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Mondavi Winery Case Study

The Wine Industry experienced great evolution during past decades. This Study shows how right strategies by Robert Mondavi, son of a poor Italian immigrant, could make his company successful for 35 years and how the market forces threatened his company in the beginning of new millennium.

According to the case, size of global wine industry ranged from$130 billion to $180 billion in retail sales. Table wine market, which has an overwhelming share of the market is divided into 5 segments: jug or commodity, popular premium, super premium, ultra and luxury. There are over 1 million producers worldwide. Europe is observed as “Old World “ and countries like Australia, Chile, South Africa, and the US are considered as” New World”. 75% of production and consumption take place in Europe which is a fragmented market. The New world increased its share of global market in past two decades. Overall growth of market is 1-2% per year since 1994 but demand for premium wines to grow 8%-10% per year for future.

Suppliers are vineyard that grow and harvest grapes. Wineries in Europe grew almost all of their own grapes while California wineries outsourced 70%-85% of their fruits. However, American Wineries had begun to acquire more land in late 1990 to secure more premium grapes for growing market segment. Buyers are wholesalers who distribute the products to retails outlets, Retailers are supermarkets, wholesale price club, mass merchandisers, liquor stores , restaurants, hotels and pubs. Recently a lot of consolidation happened in the level of distribution and retail. Substitutes products like beer and spirits are growing their share in market. Their prices are relatively cheaper. New entrants are global alcoholic beverage companies that are acquiring wineries to complement their beer and/or distilled spirits businesses, wineries who are making premium wines and large volume producing moving aggressively into the premium wince business.

5 Porter Analyses:

Analyses of 5 forces during the success time ( Robert was in Charge) shows that RM was in a good situation in terms of rivalry in industry and threats by buyers and suppliers. because of being in a growing market like USA with the least competition and threats. They could minimize threats of suppliers especially for their high quality wines by acquiring prestigious high quality vineyards in California. There was high power by substitutes and new entrants, however they could reduce their forces by differentiation their product as luxury elements for luxury occasions. New technology they used in production beside to the marketing by education give them new image and value to be far from competition with new entrants and substitute.

5 Forces during the era of success is shown in below exhibit:

For the period of case study – year 2001- we recognize 5 forces changes in Winery industry specially in US market which is domestic market for RM. Rivalry increased in the industry due to consolidation of small companies and presence of large companies with low cost manufacturing. Threats by suppliers and buyers increased again due to consolidation. RM stayed more in the strategy of JV which weakened his position comparing to his rival who choose take over strategy. Although situation for new entrants is difficult due to higher investment requirements, but big companies are entering to US market with full force. Force of substitutes is increasing. They offer easier and for every occasion product.

Porter’s 5 Forces Analysis for the era that Mondavi is in trouble, is shown in below Exhibit:

From above diagram we understand that environment has changed for Mondavi. As a family operated company they preferred to stay in their homeland market continue with the same strategies which brought them huge success. Market forces changed, new power full entrants came, supply of good quality grapes with low price was not easy as before and consolidations in winery industry and distribution industry made the situation tougher and tougher.

For VRIO I choose two smart and innovative moves and tested them in the era of success and trouble. The first move which was a successful initiative by RM and helped them to differentiate themselves in the market was “Using New Innovative Technology in Fermentation and Aging win. As shown in below exhibit it passed all tests for Value, Rarity, Inimitable and Operable.

Since 1990 that Michael took was in charge, the dynamics start changing. Many other companies started using similar technology in production. Their technology was no longer exclusive and unique. As you see in the below exhibit it did not passed VRIO. It clearly shows that Michael should have looking for other smart move.

Marketing by Educating Consumers is the second move that I tested by VRIO . Robert targeted opinion leaders within wine drinkers to enhance their knowledge and appreciation of Mondavi’s wine. This strategy worked well to differentiate Mondavi products within the wine drinkers. It made an image as a high quality wine. However, this strategy did not last successful since it positioned wine as a luxury drink for special events. Other substitute specially brewery made opposite approach and positioned beer as a product for general occasions with high publicity. Below is exhibits for VRIO tests for Robert and Michael era.

Blue Ocean Strategies

As shown in below exhibit Robert Mondavi had created blues ocean for his company during 35 years. Value Chain of Mondavi ( blue line) was different from other industry. This is why they were operating with less competition. They had different type of wines with different taste, intensive marketing with message about their aging quality and vineyard prestige.

Time passed and their Blue ocean changed to Red Ocean. Many companies copied their model and entered to the US market. In Below exhibit it is shown red line is close to blue line. In such high competitive situation, companies should look for new value chain and go into new market segment.

We define new market segment by new value that we deliver to our customers. The green line in above exhibit is an example of new value chain strategy that could work for Mondavi.

By ERRC the company will have no complexity, just few types of wines to cover most important segments of consumers, without highlighting for aging
quality and vineyard prestige. From the other side we create a simple taste that most of normal population like it. We make it easier to select (simple name) and easier to drinking. To deliver our message about the advantages and value of our products we set a premium price and use above the line marketing.

Green line strategy is a blue ocean for now. However in future some companies will start copying it and change it to red ocean. In my opinion even though we choose strategy which pass VRIO, still there is chance of imitation by others.

Few Ideas for CEO

1- Considering 5 Porters forces I would suggest CEO to expand his market to emerging markets in where he has less supply and buyer forces. Countries like South America have such a features. Taking over companies in those countries will give them competitive advantage in the said growing markets.

2- Considering VRIO I would suggest a movement which is valuable, rare, inimitable and operable. After Some acquisition in South America, a good movement is joint venture with a reputable beer or Distilled Spirits producer to complete. This will position company in top 10 in industry, not all company can do I due to their size and it is quit possible to it.

3- Considering Blue Ocean strategies as mentioned in ERRC, I would suggest re evaluate the value chain of the company. They can erase wine complexity, aging quality and vinery prestige. They should reduce price, marketing and wine range. Raise ease of drinking as well as ease of selection. The last not but least is creating new taste which is simple and appreciate by most of population.

Robert Mondavi -- Case Study

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Robert G. Mondavi, the son of poor Italian immigrants, began making wine in California in 1943 when his family purchased the Charles Krug winery in Napa Valley where he served as a general manager. In 1966, at the age of 54, after a severe dispute over control of the family-owned winery, Robert Mondavi used his personal savings and loans from friends to start the flagship Robert Mondavi Winery in Napa Valley with his eldest son, Michael Mondavi. Robert's vision was to create wines in California that could successfully compete with the greatest wines of the world. As a result, Robert Mondavi Winery became the first in California to produce and market premium wines that were expected to compete with premium wines from France, Spain, Italy, and Germany.

In order to achieve this objective Robert believed that he needed to build a Robert Mondavi brand in the premium wine market segment. This resulted in the initial pro¬duction of a limited quantity of premium wines using the best grapes, which brought the highest prices in the market and had the highest profit margins per bottle. How¬ever, he soon realized that this strategy, while establishing the brand, did not allow the company to generate enough cash flow to expand the business. In order to solve this problem Robert decided to produce less expensive wines that he could sell in higher volumes. He dedicated time and effort to finding the best vineyards in Napa Valley for the company's production of grapes. In addition, he signed long-term con¬tracts with growers in Napa Valley and worked closely with each grower to improve grape quality.

Robert Mondavi built a state-of-the-art winery that became a premium winemaking facility as well as conveying a unique sense of Mondavi wines to the visitors. Soon the new winery became a place where the best practices in the production of premium wines were developed, eventually establishing the standard in the wine industry. Robert Mondavi was the first winemaker who assembled experts with various back¬grounds in the fields of viticulture and winemaking to give advice on the new wines. He also developed new technology that allowed special handling of grapes and the cold fermentation of white wines. Furthermore, Mondavi's company created process innovations, such as steel fermentation tanks, vacuum corking of bottles, and aging of wines in new French oak barrels. Dedicated to growing vines naturally, Robert Mon¬davi introduced a natural farming and conservation program that allowed enhanced grape quality, environmental protection, and worker health.

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Moreover, from the very beginning, the company promoted the presentation of wine as part of a sociable way of everyday living. Robert Mondavi Winery was one of the first wineries to present con¬certs, art exhibitions, and culinary programs. In his book, Robert Mondavi described his search for innovation:
From the outset, I wanted my winery to draw inspiration and methods from the traditional Old World chateaux of France and Italy, but I also wanted to become a model of state-of-the-art technology, a pioneer in research and a gathering place for the finest minds in our industry. I wanted our winery to be a haven of
creativity, innovation, excitement, and that unbelievable energy you find in a start-up venture when everyone is committed, heart and soul, to a common cause and a common quest.

In 1972 Mondavi's hard work and dedication to his venture were formally recog¬nized when the Los Angeles Times Vintners Tasting Event selected the 1969 Robert Mondavi Winery Cabernet Sauvignon as the top wine produced in California.

Despite Robert Mondavi's relentless efforts, things did not always go smoothly. A noticeable improvement in the quality and reputation of the Robert Mondavi wines during the 1970s did not spark the interest of reputable five-star restaurants and top wine shops across the country. So, for over a decade, Mondavi traveled throughout the country and abroad, promoting Napa Valley wines and the Robert Mondavi brand name. Often, while dining alone on business trips, Mondavi offered restaurant em¬ployees the opportunity to taste his wine. Slowly, Mondavi got his wines on the wine lists of the top five-star restaurants in the United States. By the end of the 1970s, restau¬rant owners, famous wine connoisseurs, and industry critics were eager to be intro¬duced to Robert Mondavi products. Recognizing the increased popularity of his wines, Mondavi began slowly raising the prices of his wines to the price level of comparable French wines. Subsequently, the company expanded its capacity to produce 500,000 cases of premium wines annually.

About this time Robert Mondavi started building a portfolio of premium wine brands to satisfy the need of consumers in various price and quality segments of the domestic wine market. As a result, from the late 1970s until the 1980s Robert Mondavi diversified its portfolio through acquisition and further growth of the Woodbridge, Bryon, and Coastal brands of California wine. Most of these acquisitions were financed through long-term debt.

In the early 1990s Robert Mondavi faced financial difficulties as a result of the rapid expansion; the increased competition; and a phylloxera infestation of several of the company's vineyards, requiring them to be replanted. After contemplating the matter for several years, Robert Mondavi decided to raise enough capital to continue expan¬sion of his company while maintaining family control of the company. On June 10, 1993, Robert Mondavi issued 3.7 million shares of stock at $13.50 a share and began trading on the NASDAQ as MOND. The initial public offering (IPO) raised approxi¬mately $49.95 million, bringing the company's market capitalization to $213.3 million.

The IPO was structured with two classes of stock: Class A common stock issued to Mon¬davi family, and Class B common stock offered to the public. Class A shares carried 10 votes per share, and Class B one vote per share. This structure allowed the Mondavi family to retain 90 percent ownership of the company and, subsequently, to preserve control over the company's destiny. Robert Mondavi stock was trading at $8 a share a few days after the initial offering and at $6.50 a share six months later, slashing the company's value, and the Mondavi family's wealth, by half.

One factor affecting the price decrease in the stock was the difficulty that the in¬vestment community and analysts had in valuing Robert Mondavi due to a lack of in¬formation on the wine industry. There were only two other publicly traded wine companies, both in low-end wine categories. To help solve this problem, Robert Mon¬davi began educating investors, trying to convince them that it is possible to build a strong globally recognized business selling premium wines. As part of his knowledge-building and awareness-creation campaign, Robert sent teams to New York, Boston, and Chicago, who brought wine presentations, receptions, and tastings to the in¬vestors. According to Robert Mondavi, "Well, we had to mount an effective campaign and take it right to them, and not just explain our approach but put our wines right in their hands! Let them taste, in their own mouths, our expertise and commitment to excellence."

At the same time the company was continuing its innovating efforts, creating in 1994 a revolutionary, capsule-free, flange-top bottle design, which became widely ac¬cepted in the industry.

In the mid-1990s, the company started engaging in various multinational partner¬ships on a 50 : 50 basis: Its partnership with the Baron Philippe de Rothschild of Chateau Mouton Rothschild in Bordeaux, France, resulted in the creation of Opus One wine in 1979; with the Frescobaldi family of Tuscany, Italy, Mondavi launched Luce, Lucente, and Danzante wines in 1995; with the Eduardo Chadwick family of Chile, it introduced Caliterra wines in 1996; and with Australia's largest premium producer, Southcorp, it began producing and marketing new wines from Australia and California in 2001.

Today, the company continues to pursue its goals around the world with its unique cultural and innovative spirit and its consistent growth strategy, reaching revenues of over $441 million in 2002. The company produces 20 unique and separate labels rep¬resenting more than 80 individual wines from California, Italy, Chile, and France and sells its wines in more than 80 countries. Some of the popular Robert Mondavi fine wine labels such as Robert Mondavi Winery, Robert Mondavi Coastal Private Selec¬tion, and Woodbridge Winery have gained enormous popularity among wine lovers in the United States as well as the rest of the world. The company remains a close fam¬ily business.

Recognized as the global representative of California wines, Robert Mondavi has been a major force in leading the U.S. wine industry into the modern era and has de¬voted his life to creating a fine wine culture in America. Through hard work and a con¬stant strive for excellence; he was able to achieve his goal of causing California wines to be viewed as some of the great wines of the world.



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