Us wine industry section c_group2
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Transcript of Us wine industry section c_group2
Crafting winning strategies in a mature market
The US Wine Industry in 2001
Group 2 – Section CAshir Madaan - 13P131Avishek Dasgupta - 13P136Kanika Virmani - 13P146Rahul Aggarwal - 13P159Sidharth Gautam - 13P171Tarun Gupta - 13P177
Brief History
Wine Making Process dates back to 2700 BC
• Egypt: Means of becoming closer to God• Greece: Dionysus, the God of wine and revelry worshipped (1600 BC)• Spread to Italy, France and Spain• Romans: Introduced glassware for wine drinking (800 BC)• Middle Ages: Drink of every strata of society (476AD – late 1600s AD)• France: Sophisticated wine-producing techniques (1700s)• North America: Wine arrived in 1521• California: Wine industry was born (mid-1800s)
Industry Landscape in 2001
• Production of Chardonnay and Cabernet Sauvignon grapes doubled and Merlot tripled
• America: Fourth largest wine producer in the world34th in world per capita wine consumption
Retail Price per bottle
Price Segment Percent of Total Volume
Percent of Total Revenue
PremiumOver $14 Ultra Premium 7% 25%
$7 to $14 Super Premium 16% 27%
Budget$3 to $7
Popular Premium 33% 31%
Below $3Jug Wine&Others 44% 17%
100% 100%
Two Strategic Groups: Budget and Premium
• Top eight companies in the US produced more than 75% of the wine volume• Estimated 2500 wineries produced the remaining 25%• Dominance of few key players in the low-price volume market: greater shelf space &
high marketing budgets• 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• Majority of producers focused on low volume/ high price wines to gain maximum
return• Distribution system focused on high volume/ low priced products to maximize
economies of scale• Nearly impossible for a new company to establish a dominant position• Low barriers invited more and more wineries into the US market
Start Up Costs
• Substantial capital requirements• Undeveloped piece of land for a new entrant priced at $15,000-$40,000 per acre• Value of land between $65,000 and $150,000 per acre• Cost of establishing a winery between $125,000 and $500,000• Fixed Costs: $300-$700 per 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 1997-2001• 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/ whiteLived in suburban/ urban areasRelatively wealthy
How attractive is this industry?
Porter’s Five Forces:• Threat of new entrants: HIGH Low barriers to entry Easy entrance of new wineries to the market
• Bargaining Power of Buyers: HIGH More and more number of wineries entering the market(low-priced grapes) Production outstripped consumption by 15-20% Enormous retail and distributor consolidation
• 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
Porter’s Five Forces:• Threat of substitutes: HIGH Only 10% drank wine regularly 46% preferred beer or spirits 35% drank alcoholic beverages but not wine (beer/spirit drinkers)
• Competitive Rivalry: HIGH Number of US wineries increased more than 400% Little growth in demand, oversupply of grapes Downward pressure on price and margins Large players spent 40% of their expenditures on marketing and distribution
Should a company enter this industry and if yes, what should its strategy be?
• Looking at the industry attractiveness, a company without a differentiating strategy should not enter the industry
• Any new company should try to create a Blue Ocean • Untapped market demand• Unknown market space
rather than fighting in the Red Oceans• The new entrant should expand the market rather than targeting the
already overcrowded market• This can be achieved by:• Targeting the masses i.e the 90% population that doesn’t drink
wine in exchange for letting some traditional customers go• Creating a new market between premium and budget segments• Solving major customer problems and change their perception
about wine
Applying Blue Ocean Strategy
Blue OceanEliminate
What factors should be eliminated that the
industry has taken for granted
ReduceWhat factors should be reduced well below the
industry standard
CreateWhat factors should be create that the industry has never
offered
RaiseWhat factors should be raised well above the industry standard
• Wine Industry jargon which is difficult to comprehend
• General perception of wine among masses
• New price segment• New varieties for a
wide range of drinkers
• Ease of drinking wine
• Unnecessary focus on age, vineyard, grapes etc.
What strategy should an existing player follow?
• An existing established player should try to expand the market• It needs to look beyond the Red Ocean and tap into untapped market
by using the Blue Ocean Strategy • It should try to increase its consumer base by targeting non wine
drinkers as well• It may keep its established brand separate from the Blue Ocean
Differentiation Economies of scale
What are the factors that the industry competes on and invests in?
Premium Segment
• Competes on quality• Invests in acres of
land for wineries and machinery leasing
• marketing and distribution
Budget Segment
• Competes on lower prices
• Shelf spaces• Invests in acres of
land for wineries and machinery leasing
How long has the industry competed on these factors?
• Wine Industry has competed on these factors since the very beginning • The industry is highly competitive• Requires high investment for land and machinery• Quality has always been a crucial element of a good wine
THANKYOU