5 May 2011

Robert Mondavi and the Wine Industry

The structure of the global wine industry began to change after the economy had faltered
in 2002 with wine sales weakening in the case of Mondavi. With such weakening sales,
Australian imports began to pose a serious threat, growing nearly 30% per year since 1995
according to the case. With general wine sales slowing down, the global wine industry began to
consolidate, particularly among the New World producers. Many of Mondavis main rival
wineries began to merge with rivals, jug wine producers, and pushed into the premium wine
business. Though Mondavi was presented with the threat of industry consolidation among their
main rival wineries, the company was initially persistent to remain independent, relying on the
U.S. market for boosted sales. While their main competitors pursued other acquisitions, Mondavi
focused on the growth of its popular premier brands.
At the turn of the twenty-first century, the global wine industry reports that retail sales
have ranged from $130 billion to $180 billion. There were three categories of wine that
vineyards produced and sold: table, dessert (or fortified), and sparkling (champagne). Table wine
possessed the largest share of the market. The table wine market was divided into five segments:
jug or commodity, popular premium, super premium, ultra, and luxury. The shift towards
premium wines was shown through sales numbers as jug wine sales in the U.S. declined an
estimated 3% per year during the past decade, while premium wine sales grew a substantial 8%
to 10%. The increased demand for higher quality premium wines was also occurring in non-
European wine-producing nations as well as in the U.K. The structure continued to change at the
turn of the century since many New World wine producers invested a substantial amount of
money in technology in order to enhance the quality of their wines while also reducing operating
costs. The shift to more premium and super-premium wines forced Mondavis hand to join
international joint ventures in their pursuit to enhance their quality and brands.
Large and popular alcoholic beverage firms such as Diageo, Fosters, and Allied Domecq,
entered the premium wine business since they were already involved and generated a substantial
amount of revenue in the wine industry. For example, a popular brand name like Fosters Group
decided to enter the premium wine business due to the company's substantial growth and popular
brand name over the past few decades throughout Australia and other foreign markets. According
to the case, in 2001, Fosters Lager was ranked as the second-highest-selling imported beer in the
U.K., and the sixth-best-selling import in the U.S. Fosters entered the premium wine business
since the company already had experience in the wine industry when they acquired Mildara
Blass, one of Australias leading premium wineries, in the mid-1990s. Wine accounted for 35%
of revenue in FY2001 and the companys goal was to become a global win company with a
leading presence in every premium wine market worldwide. As with Diageo, Allied Domecq,
and other large alcoholic beverage firms, Fosters management believed that wine was the
companys main growth engine in the near and long-term future. Their strategy makes sense
since the Beringer acquisition, though expensive, gave Fosters one of the top 10 wine brands in
the U.S. and a leading market share in the U.S. in the super-premium sector. Their strategy of
entering the premium wine business and acquiring premium wineries has become successful
since Fosters is now one of the five largest wine producers in the world.
Mondavi managed four international joint ventures in 2002 which included the
Fescobaldi partnership which produced three high-end wines: Luce, Lucente, and Danzante, in
Montalcino, Italy, and sold most of it in the U.S. Mondavi also established a Chilean joint
venture which produced two wins: the luxury brand Sena and the Caliterra brand which targeted
the popular premium portion of the industry. This joint venture sold an estimated 25% of the
product in the U.S. More recently, Mondavi acquired a 49% interest in Ornellaia, a luxury
winemaker in Italy, and invested $8 million in a joint venture with Rosemount of Australia.
The thought process behind Mondavis international joint venture strategy was to begin
producing fine wine in other regions of the world, expanding and popularizing their premium
brands. The company, as the case notes, wanted to enhance its reputation as one of the world's
finest winemakers. Mondavi wanted to sell two things: quality of the image and quality of the
liquid. He believed that the higher quality the wine was, the higher the image which in turn
would lead to greater sales as consumers are more willing to pay for a high quality product with
a recognizable image. As previously mentioned, Mondavi focused on the organic growth of its
popular premier brands. The companys approach differs from the global strategies pursued by
its rivals in that their rivals looked towards consolidating and acquiring other wineries while
Mondavi looked towards expanding and bringing in higher quality with their international joint
venture strategy.
The strategy behind Constellation Brands acquisition of Mondavi was to save the winery
from its plan to split in two and sell off its premium luxury brands. The idea behind the
acquisition was to keep all Robert Mondavi brands together rather than splitting it up. The
acquisition was given favorable reviews, according to news sources, as Mondavis board of
directors, including two Mondavi family members, voted unanimously to accept Constellations
bid to acquire the company. Robert Mondavi has remained involved in the business and has
become a brand ambassador for Constellation/Mondavi. At the time of the acquisition,
Constellation was known as the worlds biggest wine conglomerate, having significant influence
worldwide. Since the time of the acquisition in 2004, Constellation has helped the Mondavi
business recover from slumping sales.
In terms of Constellation, the acquisition further consolidated the companys position as
the largest global wine company. The Mondavi acquisition has boosted Constellations annual
production from 70 million cases to 80 million, 10 million more cases than the next largest
producer (E&J Gallo Winery of Modesto), making them the leading supplier of premium wine in
the country. The strategy and consequent performance behind the acquisition has been a true
success story. As stated by Constellation, the Mondavi wines are among the most respected
premium and super-premium New World wines and the purchase complements the Company's
premium wine portfolio. It has helped Constellation become the most respected international
brand of any size and has furthered the original plan of Mondavi, to enhance their quality and
brand, while giving it global recognition. With the acquisition, Constellation has acquired one of
the world's most recognized brands and the addition of Robert Mondavi Winery has made their
section of fine wines among the most highly sought after in the world.

Five Forces Model Analysis

Threat of New Entrants
The threat of new entrants in the wine industry is fairly minimal. There is much capital needed in
order to establish a business within the wine industry which must go towards working capital and
the cost of acquiring land in order to produce the wine. With the threat of new entrants low, the
barriers to entry are high for the same reasons: high cost of capital needed to enter the industry.
There is also the fact that it is a long-term industry. Revenue is not generated instantly but over
the course of a couple to several years. If a business is attempting to establish themselves in the
wine industry, they must have initial capital that can sustain them for the moderate and long-
term. Another factor for threats of new entrants remaining low and barriers to entry high is that
many brands have consumer loyalty due to their high quality so any attempt of garnering a fair
market share within the industry is minimal. As mentioned in the opening paragraph, many
wineries are consolidating the global wine industry, leading to higher barriers to entry and
minimizing any chance that new entrants may have had in entering the market.
Threat of Competition
Unlike the threat of new entrants, the threat of competition is very high. Competitors include
rivals consolidating with other wineries, high-volume producers entering the premium wine
market, and large alcoholic beverage firms such as Diageo, Fosters, and Allied Domecq entering
the premium wine business. The other competitors to Mondavi were: E&J Gallo, Southcorp,
Trinchero Estates, and Kendall-Jackson.

Threat of Substitution
The threat of substitution is high since alternatives include alcoholic (liquor and beer) and non-
alcoholic beverages (soda and water). Beer is by far the biggest substitute to of alcoholic
beverage with soda as the substitute in terms of non-alcoholic beverages. Other substitutions
include cheaper, distilled wines that are created and sold by Mondavis main competitors.

Bargaining Power of Suppliers

The main supply that is required by wineries is grapes since they are vital in making the wine.
Grapes possess the highest amount of cost for producers. Wine producers have the choice of
either growing their own grapes of buying them from growers. If they decide to grow their own
grapes, bargaining power of suppliers is non-existent but the cost of producing is much higher. If
they decide to buy the grapes, the cost of buying is much lower but the bargaining power of
supplier is substantial.

Bargaining Power of Buyers

The bargaining power of buyers is high due to their concentrated control of sales. There are
minimal amount of distributors that generate most of the market share and revenue of wine
producers like Mondavi. The companys largest wholesaler (Southern Wine and Spirits)
accounted for 29% of the firms sales, which is a substantial amount, giving Southern Wine and
Spirits influence and power over Mondavis business decisions.
Appendix: Total Table Wine Consumption (Millions of cases), 2000 - 2010
Source: Beverage Information Group