Thursday, August 15, 2019
Mondavi Wines Competitive Threats
Mondavi: What threats in the business environment does Mondavi face and how is it addressing them? High quality premium wines produced by France, Italy, Spain, Chile and Argentina. In the past years, Demand increased for premium wines, while consumption of inexpensive, lower quality wine had fallen. As a result of changes in consumption patterns, Europe had created a great deal of excess capacity, while wineries of the new world (South America) continued to increase vineyard acreage in response to strong demand for high quality wines. The size of the global wine industry was estimated by 155 billion dollars (approximately), where Europe and South America dominated global consumption of wine with a market share of 70%. Mondavi addresses this issue by leading the production of premium table wines in the US instead. This market participated with 11% of total world consumption representing 17 billion dollars. Analysts expected demand for premium wines to grow at 8% to 10% per annum. Thus, Mondavi focused 90% of its sales in the US through 15 top retailers and 10% to the rest of the world through exporters. Leverage Risks and Capital requirements The premium wine industry is a capital intensive business. Historically, Tim Mondavi and his team had financed its operations and capital spending principally through borrowings, as well as through internally generated funds. They owned vineyards in California, and the joint ventures controlled land in California, US and Italy, which produced 7% of the companyÃ¢â¬â¢s total grape supply. The company purchased the rest of its grape supply from 360 independent growers through long term legal agreements. Because in the last years property value had risen and competitors had spent large amounts of money pursuing aggressive acquisition strategies, they could not face further growth with the same strategy due to the increasing high cost of capital. On the other hand, they could not outsource more grape from independent growers, since Mondavi worked closely with the growers to guarantee prime quality and the use of the new farming techniques developed by the companyÃ¢â¬â¢s own vineyards. So Mondavi chose to focus on a different strategy for the future. He planed to grow its internal grape sourcing by 25% by 2005, focusing on organic growth of the wine and appealing to a new segment of consumers. Management plans to take the company to the next phase by enhancing the high quality of their existing brands, appealing to the organic sectors of healthy consumers and strengthening market positions. Product Substitutes Mondavi faced three types of competitors: rival firms that were focused on making premium wines, large-volume producers moving aggressively into the premium wine business, and global alcoholic beverage companies that were acquiring wineries to complement their beer and/or distilled spirits businesses. He estimated that only 12% of the consumers drank 88% of wines purchased in the US. To stimulate demand for his products, Robert Mondavi set out to educate American consumers and to enhance their appreciation of fine wine. Over the years, he became a leading promoter of the California wine industry. He encouraged visitors to tour the winery and to taste the new wines that he created. In addition, Mondavi began to host concerts, art exhibits, and other cultural events at the To Kalon vineyard. In 1976, the company established the Great Chefs program, the first winery culinary program in the US. Robert Mondavi explained his philosophy regarding fine wine, food, and the arts: Ã¢â¬Å"People who enjoy food, art, music, also enjoy fine wines, and they enjoy them more together. . . . Wine is more than a drink. ItÃ¢â¬â¢s a culture. Ã¢â¬ Over time, the company began to advertise more extensively to broaden its customer base. Mondavi launched its first major radio advertising campaign to promote the Woodbridge and Coastal brands in 1998 and its first national television advertising in the fall of 2000. The firmÃ¢â¬â¢s advertising expenditures, including point-of-sale materials, reached $20 million in 2001. Michael Mondavi reflected back on the limitations of the firmÃ¢â¬â¢s marketing strategy of the early 1990s: Ã¢â¬Å"All those black tie events. We were complacent, cocky, and started believing our own press. For decades, our industry sent the wrong message, that wine is for special occasions, while the breweries told people that beer is the beverage of every occasion. ThatÃ¢â¬â¢s crazy. In the old country (Italy), wine was a blue collar beverage, not an elitist, white collar drink. Our goal is to grow the customer base by removing wineÃ¢â¬â¢s mystery, while still maintaining the magic. Ã¢â¬ As previously mentioned, the next step is becoming organic wine producers of its premier brands. While maintaining high quality standards, he will reach the new target audience of green consumers.