Crafting Winning Strategies

in a Mature Market:
The US Wine Industry in 2001

Brief History of Wine

First
productio
n 7000
years
ago (late
Stone
age)

North
Africa ->
Greece
(1600
BC)

Persia ->
Middle
East ->
Egypt
(2700BC)

Birth of
US wine
Industry
(1800
AD)

Rome ->
Europe
(till 1600
AD)

Greece
-> Rome
(800 BC)

Europe
->
America
(1521
AD)

Industry Landscape in 2001

Production of wine increased in anticipation of soaring

demand.
America was the 4th largest wine producer.
Tremendous growth with number of wineries growing more
than 24%.
34th place in per capita consumption.
Top eight companies in the US produced more than 75% of
the wine volume rest wineries produced the remaining 25%.
Consolidation of retailers and distributors across the United
States in late 1990s. Number of distributors fell from 5000
to 250 by 2000
Only 50 to 100 left with access to widespread national
distribution
Enormous retail consolidation with top 10 supermarkets
controlling 55% of the US market in 2000

Start Up Costs
Substantial capital requirements for setting up a large
winery.
Undeveloped piece of land for wine production was priced at
$15,000-$40,000 per acre(over the aging period).
Value of land between $65,000 and $150,000 per acre in
Northern California.
Cost of establishing a winery between $125,000 and
$500,000 depending on sophistication of equipment.
Fixed Costs: $300-$700 per oak barrel.
Salary of a winemaker at a small-to-medium sized winery$64,000
Salary of a winemaker at a medium-to-large sized winery$111,000
40% expenditure on marketing and distribution costs for
large budget players

Demand
Production outstripped consumption by 15-20% from 19972001
10% Americans drank regularly, constituted 90% of wine
purchases
Of the remaining 90%:
44% did not drink
46% preferred beer or spirits
Average wine drinker:
40-59 years of age
Caucasian/ white
Lived in suburban/ urban areas
Relatively wealthy

HOW ATTRACTIVE IS THE

INDUSTRY?

Competitive Rivalry : High

Clearly differentiated product

categories:

Budget and Premium

Intense competition within

budget segment led to
consolidation
Top 8 companies make 75% of
wine volume
Boutique wineries have no
incentive to grow
Big players put millions into
marketing expenses

Bargaining Power of
Suppliers: LOW

Wine producers having

integrated backwards
and having their own
vineyards try to control
the operations right from
production to
distribution

Inexpensive options for

specialized machinery
available

Easy availability of land

Barriers to Entry: High for budget and low for Premium

Economies of scale

Capital / investment requirements aren't high

Low labour cost

Inexpensive leasing options for machinery

Wine being produced from California to Alaska

Bargaining power of buyers
:High

Very low switching costs

Marked by oversupply with

demand lagging; only 10
% drink wine regularly

Consolidation of
distributors:
only 2 major
distributors/state
number of
distributors dropped
from 5000 to 250

Consolidation of Retailers:
top 10 supermarkets
controlling 55% of US
Market
Threat of Substitutes: High
A handful of

35% drink alcoholic drinks but not

supermarkets
wine
demanding popular

Threat is low for premium category

wines at low prices

Craft Beer/Beer and spirits most

preferred

Turnover:
2.4 times a year for premium
wines
70 times a year for Beer

SHOULD A COMPANY ENTER

THIS INDUSTRY AND IF YES,
WHAT SHOULD ITS STRATEGY
BE?

The wine industry market is really competitive market

ranging from huge player to cottage players and low
options for distribution and retail channels. Most of the
wineries have similar strategy of selling high volume
budget product and low volume premium product. Unless
the new entrant have a differentiating product, it shouldnt
enter the market.
The new entrant should try to adopt Blue Ocean strategy
where it can find the untapped market demand and
market space.
How can this be achieved?
By targeting rest 90% of the alcoholic and non-alcoholic
beverage consumers who doesnt drink wine.
Creating a new differentiating product which will neither
be budget or premium product.
Creating awareness and changing the perception about

WHAT STRATEGY SHOULD AN

ESTABLISHED PLAYER FOLLOW?

Premium Wine industry

Market would remain small with little potential for
growth
Limit production
Deliver a niche product in the premium segment at a
premium price
Focus on retention of customers
Budget Wine industry
Keep costs low
Concentrate on generating huge volumes
Strengthen the distribution network to reach maximum
number of customers