Robert Mondavi and The Wine Industry

Brief History of the American Wine Industry:- Perception in the American Society

The total wine market in the United States for 1999 was $18.1 billion with an average growth rate
of 8.5% since 1994. However, there has never been a cultural disposition for Americans to drink
wine like has historically existed in Europe, despite being populated primarily by European
immigrants. The two main reasons for this are, 1) the vineyard and production infrastructure was
very small in the 19th century when the country was developing, and 2) the first alcoholic
beverages to be mass produced and readily available nationwide in the U.S. were beer and
whiskey. The low volume producers of wine were relegated to niche markets that were comprised
of ethnic enclaves or individuals who wanted to enjoy a beverage with their food. The key
differentiators between the drinks that were readily available, beer or whiskey, and wine became
cuisine and the money necessary to attain the harder to reach imported wine. As a result of this, in
the U.S. the consumption of wine became viewed as an elite drink, and was not embraced by the
public.

Wine is now consumed on a national scale, but the attributes that categorized wine as an elite
drink during the early days of the U.S. have carried forward into the present. According to the
Adams Wine Handbook 1998, women are slightly more likely to consume wine then men, with
the majority of drinkers being in the "Baby Boomer" generation. Indeed, 12 % of the American
population consumes more than 80% of the total wine produced in America.

Mondavi’s Case: A macro-environmental analysis based of the Wine Industry.

 Barriers to Entry: The U.S. has one of the most "open markets" in the world, with low barriers to
entry for imported wines. The value of the imports out paced the value of exports while keeping a
relatively flat volume, the value per gallon has increased for imports from $15.36 in 1992 to
$17.14 in 1998. This trend clearly supports the theory that the import market is overwhelmingly
targeting the premium wine segments. The capital investment that is required to start a winery
depends on the scale of production. Very small wineries can start up with a minimal capital
investment and can purchase grapes from select suppliers.

 Bargaining power of Buyers: With the high number of producers and with the market dominated
by a few major wineries, competition in the U.S. wine market is high. Strategies implemented by
wineries to try to establish a competitive advantage can include targeting varietal segments,
strategic supplier and distribution partnerships, and differentiation based on image and price.

 Bargaining power of suppliers: Suppliers to the industry could be in the form of bottle
manufactures, label-printing services or grape production It is very common for competitors to
out bid each other for grapes from suppliers that have a reputation for high quality grapes.
Therefore, wineries choose to either purchase vineyards or assume the higher capital investment
and agricultural maintenance costs or try to attain long-term contracts with grape suppliers.
Vertical integration is what many successful companies like Gallo have pursued along with
horizontal integration or remains unbundled.

 Political/ Legal: In the U.S., there is a law mandating the implementation of a 3-tier distribution
system. The system is mandated by law because alcoholic beverages are a controlled substance
and as such the government implemented a controlled system for getting those products to the
markets. Wineries are capable of using a 2-tier distribution system, which allows wineries to sell
directly to the customers through gift shops located at the winery. Mailing lists and the internet
 can only be used in a limited number of states because most states have made direct shipments
illegal. Direct sale volumes are very low when compared to the established 3-tier system. The
role of the distribution channel is growing and taking on greater strategic importance as a trend of
international and domestic consolidation grows. The result for wine producers is the ability to
now gain access to more domestic and international markets without added marketing and capital
investments. At the same time, the number of distributors is declining due to the consolidation, so
the ability of smaller wineries to find distributors to carry the low volume wines can be
negatively impacted.

 Competitors: Although the Ultra-premium wine segment has only 7% of the volume shipped, but
it accounts for 25% of the revenue. Mondavi is trying to sustain in the niche market based only on
organic growth compared to the joint partnerships pursued by its competitors, globally.
Brand image is a very important aspect to the sale of wine. With the target market for wine being
educated professionals in the upper income brackets, the image of a high quality, low volume
winery can have great appeal. An example of this are the so called "garage wines" being produced
in France. The volume of these wineries is very low and the quality and image of the wine is very
high. Thus, the ability of small wineries to find niche markets and exploit them based on quality
and image is very important. It is can also be very advantageous for small wineries to build strong
associations with specific cuisine, lifestyle traits and local distribution channels to help set them
apart. So small wineries can be profitable in this segment if they can correctly target and
penetrate niche markets.

And there are global alcoholic beverage companies that are using innovative strategies to focus
on specific target markets. The companies are market-oriented competitors and creative in the
products they offer. Innovation extends to packaging, branding and advertising, and new entrants
to the industry intensify the competitive strategies.

 Internal Environment at Mondavi: Mondavi does not understand its target market segment and
lacks in promotion and advertisement spending. It lags behind in creating awareness about its
wines.
The 1990s saw a transition from traditional supply-driven production to business models of
market-orientated consumer demand. The suppliers who were first to recognize these changes
have enjoyed tremendous growth and have often become the high volume producers, and have
developed systematic marketing strategies. Such suppliers have created extensive portfolios of
brands and can more readily adapt to changes in consumer demand. These companies continue to
build strength in new business sectors because of their far-reaching distribution networks in the
world markets. Significant investments are made in advertising campaigns to further entrench
portfolio branding, and worldwide sales. Mondavi failed to realize the role of advertizing and got
into this business quite late.

Opportunity: With 100 acres of vineyard in the NAPA valley

Referring to the competitors’ section above, it will be very hard to survive on mere 100
yards of vineyard owing to the price competition posed by imported wines. But with a
well defined strategy of capturing the niche premium segment in America with a
differentiated product, winery can be sustained. Based on Michael porter’s 5 elements of
a value chain, we would be the leader in sustainable practices - environmentally sound,
socially responsible and economically viable and position Napa Valley wine as the high-
quality, high-value product (across price points) in American market. The extended vision
is to market our products in the developing countries particularly China and India with
Napa level quality, brand image with localized taste of wines.