Since the late 1960’s, California wine-maker Robert Mondavi has been perceived by its stakeholders as one of the world’s most innovative and high-quality producers of fine wine. It is therefore not surprising that the company has endured great financial success; in fact, it has secured an impressive annual growth in earnings per share of ~28% over the last 8 years.
Recently however, there have been many external forces that may serve to threaten the long-term profitability of the firm: sales have been decreasing over the last 6 months due to a staggering economy, Australian imports are on the rise, shrinking the size of the pie for domestic firms, and there has been an industry wide trend to consolidate; existing firms are merging and producers of beer and spirits, who already have strong brand recognition, are starting to produce their own wine labels.
The question now becomes, what can Robert Mondavi do to ensure that it sustains its leading market position? To help answer this question we must have a good understanding of how the firm operates within its competitive environment. First off, we must define the industry and market in which Mondavi operates. The range of Mondavi brands span from lower end premium, such as Woodbridge, to its luxury premium brands like the esteemed Opus One. Although each product line has its own marketing strategy, the target market encompasses all premium table wine consumers.
By catering exclusively to this particular market segment, Mondavi has chosen not to compete directly with the makers of commodity/ jug, dessert or sparkling wine. According to Porter, a sustainable strategic position requires trade-offs, choosing what not to produce. As resources and capital are somewhat limited, Mondavi has chosen to focus solely on the production of quality table wine. As quoted by Robert Mondavi himself “The higher the quality of wine, the higher the image and the more the consumer is willing to pay for it”. Offering lower quality types such as the jug varieties may dilute the brand.
Furthermore, with the help of its international partnerships, Mondavi wines are distributed and well recognized worldwide. Using the above analysis, it has therefore been determined that Mondavi competes in the market for premium table wine, which is embedded within the broader global wine industry. The global wine industry is made up of many competing firms, all of which offer a somewhat differentiated product due to variations in blend, region and quality. Although competition is high among incumbent firms, there are also many significant barriers to entry, deterring new firms from entering the market.
The competitive structure of the industry may therefore fall somewhere between perfect competition and monopolistic competition, where above normal profits may be achieved. According to Michael Porter, there are five sources of competitive pressure which not only determine the degree of competition but also the relative attractiveness of the industry to potential entrants: Threat of entry, the bargaining power of buyers and suppliers, competition from substitutes and rivalry between established competitors.
Wine making is highly capital intensive, requiring very large initial capital outlays for machinery and land in addition to working capital. Many potential entrants may be reluctant to enter because they do not have the financial means to acquire the necessary assets. Also, the assets required are specialized in the respect that if the venture fails, the assets may not be easily sold or converted for other uses, like the French oak barrels that cost between $500 and $600 per unit. In industries that are capital intensive, efficiency requires a large-scale operation, spreading fixed costs over a larger unit base- known as economies of scale.
Smaller firms such as the family run operations in Europe may not be able to realize these same cost efficiencies. Furthermore, grapes represent 50 to 70% of a winemakers COGS, thus the competition for sourcing high quality grape growers is quite high. Just as Mondavi does for 75% of its purchases, most premium wine makers enter into long-term contracts with growers to not only ensure that their demand is met but also to make sure that they receive grapes that are consistent in quality.
Due to the fact that consumers have a plethora of premium wines (substitutes) to choose from and there is no penalty for switching between brands consumer buying power is fairly high, making consumers sensitive to price increases. As previously mentioned, the competition for sourcing quality grape growers is high making switching costs high as well. In order to circumvent the dependency on outside growers, Mondavi is starting to increase its internal sourcing capabilities. The premium wine segment is quite concentrated with high barriers to entry making mergers and acquisitions a strong and prevalent growth strategy.
With industry analysts forecasting the demand for premium wine to grow at 8% to 10% per year, many former non-rivals are now becoming a threat. Jug wine producers are entering the premium market and beer and spirit producers are crossing over into the wine industry, leveraging their pre-established distribution networks and existing brand recognition. It is important to note however that although market growth is expected to increase for the foreseeable future, it would be naive to assume that this growth is going to last forever.
By using the information extracted from the Porter framework, we can now identify some of the industry’s main sources of competitive advantage, also known as its key success factors: brand image, distributer relationships, access to capital and collaboration. How a single firms acts upon each of these factors may ultimately determine its sustainability in the industry. In a market with many competitors, a differentiated product is not enough to secure demand as tastes may vary based on personal preference. However, a strong brand image will foster brand loyalty and hopefully induce repeat purchases.
Mondavi has done a good job so far at emphasizing the quality of its wines and has only enhanced its image by forging a strong association between the brand and the world of art and culture. Five major distributors control the domestic market; it is therefore essential for companies to forge strong working relationships with distributers as shelf space is limited. Mondavi’s relationship with its largest wholesaler, Southern Wines, is extremely important as they account for 29% of Mondavi’s sales and command 11. 7% of the nations total market share.
As previously mentioned, wine making is a capital-intensive business. The larger operations, like Mondavi, are more likely to benefit from economies of scale. As the industry consolidates and mergers take place, it will be much more difficult for the smaller firms to stay profitable, giving some firms no choice but to exit the industry. Furthermore, collaboration with other global wineries, like Mondavi’s joint venture in Chile, allow greater access to the global market and to benefits such as lower international wages and cheaper land.
As the domestic market becomes increasingly saturated, wineries may want to place more emphasis on their global strategy, establishing more partnerships worldwide. References 1. Michael E. Porter. “What is Strategy? ” Harvard Business Review, Harvard Business School Publishing, November-December 1996, 61-78. 2. Grant, Robert M. , Contemporary Strategic Analysis, Seventh Edition, Blackwell Publishing, 2010, 69-77. 3. Michael E. Porter & Jan W. Rivkin. “Industry Transformation” Harvard Business School, Harvard Business School Publishing, July 10, 2000, 1-14.
4. Michael A. Roberto. “Robert Mondavi and The Wine Industry” Harvard Business School, Harvard Business School Publishing, September 12, 2005, 1-32. [ 1 ]. Grant, Robert M. , Contemporary Strategic Analysis, Seventh Edition, Blackwell Publishing, 2010, p. 69-77. [ 2 ]. Michael E. Porter & Jan W. Rivkin. “Industry Transformation” Harvard Business School, Harvard Business School Publishing, July 10, 2000, p. 1-14.