Robert Mondavi Corporation

Robert Mondavi Corporation (RMC) is a company whose strategy has expanded overtime. The company began operations by pursuing a strategy of being the first wine company in Napa Valley to make wines that rivaled those from the great winemaking centers in Europe.

To meet this objective it implemented best practices in the production of premium wines by assembling industry experts developing a new technology to permit gentle handling of wine grapes and cord fermentation of white wines and introducing process innovations such as steel fermentation tanks, vacuum corking of bottles and aging of wines in new French oak barrels.

Although RMC's initial business plan called for producing super- to ultra premium wines, the company later began to explore additional price points and niches in the domestic wine market that it could sell in high volume. RMC obtains eighty-eight percent of its grape supply from non-company owned vineyards. In the 1980s, the company formed global partnerships with France, Italy, and Chile to expand its international presence. RMC has been moderately successful with its strategy.

It was able to go public in a market not particularly receptive to the wine industry, raising nearly $50 million in a 1993 IPO. But, in 1998, RMC had only a four percent market share of the U.S. table wine market. It was over shadowed by four companies, most notably E. & J. Gallo Winery with more than twenty-seven percent of the market. Although revenue showed growth in the years 1997-1999, operating margin as well as net profit margin slid in 1999.

The primary cause of these declines was a shortage of grape supply for its leading brand, Woodbridge Chardonnay. Shareholder discontent was obvious as the stock price fell nearly sixty percent. SWOT analysis of RMC shows a mixture of strengths and weaknesses for the company. On the plus side, the company derives ninety percent of its revenues from its domestic brands and has been very successful in the Popular Premium category through the sales of Woodbridge Chardonnay.

RMC employs best-in-class practices for the production of premium wines and is showing signs of introducing efficiencies at the vineyard level through its introduction of high-density plantings. Internationally, the company is weak with only ten percent of its revenues coming from this market. RMC's use of global partners for international endeavors could possibly have negative implications for RMC's quality image should these partners fail to meet its standards.

Also, RMC's reliance on independent grape growers makes is very vulnerable to fluctuations in the price, quantity and quality of grapes on the open market. This problem is further compounded by the nature of the wine industry's three-tier distribution system in which supermarkets control fifty-two percent of all retail sales volume. Supermarkets are notorious for demanding reliable production schedules from their suppliers and are unforgiving of disruptions. This is reflected by the fact that Woodbridge Chardonnay had difficulty recovering from its shortage even after production levels had returned to normal.

Finally, RMC has no presence in jug wine category which accounted for forty-four percent of the table-wine market by volume and seventeen percent of the revenue in 1999. SWOT analysis also identifies many opportunities and threats for RMC. The U.S. wine market is robust. Retail sales grew from $11.7 billion in 1990 to $18 billion in 1999. U.S. demographics are in RMC's favor. Higher incomes (families earning more than $75,000) represent more than thirty-one percent of domestic wine consumption, indicating a strong market potential for premium wines. Likewise, the export market is attractive.

Overall, twenty-three percent of world-wide wine production was exported to international markets. In 1999, U.S. wine exports grew from $137 million in 1990 to $548 million. The U.S. saw more than a nineteen percent increase in wine exports in 1998, the highest rate of increase among the major wine-producing countries. Along with market opportunity comes a host of competition for the business. Gallo, no longer content with just being a supplier of jug wines, is seeking to enter the premium wine market by developing new brands from recently acquired vineyards in Sonoma County.

Analysts expect further competition in the market for premium and ultrapremium brands as large wine and alcoholic beverage companies acquire smaller winery operations to gain access to these markets. RMC's chief threat in the superpremium and ultrapremium market is ability to compete for grape sources with other large competitors such as Beringer, Kendall-Jackson, Sebastian Vineyards, UDV NA Wines, Gallo, and Canandaigua.

In export markets, up and coming "new world" producers in the U.S., Australia, Chile, Argentina, and South Africa are making inroads on the leading wine exporting countries, France, Italy and Spain where RMC has partnered. Gallo accounted for approximately half of U.S. exports.

Based on the prevailing industry and competitive conditions and RMC's current situation, the top issues that RMC's management team needs to consider include: Will the supply of grapes be adequate for dealing with future market fluctuations and increased demand from new competition in the premium market segments? Should RMC build additional wine producing capacity or allocate its resources toward vineyards? Should RMC focus on domestic or international markets? Is the mix of global partnerships adequate given the progress being made by "new world" producers? Would RMC benefit from the acquisition of international wineries and vineyards? Recommendations RMC should allocate resources to additional wine producing capacity rather than vineyards because this will allow RMC to produce more high-end reserve and vineyard-designated wines at higher price points.

It will be essential for RMC to defend its premium wine market niche as larger competitors target this market and market demand is shifting away from jug wines to the premium market. It's important to note that RMC could be equally vulnerable to an oversupply of grapes if it increases its own vineyard capacity. While the 1996 phylloxera infestation significantly impacted RMC's bottom line, this type of phenomenon is likely to be abated by advancements in biological pest controls. A global strategy is essential to RMC's future success.

Not only should RMC exploit export market opportunities, but it also needs to protect.