Competitive strategy of wine industry

8 August 2016

The wine may appear to be a simple drink with limited variation available, has turned into a multibillion dollar a year industry with enormous variation and an increasingly sophisticated consumer base. The variation available and changes in the age groups who are becoming the major markets for wine producers have created visible market trends that cannot be ignored. These trends also affect the global market. Focusing on market scale and branding expertise, these opponents have capitalized on the globalization of the wine industry.

Recently, more and more wine production is taking place in “New World” regions such as parts of Australia, Chile, and the United States, which have gained a strong comparative advantage in the wine industry. Another problem is that some wine firm (usually French or Italian) are not capable to satisfy the demand of country such as China which has a huge population and even if the people who drink wine are not a lot the level of wine consumption is increasing and as a consequence the amount of export is growing as the graph below shows. Source: All material ©2010 – 2012 Twisted Pine Productions.

Competitive strategy of wine industry Essay Example

Imports of bottled wine in China increased by 94% year-on-year (y-o-y) to US$1. 27bn in 2011, according to data provided by the China Culture Association of Poetry and Wine (CCAPW). According to CCAPW, the total volume of imported wine climbed 76. 5% y-o-y in 2010, while it increased by 80. 9% y-oy in 2011. CCAPW also revealed that sales of domestically produced wine grew 36. 3% y-o-y to CNY34. 2bn (US$5. 4bn) in 2011. Wine continues to be dominated by domestic brands, and although imports from major producing nations such as France have grown, they remain beyond reach in price terms for all but the most affluent of Chinese consumers.

As a consequence of these barriers, winemakers from leading winemaking countries have entered the Chinese market via joint ventures, providing expertise and advice to local vineyards, thus finding a means of capitalising on this growing market. It’s very important distinguish the industry of wine in 2 main category: Small producer: who has high prices, low level of competitors but low production capacity; focused on niche Big producer: who has medium/low prices, more competitors and high production capacity; focused on economies of scale Rivalry

Barriers to Entry: The wine industry represents substantial barriers to entry. The most significant of these barriers is the price of land. Prices of land for vineyards has risen sharply. Along with the initial investment in land, there is a large capital investment in equipment. There are requirements for processing facilities and for storage facilities of large barrels of wine. Time is also against the new comer to the wine industry. It will often take years of aging before a wine can be brought to market making the return on investment very slow.

Degree of Rivalry: The wine industry is an industry with many competitors. A high number of competitors suggest that price competition is very high. Along with the high number of competitors, there is also substantial consolidation of larger brands. Companies such as Foster Brands, Constellation, and Gallos have been purchasing smaller wineries and often have brand portfolios with as many as one hundred plus wine brands in the portfolio. These larger producers are using their power to push smaller manufacturers off the shelves. Power of Buyers:

Buyers in the wine industry can be grouped into two categories, distributors and retailers. The distributor market has undergone intense consolidation with the five largest liquor distributors having over thirty percent of the market. The retailers also have a great deal of power over producers. The two largest wine retailers are Costco (with 10%) and Wal-Mart (with 9%). Threat of Substitutes: Brand loyalty is depend of the country, there are some countries accustomed to the use of wine which have acquired expertise allowing to learn about wine and to be loyal to a certain producer.

Though there are other customers, such as Americans which has not the knowledge of the product that may be loyal to a certain product such as a merlot, they do not care who makes it. Supplier Power: There are several suppliers. One supplier is the vineyards. These vineyards lack power, the global market has been flooded with grapes from California, Australia, and several other countries. With all of these pressures, there is very high competition and low power of suppliers. Other suppliers such as bottlers are also easily substituted so they lack significant buying power. Conclusion regarding rivalry:

The problem with the wine industry is the consolidation of distributors and buyers. With so much power in the hands of buyers, a winery needs to be large so that they cannot be pushed around by the buyers. This is why many small wineries have consolidated; they need to be larger to gain bargaining power. key success factors in the wine industry BEING DIFFERENT J. Lapsley and K. Moulton [2001] explain in their book “Successful Wine Marketing” how crucial it is that wine products seek a real identity. An appellation’s success is based on its ancestral and rigorous attributes, and of course, on the grower’s competence.

A newer approach consists of developing branded wines and assuming that a brand conveys a particular identity derived from its specific competitive positioning and astute advertising. SEGMENTING THE MARKET The advantage of having real market segmentation is that consumers can be grouped homogeneously. This helps to improve the efficiency of any commercial actions undertaken. McKinna [1987] showed that wine consumers could be classified into four main market segments: connoisseurs (25%), students (51%), new consumers (10%), and bulk consumers who drink wine served in boxes, etc. (14%). These averages may cover significant national variations.

The market breakdown will vary depending on whether the country in questions is “Old World” and accustomed to well established benchmarks like appellations, or “New World” and more spontaneously interested in specific branded wines or grape varieties. MOVING CLOSER TO THE MARKET Mudill, Riding, Georges and Haines [2003] have highlighted distribution channel concentration as the key variable in the world wine market. Like wine producers, actors in these channels have engaged in countless mergers and acquisitions in their attempts to gain more power vis-a-vis the major retailers and to shorten the logistics chain.

In many sectors of activity, value added has steadily moved downstream, benefiting retailers instead of entrepreneurs who are in the process far upstream. This has triggered a merger-mania with companies trying to move as close as possible to the end user by eliminating intermediaries. FINDING A DIFFERENT WAY TO COMMUNICATE It is known that amongst the various marketing mix tools available to wine sector product managers, communications [advertising] plays a role that is clearly important. Furthermore, although one of communication’s main goal is to attract new (and often young) consumers.

The Internet can help sponsors here by providing an additional vehicle for media communications. Kehoe and Pitkow [1996] have clearly shown that the Web targets a mainly male population that is relatively young, influential, and which enjoys above-average education. Their E-commerce has increase sales by 11% in the year 2011. Conclusion To achieve a good ranking in the wine industry it is necessary to analyze the own product, the global market and figure out what yours goals and objectives are. After having settled this, follows the development of an international strategy. Srategy suitable for the wine industry

In the wine industry, the used strategies change depending the dimension of the companies. In the small company is recommended use the home replication strategy, selling the same products in both domestic and foreign markets, having a strong name and characteristic to loyalty a specific consumers grouped in a niche. Instead in the big companies is recommended penetrate the market using a transnational or even global strategy since rivals are the same in most country markets so there is a strong competitiveness that has to be attacked by low costs and global standardization strategy. MARCO SIMONINI

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