Global Wine War Flashcards
Main points:
Wine Industry Overview:
Industry Analysis: Reminder
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Define the industry
- In what industry does our company compete?
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Identify the players
- Who are the players that influences our company’s profitability?
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Analyse the players
- How can we evaluate the relative strengths of the forces influencing profitability?
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Test the analyses
- How can we make sure that our analysis is correct?
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Respond to the industry environment
- How can we develop a way to deal with the industry environment?
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Change
- How can we exploit change in the industry and even act to shape the industry?
1 - Global Wine Industry: Players
(Classify these players according to Porter’s Five Forces: potential entrants, suppliers, buyers, producers of substitutes, industry competitors, and producers of complementary goods)
2 - Players’ Influence on Profitability:
Evaluate the relative strength of each player and how it influences profitability. This effort should yield an overall assessment of the level of profitability available in the industry
=> Porter’s Five Forces Framework
Bargaining power of suppliers: moderate
Strengthening factors
- Major players often need to source grapes and grape juice from independent growers
Weakening factors
- Usually wine producers operate fairly vertically-integrated businesses => own vineyards
Bargaining power of buyers: moderate
Strengthening factors:
- Wine producers usually show no forward integration into retail businesses
- Strong buyer power in some markets with concentrated beverage industry
Weakening factors:
- Wine producers can differentiate their products quite strongly (still, sparkling by region of origin, grape variety, style)
- Thus, major buyers generally need to offer a wide range of wines for their own customers, should tend to weaken buyer power.
Threat of substitute products: high
- Low switching costs, various consumption patterns in different geographies
Threat of new entrants: moderate
Weakening factors (barriers to entry):
- Costs associated with land, labour and capital equipment
- Reputation is difficult to establish for new entrants
- Regulations and Policies
Strengthening factors
- Low switching costs
- Growing industry
Rivalry among existing firms: moderate to high
Weakening factors:
- Strong differentiation possibilities
Strengthening factors
- Highly competitive due to high fixed costs and moderate buyer power
- Purchasers have a wide range of wines to choose from, with relatively low switching costs
3 - Conclusion from player analysis
Analysis suggests that profitability in the global wine industry will generally be medium.
It should be possible to explain superior levels of profitability among some industry participants by how they deal with the competitive forces.
4 - Test the Analysis
Test the analysis by comparing these predictions with observed levels of profitability. If the assessment suggests low profitability, then there should be at least one force that shrinks the overall market pie
Industry Indicators:
- Oversupply, tight credit conditions and continued competition with other alcoholic beverage industries
- Old World producers burdened with oversupply and declining demand
- Weakening consumption in traditional wine-growing regions
- Competition with other alcoholic beverage industries
- Global consumer spending has been on the rise
- Slowly growing revenues
=> Pressure on profitability but industry performance indicators are in line with analysis
=> The average wine industry profit margin was 11.9% in 2017
5 - Respond
Given this analysis, how should the firm respond to attain a more profitable position? Assess the opportunities to increase profits and the potential threats to existing profits
- Change
The final step is to develop a strategy that allows the firm (or group of firms) to compete over time and explore opportunities to change the industry structure.
Because the industry environment is dynamic, firms need to be proactive and respond to future regulatory or technological changes that affect each of the Five Forces
Case Overview:
Tradition-bound Old World wine industry VS market-oriented New World producers in the battle for the Chinese wine market in 2015.
China’s wine consumption growth presented a large and fast-growing export target that was extremely attractive both to Old World producers burdened with oversupply and declining demand and to New World winemakers faced with rising costs and a deteriorating image.
But changing Chinese market conditions and consumer preferences required both sets of players to devise new strategies to gain share in this fast-growing market.
Global Wine War
A group of new competitors caused rapid and dramatic changes to global competitive industry structure
- Entrenched competitors who had shaped the rules of the industry and dominated it for two centuries saw their competitive positions challenged and their market shares seriously eroded in the space of a few years
The Old World’s Dominance in the Wine Industry:
Sources of Competitive Advantage
- Terroir: Suitable climate and soil for grape-growing
- Grape-growing experience: longstanding knowledge and expertise in grape growing
- Wine-making skills: the French producers accumulated a rich tradition of wine making
- Well developed logistics and distribution
=> natural and acquired capabilities gave France an enormous source of advantage as the export markets developed during the nineteenth and twentieth centuries
Competitive Innovations
- Packaging innovations: The introduction of glass bottles, the cork stopper, and pasteurization (–> mass production, longevity of the bottled wine)
- Developing differentiated segments: It was the monks and then the aristocrats in France who first created the differentiated “fine wine” segment
- Market positioning: The French AOC classification system (=> product classification and a guarantee of the quality)
=> Both competitive advantages and competitive innovations contributed to building the image and reputation of French wine!
New World and “Judgement of Paris”:
Wine competition organized in Paris in 1976
- French judges carried out two blind tasting comparisons: one of top-quality Chardonnays and another of red wines (Bordeaux wines from France and Cabernet Sauvignon wines from California)
- A Californian wine rated best in each category, which caused surprise as France was generally regarded as being the foremost producer of the world’s best wines
=> Gave confidence to New World producers
The New World’s Increasing Growth:
Chinese Wine Industry:
The decade’s most attractive market
- Wine became a prestige product => top segment growth
- Domestic entry-level wine dominated most other consumption
- With domestic production lagging demand growth, a large import market opened up
- Chinese consumers moved to the middle market, Australia’s simpler brands and good mid-priced wines became the new favourites
- In 2015, Chinese wine imports reached €1.7 billion, with France leading in value (45% import market share) and volume (43%) but Australia, third in volume (14%) and second in value (23%), was closing the gap
The Old World’s Responses to Threats & Opportunities:
- Using Hong Kong as the entrance point
- Forming Joint Ventures with local distribution agents
- Differentiating products and targeting premium segment
- Developing a wine culture among Chinese consumers
- Promotional events, tastings, and educational seminars
- In 2012, AOP (Appellation d’Origine Protégée) was initiated as part of an industry modernisation plan
