Business Policy Assignment-Us Wine Industry

Business Policy Assignment

US Wine Industry

Five force Analysis of the US wine industry

1. Competitive Rivalry (High)

Overall, the global wine industry was highly fragmented with no one company controlling more than 1% of global retail sales in the same year.

The number of companies competing in this market was growing rapidly. From 1975 to 2003 the number of US wineries, for example, increased from 600 to over 2,500, or more than 400%.

With little growth in demand andan oversupply of grapes, there is downward pressure on price and margins.

The dominance of a few key players in the low-price volumemarket gives them an ability to leverage distributors to gain shelf space and put millions of dollars into marketing budgets.

1. Bargaining Power of Buyers(High)

The wine sector consolidated at the lower end of the market, across the United States.The number of distributors had fallen from nearly 5,000 in the 1950s to approximately 250 by 2000.Only 50 to 100 of the largest wineries – out of more than 2,500 producers – had access to widespread national distribution in all 50 states.        At the same time there was also enormous retail consolidation, with the top ten supermarkets controlling 55% of the US market in 2000.Thousands of local, national, and international wine brands were vying for space on the store shelves of a handful of powerful supermarkets whodemanded popular wines at very low price

1. Bargaining Power of  Suppliers(Low)

          Wine producers have integrated backward to have their own vineyards.; so, as such there are no suppliers in the normal sense. Labour costs representing half of per-acre costs, inexpensive leasing options for specialized machinery widely available, and relatively limited real estate investment help weaken this force.

1. Threat of Substitutes(High)

Beers and Spirits are the main substitutes. Only 10% of Americans drank wine regularly in 2001 and constituted almost 90% of wine purchases.Of the remaining 90% who were not regular wine consumers, roughly 44% didnot drink and the remaining 46% preferred beer or spirit.

1. Threat of New Entrants(High)

There are challenges like supply of wine being more than the demand, consolidation of distributors and retailers, an already existing large number of wine producers, decreasing consumption of wine, etc. Despite these challenges, the prestige, glamour, abundance of low-priced grapes, and low barriers to entry invite more and more wineries into the US market.

Thus, it is very likely to not be a profitableindustry, given the magnitude of four forces being  high. Looking at the industry attractiveness, a company without a differentiating strategy should not enter the industry.

Cost Leader Strategy:

As the bargaining power of distributors and retailers rose exponentially against the plethora of wine makers, a juggernaut emerged. While the overwhelming majority of wine makers focused on low volume/high priced wines to gain maximum return on their investment, the distribution system increasingly focused on high volume/low priced products to maximise their economies of scale. Despite certain challenges, abundance of low-priced grapes and low barriers to entry invited more and more wineries into the US market. With such a high number of wineries trying to penetrate the US market, including the foreign companies, trying to have a cost leader strategy of cutting down costs and selling wine on cheap rates wouldn’t benefit the company entering substantially owing to the high competition. Also with the major players spending around 40% of their expenditures on marketing and distribution costs, capital expenditures for small wineries dropped further down. Thus, a cost leader approach would hardly matter in the wine industry.