Mondavi

Assessing Industry Threats and Opportunities

Case: Competition in the Global Wine Industry (CB)

Discussion Agenda: You have been selected as a consultant by a U.S. wine industry trade association to recommend internationalization strategies for U.S. wine producers. Assess the attractiveness of the global wine industry and recommend specific country markets that would be suitable for U.S. wine producers to target for entry. You should then suggest appropriate strategies that U.S. wine producers should consider when entering new markets. You should be able to use the concepts and tools of analysis presented in Chapters 2 and 6 to support your analysis and recommendations.

Case Preparation Questions:

1. What are the dominant business and economic characteristics of the global wine industry? What is the industry like?

 Global wine market decreased from 1997 to 1998

 US wineries were switching from family management to professional management

2. What is competition like in the global wine industry? What competitive forces seem to have the greatest effect on industry attractiveness? Justify your conclusions.

 Global wine market was becoming more significant and competitive - about 25% of wine purchased was produced in a different country - up from 17%

o Wine used to be locally produced and consumed, but now that is changing

o US wine industry only exported 13% of their production while Old World wineries exported about 25%, Argentina at 40%, Chile at 80%

 Old wine producing countries had begun to put more emphasis on exporting

 US was the 4th largest producer of wine, but only contributed about 4% to the wine export market

o US wineries didn't emphasize exporting - they would only export when they had excess supply they couldn't get rid of domestically.

o Because of the US market maturing, increased competition, smaller number of big players, US started to work on exporting

3. How is the global wine industry changing? What are the underlying drivers of change and how might those driving forces change the industry?

* Australia -

o Shifts in diet increased demand

o Growing awareness of health benefits of wine increased demand

o Increased participation in recreational activities and entertainment increased demand

o few suppliers dominated the market

o Minimal demand for imports (5%)

* Argentina

o minimal demand for imports (.4%) - difficult for imports to compete against low priced domestic wines - customers were price conscious, not quality conscious

* France and Italy - high production and consumption, but consumption levels were flat or declining

o Italians only bought 2.8% imports

o France bought 13.4% imports

* UK, Canada, Japan, and most of Asia

o Majority of wines are imports

o UK and Canada consumption levels rising slightly

o Canada started to put constraints on competition in the wine industry

o Japanese didn't drink too much wine, but they were very quality conscious and willing to spend $$$

o Asian countries didn't drink that much, but they had a very big untapped population

* US

o Very big market that was growing at a healthy 8.5% since 1994

o There were about 1,600 small, family owned, low volume wineries that accounted for about 20% of the market share in the US

o The other 80% of the market was dominated by about a dozen large volume wineries

o Wine was perceived as an elite drink until the second half of the 20th century - not embraced by most of the public

o Demographics of US wine drinkers

 Women slightly more likely to drink

 Majority of drinkers are baby boomers

 Professionals or managers who were college grads and make > $60K

 15.7 million core drinkers made up about 88 of the US wine market

o Until the 1970s, wine in the US was viewed as low quality, jug type wine. There were a few high quality produces, but they had a hard time competing with the old world competitors

 This changed in 1976 when several wines from Napa Valley beat out several well-established European wineries for the top honors - from then on, they were competitions for the old world wineries

o US had one of the most open markets for imported wines -few restrictions pace on imports and imports free to capture whatever market share they could

 Imports didn't compete that well because the large wineries in California and their ideal growing conditions

 California wasn't only competing against imports from oversees, they were also starting to compete with wineries from NY and Washington

o Prior to 2000, there were a lot of mergers, acquisitions among US wineries. However, this changed when the foreign wineries started looking to acquire the US wineries - they saw this as the fastest way to get into the market and exploit the already established distribution channels, existing suppliers, and market knowledge

o Customer preferences for the colors, as well as the preference from white to red changed

o Value of imports were rising - which meant that the foreign wineries were targeting the premium wine segment

o The amount of wine being imported was increasing as a whole number, but so was the export market - the market for US was just growing - however