Negotiation

Chulalongkorn University (Thailand)

Brown-Forman Wine Estates (WE) Case Analysis

Proudly Presented by

Team Members

Vipada Ungvichian

Anek Tipayavat

Prinya Dharmarak

Grace Wongseelashote

Advisor: Prof. Melanie Billings-Yun

Executive Summary

Brown-Forman Wine Estates (WE) is a new group in the Brown-Forman Corporation (BFC). It specializes in the sale of high quality Californian and Australian wines. Currently, it is facing slowing growth in the US premium markets. However, there are opportunities to expand abroad as the demand for premium wines are increasing in the global market.

Three proposed alternatives are very thorough. Putting more emphasis on the U.S. premium segments is can be very profitable, as it relies upon WE's core competency. Conversely, WE could try to increase sales of lower priced brands simultaneously with attempting to reduce costs to better the entire company performance. Lastly, WE could establish an international foothold, which would reduce cost per unit through economies of scale, while widening WE's market base.

WE's crucial strength is its competency and high degree of experience in premium wines. Hence, WE should deploy such advantage to the maximum level by expanding its U.S. premium wine market through focusing on on-premises sales, as this channel yields the highest profit margin. Another attractively profitable market to pursue is East Asia, where demand for premium wines is expected to grow enormously.

The first part of the implementation would be to transfer the lower imaged brand, Bel Arbor, to BFC. This is to remove the risk of losing prestige of the high end products. Secondly, Bonterra, a premium brand, will be upgraded to super-premium status. This will be accompanies by a change in marketing for this brand to further penetrate the on-premise market. For international growth, we would develop and East Asian Sales Unit. The initial wines targeted for this expansion will be the super and ultra premium Jekel and Geoff Merrill Res.

Situation

Brown-Forman Wine Estates (WE) is a new group in the Brown-Forman Corporation (BFC), specializing in high quality Californian and Australian wines. Currently, it is facing slowing growth in the US market. This is especially clear in the premium level where the growth rate has slowed from double digits to 6%. Desiring to maintain a high ROA, the company must come up with a plan to compete in this prestigious market.

A significant challenge is increased competition for share of the premium wine market. Consolidation in the industry allows for more powerful competitors, while the growing number of smaller vineyards and globalization will stimulate fiercer competition. This is offset by a growing market for premium wine all over the world.

Steve Dorfman, Managing Director of WE, sees two major challenges in these trends. In this prestige market, image is key. However, the newly formed group consists of brands of various images, which could pull down the prestige of the top brands. Secondly, with the slow growth in the US market, the company is looking towards international expansion as an additional source of revenue.

Objective: to attain BFC's ROA target by enhancing WE's portfolio image as a premium wine and expanding its market.

Alternatives

More emphasis on U.S. premium wine segment: WE would focus mainly on the domestic market, placing more emphasis on higher-margin "on-premise" sales. This adheres to current strengths while boosting WE's luxury image. However, WE has to compete with European imports, especially from France, Italy and Spain. This is a major disadvantage as US is the second largest importer of wine. The high image from the European brands is a threat.

Boost marketing of lower priced brands and implementing cost reduction among remaining brands: This plan would shift WE's focus toward mass marketing in order to increase overall sales volume and competitiveness. In particular, WE would seek to strengthen the market penetration of its major bulk brand, Bel Arbor, which currently accounts for 48% of its U.S. brand profit and boasts a sizable international market. Moreover, it has the highest ROI among U.S. brands, with 12.5% in the U.S. and 9.1% internationally, including goodwill.

The downside is that this requires both high investment, because it would put WE in direct competition with giants such as E&J Gallo, and high risk, as it fails to take advantage of the world trend toward premium wines. Moreover, it would draw marketing focus away from the premium segment, which contains WE's core products. Finally, as with Gallo, it could lead to the reduction of the perceived image of the premium level brands through association with jug wines.

Export to East-Asian countries: WE could increase its interest in high-potential markets in Asia. These countries are very attractive, since there is a shift in consumer preference toward consuming wines. By taking this preemptive move, WE will be able to build brand awareness while reducing cost per unit through economies of scale. Building a strong foothold in these countries would also enable its future expansion into other new countries.

The disadvantages are high cost and time required to conduct market research. WE will also expose itself to many external risks, e.g., cultural and political. Tariff and non-tariff rates are also another critical factors that WE must take into consideration.

Figure 1 shows our evaluation of each alternative based on six critical criteria: financial returns, competitiveness, long-term growth, degree of success, brand recognition, and core competency.

Solution

WE must choose the alternative(s) that will best allow it to achieve both a high degree of prestige brand recognition and expansion of its market base. To achieve brand recognition in the U.S. high-end market, WE has to focus more on one of its current sales strategies--on-premises sales of its super-premium and ultra-premium brands. Expanding in this high-end segment will raise both revenues and profit margins. Such expansion is sustainable due to WE's long-term experience, strong foothold in U.S. market, and