Case Study_ Mondavi Wine.doc


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Case Study_ Mondavi Wine.doc

  1. 1. IntroductionRobert Mondavi had a dream, to put the United States on the map for premium wines. The quest tobuild his wine empire began in 1966. Mondavi did the impossible, by taking a mix of traditional andrisky approaches to ensure Robert Mondavi Corporation’s survival. Or was he just buying time? Thefocus of this study will be to analyze the operations of Robert Mondavi Corporation (RMC). Thequestion remains, “How far can a corporation stray from its vision before disaster strikes?”Wine Market SnapshotAlthough Americans ranked 13th in wine consumption per capita in 1999, sales grew dramaticallythroughout the 1990’si. Wine could be broken into the following four categories. Prices are listed on aper bottle basis.Jug Wine (Below $3)Popular Premium ($3-$7)Super Premium ($7 - $14)Ultra Premium ($14 and up)Wine was produced in every state, aside from Alaska, and sales dollars reached record highs.iiSource: The Gomberg-Fredrikson Report/Wine InstituteCompetitive Environment
  2. 2. Even with stable sales growth in the wine sales market, the industry was dominated by seven wineries.These seven wineries make up nearly 65% of total U.S. table wine sales, as highlighted below. Source: Adam’s Wine Book 1999Mondavi’s vision was, “To do whatever it took to make great wines and to put Napa Valley on themap, right alongside the great winemaking centers of Europe."iii Large beverage firms such as Nestleand PepsiCo also aggressively sought this position by acquiring wineries. The reason lies in the highprofit margin that the premium wine market offers. Shown on the following page, the percentage of aparticular genre of wine produced, and the amount of revenue it provides in the United States market.
  3. 3. Source: Source: 1999 estimates by Gomberg, Fredrikson, and AssociatesThe wine market in the United States is feeling intense pressure internationally. Chile and Australiawere aggressive in international sales. US firms, including Mondavi, felt that expanding globally wasthe next step in the evolution of the wine business. Mondavi embarked on three internationalpartnerships. Mondavi was now producing wine in Italy, Chile, and France. Mondavi boasted the firstAmerican ultra premium wine (Opus One)iv as a result of these endeavors.Competitive AdvantageConventional methods of appealing to consumers through advertising are futile in the premium winemarket. Premium wines work on a “pull” demand strategy. Success lies with the following:Wine competitions (local – international)  medal winners would receive press in various journals andpublications. This form of advertising helped provide brand awareness. Mondavi has won 100s ofawards over the years.Wine tourism  allowing the consumer to learn how the particular bottle is conceived from start tofinish. Robert Mondavi fully appreciated this element, and built Mondavi Winery as such. “... I wantedmy winery to have elegance and style, to be a place that would properly highlight our talents and thework going on inside. I also wanted it to be a place that would attract streams of visitors.”5 Star Restaurants  wine lists at restaurants are highly sought after and Mondavi traveled the USshowcasing his fine wines to chefs, waiters, and sommeliers.Wine Clubs/Specialty Stores  Mondavi offered consumers the Mondavi Spotlight Wine Club.vNew Market EntrantsRelatively inexpensive to open a small winery (-)Distribution system may be too costly for small firms to expand (+)
  4. 4. Small wineries can focus more on premium, profitable products (-)New World competitors must offset lack of demand in home countries by aggressively going international. (-)Premium U.S. DomesticWine Competitive PositionSupplierWeather (temperature/climate) can have an adverse effect on the grape crop (-)Phylloxera and other insects can destroy an entire crop. (-)Transportation costs of international grapes are on the rise (-)Many wineries grow grapes on site, giving owner complete control. (+)Buyer PowerPopular premium wines’ demand outweighs the supply (+)Supermarkets accounting for over ½ of wine sales carry countless competitors (-)Cost does not play strong role in decision making process (o)Competitive Rivalry7 firms account for clear majority of sales (-)Industry is still growing (+)Reputation can be easily damaged (-)SubstitutesLocal wineries premium wine (-)International wines including recent New World wines (-)Wine Coolers (-)Fruit flavoured juice/beverages (-)For a small winery this could be a very attractive industry. A focus on quality even with limiteddistribution channels can be very profitable. For a winery trying to compete on a similar scale asMondavi, it is very unattractive. Securing distribution and international expansion proves to be toocostly.Mondavi Corporation – A Closer Look & Shareholders’ ConcernStrengths Weaknesses
  5. 5. Pioneer of Premium U.S. WinesStrong Brand RecognitionOffered in 5 Star Restaurants Too focused on goals and objectives, ignoredDiverse product offerings surroundings (unable to quickly adapt)International partnerships including 1st Ultra Expanded too quicklyPremium US wine Ignoring core competenciesInnovative  from techniques of producing wine, to Phylloxera infestation resulted in loss of a crop, andworking with NASA on root growth analysis consumed a considerable amount of cash on hand.Countless awards and recognitions, “Man of the Leadership team unable to compromise and prioritizeYear” – Wines & Dines, to EU “Lifetime Only premium wine company publicly traded wineAchievement Award” in 1998 (at the time)  difficult for Analysts/investors toDistinctive Competencies  Differentiation assessproduct offering premium wine praised worldwideOpportunities ThreatsUS market still shows signs of future growth Continued growth in market share from New WorldInternational market still considerably untapped wine rivals (ex: Australia & Chile)Reposition focus back to core brands that contribute Market fears company turnaround is not likely 90% of revenue stock price continues to dropEvaluate selling off less expensive brand(s) Natural disasters or problems Growth in premium and ultra premium wine market of small wineries Other large competitors aggressive and expensive push to steal Mondavi market shareStockholders have every reason to be concerned. The stock price has been at best inconsistent as shownon the following page.Source: Robert Mondavi Corporation (RMC) SEC FilingsDue to expansions it is clear that Mondavi is not a conservative firm and would have difficultyaccessing financing. (Note: Most firms fall in between 33-50%)
  6. 6. Source: Robert Mondavi Corporation (RMC) SEC FilingsPerformance by Mondavi should be considered failing in stockholders’ eyes. Generally companieshave a 15%-25% return on the shareholders’ investment. Mondavi is clearly heading in the wrongdirection. The chart on the following page shows the three year trend.Source: Robert Mondavi Corporation (RMC) SEC FilingsThe Multi Personalities of Mondavi – Clearly Different Roads to Travel
  7. 7. RMC (1966) RMC (2004)viVision Vision"To do whatever it took to make great wines “To enrich life through wine” Divided RMCand to put Napa Valley on the map, right wines into two categories. Luxury > $15 andalongside the great winemaking centers of Lifestyle > $15.Europe."Strategy StrategyPioneer the premium to ultra premium Strong push on lifestyle brands. Divest inmarket in the United States. Focusing on a luxury brands, and all logistics associatedfew key brands. Market the most expensive/ with such. Use licensing to take advantage ofhighest profit margin fine wines. Aggressive brand equity. After divesting, freed up capitalsales approach, and strong Old World winery can be used to consider new products.influences.Many can speculate on the future of Mondavi if the 2004 vision and strategy would have beenimplemented, but instead Constellation Brands acquired RMC in December of 2004. Listed belowdetails the events in a comparative analysis on what could have been if the 2004 plan went ahead. Constellation Brands acquire RMC (2004) New Strategic Plan (2004)Background BackgroundConstellation headquartered in NY is the largest Family struggles have caused several recent boardproducer/marketer of over 200 beverage alcohol member and CEO changes.brands. Board deemed “major strategic review” was neededGross sales are $5 billionSells products in over 60 countries.Strategy StrategySold the Arrowood, Grand Archer, and Byron wine Refocus strategy to sell/market lower price winesassets for $40 million. Byron is considered a Super Sell off assets/brands including Opus OnePremium Wine. Eliminate unnecessary staffSelling 90 million cases annually as the world’s End expensive contracts with grape distributorsleading wine producer/marketer. Relocate headquarters to DelawareConstellation not only acquired additional product Strong push towards new brandslines, but the quality brand image of RMC. Eliminate different stock class structures (no A & B)Shareholder Response Shareholder ResponseClass A shareholders received: $56.50 a share & It not would have been favorable. The particularClass B received: $65.82. With the stock price of industry Mondavi is interested in actually reported$40.35 as the high in the 4th quarter of 2004, negative growth the year prior. Mondavi’s coreshareholders should consider this acquisition as an competences are a strong reputation of providingacceptable business solution. premium wines. Investors had previously questioned Mondavi since its first public offering, and now selling off profitable product lines would be considered a poor choice. This is reflected by Mondavi having to issue another press release
  8. 8. ensuring stockholders the value of the dissolution of many assets.ConclusionRobert Mondavi believed he saw something in those vineyards of California that could change theWorld, and he was correct. Unfortunately for Mondavi Corporation rapid expansion left little room forcostly surprises. In 2004, RMC by strategic standards was a complete stranger to the ideas andprinciples of yester years. RMC had forgotten what their original goals and intentions were, and mostimportantly they had forgotten what had made RMC a successful firm to begin with. RMC should havefocused on producing the highest quality of wine, and demanding the highest price the market will payfor such. Slow international expansion could occur after RMC proved to shareholders that it couldeliminate a large portion of debt, as well as increase current assets (i.e. cash) to help finance futureendeavors.i High Spirits. California Wine and Food Magazine 2000ii Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001iii Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001iv Wine Business Monthly: Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001vi Bank of American Securities 34th Annual Conference. 9/2004 1