Five Forces analysis of US Wine Industry

Using Porter’s Five Forces Model, analyse the competitive pressures that Robert Mondavi faces in the U.S. domestic wine industry.

Threat of New Entrants

The threat of new entrants is moderate given the following reasons: Economies of scale:

Capital / investment requirements aren’t high. “Using personal savings and loans from friends, Mondavi founded his Napa Valley winery” pg 2

Customer switching costs is minimal:”the basis of competition in the lower segments of the wine market (jug to premium) is primarily driven by price, retail shelf space, and branding, competition at the higher segments (super-premium and above) was driven by more quality and brand image” pg 10

Access to industry distribution channels is difficult for lower segments of the wine market but very accessible by brands in the higher market segment “Although many retail chains carried super-premium to ultra-premium wines, obtaining shelf space was a lesser concern for producers of these brands” pg 10

The likelihood of retaliation from existing industry players is very low as no instances were stated. In fact, it is mentioned that “The wine group, and Brown Forman were able to enter and compete with Gallo (a family-owned business since 1933)” pg 11

Technological capacity and knowledge:

Threat of Substitutes

The threat of substitute products like beer and spirits pose a threat to the industry. They limit price levels. Some reasons for this high threat of substitution are:

Buyers are more willing to substitute wine for other alcoholic beverages based on preference “research into American consumption patterns show that of the remaining 90% who are not regular wine consumers, half are teetotallers and the other half prefer beer or spirits” pg 20 (2nd paper)

The price of wine’s substitutes are relatively cheaper “while all income levels consumed wine, higher income was associated with greater wine consumption” pg 9

There isn’t any switching cost related to substitution

Bargaining Power of Suppliers

. The bargaining power of suppliers is low because of the following:

The suppliers outweigh the buyers thus given them little or no bargaining power “Given increased plantings and favourable weather conditions in the past few years, the oversupply of grapes has been a driving force…to prevent prices from falling further due to this excess capacity, some producers had to resort to drastic measures” pg 22 (2nd paper)

Buyers (wineries) integrate backwards into supply “Mondavi..purchased the Byron winery and 55 acres of vineyards” pg 5

Bargaining Power of Buyers

The bargaining power of buyers is great because of the following reasons:

The industry is marked with oversupply with consumption (demand) lagging way behind production. “Given increased plantings and favourable weather conditions in the past few years, the oversupply of grapes has been a driving force” pg 22 (2nd paper)

Products were standardised to the advantage of Robert Mondavi though “The winery became a laboratory for developing what were to become some of California wine industry’s best practices in the production of world-class premium wines” pg 3. This may allow them to demand only industry standards though it should be noted that “many inexperienced wine drinkers feel confused about all the wine choices” pg 24 (2nd paper)

Intensity of Rivalry

The intensity of rivalry between competitors in the industry is moderate because of the following factors:

It is made up of a few dominant competitors “the top 10 wineries accounting for 70% of US production” pg 9.”While over 2000 wineries exist, the top five wine companies have cornered two-thirds of the domestic wine market” pg 20(2nd paper). Thus relaxing rivalry.

Rivalry was lessened because some competitors were able to differentiate their products “Although larger producers held advantages in scale and capital, the smaller wineries were able to compete by consistently producing high quality wine in limited quantities” pg 11.

The fact that there was no switching cost and that sales depended either on price or marketing for the lower and higher segments respectively, increased rivalry:”the basis of competition in the lower segments of the wine market (jug to premium) is primarily driven by price, retail shelf space, and branding, competition at the higher segments (super-premium and above) was driven by more quality and brand image” pg 10

The exit barriers don’t seem be an issue “during the 1980s, many of these food and beverage companies have divested their wine holdings, choosing instead to focus on their core business” pg 11. Thus reducing rivalry. 

What are the key success factors of the wine industry?

Using the various countries grouped as new world and old world countries as an example, these are the key success factors facing the wine industry:

Establish an existing domestic market position

Most of the older wine producing countries have a stronger existing domestic market position. Countries like Italy, France and Germany have a strong domestic market position while Spain’s is moderate due to the fact that “old world producers have had the advantage of tradition behind them in their home markets. Over the centuries, wine has become an integral part of many European cultures and is considered standard accompaniment at lunch and dinner”. However, for most new world countries, this is not the case. They have a weaker existing domestic market position because unlike the Europeans, it hasn’t been their tradition. As “Dewald (2003) reports an emerging pattern in Hong Kong from consuming Chinese tea and brandy to drinking red wine”. Australia, Chile and South Africa have a weak existing domestic market position while the United States’ is strong and Argentina’s moderate.

Ensuring domestic growth

On the other hand, domestic growth has been weak in old world countries due to the fact that there is little room for expansion and most of these countries are experiencing declining per-capita wine consumption as social campaigns against alcoholism and drunk driving have increased”. Italy, France and Spain all have a weak domestic growth; while Germany maintains a moderate growth. New world countries like Australia, Chile and South Africa also have a weak domestic growth. With a moderate and Strong domestic growth from Argentina and the United States respectively, it is obvious they are prospective markets due to their rather better domestic growth. Argentina’s due to the fact that it is “has the oldest wine culture outside Europe”.

Establishing economies of scale and underlying cost structure benefits

All the old world countries have weak economies of scale with majority of the new world countries having a moderate; Australia and Chile show strength in this aspect. This is due to the fact that most Spanish (and European) production come from small bodegas”. Unlike the Europeans, “diversified conglomerates and wine groups account for a large fraction of US wine production and are able to leverage their size to enjoy both economies of scale and scope”.”Australia wine industry is highly concentrated with four companies accounting for over 75% of production, providing economies of scale in producing value-for-money wines”.

Managing adaptability to industry changes

All the new world countries have proven to be strong in adaptability to industry change. Australian government officials together with its wine producer’s developed Strategy 2025 and “has been the force behind domestic and international expansion..through measures promoting exports and preventing high taxes”. “Argentina developed its own version of the successful Australian Strategy 2025…and have experienced recent success”. This shows the countries commitment to change. On the other hand, the French wine industry’s “inability of the appellation system to appeal to what is becoming a global way of understanding wine” is causing it it’s export market. Thus Countries like France and Germany are weak in adapting to industry change; while, Italy and Spain have a moderate outlook.

Attracting foreign investments

Majority of the New world countries have a strong prospective toward attraction of foreign investments. “large foreign investments enabled significant production expansion and export of quality wines” in Chile. As for majority of the old wine countries, they are moderate towards attracting foreign investments. “Spain’s openness to foreign trade and investments has encouraged foreign producers’ investment”. United States, Australia and Chile have a strong attitude towards foreign investment. Argentina, South Africa, Italy, Spain and France have a moderate outlook towards foreign investment; Leaving only Germany which is weak in attracting foreign investments.

Thus, it can be concluded that Australia and Chile have a strong competitive advantage as they are very well positioned to produce and export wine with their adaptive, large scale producers and their graet lure for foreign investment. Also economies of scale and economies of scope in marketing offer a strong advantage to the United States because it is a populous and affluent nation.

Strong marketing economies of scale and moderate production economies of scale in South Africa and Chile have gained them a moderate competitive advantage due to unrest and economic concerns in the respective nations. Spain and Italy are hampered by decreased consumption rates and weak economies of scale in production. However, they have shown promise in their ability to adapt to an internationalised marketplace and to attract foreign investments. This has left them with a moderate competitive advantage.

On the other hand, countries like France and Germany; though they have large domestic markets, there is little possibility for growth. The concentration of production into small wineries, scarce land and labour, complex labelling practices and inability to leverage new production techniques have left them with a weak competitive advantage.

As CEO, what steps would you take to ensure the success of strategy implementation/execution? What are the potential problems that you might face in this process?

First of all I’ll clarify the vision of the company because it seems to me that the senior management of the company had lost sight or didn’t have a clue of what it was. I’ll clearly define what the organization will look like if our strategy is executed successfully. I’ll develop a summary of the vision and communicate it to all stakeholders consistently. 

From our key success factors, I’ll develop goals with due dates, metrics to show progress or lack of progress and someone that is accountable for their completion.

Next, I’ll develop a strategic plan that aligns everyone – from senior executives to front-line employees – to a common direction and goal. To make a strategic plan more actionable, a thorough functional SWOT Analysis will be carried out. The SWOT analysis will help identify key Strengths, Weakness, Opportunities, and Threats. A Porter’s five forces analysis would also be carried out to help us as an organisation discover exactly where we stand compared to competition, market conditions, and in light of current internal issues and opportunities.

An action plan is put into platy to:

Maintain , build and leverage on strength

Prioritise and optimise opportunities

Find a remedy for the weaknesses

Counter the threats

A Porter’s Value Chain analysis is also carried to identify weak business areas we would like to drop; and how we can optimise them.

Next, the corporate goals will be broken down into department goals and to individual goals, with clear timeframes, and regular review of progress or issues related to attainment of the action plan. 

Constant departmental reviews will be emphasised as a sure way to provide focus, accountability, communication, and a predictable way to achieve strategic goals.

I might face challenges in communicating effectively, the companies visions and goals as it is clear from the paper that personnel in the organisation have different views of the company and where they want it to be. Apart from this, the only challenge that may come up is in strategic Planning as people often over-complicate it.