Group members Nureen Bano Saima Fazal Syed Yasir Husnain Rizvi

1.

Analysis of General Environment / Societal environment

Economic

Technology

Legislation & Regulations

Sociocultural

Societal Environment: Economic

Recession: Wine consumption does not decrease during economic downturns. Changes in Demand Vintners and Growers cited a continued economic downturn as the most significant constraint to industry growth Impact of Recession Trade Deficit & GDP 2.76% Trade deficit effect on GDP (4.2-6.96)

Percentage Change in Wine Sales and GDP, US: 1948-1997

Societal Environment: Technology

E-commerce e-commerce infrastructure New opportunities for wine connoisseurs & wine producers The ability to ship small quantities directly to individual wine drinkers without passing through layers of middlemen may mean that small niche growers may be able to find their position in a market dominated by large brand names New developments in technology: New wine production technique and growth of high quality grapes Cold fermentation Oak barrel Aging Stainless steel fermentation tank Gentle grapes handling Gravity flow sys Improvement in production yields & better storage of wine

Societal Environment: Legislation & Regulations

Few barriers and trade barrier to trade in the U.S. WI Non-tariff trade barriers for import. Tariffs, the most important barrier to the international wine trade World trade organization was helping alleviate :foster a more open market on a global scale Stability of government

Societal Environment: Socio-cultural

Spending power. Growing group of earners from various countries. Shift in demographics in the developing countries Scientific evidences: Health benefits to be derived from moderate drinking of wine(red wine) Large European Immigrant population Lifestyle changes Wine drinkers :professionals, managers, college graduate and made over $60000 annually. Majority wine drinkers being in the Baby boomers. Ingrained in the Christian faith, aids the spread of wine production and consumption across Europe.

2.

Analysis of Industrys dominant characteristics

Market size and growth rate
Number of rivals Scope of competitive rivalry Buyer needs and requirements
1999 was an $18.1 Billion market; growing at an annual average rate of 8.5% .

The industry was consolidating to a smaller number of big players

U.S. Wineries rivalry competes at regional, local, national, international and global level.

adult, low prices, taste and quality

2.

Analysis of Industrys dominant characteristics Cont.

Product innovation
Gentle grape handling, Cold fermentation, Stainless steel, fermentation tank, Oak barrel aging

Supply/demand conditions Pace of technological change

4th Largest wine producer in the world. U.S. share 9.3% in overall world wine consumption. Traditionally export only excess supplies

The technology of agricultural engineering started a revolution in wine production that expanded even more rapidly. Process innovation Development of E-commerce technology to survive in global market.

Vertical integration Learning and experience curve effects Degree of product differentiation

Most wineries opted either to purchase vineyards or assume the high capital investment and agriculture maintenance cost or to enter into long term contract with dependable grapes suppliers

In U.S. wine industry has a trend of joint venture and vertical integration company exchange their experience and knowledge to gain market information and to have competitive edge.

Less differentiated at domestic level with lower prices having high competition Creating differentiating at international level with high prices.

3.

Industry Competitive Situation ( Porters Five Forcees analysis)

Threat of new Entrants

Threat of Subititute

Rivals
Bargainin power of Buyer

Bargaining power of Supplier

Competitive Rivalry
Factors Composition of Competitors Mkt. Growth rate Scope of competition Fixed storage Cost Capacity Increase Degree of differentiati on Equal Size HUF * MUF NUTRAL MFA HFA Comments Unequal Size Equal size competitor * High Market is maturing Global & Domestic Vineyard

Slow

Global

Domestic

High

Low

Large

Small

Surplus

Commodity

High

Not a high degree of differentiatio n Sharing of Resources

Strategic Stake

High

Low

The rivalry among competing seller into industry:

In 2000 the domestic competition of wine sector was strong and the US market was maturing domestically. The industry was consolidating to smaller number of big player and key player of US market to target niches. Most of the US wineries was expanding internationally by exporting products and competes globally. There were over 1600 us wineries operating those of which low volume, family managed enterprises. Fewer are large volume producer was dominating the market. Both old and new world producer had begun implementing strategies targeted closely to specific niches. In the US market the demand of wine are growing that shows the competition among rivals is strong. Internationally US wine industry exported 13 percent of its production while old wineries (France, Italy and Spain) exported at the average of 25 percent and new world producers (Australia exported over 40 percent of its production and Chile exported over 80 percent of its production. US wine industry facing high competition at domestic and international market.

Threat of New Entrants/ Entry Barriers

Factors Economies of scale Capital required Low * High HUF Small MUF NEUTRAL MFA HFA * Large Comments Pricing threat for entrant Low investment is required to compete

Access to distribution channels

Expected retaliation Differentiation Brand Loyalty Experience Curve

Ample

Restricted

Reduced Whole sellers

Low Low Low

* * *

High High High

Not a strong defense from Rivals New taste may introduce Customer acquision prob Complexity of wine making process With fewer restriction

Insig Govt. Action

Sig

Low

High

Potential Entries Of New Competitors:

E & J. Gallo winery, Canandaigua wine, the wine companies have captured greater part of market share in US market. Their market share diminishes when new entrants in 1600 US producers come and operate. Combined shares of 1600 companies increases while decreases the market shares of market leader. See exhibit 5 US. Market had one of the worlds most open market for imported wines. With few restrictions placed on wine imports and with import brands free to capture whatever market share they could get in completion against domestic brands. Low entry barriers to operate new business. Low entry barriers for foreign business in US. US domestic wine producers facing strong competition and they have big threat for new foreign companies because they contain sufficient resource, capital to compete with US market leader. In 1999 early 2000 import brands upped their share of the US market to 20% ( up from 17% in 1998)

Threat Of Substitute Product

Factors HUF MUF NEUTRAL MFA HFA Comments
Threat of Obsolescence of Industrys product

High

Low

Wine preferences

Aggressiveness of substitute products in promotion

High

Low

Substitute are moderately advertised

Switching Cost

Low

High

Switching cost is low Quality with Price segmentati on

Perceived price/ value

High

Low

Threat of Substitutes:
The first alcoholic beverages were to be mass-produced nationwide were beer and whiskey. Beer and whiskey being more affordable as well as readily available in the USA. Wine was viewed as more of an elite drink. Wine was considered for specific segment well to do individuals who earned high income annually and was not embraced by a substantial part of the general public untill the 2nd half of the 20th century. Now there are over 1600 wineries operated in United States and buyers have much choices wine to purchase. Product innovations and development firm the interest of buyer. The wine is available at cheaper price with low or moderate quality and high level quality of wine are available at premium and ultra premium price. Wine industry is facing lessening the threat of substitutes by the increasing of demand of wine, availability and affordability to consumers.

Power of Supplier
Factors
# of important Suppliers

HUF Few

MUF *

NEUTRAL

MFA

HFA Many

Comments Few quality suppliers available Quality grapes required. Few quality suppliers available Complexity of procedure Buyers giving large profit to suppliers. Large quantity purchased

Switching cost

High
Availability of substitutes

Low

Low

High

Threat of forward integration Importance of Buyer industry to suppliers profit Quantity purchased by the industry of suppliers product

High

Low

Small

Large

Low

High

Suppliers product an important input to the buyers Highly Imp business

Less imp

Bargaining power of supplier is high

Bargaining Power of Suppliers:

Before 19th century the bargaining power of supplier was very high because US infrastructure and production capacity was very small, companies majorly relied on foreign supplier. In the 19th century the bargaining power of suppliers remained high although US. was developing vineyards but these were few in numbers and the US. wine production infrastructure was still quite small. As the demand of wine rose up the significance of vineyard, wine producing equipments, bottle manufacturers, bottle labeling and printing services and ad agencies had took attentions of wineries. Companies could start by the limited initial capital requirement by the outsourcing the grapes which rose the bargaining power of supplier. But still it was not uncommon for wineries to compete aggressively for the high quality grapes of certain reputable suppliers and thus bid up price. Hence, most wineries opted to purchase vineyards and assume the higher capital investment and agricultural maintenance cost. Simultaneously some firms enter in to long term contracts with dependable grapes suppliers which drastically reduce the bargaining power of suppliers. By the increased of demand, number of suppliers in the market also increased which reduce the companies switching cost, and reduce the supplier bargaining power. Besides the domestic market developments, international wineries acquisition and joint venture and mergers also placed effects on the suppliers bargaining power by the sharing of resources, market information and access to market and etc.

Power Of Buyer
Factors
Number of Important buyers Threat of Backward integration

HUF
Few

MUF

NEUTRAL

MFA
*

HFA
Many

Comments
Buyer market

High

Low

Firm have more access on quality & price control

Product supplied

Commodity

Specialty

Global & domestic competition

Switching cost % of buyers cost

Low

High

Multiple brands available Different price segment available

High

Low

Profit earned by buyer

Low

High

Different price segment available

Bargaining Power of buyers:

U.S. is the open market for the importer with fewer restrictions

and also there are over 1600 domestic wineries are competing with each other and creates buyers market. Some of wineries are targeting niches and consumers are aware off and brand loyal. Some of the wineries offer differentiated taste with low volume and charging premium and ultra premium prices which reduce the bargaining power of end user US wine industry consists of different companies which have large product portfolio and price range to cover different market segments. Price completion is high in low priced lower quality of brands and bargaining power of buyer is high because of low switching cost because consumers have much more choice available in the market with readily availability.

Overall Industry attractiveness

Forces Rivalry among existing firms Threat of New entrants Average Values

HUF 1 Criteria

MUF 2

NUTRAL 3

MFA 4

HFA 5 Favorable

Unfavorable

Neutral

(1+1+1+2+2+3+3)/7 = 1.86

Avg < 3

* * * * *

(1+1+1+2+4+4+5+5)/8 = 2.88 (5+2+1+3)/4 = 2.75 (1+1+2+2+4+5+5)/7 = 2.86 (2+2+3+4+4+4)/6 = 3.17

Avg < 3

Power of buyers

Avg < 3

Power of Suppliers

Avg < 3

Threat of substitutes

Avg > 3

Overall Industry attractiveness

Factors
Rivalry Entry Barriers Power of buyers Power of Suppliers Threat of substitutes
Criteria:

Unfavorable Neutral
* * * *

Favorable

Avg > 3 : Favorable Avg <3 : Unfavorable

4.

Drivers of change
Changing societal concern, attitude and lifestyle.
Geographic expansion and strategically more importance on export. Joint ventures, acquisition and vertical integration. Product innovation and technology.

5.

Strategic Group Map of Selected Wineries

High

E & J Gallo 330,000 thousands Gallon

Production Capacity

Beringer 17,800 Mondavi 17,387

Wente 5,100

Low Low

Moderate

Premium

Ultra premium

6.

Key Success Factors For The US Wine Industry:

Market Share: revenue Production Capacity: production capabilities to produce Export Share: wine exporters shares, based on volume Technology And Innovation: product development and ability to innovated and to introduce new technology Joint Venture: high capital requirements and collaboration Market Segment Coverage: ultra premium, super premium, popular premium, jug wine and others Geographic Expansion: presence and feasibility of US wineries in other countries.

7.

Critical Success Factor KSF Market Share Export Share Technology And Innovations

US Wine Industry Competitive Profile Matrix (CPM)

E & J Gallo Mondavi Beringer
Weight Rating Score Rating Score Rating score

Wente Bros

Rating score

Production Capacity

.15 .10 .25 .06 .14 .13

4 4 3 3 1 4

.60 .40 .75 .18 .14 .52

3 2 2 4 2 3

.45 .2 .5 .24 .28 .39

3 2 1 1 3 3

.45 .2 .25 .06 .42 .39

3 1 4 1 4 4

.45 .1 1 .06 .56 .52

Acquisitions & Joint Ventures Marketing & Distribution efficiency Geographic Expansion total

.17
1.00

.68
3.27

.51
2.57

.51
2.28

.68
3.37