U. S. wine industry. Solutions The majority of the problems that the industry is currently facing are circumstances that are beyond the industries control. Problems such as the climate and the economy are beyond their control and therefore they have to find ways to make those issues work with for them and not against them. In terms of the climate the industry could focus on advertising the wines that are easier to produce in such drastic climates.
Therefore, if there is a certain type of grape that grows better in the warm heat then therefore they should prepare for that by marketing that particular wine to their target market. As far as the economy goes, since it has been a couple years the industry can now look in to the different types of trends that have occurred, such as the decrease of wine sales in restaurants, and the increase in purchase sales of cheaper priced wines. Once they can recognize these trends then they can act in ways that will work with the supply and demand that is occurring amongst the industry today.
A solution for the CARE Act would mainly pertain to the smaller wineries, since they will be the ones greatly affected by the bill. Small wineries should take this time to try to find a larger conglomerate that may be able to assist them, or perhaps a merger of some sort is a necessity at this particular time. The goal for the smaller wineries would be to stay in business and therefore they might have to risk losing some say in how their company operates. The final issues is the price of gas, throughout the U. S. this is a constant fluctuation.
Therefore wineries have to be aware that the price will and is going to change. Therefore when they are planning purchase or shipping orders that have to really strategize in order to protect their production costs. When they are in need of grapes from a distant location they would be better off buying in bulk since the price of shipping will increase as a result of the increase in gas. The same would pertain to when a company is shipping an order to a distributor or to the consumer directly. Shipping will cost the consumer more when they purchase smaller amounts frequently as opposed to a bulk amount infrequently.
Summary The United States wine industry has managed to make their way through this recession without feeling the hit as hard as other industries may have. However, that does not mean that the industry is recession proof. In order for the industry to continue to see a small but steady growth they will need to focus on making their current issues work for them and not against them. The industry thrives heavily on the production of grapes and therefore they need to either continue to maintain their own vineyards, or commit to a vineyard that will constantly be their supplier.
Maintaining these good relationships will allow for wine companies to work with the issues that are thrown at them beyond their control, such as the economy, climate, and the price of gas. The industry is highly concentrated and therefore the larger companies will continue to progress farther than the small, family owned wineries, especially with the after math of the CARE Act. The U. S wine industry has been able to adjust to the economic crisis thus far but they need to continue to stay innovative and updated on new atmospheric developments in order to stay above the cure.
The industry could improve their entry power and their substitute power which would enable them to keep a tighter hold on the alcohol consumption industry as a whole. By increasing the amount of attention that they give to their end consumers and by creating some sort of loyalty program they will be able to lower the threats of entry, substitutes, and rivalry among the industry. Majority of winemakers operate in the same fashion, and it is time for some companies to aim for a competitive advantage, but price distinguishing in order to make it through this economy successfully.
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