Case-Review-on-Robert-Mondavi

1.Evaluatethestructureoftheglobalwineindustry.Howandwhyisthestructurechanging?WhatthreatsdothesechangespresentforRobertMondavi?MarketStructure:Theglobalwineindustryisestimatedtobeinsizeof$130billionto$180billioninretailsaleswhichisattributedinthreetypesofwine:Tablewine(alcohollevel14%),dessertorfortified(alcohollevel14%)andsparklingwhereTablewineaccountedforthemajorshareofthemarket.Thetablewinemarketisfurtherdividedintofiveprincipalsegments:jugorcommodity,popularpremium($3–7perbottle),superpremium($7–14perbottle),ultraandluxury.TheconsumptionsofpremiumwinekeptgrowinginUSandothernon-Europeanwine-producingnations,i.e.UK.However,mostofthecontinentalEuropeancountriescontinuestokeephighdemandoninexpensivetablewine.USpaid$7.2perbottleonaverage,whichishigherthanWesternEuropeanconsumers($4.8perbottle.)MarketStructureChangesTheindustrystartedtoconsolidatewithmoremergingactivitiesthatlargefirmsaimtoachievehighereconomiesofscaletoachievecostefficiency.ItwillimposesignificantthreattoRobertMondavi’sfamilybusinessasoneofthedomesticwine-producerinUS.Consolidationtookplaceinthedistributionchannelsforretail/wholesale.ThemarketsharesarecontrolledbyfivedistributorsinUSandAmerciancsincreasinglypurchasedwineviathenewchannels,e.g.wholesaleclubs.Onedistributor,SouthernWineandSpirits,accountsfor29%ofMondavi’srevenue.Costco,thelargestwineretailerintheStates,nowaccountsfor10%ofMondavi’sunitsales.Asthewineindustryitselfconsolidates,largerfirmsmayhaveanadvantageoverMondavibecausetheycancombattheincreasingpowerofretailersandwholesalersmoreeffectively.Largebeeranddistilledspiritsproducershavebeenmovingaggressivelyintothepremiumwinebusiness.Thesefirmshavedeeppocketsandtheabilitytocross-subsidizetheirwinebusinessesusingcashflowfrombeer,spirits,andotheroperations.Branddilution.Mondavihasbeentryingtocaptureeconomiesofscopebyleveragingitscorebrandacrossmultiplemarketsegments.Forinstance,theyrecentlyre-launchedtheCoastalbrandtoplacemoreemphasisonitsRobertMondaviheritage.Someconcernsexistthattheseproductlineextensionsmaydilutethecorebrand.FollowingtheincreasingcompetitionwiththeNewWorldwineproducers,suchasSouthcorpwhichaccountedfor7%ofallwineimportsintheUnitedStates,anditproduced2ofthetop5importedbrandsinthecountry.Inparticular,importshaveputpressureonMondavi’swinesinthepopularpremiumsegmentandatthelowerendofthesuperpremiumsegment.Exhibit2inthecasedemonstratesthatpriceshavebeenstagnating/declininginthesesegmentsinwhichMondavicompeteswiththeWoodbridgeandCoastalbrands.1.WhyarelargealcoholicbeveragefirmssuchasDiageo,Foster’s,andAlliedDomecqenteringthepremiumwinebusiness?Dotheirstrategiesmakesense?WhatadvantagesordisadvantagesdoesMondavihaverelativetothesefirms?Foster’sgroup–inbeerbusiness–usecashflowtofundanaggressiveexpansionintothepremiumwinebusiness.TheBeringer’sdealrepresentsitsboldeststrategicmovetodate,TheBerginerdealcertainlyprovidesFoster’swithgreaterdistributionclout.ThisacquisitionprovidesthepromiseofmoresubstantialrevenuesynergiesthantheSouthcorp/Rosemountdeal.Foster’sexpectstouseBeringer’sstrongpositionintheUStoenhancethesalesofitsMildaraBlasswinesthere.Thescopeeconomiesacrossthebeerandwinebusinessesappearfairlysmallthough.someadvertisingandmarketingeconomies.fewproductioneconomiesexist,asthefirmproducesbeerthroughastandardizedmassproductionprocess–fardifferentthanthecraftofwinemaking.Thefirmcannotdistributebeerandwineonthesametrucks,asbeerkegsneedtoberefrigerated.Brand-buildingactivitiesdifferaswell,ascreatingandmarketingawinebrandtypicallydivergesfromtheapproachusedtodevelopabeerlabel.Finally,salesforcesynergiesappearminimal,asasinglesalesforcewillfinditdifficulttosupportboththewineandbeerproductlines.Cross-subsidization(beertowineinthiscase)onlymakessenseiftherearesizeablescopeeconomies.Withoutthem,cross-subsidizationdoesnotproveoptimal,.BCG-sincethecapitalmarketstendtoallocateresourcesmoreefficientlythancorporatemanagerswhoaretryingtomovemoneyfrom“cashcows”to“growthbusinesses.”Notethatthisisinaccordancewiththefamousgrowth-sharematrixoftheBostonConsultingGroup.Rememberthatthetheorybehindthematrixarguesthatcorporatemanagersshouldmaintainaportfolioofbusinessesandfundnewgrowthopportunitiesbyshiftingresourcesfrommature,low-growth,high-sharebusinesses.AlliedDomecq&Diageo.ousethecashflowfromitsdistilledspiritsandrestaurantbusinessestofundentryintothepremiumwinebusiness.Economiesofscope-lackofsynergiesbetweenthesetwolinesofbusiness).Exhibits8aand8binthecasedemonstratethatthebeerandspiritsmarketsarenotgrowing.thesefirmsaresearchingforrevenuegrowth,butnoenhancingshareholdervalue,giventhemodestscaleandscopeeconomiesassociatedwithentryintothewinemarket.Theexecutivesinthesematurebusinessesmaybepursuingrevenuegrowthtopreservetheirpowerandstatus,growthesizeandscopeoftheirorganization,andincreasethesizeoftheircompensationpackages.1.WhatarethestrategicalternativesforMondavi?WhatwouldyourecommendtoMondavi’smanagement?Staythecoursea)Benefits:Acquisitionmultiplesarehigh.Acquisitionsarehardtointegrate.Thebenefitsofgreatersize/scopearequestionabl