Porters 5 forces

Forces Fierce (4) Strong (3) Moderate (2) Weak (1)

Rivalry 4     
The threat of New Entrant   3   
Threat of Substitute   3   
Bargaining Power of Suppliers   3    
Bargaining Power of Buyers 4    
Total 8 9

Grand Total  17

Rivalry- Competitive Intensity (Fierce)

 The number of competi ng fi rms is high.

 Competi tors are of similar size in the two strategic groups

 Firms have similar capabiliti es

 Demand is falling

 Consumers have a lot of opti ons

 Barriers to leaving the industry are high due to high start-up costs

 Barriers to entering the markets are low

 Fuelled industry consolidati on

The threat of New Entrant

 As the barrier to entry is low the threat of new entrants is high.

 Despite the challenges, the presti ge, glamour, the abundance of low-priced grapes,
and low barriers to entry invited more and more wineries into the US market

The Threat of Substitute

 Among the folks who were not regular wine consumers (90% of the US), 44% were
either non-drinkers, and 46% preferred spirits or beer. Moreover, the turnover for
liquor and beer is 50 ti mes/year and 70 ti mes/year respecti vely whereas the turnover
for wine is 2.4ti mes/year.

Bargaining Power of Buyers

 People have a lot of opti ons to switch from, besides the industry itself is fragmented
into diff erent price segments and the number of players in each segment is high.

The bargaining of Suppliers

 As the wine sector consolidated at the lower end of the market, there had been a
simultaneous consolidati on of retailers and distributors across the United States. The
number of distributors had fallen from nearly 5,000 in the 1950s to approximately 250
by 2000

-
 the distributi on system increasingly focused on high volume / low priced products to
maximize their economies of scale due to which the low volume/ high priced
producers could not have a nati onwide supply chain.
How attractive is this industry?
The industry is divided into two strategic segments: Budget and Premium. Both the segments
are heavily crowded. The people of the US are inclined towards beer and spirited drinks more
than wine. The cost of starti ng up is high. Because of these reasons, the industry does not
seem to be very att racti ve as almost all the forces are powerful in the industry.

Following the logic of competitive strategy, should a company enter this industry and if yes,
what should its strategy be?

Should a company decide to venture into this industry, one good news is that the Wine
Market Council has started an att racti ve ad campaign to boost the demand for the product
which will also address the issue of inferior knowledge among consumers about the product.
The company venturing in this industry should capitalize on these opportuniti es.

The other major concern for the company would be to decide the price segment that it wants
to compete in. In my opinion, the company should go into the premium sector of the market
and opt for a backward integrati on plan to reduce the bargaining power of distributors and
retailers to have nati onwide coverage. Also, the maximum revenue was generated from this
segment even though the number of units sold was less hence the ROI is higher in this
segment. In additi on to that, the labor cost will be less too.

If the company goes for low price segments, there are already established players in the
market and they could come up with retaliatory countermoves to bring the company down.
(Lowering the prices further, increasing quality, increased adverti sing)

With a growing global grape glut, more and more wineries entering the market, and a
simultaneous squeeze in distributi on and retail channels, it was nearly impossible for a new
company to establish a dominant positi on.

Following the logic of competitive strategy, what strategy should an established player
follow?

An established player should increase their marketi ng budget and increase the awareness of
the product to the consumers and also try to educate the consumers of the multi ple varieti es
that wine off ers. It could also try classic strategies such as lowering the prices further or
increasing the quality to compete with the rivals.

What are the factors the industry competes on and invests in? How long has the industry
competed on these factors?
Price

Quality

ADD POINTS and FACTORS

CASE FACTS !!
Consumer

 Consumers faced a choice of hundreds of diff erent grape varietals, colors,

packaging sizes, styles of wine, countries of origin, and regions.

 “The consumer wants quality or price – one or the other,”

 The myriad choices made becoming bett er informed a daunti ng propositi on:
more than 80% of wine drinkers felt that their knowledge of wine was average
or below average, according to a nati onwide survey

 Only 10% of Americans drank wine regularly in 2001 and consti tuted almost
90% of the wine purchases. Of the remaining 90% who were not regular wine
consumers, roughly 44% did not drink and the remaining 46% preferred beer or
spirits.

 35% of the populati on drinks alcoholic beverages but they don’t drink wine,
They’ve tried it, they don’t like it. They’re beer drinkers or they’re spirits
drinkers.

Market

 America was the fourth-largest producer, it remained stuck at 34th place in

world per capita wine consumpti on.

 Overall, the global wine industry was worth roughly $130-$180 billion in 2001
with an average growth rate of 1-2% per year since 1994. Yet it was also highly
fragmented with no one company controlling more than 1% of global retail
sales in the same year. Yet the number of companies competi ng in this market
was growing rapidly.

 The industry was divided into two strategic groups: budget and premium
segments.

 The intense competi ti on in the budget segment fueled industry consolidati on.

 The top eight companies in the US produced more than 75% of the wine
volume, while the esti mated 2,500 other wineries produced the remaining 25%.

 the wines produced by the top eight companies were low priced, selling below
$7 per bott le. These low-priced wines accounted for 77% of the volume of wine
sold, yet brought in just 48% of sales

 At the other end of the spectrum, the remaining 23% of wine sold above $7
were considered premium wines and accounted for 52% of sales.

 The dominance of a few key players in the low-price volume market gave them
the ability to leverage distributors to gain shelf space and put millions of
dollars into marketi ng budgets. Small bouti que wineries survived, but they
were forced to remain small or risk being clobbered by the majors.
Distribution

 The number of distributors had fallen from nearly 5,000 in the 1950s to
approximately 250 by 2000. On average there were only two major distributors
per state.

 Only 50 to 100 of the largest wineries – out of more than 2,500 producers –
with access to widespread nati onal distributi on

 Research by the American Wine Insti tute showed that only 17% of its members
had distributi on in all 50 states.

 There was also enormous retail consolidati on, with the top ten supermarkets
controlling 55% of the US market in 2000

 Tens of thousands of local, nati onal, and internati onal wine brands were vying
for space on the store shelves of a handful of powerful supermarkets that
demanded popular wines at very low prices.

 While the overwhelming majority of wine producers focused on low volume /

high priced wines to gain the maximum return on their investment, the
distributi on system increasingly focused on high volume / low priced products
to maximize their economies of scale.

 If a winery wants to gain nati onwide distributi on it needs to produce high

volume / low priced wine as distributors

 Inventory turnover for liquor and beer is 50 ti mes/year and 70 ti mes/year

respecti vely whereas the turnover for wine is 2.4ti mes/year.

 With only 350 wineries producing more than 10,000 cases a year (Gallo

 sold 65 million cases in 2001) the remaining wineries were fi nding it

increasingly diffi cult to get their product to market.

 Despite these challenges, the presti ge, glamour, the abundance of low-priced
grapes, and low

 Barriers to entry invited more and more wineries into the US market.

 By 2001 imports accounted for 20% of all wine sales in the US.
Start-up Costs

 The capital requirements for entry were substanti al

 For a new entrant, an undeveloped plot of land for wine grape producti on was
typically priced at $15,000 to $40,000 per acre over four years (the ti me it
takes vines to mature), not including the value of the land.

 The best areas of Northern California land were valued between $65,000 and
$150,000 per acre. Real estate prices were much lower in other winemaking
regions of the country, and even less in other countries such as Chile and
Australia.

 Fixed costs in this category were largely centered on the cost of oak barrels
($300-$700 per barrel) and the

 the ti me that the fi xed capital and cash fl ow were ti ed up in the aging process
(24-30 months).

 In terms of labor costs, the average salary of a winemaker at a small-to-

medium-sized (10k-50k gallons/year) winery was just $64,000. Compare this to
the salary of a winemaker at a medium-to-large sized winery (100k-500k
gallons/year), which topped out at an average of $111,000 at the turn of the
century.

 With litt le to no opportunity for wide distributi on, the capital requirements for
a small winery dropped further as the large budget players spent over 40% of
their expenditures on marketi ng and distributi on costs.