Wine Industry

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1. Competitive Analysis of Porter’s Five Forces Model ………………………….

1.1 Bargaining Power of Suppliers…………………………………………….....

1.2 Bargaining Power of Customers………………………………………………

1.3 Potential Entry of New Competitors……………………………………….....

1.4 Rivalry among Competing Firms……………………………………………..

1.5 Potential Development of Substitute Products……….....................................

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1

1-2

2-3

3

4

2. Key Success Factors of the Wine Industry ……………………………………..

2.1 World Renowned Growing Area – California………………………………..

2.2 Modern Winemaking Facilities & Technologies……………………………..

2.3 Domestic Market Growth Potential…………………………………………..

2.4 Globalization of Wine Industry………………………………………………

5

5

5

6

6

3 Strategy Implementation ………………………………………………………...

3.1. Steps to ensure the Success of Strategy Implementation ……………....

3.1.1 Positive Cash Flow………………………………………………….

3.1.2 Market Segmentation & Product Positioning ………………………

3.1.3 Traditional & Online Advertising Campaign……………………….

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7

7

7

7-8

8

8

PGSM IEMBA 2010 STRATEGIC MANAGEMENT

3.1.4 Management & Operations Control………………………………...

3.2. Potential Problems during the Strategy Implementation ……………...

3.2.1 Conflicts between Employees………………………………………

3.2.2 Resistance to Change……………………………………………….

3.2.3 Challenge of Financial Management & Monetary Systems………...

8-9

9

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4 Conclusion ………………………………………………………………………...

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5 Bibliography……………………………………………………………………….

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6 Appendix…………………………………………………………………………...

11-15

1. Competitive Analysis of Porter’s Five-Forces Model

Porter’s Five Forces model is a widely used approach to identify and analyze five competitive

forces that shape every industry, and helps determine an industry's weaknesses and strengths.

(Exhibit1) The competitive pressures that Robert Mondavi faces in the U.S. domestic wine

industry are described below:

1.1 Bargaining Power of Suppliers

RMC has used backward integration strategy to increase control of grape suppliers. He

has successfully convinced many of Krug’s top grape suppliers to sign long term contract with

RMC for approximately 75% of its purchases. (Professor Roberto, 2002)

He also worked closely with each grower to improve grape quality and the contract has

been structured where the compensation was tied to the grape quality & crop yields. This will

improve the stability of the price as most of the growers depend on RMC for sustenance, thus

giving them very little bargaining power over RMC. Mondavi also convinced Krug’s top two

KANG HEAN LEE / MAL10067 1


suppliers to take financial stake in his new winery. (Silverman, Gilinsky, Guy & Baack, 2001)

Since now they are the stakeholders & have long term contractual relationship with Mondavi, it

has reduced the likelihood that suppliers will increase price.

Furthermore, RMC has invested more than $50mil over the past 10 years to replant

vineyards after the phylloxera epidemic. For long-term plan, Mondavi also acquired additional

vineyards to increase its internal grape sourcing to 25% by 2005 so that it won’t rely heavily on

independent growers. (Professor Roberto, 2002) As such, threat of supplier bargaining power is

low for RMC as they attempt to control the supplier’s operations right from production to

distribution.

1.2 Bargaining Power of Customers

Sales of wine in U.S. are mainly controlled by three-tier distribution system. RMC sells

wines to their customers who are the wholesalers/distributors, who then provided wines to local

retails businesses which accounted for 78% of total sales volume in U.S. Supermarkets alone

have contributed 52% of retails wine sales. (Silverman, Gilinsky, Guy & Baack, 2001)

However major changes had taken place in wholesale and retail wine business. Number

of alcoholic beverage distributors had decreased by 75% in early 1960s and substantial market

share are now controlled by top 5 distributors. (Exhibit 2) As a result, large distributors are

enjoying economies of scales and prefer to distribute only top selling wine brands since the

product can be replenished quickly. Bargaining power of distributors had increased since they

have a lot of wine brands to choose from.

Furthermore, five new world countries - Australia, Canada, Chile, New Zealand and U.S.

have signed trade agreement in 2001 to keep markets open and reduce trade barriers. (Castaldi,

Cholette, Hussain, 2006) With the globalization of wine industry, a lot of international wine

brands are eyeing for space on the store shelves of these few powerful supermarkets. As a result,

RMC faced increasing competition as they relied heavily on top distributors & retails chain for

domestic sales, which accounted for two-third of its revenue. (Professor Roberto, 2002) As such,

bargaining power of customers is high for RMC

1.3 Potential Entry of New Competitors



Consolidation is occurring among wineries worldwide through merges and acquisitions.

In 1970s, several food and beverage conglomerates, like Nestle and Coca-Cola have entered

premium market by acquiring premium to ultra-premium wineries. In 1980s, global alcoholic

beverage companies, like Canandaigua and The Wine Group have acquired wineries to

complement their beer & distilled spirits businesses. In 1990s, there were some 200 new wineries

in the Napa Valley competed with RMC in premium market. (Silverman, Gilinsky, Guy &

Baack, 2001)

A growing number of these wineries were nearly owned by multinational companies

which have free-flow of cash and able to gain economic of scales in wine industry through

merger or requisition. Furthermore, they have substantial investment in working capital and

funding to acquire new vineyards or even pay higher prices for grape supplies. Although RMC’s

skills & expertise are difficult to imitate, but the knowledge and experience of these new

competitors in alcoholic beverage industry powered with the support of their existing distribution

assets will be an added advantage to compete in wine industry.

As a result, the new competitors have dwindled capital resources of RMC, which ended

in public listing to obtain more capital to compete and take advantage of future opportunities

(Silverman, Gilinsky, Guy & Baack, 2001) As such, threat of new competitors is high for RMC

especially when the big companies treat mergers and acquisitions as attractive ways to grow.

1.4 Rivalry among Competing Firms

Rivalry among competing firms is often the strongest of the five competitive forces

especially in U.S. wine industry, which was composed of approximately 1,500 wineries with the

top 10 accounting for 70% of U.S. production. (Silverman, Gilinsky, Guy & Baack, 2001)

RMC has experienced intense rivalry from few dominant & large volume producers like

E&J Gallo Winery and Canandaigua Wine which have controlled 40-50% of market share.

(Exhibit 3) Furthermore, E&J Gallo also enter the premium wine segment aggressively to

capitalize on changes in consumer demand toward premium wines. This will affect RMC which

is primarily competing for premium wine market.



Besides, large volume producer like E&J Gallo also gained economies of scale and have

been viewed as sales powerhouse by many industry observers. They adopted strategy of

substantial vertical integration by owning glass container manufacturer, bottle cork operation, a

fleet of trucks and network of distribution centres throughout the country. (Professor Roberto,

2002) This enabled Gallo to enjoy a significant cost advantage. In this situation, rivalry is more

likely.

Furthermore, most of the rivalries have focused on channels promotions strategy to

increase brand awareness and broaden its customer base in the premium market. They employed

a direct sales force, organize wine competitions, wine testing and education activities at their

vineyard to build public’s awareness. To sustain the competitiveness, RMC has gone far with the

launched of its first radio & television advertising campaign nationwide. As such, rivalry among

competing firms is high for RMC in premium wine segment.

1.5 Potential Development of Substitute Products

There are a lot of categories in non-alcoholic and alcoholic beverage such as beer and

distilled spirits. When considering substitute for wine, many people always think the wine

substitute is beer. Actually all these are more of a compliment than substitute as each product has

its own characteristic, can be differentiated and used to accompany different occasion.

However the threat of substitute products is still exist within the wine category. For

example, an incident happened in 1999 where all the distributors began to substitute competing

Chardonnay brand on retailer’s shelves after RMC experienced shortfall in supplying

Woodbridge Chardonnay brand. (Silverman, Gilinsky, Guy & Baack, 2001) Besides, there are a

lot of wines with similar price, taste & quality are readily available from local or multinational

brands. The wide selection of wines has confused the customers during the buying process and

always have trouble to remember which wines they bought and liked. (Castaldi, Cholette,

Hussain, 2006) As such, the brand loyalty of customers is low and switching to an alternative

product is more likely during the purchase process.



Although RMC has wine product in all premium categories and hold a competitive

advantage in economic of scales and price, the threat of substitute products is still possible as

most of the distributors only prefer to sell the wines which gained most awards and acclaim from

wine enthusiasts. In conclusion, threat of substitute products is consider moderate for RMC.

Based on Porter’s Five Forces, it can be concluded that only threat of suppliers are

favorable to RMC. Due to the high competitive and continuous threats from new entrances, it is

important for RMC to be more innovative in developing world-class wines in order to sustain its

domestic economic profits.

2. Key Success Factors of the Wine Industry

Key success factors (KSF) are limited number of characteristics that have a direct and serious

impact on the effectiveness and efficiency of an organization. Activities associated with KSF

must be performed at the highest possible level of excellence to achieve the intended overall

objectives. The key success factors of wine industry are described below:

2.1 World Renowned Growing Area

U.S., a new world producing country in wine industry was composed of approximately

1,500 wineries. The most famous growing area is California, which are the top wine producer in

U.S. and fourth leading wine producer in the world behind the countries like France, Italy and

Spain. (Wine Institute, 2007) The uniqueness of California is the ideal climate, topography, and

soil condition which enable wineries to produce premium wines to compete with the premium

European brands. Furthermore, two Napa Valley wines have won gold medals at a 1976 blind-



tasting competition in Paris. As a result, California has attracted a lot of tourists and continuously

provides a constant source of customers to wineries.

2.2 Modern Winemaking Facilities & Technologies

Wine industry is a capital intensive industry and requires great winemaking techniques &

facilities to produce high quality wines. California’s wineries are predominantly family owned

and multi-generational which control all aspects of grape growing techniques. For example,

based on the study by Professor Roberto (2002), RMC operated six wineries in California and

each of these wineries employed modern technology to insure the gentle handling of grape and

the high quality of fermentation and aging processes. Besides, it also built a state-of-art

winemaking facility and assembling a team of experts in the area of viticulture and winemaking.

All these new techniques and development of experts have been an added advantage for U.S.

wineries in the production of world-class premium wines. Their willingness and ability to

implement new marketing techniques is the KSF for wine industry.

2.3 Domestic Market Growth Potential

U.S has a very strong domestic market for wine industry. It is the fourth largest producer

of wine and third largest consumer in 1999. (Exhibit 4 & 5) The wine consumption has increased

steadily in U.S. with overall growth of 1-2% every year since 1994. The highest concentration of

table wine consumers is in the 35-to-55 age bracket and 31.4% of consumption contributed by

the adults in families earning over $75,000 annually. Normally this group of people has a very

high disposable income and willing to pay more for premium wine. As a result, wineries are able

to leverage on this favorable demographic to enjoy economies of scale in the growing premium

market. Those adults who are not regular wine consumers consist of teetotalers and beer or spirit

supporters. (Castaldi, Cholette and Hussain, 2006) There are a lot of potential to convert this

group of beer purchasers to become wine consumers via innovative marketing strategy, e.g.

health benefits related to moderate wine consumption. In conclusion, many project that U.S. will



become the world’s largest wine market by 2008 with the steady rise of per-capita consumption

in recent years. (Exhibit 5)

2.4 Globalization of Wine Industry

In 2001, U.S. wine industry has gone into globalization with the signing of Mutual

Acceptance Agreement (MAA) on Oenological (winemaking) Practices with four new world

countries - Canada, Australia, Chile and New Zealand. The main purpose is to promote greater

international wine commerce and eases trade barriers for U.S. wine & imported wines. (Wine

Institute, 2007) Such move enables U.S. wineries to sell their product outside the region with

lower tariffs, logistic cost and trade barriers. As such, U.S. wineries have increasingly look

abroad to increase sales, earnings and take advantage of certain macro-economic factors such as

exchange rates. It also gives an opportunity for them to showcase other wines to enhance its

reputation in international markets.

3. Strategy Implementation

3.1 Steps to ensure the Success of Strategy Implementation

Robert Mondavi future business strategy is to form global join ventures as a way to

develop world-class wine and transform RMC to become a truly global company that grow,

produce and sell wines in all the best wine-growing regions in the world. (Silverman, Gilinsky,

Guy & Baack, 2001) To ensure the success of strategy implementation, RMC need to focus on

below few areas:

3.1.1 Positive Cash Flow

Successful strategy implementation always requires additional capital. Based on

the RMC Financial Statement (FY1997-1999), although the revenue has increased from $300.80



millions to $370.60 millions, but the net profit margin has reduced significantly from 9.4% in

FY1997 to 8.3% in FY1999 (Exhibit 6). Therefore, it is very important for the company to

recover its financial position by further pay down its debt in order to generate more free cash

flow. In addition, stronger cash flow will provide more financial resource for RMC to grow its

portfolio by taking advantage of future opportunities.

3.1.2 Market Segmentation & Product Positioning

With the plan to venture globally, it is very important for RMC to determine the

characteristic and needs of consumers as well as analyze consumer similarities and differences in

every new market. As consumers are different in every country, RMC needs to produce different

wines to meet different country preference. With market segmentation, it will enable RMC to

position each of its wines appropriately to meet consumer needs and expectation. As a result,

RMC will have better control on production, distribution and advertising for each of its wine. It

will help RMC to improve operation efficiency and maximizing the profits.

3.1.3 Traditional & Online Advertising Campaign

To conquer the global market, it is extremely important for RMC to build its

brand and broaden its customer base. Based on the study by Professor Roberto (2002), most of

the premium wineries in U.S. do not spend much on consumer advertising. They tended to focus

more on channel promotion. As such, it poses a large opportunity for RMC to strengthen its

brand appearance in advertising medium. RMC can focus on TV and radio advertising to build

trust and emotional connection with consumers or advertise in selected premium magazines to

strengthen its premium market penetration. Furthermore, with the emerging of new online

medium, it will also help RMC to reach those consumers who are difficult to reach via traditional

media. In conclusion, advertising is an important tool for brand building.

3.1.4 Management & Operations Control

Strategy implementations will never success without the strong management and

operations control. RMC needs to establish clear, reasonable, measurable and achievable annual

objectives which are well communicated throughout an organization. With clear annual

objectives, all the employees will have the same understanding and moving towards the same



direction in implementing the strategy. It will also help in allocating resources more efficiently

according to annual objectives and provide relevant training for each employee to further

enhance their skills. Besides, performance-linked rewards must be well implemented to motivate

and improve the productivity of all employees. Lastly, adequate and timely evaluation is needed

to ensure the performance conform to the strategy.

3.2 Potential Problems during the Strategy Implementation

Questions and problems will undoubtedly occur as part of implementation due to the

divergence of views throughout the implementation stage. It is common as some of the decisions

cannot be completely planned until implementation begins. Some of the potential problems are

described below:

3.2.1 Conflict between Employees

Conflict might occur between two or more parties in RMC. Normally

misunderstanding & disagreement occur during the implementation process as each party has

their own commitments and expectations to achieve. Conflict is unavoidable for all organizations

especially for RMC which has a large workforce to manage. For example, in 1999 Michael

Mondavi was caught between the 2 camps due to an argument for RMC’s future strategy.

(Silverman, Gilinsky, Guy & Baack, 2001) As such, conflict need to be solved before negative

consequences affect the organizational performance and strategy implementation.

3.2.2 Resistance to Change

Resistance to change is another potential problem that RMC might face during the

strategy implementation. People fear to change because any changes in structure and strategies

will affect or disrupt the current working environment. However, continuously adapt to changes

is necessary for RMC to compete in the fast growing and increasingly competitive wine industry.

Normally those organization best adapt to the changes will gain significant competitive

advantage and strategy implementation can be relatively easy.

3.2.3 Challenge of Financial Management & Monetary Systems



RMC will face a challenge to maintain its financial stability over the next few

years as strong financial budgets & capital are required to sustain the business worldwide. RMC

will also deal with two or more exchange rates which can complicate its global operation.

Furthermore, the company’s profit will be affected by the direct impact from the weaker U.S.

dollar when the economy slowdown. All uncertainty and instability in international financial and

currency could present considerable risks for RMC to gain strength and meet the challenges of

the years ahead.

4. Conclusion

Based on the above analysis, RMC is facing fierce competitive pressures in the domestic wine

industry. However, its plan to build the brand and improve the financial returns through global

expansion, complemented by an improving economic outlook as well as favorable long-term

demographic trends in U.S. wine industry will definitely position the company for future success.

5. Bibliography

David, Fred R., (2010). “Strategic Management Concepts and Cases”, Thirteenth Edition, New

Jersey: Pearson.

Silverman, Murray., Gilinsky, Jr. Armand., Guy, Michael. & Baack, Sally., (2001). “Robert

Mondavi Corporation”, Case Study 12, in Thompson, A. A. & Strickland, A. J., “Strategic

Management Concept and Cases”, New York: McGraw-Hill Higher Education

Castaldi, Richard., Cholette, Susan., & Hussain, Mahmood., (2006). “A Country-level Analysis

Of Competitive Advantage In The Wine Industry”, DEIAgraWP-06-002, pg15-27



Roberto, Michael A., (2002). “Robert Mondavi and the Wine Industry”, HBS Case #9-302-102,

from http://hbr.org/product/robert-mondavi-and-the-wine-industry/an/302102-PDF-ENG?Ntt=

%25239-302-102

Wine Institutes, (2007). “California Wine: A Signature California Industry”, Press Room,

from http://www.wineinstitute.org/resources/pressroom/04032007

Wine Institutes, (2007). “U.S., Canada, Australia, Chile and New Zealand Sign Mutual

Acceptance Agreement on Oenological Practices”, Press Room, from

http://www.wineinstitute.org/search/node/U.S.%2C+Canada%2C+Australia

%2C+Chile+and+New+Zealand+Sign+Mutual+Acceptance+Agreement+on+Oenological+Practi

ces

6. Appendix

Exhibit 1

Porter’s Five Forces Model


Potential Developme

nt of Substitute Products

http://www.wineinstitute.org/search/node/U.S.%2C+Canada%2C+Australia%2C+Chile+and+New+Zealand+Sign+Mutual+Acceptance+Agreement+on+Oenological+Practices



http://www.wineinstitute.org/resources/pressroom/04032007

http://hbr.org/product/robert-mondavi-and-the-wine-industry/an/302102-PDF-ENG?Ntt=%25239-302-102

http://hbr.org/product/robert-mondavi-and-the-wine-industry/an/302102-PDF-ENG?Ntt=%25239-302-102


Source: Fred R. David, Strategic Management Concepts and Cases (Thirteenth Edition)

Exhibit 2

1999 U.S. Market Share – U.S. Wine & Spirits Wholesalers

Distributor Market Share

Southern Wines & Spirits 11.7%

Charmer/Sunbelt 6.6%

National Distributing Co. 5.7%

Young’s Market 4.5%


Rivalry

among

Competing

Firms

Bargaining Power of Customers

Potential Entry of

New Competito

rs

Bargaining Power of Suppliers


Glazer’s Wholesale 4.5%

TOTAL TOP 5 33%

TOTAL TOP 10 45%

Source: Professor Michael A. Roberto, HBS #9-302-102

Exhibit 3

United States Table Wine Market, 1994-1998 (Based on volume)

Company % Market Share 1994

% Market Share 1996

% Market Share 1998

E & J Gallo Winery 34.3% 27.7% 27.5%

Canandaigua Wine 17.7% 15.5% 14.8%

The Wine Group 9.7% 11.4% 14.6%

Beringer Wine Estates 3.2% 2.5% 4.0%

Robert Mondavi Winery 3.2% 3.6% 3.8%

Next Three Competitors 13.7% 11.9% 12.9%

Other 18.2% 27.4% 22.4%

Total 100% 100% 100%

Source: Murray Silverman, Jr. Armand Gilinsky, Michael Guy, Sally Baack,

“Robert Mondavi Corporation”, Case Study 12

Exhibit 4

Wine Production 1999 (000s of Hectoliters)

Production Imports Exports

France 62,900 5,580 15,700

Italy 58,400 749 18,600

Spain 36,800 1,600 10,600

US 26,000 4,210 2,850



Argentina 15,900 96 900

Germany 12,120 12,442 2,100

Australia 7,900 243 2,200

South Africa 5,900 154 1,300

Romania 5000 - -

Chile 4,300 178 2,300


Exhibit 5

Wine Consumption – Selected Nations

1999 Per Capita Total Consumption (000s of HLs)

(Liters per Year) 1994 1999 2005E

Italy 59.5 33,000 35,100 35,300

France 58.2 34,900 34,300 34,000



Spain 35.5 12,900 16,000 16,500

Germany 22.9 18,560 18,420 18,500

Belgium 26.2 2,200 3,000 3,200

UK 19.3 7,400 9,300 12,700

Australia 19.8 3,300 3,700 4,000

Argentina 36 14,200 12,800 13,800

Chile 18.5 2,500 2,100 2,000

US 10.5 17,400 20,800 22,300

Canada 8.6 2,200 2,700 3,000

Japan 2.8 1,390 2,910 3,500

China 0.3 3,460 5,300 6,000

South Africa 9.5 3,700 3,900 4,300

Rest of World 17,130 18,090 19,000

Total World 174,240 188,420 198,100


Exhibit 6

Robert Mondavi Corporation, Statements of Income (FY1997-1999)

Jun-99 Jun-98 Jun-97

Revenue $370.60 $325.20 $300.80

Cost of Goods Sold 205.40 175.70 166.00



Gross Profit 165.20 149.50 134.80

Gross Profit Margin 44.60% 46.00% 44.80%

SG&A Expense 104.60 90.00 79.80

Operating Income 60.60 59.50 55.00

Operating Margin 16.40% 18.30% 18.30%

Non-operating Income 3.60 0.40 1.90

Non-operating Expenses 14.20 12.30 10.60

Income Before Taxes 50.10 47.60 46.20

Income Taxes 19.30 18.60 18.00

Net Income After Taxes 30.80 29.00 28.20

Net Profit Margin 30.80 29.00 28.20

Diluted EPS from Total Net Income ($) 1.94 1.83 1.80

Dividends per Share ($) -- -- --

Source: Murray Silverman, Jr. Armand Gilinsky, Michael Guy, Sally Baack,

“Robert Mondavi Corporation”, Case Study 12


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