Robert Mondavi and the Wine Industry

Robert Mondavi and the Wine Industry

Arfeen Alam

Busi:4033

Yorkville University

2017-07-29

Robert Mondavi and the Wine Industry

Robert Mondavi began making wine in the Napa Valley in 1943 in the hopes of one day launching his own business. The purpose behind his dream was to rival the wines made in Europe. It focuses in premium wine that sells primarily in the United States and operates with six wineries in the base of California (Roberto, M., 2005). The economic structure of the wine industry has changed significantly over the years as the intensity of competition and the average profitability of the firm is affected through competition. Therefore, in this case, we will examine and incorporate the elements of a strategic audit, identify the change initiatives undertaken, evaluate the success or failure of the changes made and finally decide on the future steps of the company.

Mondavi

Reviewing the companies case study, we find that the Mondavi company operated over 9,700 acres at six different locations across California, as well as an extra 1600 acres in a joint venture in Chile and Italy (Roberto, M., 2005). However, the company went even further with a team of 360 independent growers who were all properly trained to ensure quality and constant supply. Furthermore, the company also ensured best practices by teaching new techniques to the growers. This enabled the company to produce 16 different wine brands all targeted to different aspects of the market (Roberto, M., 2005). By increasing their product lines, the product has been able to sell over 356,000 cases (Roberto, M., 2005). However, in the year of 2002, the structure of the global wine industry began to transform after the economy had shifted causing Mondavi wine sales to deteriorate (Roberto, M., 2005).

Change Initiatives Taken

         With the markets changing the wine industry reports that retail sales have ranged up to $180 billion (Roberto, M., 2005). However, this was only due to the three main categories of wine that vineyards produced. For example, there was table, fortified and champagne, all of which targeted different drinkers of the alcoholic market (Roberto, M., 2005). Furthermore, the table wine possessed the largest share of the market because it was divided into five segments such as jug or commodity, popular premium, super premium, ultra, and luxury (Roberto, M., 2005). Premium wine sales grew a considerably upwards to 10% while the jug wine sales in the U.S. declined an estimated 3% per year during the past decade (Roberto, M., 2005). The increased demand for higher quality premium wines was also increasing in non-European wine-producing nations as well as in other parts of the world (Roberto, M., 2005). New world wine producers invested highly in technology to create an competitive advantage since labour was cheap but having technology would make it even cheaper. This strategy enhanced the quality of wines but at the same time reduced operating costs. The shift to more premium and super-premium wines forced Mondavi’s hand to join international joint ventures in their pursuit to enhance their quality and brands but this largely due to competitors such as Diageo, Fosters and Allied Domecq entering the premium business (Roberto, M., 2005)..

Five Forces Model Analysis

Threat of New Entrants. The threat of new entrants in the wine industry low due to the fact that large capital is required. It would also be very hard to gain financial leverage from financial institutions because a new firm would require years of income statements and profitability. The capital would also be required in expensive wine making assets and labour. Since a large capital is required, this places a high barrier to entry since not everyone has the capital and a lot of experience and knowledge is required to produce the perfect tasting wine. In this case alone, 9,700 acres of land was required and as time passes, land appreciates in value which makes it harder to start a business. As we can see from the case, revenue is not generated instantly but over the course of several years because vineyards have their own life cycle. In this case we found that this firm has diversified its products into several lines. There is also a factor of consumer loyalty however this is a minor factor since majority of consumers will purchase new drinks if they have great taste and cheaper costs.

Threat of Competition. The threat of competition is very high because a lot of the old wineries are acquiring other branches. Through this absorption many firms are now growing rapidly and are gaining market share by buying out other companies. For example, in the case we find rivals consolidating with other wineries all of which are high-volume producers entering the premium wine market. More threatening news is that large alcoholic beverage firms such as Diageo, Foster’s, and Allied Domecq are also entering the premium wine sector. Other threats include Mondavi were: E&J Gallo, Southcorp, Trinchero Estates, and Kendall-Jackson. However, even though these all may seem as a threat, Mondavi will need to beat them at price points in order to hold onto the market. If any of these competitors are offer the same level of premium tasting drinks and offer at lower prices, Mondavi will have to respond quickly. However, there is a stigma for wine buyers that if a wine is low priced then it is assured to be of low quality.