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Mondavi Case Study


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  • 1. Robert Mondavi and The Wine Industry Case Study By Elizabeth Kulin Mondavi is a winery worth $600 million located in Napa valley California. It hasstake in 16 different brands through various types of ownership and partnershipbusinesses. Its focus is in premium wine, and although the company has partook indifferent types of acquisitions and mergers, it is now (in 2002 when this case was written)has decided to grow organically, rather than through acquisitions, and position as a USluxury premium winery. This strategy is hoped to counteract the negative decline in salesand growth in competition that Mondavi experienced at end of Q2 FY2002 brought on byeconomic decline and increasing competition. At this time, Mondavi was ranked #8 in the US and #13 globally in market sharepercentage. They have strong presence in the premium wine category. The case statesthat premium wine sales have grown 8-10%. Additionally, as stated on page 2 of theCase “Robert Mondavi and The Wine Industry” by Michael A. Roberto, “since 1994…demand increased for premium wines, while consumption of inexpensive, lower-qualitywine had failed. Industry analysts expected the demand for premium wines to grow at8010% per annum for the foreseeable future.” This means that not only is this categoryincreasing in demand among consumers, but also that consumers are and expected tocontinue to be, willing to pay higher prices for wines of better quality. However, thereare industry and market threats that must be considered, such as the economic decline ofthe US and larger competition growth in the wine industry. Key issues for Mondavi at this point in time (end of Q2 FY2002) is competitionof rival firms of premium wine, large-volume producers entering the premium winecategory, and global alcoholic beverage companies who were entering the categorythrough acquisitions. These multiple types of beverage companies are entering thepremium wine category because the market opportunity and consumer behavior towardspurchases of higher quality wines. For Mondavi, this trend could be the answer to theirsales decline problems. Exhibit 2 shows that Mondavi’s local Napa brands decreased insales volumes during 2002 first 2 quarters, as well as in net revenue. However, its imports(which are priced higher) grew 10 case sales and 7.8% in net revenue. At the same time, producing premium wine independently includes multiplecosts; such as land purchasing, development, crushing, barrels, and bottling. These costsare important factors to consider when deciding how to grow the Mondavi brandportfolio. In detail, the cost of growing grapes includes land purchasing of $100,000 in
  • 2. Napa per acre. Mondavi owned 9,7000 acres of land in California. Additional costs areland development into vineyards, which were about $33,000, and $75 per day per worker.Post land development costs include $15,000 tanks (for 25,000 liters of wine, for 20years)~$1.00 for bottling, and 2-3% of sales for marketing. Exhibit 3 shows 2001 Mondavi sales up 18% from 2000, but as exhibit 2 shows,by Q2 FY2002 the company is already 9.8% negative in 2002 from 2001. Therefore,2002 may be a loss in sales for the company. However, exhibit 1 shows that COGS are15,556 less in Q2 FY2002 than by Q2 FY 2001 (or 11.9%). If the company can keepcosts down, they may be able to offset the negative effect from the declined salesrevenue. At the same time, if Mondavi can increase revenue, profit would also increase.Average super-premium wine retail price is $12.00. Winery makes $1.40 per bottle ingross profit EBIT (post EBIT, net profit = $.47) or 23% gross profit margin [1-(4.40-6.00)*100]. By decreasing cost and increasing revenue, Mondavi could increaseprofits for 2002.Mondavi has two choices: Focus on expanding the sales of wine from grapes gown intheir vineyards, OR, Focus on selling wine from new acquirements of grapes.Cost and Profit analysis:Land purchasing cost: 620 liters of juice per ton of grapes and ~5 tons of grapes peracre is produced (620*5), therefore, each acre can produce ~3,100 liters of juice, or3,100,000mls. 1 bottle has 750mls, which means that each acre produces(3,100,000/750) 4,133 bottles of wine, or (4,133/12) 344 cases. At $1.40 per bottle ingross profit of premium wine, that equals $5,786 per acre, per harvest. Therefore,Mondavi would have to harvest each acre at least 18 times to pay off just the cost ofpurchasing the land (not including all additional production costs such as development,crushing, barrels, bottling, and sales force per harvest).Buy grapes: Cost = $500 per ton of grapes (average California price for grapes p. 21));Produces 620,000 liters of juice, or 827 bottles; at $1.40 gross profit per bottle (assuminggross profit quoted in exhibit 9 is omitted of land purchasing cost), that equals $1158 inrevenue per ton or $658 in gross profit per ton (at premium gross profit average). If Mondavi were to acquire grapes, they may be able to produce wine at lowercosts. Additionally, if they acquired imported grapes (if the cost justified the potentialrevenue and profit), they could leverage from the import sales growth they have beenexperiencing. Although the initial cost of international joint ventures and buying grapeswould need to be analyzed and contrasted with the cost and revenue potential differencefrom internal growing, Mondavi has seen a consumer interest in this wine category andtherefore could jump on this market opportunity. Furthermore average pricing per bottleof import wine is set almost 80% higher than premium wines average prices (exhibit 13)and additionally, by buying or partnering with international vineyards, Mondavi couldavoid land purchases, development, and some production costs (or only be responsiblefor 50% if within a JV) but be rewarded with higher gross profits and margins per bottlesold. Finally, although industry forecasts that premium wine will grow among theconsumer interest, so is competition and market sharing. There is an obvious markettrend among Mondavi wine consumers for their import brands, which are higher priced,and potentially (depending on the strategic situation of buying grape sources) lower costfor Mondavi to produce.
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