.

Competitive Analysis of Porters Five-Forces Model

Porters Five Forces model is a widely used approach to identify and analyze five competitive
forces that shape every industry, and helps determine an industry's weaknesses and strengths.
The competitive pressures that Robert Mondavi faces in the U.S. domestic wine industry are
described below:
1.1

Bargaining Power of Suppliers

RMC has used backward integration strategy to increase control of grape suppliers. He
has successfully convinced many of Krugs top grape suppliers to sign long term contract with
RMC for approximately 75% of its purchases.
He also worked closely with each grower to improve grape quality and the contract has
been structured where the compensation was tied to the grape quality & crop yields. This will
improve the stability of the price as most of the growers depend on RMC for sustenance, thus
giving them very little bargaining power over RMC. Mondavi also convinced Krugs top two
suppliers to take financial stake in his new winery. (Silverman, Gilinsky, Guy & Baack, 2001)
Since now they are the stakeholders & have long term contractual relationship with Mondavi, it
has reduced the likelihood that suppliers will increase price.
Furthermore, RMC has invested more than $50mil over the past 10 years to replant
vineyards after the phylloxera epidemic. For long-term plan, Mondavi also acquired additional
vineyards to increase its internal grape sourcing to 25% by 2005 so that it wont rely heavily on
independent growers. (Professor Roberto, 2002) As such, threat of supplier bargaining power is
low for RMC as they attempt to control the suppliers operations right from production to
distribution.
1.2

Bargaining Power of Customers

Sales of wine in U.S. are mainly controlled by three-tier distribution system. RMC sells
wines to their customers who are the wholesalers/distributors, who then provided wines to local
retails businesses which accounted for 78% of total sales volume in U.S. Supermarkets alone
have contributed 52% of retails wine sales. (Silverman, Gilinsky, Guy & Baack, 2001)

However major changes had taken place in wholesale and retail wine business. Number
of alcoholic beverage distributors had decreased by 75% in early 1960s and substantial market
share are now controlled by top 5 distributors. (Exhibit 2) As a result, large distributors are
enjoying economies of scales and prefer to distribute only top selling wine brands since the
product can be replenished quickly. Bargaining power of distributors had increased since they
have a lot of wine brands to choose from.
Furthermore, five new world countries - Australia, Canada, Chile, New Zealand and U.S.
have signed trade agreement in 2001 to keep markets open and reduce trade barriers. (Castaldi,
Cholette, Hussain, 2006) With the globalization of wine industry, a lot of international wine
brands are eyeing for space on the store shelves of these few powerful supermarkets. As a result,
RMC faced increasing competition as they relied heavily on top distributors & retails chain for
domestic sales, which accounted for two-third of its revenue. (Professor Roberto, 2002) As such,
bargaining power of customers is high for RMC
1.3

Potential Entry of New Competitors

Consolidation is occurring among wineries worldwide through merges and acquisitions.

In 1970s, several food and beverage conglomerates, like Nestle and Coca-Cola have entered
premium market by acquiring premium to ultra-premium wineries. In 1980s, global alcoholic
beverage companies, like Canandaigua and The Wine Group have acquired wineries to
complement their beer & distilled spirits businesses. In 1990s, there were some 200 new wineries
in the Napa Valley competed with RMC in premium market. (Silverman, Gilinsky, Guy &
Baack, 2001)
A growing number of these wineries were nearly owned by multinational companies
which have free-flow of cash and able to gain economic of scales in wine industry through
merger or requisition. Furthermore, they have substantial investment in working capital and
funding to acquire new vineyards or even pay higher prices for grape supplies. Although RMCs
skills & expertise are difficult to imitate, but the knowledge and experience of these new
competitors in alcoholic beverage industry powered with the support of their existing distribution
assets will be an added advantage to compete in wine industry.

As a result, the new competitors have dwindled capital resources of RMC, which ended
in public listing to obtain more capital to compete and take advantage of future opportunities
(Silverman, Gilinsky, Guy & Baack, 2001) As such, threat of new competitors is high for RMC
especially when the big companies treat mergers and acquisitions as attractive ways to grow.
1.4

Rivalry among Competing Firms

Rivalry among competing firms is often the strongest of the five competitive forces
especially in U.S. wine industry, which was composed of approximately 1,500 wineries with the
top 10 accounting for 70% of U.S. production. (Silverman, Gilinsky, Guy & Baack, 2001)
RMC has experienced intense rivalry from few dominant & large volume producers like
E&J Gallo Winery and Canandaigua Wine which have controlled 40-50% of market share.
(Exhibit 3) Furthermore, E&J Gallo also enter the premium wine segment aggressively to
capitalize on changes in consumer demand toward premium wines. This will affect RMC which
is primarily competing for premium wine market.
Besides, large volume producer like E&J Gallo also gained economies of scale and have
been viewed as sales powerhouse by many industry observers. They adopted strategy of
substantial vertical integration by owning glass container manufacturer, bottle cork operation, a
fleet of trucks and network of distribution centres throughout the country. (Professor Roberto,
2002) This enabled Gallo to enjoy a significant cost advantage. In this situation, rivalry is more
likely.
Furthermore, most of the rivalries have focused on channels promotions strategy to
increase brand awareness and broaden its customer base in the premium market. They employed
a direct sales force, organize wine competitions, wine testing and education activities at their
vineyard to build publics awareness. To sustain the competitiveness, RMC has gone far with the
launched of its first radio & television advertising campaign nationwide. As such, rivalry among
competing firms is high for RMC in premium wine segment.

1.5

Potential Development of Substitute Products

There are a lot of categories in non-alcoholic and alcoholic beverage such as beer and
distilled spirits. When considering substitute for wine, many people always think the wine
substitute is beer. Actually all these are more of a compliment than substitute as each product has
its own characteristic, can be differentiated and used to accompany different occasion.
However the threat of substitute products is still exist within the wine category. For
example, an incident happened in 1999 where all the distributors began to substitute competing
Chardonnay brand on retailers shelves after RMC experienced shortfall in supplying
Woodbridge Chardonnay brand. (Silverman, Gilinsky, Guy & Baack, 2001) Besides, there are a
lot of wines with similar price, taste & quality are readily available from local or multinational
brands. The wide selection of wines has confused the customers during the buying process and
always have trouble to remember which wines they bought and liked. (Castaldi, Cholette,
Hussain, 2006) As such, the brand loyalty of customers is low and switching to an alternative
product is more likely during the purchase process.
Although RMC has wine product in all premium categories and hold a competitive
advantage in economic of scales and price, the threat of substitute products is still possible as
most of the distributors only prefer to sell the wines which gained most awards and acclaim from
wine enthusiasts. In conclusion, threat of substitute products is consider moderate for RMC.
Based on Porters Five Forces, it can be concluded that only threat of suppliers are
favorable to RMC. Due to the high competitive and continuous threats from new entrances, it is
important for RMC to be more innovative in developing world-class wines in order to sustain its
domestic economic profits.