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Mid Term Case Analysis
- 1. 23128582 MGMT 473 Mid Term 15October, 2015 Mid Term Case Analysis: Robert Mondavi and the Wine Industry Overview of the Industry: *The information below is used to better understand the Industry as a whole and will be used to provide a better analysis for Robert Mondavi and for better recommendations. The structure is similar to the brainstorming used in class for analyzing cases. New World: Large publicly traded firms Focus on higher quality; investment in technology; cheaper operating costs Purchase their wine Strong grape markets Branding focused on grapes and equity Mergers between competitors Labor can be expensive On-premise important in US (55% of sales) Small number of distributors Costco largest retail seller of wine Old World: Small family owned vineyards; Strong Government role; provided subsidies; strict regulations 75% of production; declining Cheaper wines; make it for themselves; handpicked Small consumer branding Off-premise sales more influential Leading brewers are the biggest disturbers The wine industry is gaining more attention for higher-quality, premium wines in non-European countries (North American buyers pay $7.20 per bottle), while western Europe continues to consume cheaper table wines (retail price of $4.80 per bottle). Europe’s wine production is declining and fragmented, but they still have a strong 75% of production with four top firms. However, with the shift to higher quality the “New World” wineries are investing in their vineyards to take advantage of this growing segment of the market. The cost of making wine mainly comes from the investing in capital to grow and procure the grapes. The higher quality land can be extremely expensive per acre and take years to gain product. However the investment can last for 50 years. When it comes to marketing, jug wines tend to use TV and radio while higher quality ignores marketing for the most part. Both the “Old World” and the “New World” struggle with distribution due to the high power they possess. While Europe focuses on “off-premise” selling to retail accounts, the US focuses on “on-premise” selling to restaurants, hotels and pubs. Table: Most popular in the Market Jug/Commodity: Cheapest but declining 3% per year 38% of Case Sales 13% of Retail Sales Producers acquired premium wineries Higher yields; 800 liters per ton Promoted in TV and radio Popular Premium: Sales growing 8-10% per annum Grapes app. Cost $500 per ton 6-12 months fermentation Channel promotion; on premise marketing Super Premium: 500-600 liters per ton Only 2-3% on marketing Ultra: Grapes app. Cost $3000 per ton; $100,000 per acre 18 months fermentation Luxury: $150,000-250,000 per acre
- 2. 23128582 Analysis of RobertMondavi’s Company: Background: Robert Mondavi’s ultimate goal was to create the highest quality wine in the industry. In order to do this, his main focus and strategies were revolved around differentiation. For marketing, he started unique ideas like “The Great Chefs Program” that established a reputation of drinking wine as a culture instead of simply a product. He pushed the idea that fine wine is associated with “fine” people, making the customer feel high in status. He also used innovation in technology with first mover ideas like the capsule-free, flange-top bottle; which others followed immediately. Shaping the market was equally as important to gain differentiation through relationships with competitors because he believed he could establish a higher quality of wine globally. By focusing on the dominant market in Europe, he created joint-ventures with French companies; which was one of four countries that dominated the wine industry. He continued to create relationships with other firms in the 1990’s to enhance in high volume markets, like Australia with Rosemont of Australia. Through the relationships and 50/50 joint ventures he was able to expand his high quality wine in both the “New World” and the “Old World”. With these relationships he established economies of scope because he provided the opportunity to grow and access different production styles, markets, and segments that were profitable, easier and cheaper than the competitors. The advantage of high quality wine is that it is a growing segment. These relationships provided an essential role in being able to use their resources and their internal benefits to gain economies of scope, and thus find more ways to gain higher quality. Winemaking: Robert Mondavi used more expensive techniques to develop his wine, which separated his quality from others. He used environmentally friendly farming, which was extremely important
- 3. 23128582 when it cameto European markets that had intense regulations; it portrayed that he cared about the process, unlike the big firms who were just trying to produce at the lowest cost; demonstrated by the competitor Kendall-Jackson. He owned acres in over 5 countries and had to be able to follow different regulations because 25% of his grapes were internally developed on the land he owned. For the 75% of external grapes, they were grown by independent growers that he created strong relationships and designated long term contracts. His economies of scale may seem small, but the majorities of large firms have a much smaller percentage of internal grapes and used solely independent growers. This provided more control over the processes and allowed him to invest and develop his own “state-of-the-art gravity flow system”. By investing heavily in R and D and technologies, he not only eliminated cost, but he created higher quality wine. He was a first mover in his industry and was not afraid to establish new methodologies in order to obtain his high quality goal. Products: With his 16 different brands of wine, Robert Mondavi was trying to gain advantage in all segments of premium/higher quality wine and develop differentiation to maintain economies of scale. He differentiated in the wine industry in the sense of product extensions and new product lines by investing globally with luxury/ultra wines, and domestically with different competitive segments. His third largest brand, Robert Mondavi Winery, focused on off-premise retail stores and limited release to establish dominance because his reputation coincided with quality. His hopes were that making the sales limited access it would create more demand. However this was later realized as a setback, because lack of marketing gave competitors like Gallo the chance to put their name out in the market more. When competition rose for cheaper premium wine, he invested into a new brand, but made the mistake that it was a declining segment. The economic
- 4. 23128582 logic of enteringinto a declining segment was smart only because he wanted to have his name in as many segments as possible, so if a customer decided to buy higher quality wine, they would recognize the brand name. Also, it did not cost him as much as his higher quality wine because production was not segmented and he did not need to open a new winery; using his economies of scope. The main competitive advantage of all his brands, in all the segments, ultimately had to do with putting his name on the bottle. His differentiation of quality was strong enough that even with his Woodbridge brand, he made sure to put the Mondavi label on it. Also with the Woodridge brand, which was in the growing segment of popular premium, he invested in methods of production that others would not, to maintain a competitive advantage. With both his name and his style of production, he used the slogan “quality liquid and quality image”, relating back to selling not only a product, but a culture. With his economies of scale he was able to enter into almost every segment. Distribution: As for distribution, Robert Mondavi gave himself a lot of power because the top 15 distributors out of 100 distributors accounted for 2/3 of their revenue. By concentrating his product into such few distributors, it provided them with buying power to set prices and thus made marketing more intensive. However, Mondavi made a mistake when dealing with marketing to the distributors by having all 200 salespeople able to market every brand. Instead, he should have split them into teams based on the revenue and growth of the segment of each brand. For example, he could have had 80 of the sales people only focused on the premium wines that generate the most revenue, while maybe 40 focused on luxury and ultra wines, due to the separation of growth between the segments. The overload of information can take away from the sale because there are different channels the brands are sold through. The premium wines need to focus on
- 5. 23128582 distributors that dealwith supermarkets and mass merchandise, while luxury focuses on off- premise sales. However, besides marketing to the distributors, Robert Mondavi saw success exporting wine by exporting directly to an importer or operator who then did the dirty work of getting it to the wholesalers and retailers. This provided more ease and less cost for Mondavi, providing a competitive edge. Marketing: Robert Mondavi faced serious issues with marketing efforts and needed to badly expand his customer base, as 12% of the consumers drank 88% of the wine purchased. This was due to their negligence and lack of advertising through more modern means. In the 1990’s they assumed they were perceived as superior and limited, but this only limited their customer market. Gallo immediately spent money on advertising and became extremely popular in their jug wine segment. However, it did create an issue when they wanted to expand into premium wine because as Mondavi was linked to quality, Gallo was linked to low end wine. Robert Mondavi failed with the California Adventure Theme Park because he figured people wanted to learn about wine but he chose a bad market. They needed to focus their efforts on branding the name with the original idea that drinking fine wine is a culture and invest in social media, as this is the modern mecca of advertising. While people are browsing on Facebook, they could buy space for an add that shows a group of well-dressed adults having a fun time at a house party, all with glasses in their hand of some Mondavi Woodbridge. They could also create an app that had information about each business unit discussing the wine and why it is so high in quality. A game incorporated in the app could also encourage consumption. If that way is too expensive, they need to create a website with specific deals and offers; especially with referrals to friends,
- 6. 23128582 as word ofmouth is essential in the wine industry. It could also be useful for letting customers know where and when tours/wine tasting events will occur. Competitors: With the three main types of competitors, the focused competitor Kendall-Jackson made the choice of acquiring land and wineries in countries, instead of partnering up. Mondavi had a better technique because it seems disrespectful to simply assume they could enter a new market and be greeted with open arms. The firms actually from the countries understood how to communicate and sell more efficiently because they understood their culture. Also the company decided to stay independent, which could have been beneficial because they could have made decisions without asking for the boards’ approval. However, the two billion dollars could have helped them establish economies of scale and further grown domestically; especially if they were doing it without relationships like Mondavi. The large volume producer, Gallo, had a similar strategy to Robert Mondavi because they focused on their relationships with suppliers and independent contractors to create innovative methods of production to differentiate them, but for low end wines. Gallo also had an advantage in cost due to their economies of scale and used vertical integration, allowing them to do the distribution and thus use their sales force for other means. Beer and distilled spirits producers used diversification to enter the industry. Through their reputations and relationships with current customers it was less costly to merge their new products. However, diversification can take away from their other products and it would be smarter to keep them separated, but use a label like Mondavi did when he entered into a different wine segment. Recommendations:
- 7. 23128582 The restructuring toseparate into distinct business units was a good idea because then each unit can have focus on individual marketing, sales pitches, and customer bases, while still maintaining the overarching quality name brand with the Mondavi label. The problem before was the economies of scale were almost too big and his brand began to look like a generic brand. With this reorganization they will be able to focus clearly on the individual brands. Perhaps when they create a website or app, each business unit can contain its own tab and then inform how each segment creates and distinguishes its production process. Mondavi has always been innovational with how he produced the wine and did not gain enough credit for his methods compared to his competitors. Going back into how he needed to market to distributors as mentioned in the “distribution” section of the analysis, the firm can now clearly have separate teams who focus on specific distributors to gain sales and find the appropriate channels, so they can gain supply power. The new approach to simply focus on the brands and stop with the acquisitions and mergers is frowned upon. Establishing each brand more is important, but Robert Mondavi gained economies of scale through his 50/50 joint-ventures with large global firms. It is understood that capital is more expensive, but using their economies of scope will help to further expand in the successful countries. By staying back and letting the smaller firms grow and no longer will shape the market, the smaller firms be able to develop their own stake in the market. Based on the competitors’ strategies, the wine industry is a game of growth and whoever can put their name out successfully, determines their market share.