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Robert Mondavi and the Wine Industry

Robert Mondavi and the Wine Industry

Robert Mondavi Company is one of the most recognized companies in the wine industry and the global market. This report analyzes the wine industry, Robert Mondavi’s internal strategies, its business, corporate and internationalization strategies.

Industry Analysis

Robert Mondavi Company operates in the wine industry. The wine industry was valued at US$ 180 billion at the turn of the millennium (Roberto, 2005). Using Porter’s Five Forces model, it is possible to analyze the competitiveness of the industry. The forces include the threat of potential entrants, bargaining power of buyers, bargaining power of suppliers, threat of competition and threat of substitution.

The threat of potential entrants depends on the segment of the industry the entrant wants to operate in (Roberto, 2005). For non-premium brands, the threat is high, because the machinery needed for production is readily available and not expensive. Furthermore, sourcing for grapes to produce wine is not a difficult task. There is also low switching cost and low customer loyalty in jug wine brands. However, the situation is different for premium brands. The technology required for production is expensive, thus reducing the threat of new entrants. Getting high quality grapes is also difficult making supply of grapes a problem. Furthermore, there is a high switching cost and the consumers tend to be loyal to their wines.

As for the bargaining power of buyers, it is high. There are a few distributors that supply bulks of produced wine. For instance, Southern Wine Spirits control more than 29% of the wine produced in the US (Roberto, 2005). These few firms, therefore, operate in an oligopolistic market maximizing their control over the manufacturers’ market decisions. The bargaining power of suppliers in the wine market depends on the segment. For non-premium sector, suppliers’ power is low. There are many suppliers that can supply grapes which are not necessarily high quality. The opposite applies for premium wine segments.

The threat of competition is high all segments of the industry. Robert Mondavi’s major competitors include Diageo, Allied Domecq, Kendall-Jackson, E&J Gallo and Trinchero Estates, among others (Roberto, 2005). The threat of substitution is also very high, because there are many alternatives to Robert Mondavi’s premium wine brand. Alcoholic substitutes include beer and liquor. Non-alcoholic substitutes include water, milk and soda. What is more, there is also a variety of cheap jug wine that can act as substitutes. Generally, though, the wine industry is attractive and lucrative.

Internal Analysis

Robert Mondavi has resources that enable it to have competitive advantage over its rivals. Using the VRIO framework, the resources and capabilities that create value, rarity, non-imitability and organizational efficiency for Robert Mondavi can be identified. The resources range from financial, physical and reputational to technology. One of the resources that help the company create value is financial muscle. Robert Mondavi has been profitable in all its years of operation with constantly increasing incomes (Roberto, 2005). Furthermore, the company has more than 9700 acres of vineyard in the US alone and a further 1600 held through joint ventures in the US, Italy and Chile (Roberto, 2005). The company also explores rarity. It has modern technology that allows to produce wine efficiently. For instance, it employs gravity technology in its manufacturing plants to move the juice from the crushing platforms to fermenting and to the aging barrels (Roberto, 2005). This eradicates the need to have pumps. Other companies cannot duplicate this with ease, giving Robert Mondavi a competitive edge. To reduce imitability, the company further uses French oak barrels of different sizes. They increase quality of wine and its flavor. As for the organization, the company has created specific units which have autonomy over their sales and marketing strategies (Roberto, 2005). Its vast financial resources and state-of-the-art technologies hugely increase Robert Mondavi’s competitive advantage.

Business Level Strategy

The company pursues differentiation and focus strategies. Using Porter’s Generic Business Strategies Model, it is clear Robert Mondavi’s strategy falls in the fourth quarter. In terms of strategic target, the company focuses on a few particular segments (Roberto, 2005). They are super premium wine, ultra-premium wine and super-ultra-premium wine. This choice uses the uniqueness of the product and customer priorities to drive sales. Its value chain analysis shows that the company has pursued backward integration. It leases and owns more than 9700 acres of vineyards (Roberto, 2005). They allow the company to be autonomous by lowering dependence on grapes suppliers. Furthermore, the company crushes and ferments grapes and does aging for itself through its various plants located in California and joint ventures in Chile (Roberto, 2005). Value addition through fermenting and aging supports its business strategy of differentiation and focus, as the company is able to maintain its own standards for particular flavors.

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Corporate Level Strategy

At a corporate level, Robert Mondavi pursues a host of strategies with the major one being partnerships and joint ventures. The company enters partnerships to manage some of its plants and vineyards, for example, One Opus in Napa Valley (Roberto, 2005). This not only reduces its operational costs, but also spreads the risks in case of any adverse economic ramifications. Furthermore, the company explores mergers and acquisitions, especially in international markets. Robert Mondavi uses more than 100 distributors to get its products to the market. Robert Mondavi also sells abroad through its joint ventures. Exports constitute an average of 8% of its total sales (Roberto, 2005). These diversification creates value for the company and reduces risks aside from increasing profitability.

Internalization Strategy

Robert Mondavi pursues internationalization to expand its market and enhance its global reputation as one of the finest producers of premium wine (Roberto, 2005). The company uses joint ventures to expand into foreign markets. The analysis on the basis of the Integration-Responsiveness framework and Porter’s Diamond framework shows that there is weak pressure for global interaction, though there is strong pressure for local responsiveness. As a result, the company pursues minimal joint ventures abroad. For instance, Robert Mondavi has just two ventures in Chile with Chadwick. In Italy, it also has two venture partnerships with Frescobaldi and Ornellaia (Roberto, 2005). It has one venture partnership in Australia with Rosemount (Roberto, 2005). These ventures make its products known in the foreign markets. Since the venture partners are already established in their respective markets, Robert Mondavi easily enters the foreign markets. Geographical expansion, therefore, creates value for the company, as it aids with making an entry into a highly segmented market allowing to gain considerable market share.

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Financial Performance

Robert Mondavi has had a healthy financial performance in the past two decades. Its financial ratios and numbers compare favorably to those of competitors and industry averages. For instance, its revenues have been growing. In 1994, it had revenues totaling US$ 177 million, and by 2001 it had hit the US$ 480.9 million mark (Roberto, 2005). While its net revenue fluctuates, the company has never recorded losses. Its return on assets in 2002 was 5.6%, which is healthy considering that some of the industry performers stood at 5.1% (Roberto, 2005). What is more, such industry leaders as Allied Domecq and Diageo recorded 9.2% and 7.0%, respectively, which shows Robert Mondavi is competitive (Roberto, 2005). Its net income over sales stood at 10.0%, which was way better than Constellation’s and slightly below that of Allied Domecq, 12.4% (Roberto, 2005). The industry average in 2002 stood at 6.5% (Roberto, 2005). Robert Mondavi also has a healthy return on equity ratio of 12.0%, which is above the industry average of 10.3%, even though it is way below that of its competitors (Roberto, 2005). For instance, Diageo recorded 21.1%, while Allied Domecq recorded the return on equity rate of 27.8% (Roberto, 2005).

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There are various threats that Robert Mondavi should hedge against. One of them is the industry’s continued consolidation (Roberto, 2005). There are many companies that are merging to increase their market shares. Robert Mondavi should increase its joint venture and acquisition efforts to make inroads both locally and internationally. It should also consider merging with other industry heavyweights. The opportunities exist in the form of untapped market segments. Currently, only one of its wineries produces the popular premium segment (Roberto, 2005). The company should consider expanding its customer base. Other companies such as Constellation that were not in the premium wine business have entered the market, and they will continue to do so. Robert Mondavi should expand its focus even to beers and soft drinks to leverage its reputation and gain market share.

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To pursue a new industry segment, the company should also increase its skills resources. Currently, the expertise is apt for premium wine production. The company can also increase its financial resources to acquire established businesses in new market segments, thereby making an easy entry. Given its existing resources, Robert Mondavi should consider competing in the beer and soft drinks industries. It has the necessary resources and capabilities that have seen it succeed in the premium wine market. Additionally, Robert Mondavi should consider expanding into the developing countries. Developed countries are saturated with competitors. New markets such as Brazil, India and South Africa provide good prospects. Robert Mondavi should enter these markets through joint ventures, which have proven to be effective for the company so far.