crafting winning strategies in a mature market

1. Crafting winning strategies in a mature
market
The US Wine Industry in 2001
Group 2 – Section C
Ashir Madaan - 13P131
Avishek Dasgupta - 13P136
Kanika Virmani - 13P146
Rahul Aggarwal - 13P159
Sidharth Gautam - 13P171
Tarun Gupta - 13P177

2. 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)

3. Industry Landscape in 2001
• Production of Chardonnay and Cabernet Sauvignon grapes doubled and Merlot
tripled
• America: Fourth largest wine producer in the world
34th in world per capita wine consumption
Retail Price per bottle Price Segment Percent of Total Volume Percent of Total Revenue
Premium
Over $14 Ultra Premium 7% 25%
$7 to $14 Super Premium 16% 27%
Budget
$3 to $7 Popular Premium 33% 31%
Below $3 Jug Wine&Others 44% 17%
100% 100%
Two Strategic Groups: Budget and Premium

4. • 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

5. 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

6. 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/ white
Lived in suburban/ urban areas
Relatively wealthy

7. How attractive is this industry?

8. 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

9. 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

10. Should a company enter this
industry and if yes, what should its
strategy be?

11. • 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

12. Applying Blue Ocean Strategy
Blue Ocean
Eliminate
What factors should be
eliminated that the
industry has taken for
granted
Reduce
What factors should be
reduced well below the
industry standard
Create
What factors should
be create that the
industry has never
offered
Raise
What 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.

13. What strategy should an existing
player follow?

14. • 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

15. What are the factors that the
industry competes on and invests
in?

16. 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

17. How long has the industry competed
on these factors?

18. • 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

19. THANKYOU