Introduction

Robert Mondavi had a dream, to put the United States on the map for premium wines. The quest to build his wine empire began in 1966. Mondavi did the impossible, by taking a mix of traditional and risky approaches to ensure Robert Mondavi Corporation’s survival. Or was he just buying time? The focus of this study will be to analyze the operations of Robert Mondavi Corporation (RMC). The question remains, “How far can a corporation stray from its vision before disaster strikes?”

Wine Market Snapshot

Although Americans ranked 13th in wine consumption per capita in 1999, sales grew dramatically throughout the 1990’si. Wine could be broken into the following four categories. Prices are listed on a per bottle basis.

Jug Wine (Below $3) Popular Premium ($3-$7) Super Premium ($7 - $14) Ultra Premium ($14 and up)

Wine was produced in every state, aside from Alaska, and sales dollars reached record highs.ii

Source: The Gomberg-Fredrikson Report/Wine Institute

Competitive Environment

Even with stable sales growth in the wine sales market, the industry was dominated by seven wineries. These seven wineries make up nearly 65% of total U.S. table wine sales, as highlighted below.

Source: Adam’s Wine Book 1999

Mondavi’s vision was, “To do whatever it took to make great wines and to put Napa Valley on the map, right alongside the great winemaking centers of Europe."iii Large beverage firms such as Nestle and PepsiCo also aggressively sought this position by acquiring wineries. The reason lies in the high profit margin that the premium wine market offers. Shown on the following page, the percentage of a particular genre of wine produced, and the amount of revenue it provides in the United States market.

Source: Source: 1999 estimates by Gomberg, Fredrikson, and Associates

The wine market in the United States is feeling intense pressure internationally. Chile and Australia were aggressive in international sales. US firms, including Mondavi, felt that expanding globally was the next step in the evolution of the wine business. Mondavi embarked on three international partnerships. Mondavi was now producing wine in Italy, Chile, and France. Mondavi boasted the first American ultra premium wine (Opus One)iv as a result of these endeavors.

Competitive Advantage

Conventional methods of appealing to consumers through advertising are futile in the premium wine market. Premium wines work on a “pull” demand strategy. Success lies with the following:

Wine competitions (local – international) medal winners would receive press in various journals and publications. This form of advertising helped provide brand awareness. Mondavi has won 100s of awards over the years. Wine tourism allowing the consumer to learn how the particular bottle is conceived from start to finish. Robert Mondavi fully appreciated this element, and built Mondavi Winery as such. “... I wanted my winery to have elegance and style, to be a place that would properly highlight our talents and the work going on inside. I also wanted it to be a place that would attract streams of visitors.” 5 Star Restaurants wine lists at restaurants are highly sought after and Mondavi traveled the US showcasing his fine wines to chefs, waiters, and sommeliers. Wine Clubs/Specialty Stores Mondavi offered consumers the Mondavi Spotlight Wine Club.v

New Market Entrants

Relatively inexpensive to open a small winery (-) Distribution system may be too costly for small firms to expand (+) Small wineries can focus more on premium, profitable products (-) New World competitors must offset lack of demand in home countries by aggressively going international. (-)

Premium U.S. Domestic

Wine Competitive Position

Supplier

Weather (temperature/climate) can have an adverse effect on the grape crop (-) Phylloxera and other insects can destroy an entire crop. (-) Transportation costs of international grapes are on the rise (-) Many wineries grow grapes on site, giving owner complete control. (+)

Buyer Power

Popular premium wines’ demand outweighs the supply (+) Supermarkets accounting for over ½ of wine sales carry countless competitors (-) Cost does not play strong role in decision making process (o)

Competitive Rivalry

7 firms account for clear majority of sales (-) Industry is still growing (+) Reputation can be easily damaged (-)

Substitutes

Local wineries premium wine (-) International wines including recent New World wines (-) Wine Coolers (-) Fruit flavoured juice/beverages (-)

For a small winery this could be a very attractive industry. A focus on quality even with limited distribution channels can be very profitable. For a winery trying to compete on a similar scale as Mondavi, it is very unattractive. Securing distribution and international expansion proves to be too costly.

Mondavi Corporation – A Closer Look & Shareholders’ Concern

Strengths

Pioneer of Premium U.S. Wines Strong Brand Recognition Offered in 5 Star Restaurants Diverse product offerings International partnerships including 1st Ultra Premium US wine Innovative from techniques of producing wine, to working with NASA on root growth analysis Countless awards and recognitions, “Man of the

Weaknesses

Too focused on goals and objectives, ignored surroundings (unable to quickly adapt) Expanded too quickly Ignoring core competencies Phylloxera infestation resulted in loss of a crop, and consumed a considerable amount of cash on hand. Leadership team unable to compromise and prioritize Only premium wine company publicly traded wine (at the time) difficult for Analysts/investors to

Year” – Wines & Dines, to EU “Lifetime Achievement Award” in 1998 Distinctive Competencies Differentiation product offering premium wine praised worldwide

assess

Opportunities

US market still shows signs of future growth International market still considerably untapped Reposition focus back to core brands that contribute 90% of revenue Evaluate selling off less expensive brand(s)

Threats

Continued growth in market share from New World wine rivals (ex: Australia & Chile) Market fears company turnaround is not likely stock price continues to drop Natural disasters or problems Growth in premium and ultra premium wine market of small wineries Other large competitors aggressive and expensive push to steal Mondavi market share

Stockholders have every reason to be concerned. The stock price has been at best inconsistent as shown on the following page.

Source: Robert Mondavi Corporation (RMC) SEC Filings

Due to expansions it is clear that Mondavi is not a conservative firm and would have difficulty accessing financing. (Note: Most firms fall in between 33-50%)

Source: Robert Mondavi Corporation (RMC) SEC Filings

Performance by Mondavi should be considered failing in stockholders’ eyes. Generally companies have a 15%-25% return on the shareholders’ investment. Mondavi is clearly heading in the wrong direction. The chart on the following page shows the three year trend.

Source: Robert Mondavi Corporation (RMC) SEC Filings

The Multi Personalities of Mondavi – Clearly Different Roads to Travel

RMC (1966) RMC (2004)vi

Vision Vision

"To do whatever it took to make great wines and to put Napa Valley on the map, right alongside the great winemaking centers of Europe."

“To enrich life through wine” Divided RMC wines into two categories. Luxury > $15 and Lifestyle > $15.

Strategy Strategy

Pioneer the premium to ultra premium market in the United States. Focusing on a few key brands. Market the most expensive/highest profit margin fine wines. Aggressive sales approach, and strong Old World winery influences.

Strong push on lifestyle brands. Divest in luxury brands, and all logistics associated with such. Use licensing to take advantage of brand equity. After divesting, freed up capital can be used to consider new products.

Many can speculate on the future of Mondavi if the 2004 vision and strategy would have been implemented, but instead Constellation Brands acquired RMC in December of 2004. Listed below details the events in a comparative analysis on what could have been if the 2004 plan went ahead.

Constellation Brands acquire RMC (2004) New Strategic Plan (2004)

Background Background

Constellation headquartered in NY is the largest producer/marketer of over 200 beverage alcohol brands. Gross sales are $5 billion Sells products in over 60 countries.

Family struggles have caused several recent board member and CEO changes. Board deemed “major strategic review” was needed

Strategy Strategy

Sold the Arrowood, Grand Archer, and Byron wine assets for $40 million. Byron is considered a Super Premium Wine. Selling 90 million cases annually as the world’s leading wine producer/marketer. Constellation not only acquired additional product lines, but the quality brand image of RMC.

Refocus strategy to sell/market lower price wines Sell off assets/brands including Opus One Eliminate unnecessary staff End expensive contracts with grape distributors Relocate headquarters to Delaware Strong push towards new brands Eliminate different stock class structures (no A & B)

Shareholder Response Shareholder Response

Class A shareholders received: $56.50 a share & Class B received: $65.82. With the stock price of $40.35 as the high in the 4th quarter of 2004, shareholders should consider this acquisition as an acceptable business solution.

It not would have been favorable. The particular industry Mondavi is interested in actually reported negative growth the year prior. Mondavi’s core competences are a strong reputation of providing premium wines. Investors had previously questioned Mondavi since its first public offering, and now selling off profitable product lines would be considered a poor choice. This is reflected by Mondavi having to issue another press release ensuring stockholders the value of the dissolution of many assets.

Conclusion

Robert Mondavi believed he saw something in those vineyards of California that could change the World, and he was correct. Unfortunately for Mondavi Corporation rapid expansion left little room for costly surprises. In 2004, RMC by strategic standards was a complete stranger to the ideas and principles of yester years. RMC had forgotten what their original goals and intentions were, and most importantly they had forgotten what had made RMC a successful firm to begin with. RMC should have focused on producing the highest quality of wine, and demanding the highest price the market will pay for such. Slow international expansion could occur after RMC proved to shareholders that it could eliminate a large portion of debt, as well as increase current assets (i.e. cash) to help finance future endeavors.

i High Spirits. California Wine and Food Magazine http://www.californiawineandfood.com/wine/wine-2.htm 2000

ii Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001

iii Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001

iv Wine Business Monthly: http://www.winebusiness.com/html/MonthlyArticle.cfm?dataId=13473

v Robert Mondavi Corporation (Case Study). Silverman, Gilinsky 06/2001

vi Bank of American Securities 34th Annual Conference. http://media.corporate-ir.net/media_files/irol/90/90413/presentations/BofAConinSF_92004/sld001.htm 9/2004

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