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Seminar Paper, 2004
20 Pages, Grade: 1,7 (A-)
2. Opportunities vs. Threats: Analysis of the environment the Robert Mondavi Company is settled in
2.1 Global environment
2.2 The US wine industry – an overview
2.3 Competitive forces in the US wine industry
2.3.1 Potential entrants
2.3.2 Bargaining power of buyers
2.3.3 Bargaining power of suppliers
2.3.4 Closeness of substitutes to the industry’s products
2.3.5 Intensity of rivalry among strategic groups
3. Strengths vs. Weaknesses: Internal aspects of the Robert Mondavi Winery
3.1 Resource situation
3.1.1 Tangible resources
3.1.2 Intangible resources
3.2 Strengths and weaknesses along the company’s value chain
3.3 Making the difference – Robert Mondavi’s Core Competencies
4.1 Current standing in the industry
4.2 Under Pressure – recent strategies to face the new environmental challenges
4.3 Future prospects
Table 1: Differences in “New World” and “Old World” wine markets .
Figure 1: Wine consumption in the USA, 1968 to 2000
Table 2: Key data of the US wine industry .
Table 3:Container size and US volume of sales, April, 1998 – April, 1999
Table 4: Top 30 US wine companies, June 2004
Table 5: Financial performance of the Robert Mondavi Company 1999 – 2003
Figure 2: Porters value chain analysis
Table 6: Top 20 of “Top 100 Wine Brands” on premise
Figure 3: Stock performance of the Robert Mondavi Company compared to Constellation brands over the past five years
The Robert Mondavi Company has been one of the most innovative high quality winemakers in the US history. However during the last years the company is facing increasing competition, especially in their main segment – premium wine.
The first step of this SWOT analyses is an examination of the environment the Robert Mondavi Company is settled in. Afterwards we will give an overview regarding three internal aspects: resource situation, strength and weaknesses of the value chain and core competencies. In the third part we will draw the line using the gained information of the SWOT analyses and the company’s current situation to explain the recent strategies and future prospects. The leading question will be: Is the companies resource allocation and strategy still adequate to succeed the new challenges and what are possible alternatives?
To analyse the specific opportunities and threats the Robert Mondavi company is facing, we will give a short overview of the general environment of the wine industry including political, technological, economic and global segments. Hereby we will focus mainly on the situation of the US market.
Once the boundaries have been identified we go on analysing competitive forces in the industry environment by using Porter’s five forces model. The leading question to answer will be: How is the market structured and what factors cause environmental change?
The size of the global wine industry ranged from $130-$180 billion in the beginning of the 21st century with an average growth rate of 1-2% per year since 1994. In general this market is highly fragmented – no company reached more than one per cent of global retail sales in 2001. To describe the macro-level of this industry it is useful to separate between two different wine markets, the “New World” and the “Old World”.
The international wine industry has been undergoing a significant restructuring. No longer do “Old World” producers such as Italy, France, Spain and Germany dominate the industry to the extent that they once did. No longer are “New World” producers such as Australia, New Zealand, South Africa and California regarded with the contempt that they once were. There are significant differences regarding consumption, production and innovation between the “Old World” market in Europe and the “New World” market in countries such as America, Australia, South Africa and Chile (for details see Appendix, Table 1).
Europe, especially France, Spain and Italy shares 75 per cent of world wide wine consumption and production. But during the last decade the “New World” is on the advance, and this trend is accelerating. For example between 1987 and 1999, the volume of Australian wine production increased by over 70 per cent. Even the relatively high competitive advantage of European quality wine making is declining. Studies such as “marketing focus in the Chilean wine industry” by Forster et al and several international wine rankings show the increasing quality of new world wines.
In the world wide market table wine accounts for an “overwhelming share”. There are five principle segments among the table wine market: jug or commodity (< $3 per bottle), popular premium ($3 – $7 per bottle), super premium ($7 – $14 per bottle), ultra premium ($14 – $25 per bottle), and luxury (> $25 per bottle). In the New World we can observe a trend towards the higher quality premium segment, whereas the European consumer behaviour hasn’t change significantly.
In the last few decades the US wine market has changed dramatically. Since the boom years of 1968 to 1972 per capita demand for wine started increasing significantly. In 1986 per capita wine consumption reached 9,2 litres, which was an increase of 82,9 per cent compared to 1972. Population growth led to a total increase in wine consumption of 114,7 per cent from 1968 to 2000 (see Appendix, Figure 2, Table 2). Nowadays the wine industry is an important segment of the American economy, worth $45 billion and creating almost half a million jobs. Due to geographical circumstances this industry is concentrated in California, with a 90 per cent share of the US wine production.
After the so called “baby boomer generation”, this decade of enormous growth is over, the demand has declined and levelled out at 1 to 2 % per year. Even though the number of bonded wineries has increased from 424 to 2443 during the period 1965 – 1999, the degree of concentration remains very high. The largest 4 companies account for 48 per cent of storage capacity and the largest 20 control 75% of the U.S. wine industry. Along to the shift towards the premium sector in the “New World”, premium wine sales grew 8 – 10 per cent until 2001, while the jug wine sales had declined approximately 3%. Although the premium sector growth rate has slowed down in the last two years, which we consider due to the slumping US economy after September 11th, we think that the premium market will recover soon.
In contrast to Europe the classic 750 ml bottle is not the market leader in volume presently. The market share of the 1.5 litres bottle is 30,8 per cent and bottles bigger than 3 litres have a 37 per cent market share (see Appendix, Table 3). This specific consumer behaviour causes on the one hand higher costs in packaging and distribution for local companies, but on the other hand it protects the home market from European exporters, which are not used to this sort of packaging.
We will use Porters five forces model to analyse the competitive forces in the industry environment of the Robert Mondavi Company. This model outlines the attractiveness of the wine industry by using five different categories: risk of entry by potential competitors, bargaining power of buyers, bargaining power of suppliers, closeness of substitutes to an industry’s products and the intensity of rivalry among established companies within an industry. Because the competition and structure between the low priced jug and the premium (to high-end) wine branches is significantly different, we will analyse them sequentially.
The risk of entry by potential competitors depends on factors, that make it costly to enter an industry.
The two leading companies in the jug wine branch are E&J Gallo and Constellation Brands. Both companies compete head to head to be the number one player in the wine industry. With an annual US case sales of 75 million (Gallo) and 66 million (Constellation) they are far ahead of the Robert Mondavi company with 9,7 million cases sold in 2003. Although the switching costs and brand loyalty are pretty low, the large economies of scale the two leading companies are gaining and the necessary investments needed for price competition represent very high costs for new entrants.
In the premium segment of the US wine industry the situation looks completely different. Compared to the low cost strategy in the jug wine branch, the highly fragmented premium segment follows a strategy of differentiation combined with the overall goal of excellent quality. Because the premium segment was the only branch with sustainable growth (8-10% per year) several firms have invested heavily in premium standard wineries. In contrast to the jug wine branch the switching costs are relatively high, because a customer who wants to change his premium wine needs relatively more time (transaction costs) to find an adequate competitive product in quality, taste and price. At the same time these are reasons witch cause relatively high brand loyalty. Due to the relatively low amount of cases sold economies of scale are negligible.
As a result of US policy during the Prohibition, the US wine industry has a three-tier system, witch separates between suppliers, wholesalers and retailers. There are two major reasons, why US alcoholic beverage distributors are powerful. First of all, direct distribution of wine is still forbidden in 20 states and several other states have severe restrictions. Second there are five distributors with an overall market share of 33 per cent, which can use their oligopolistic power in price negotiations with the wineries.
There are three different stages in the production of wine, where companies have the possibility to work with suppliers: grape growing and/or procurement, crushing, fermentation, aging and finally bottling and packaging.
In the jug wine branch, suppliers have a very low bargaining power, because the price and the quality of the grapes are low and suppliers can be replaced easily.
In the premium segment, there are very limited wine yards, witch can offer the high quality necessary. Therefore, the wineries tend to own a high amount of wine yards to be less depended from single suppliers. This worthwhile backward integration is often not possible due to the high land costs on the one hand, and the relatively small budgets in this high fragmented premium business on the other hand. Owing to the mentioned facts the bargaining power of the suppliers is relatively high, albeit wineries try to reduce this bargaining power by negotiating long term contracts. Crushing, fermentation, aging and bottling are regularly done by the wineries themselves to guaranty the high quality of the product.
 Roberto, M. A. (2002): p.1.
 Roberto, M. A. (2002): p.2.
 Wittwer, G.; Anderson, K. (2001): p.179.
 Forster, W.; Beaujanot, A.; Zúniga, J. (2002), p. 37f., Wittwer, G.; Anderson, K. (2001): p.184., Wine Enthusiast Magazine voted 4 New World wines amoung the Top 10 in 2003.
 Roberto, M. A. (2002), p.1.
 Follwell, R. J.; Volanti, M. (2003), p.25f.
 Nickening, R. (2004), p.16.
 Roberto, M. A. (2002), p.2, Follwell, R. J.; Volanti, M. (2003), p.26.
 Eyler, R. (1999): p.2.
 Porter, M. (1979), p.
 Wine Business Monthly
 Roberto, M. A. (2002), p.5.
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