Mondavi Case

Industry Analysis
New World

Old World

Buyer power: lower

Higher branding

Buyer power: higher

Supermarket sales
Less branding

Entry barriers: higher

Gestation period
Automation
Branding
Larger MES

Entry barriers: lower

Gestation period

Supplier power: lower

More land availability
Liquid market for grapes

Supplier power: higher

Less land availability
Illiquid market for grapes

Rivalry: less price-based

Branding
Less price-sensitive

Rivalry: price-based
Excess capacity
More price-sensitive
Exit barriers

Substitutes: moderate to high

Alcoholic beverages

Substitutes: high
Home-made wine

Threats to Mondavi's Competitive

Position
How is Mondavi doing?
Solid, not spectacular
But what do investors think of it?

Imports
Industry consolidation
Consolidation in the distribution channel
Wholesalers
Retailers

New entrants

Economics of the Wine

Business
Up-front expenditures
a.

Land acquisition: 100 acres x $100K per acre = $10 million

b.

Vines: 2,350 vines per acre x $5 per vine = $1.2 million

c.

Vineyard development: 100 acres x $32,500 per acre = $3.25 million

d.

Barrels: 1,378 barrels (i.e. 310K liters/225 liters per barrel) x $575/barrel = $792K

e.

Crushing Equipment: $500 per ton x 500 tons of grapes = $250,000

f.

Bottling Equipment: $650,000

g. Other capital costs (tanks, pumps, etc.) = $1 m.

h. Total up-front expenditures = $17.1 million

Economics of the Wine

Business
Wine Production
a. 100 acres x 5 tons per acre x 620 liters per ton = 310,000 liters
b. 310,000 liters = 413,333 bottles = 34,444 cases
. Annual Profits
Retail for ultra-premium = $20
Winery price = $10-$12 (based on Exhibit 9 margins adjusted upward
for ultra)
Revenues = 413,333 bottles x $11 per bottle = $4.5 million per year
Profits per year
= $4.5 million x 35% = $1.6 million.

. Rate of Return
Based upon these assumptions, the rate of return on the initial
$17.1 million investment falls below 10%.

Key issues in the Mondavi case

Structural changes in the industry shape firm strategy
Firms OE does not guarantee strategic dominance
Industry attractiveness/lack of it (using the Porter
model) can be reflected in economic analysis
Consolidation
Production economies only in bottling and packaging costs

Beer and wine economies

Primarily marketing related
Brewing standardized high-volume process
Cannot use same trucks for both (refrigeration)
Brand-building differs
Cannot use same sales force for both

Key issues in the Mondavi case

Mondavis choices
Stay in business and grow organically
High acquisition multiples
Limits to acquisition size
Distributor and competitor consolidation

Acquire domestic/foreign winery

Some synergies
Multiples and integration

Exit
High multiples
Family firm- concentrated ownership
What does the lack of synergy between spirits and wine
business imply?