Mondavi is a winery worth $600 million located in Napa valley California. It has stake in 16 different brands through various types of ownership and partnership businesses. Its focus is in premium wine, and although the company has partook in different types of acquisitions and mergers, it is now (in 2002 when this case was written) has decided to grow organically, rather than through acquisitions, and position as a US luxury premium winery. This strategy is hoped to counteract the negative decline in sales and growth in competition that Mondavi experienced at end of Q2 FY2002 brought on by economic decline and increasing competition.
At this time, Mondavi was ranked #8 in the US and #13 globally in market share percentage. They have strong presence in the premium wine category. The case states that premium wine sales have grown 8-10%. Additionally, as stated on page 2 of the Case “Robert Mondavi and The Wine Industry” by Michael A. Roberto, “since 1994…demand increased for premium wines, while consumption of inexpensive, lowerquality wine had failed. Industry analysts expected the demand for premium wines to grow at 8010% per annum for the foreseeable future.” This means that not only is this category increasing in demand among consumers, but also that consumers are and expected to continue to be, willing to pay higher prices for wines of better quality. However, there are industry and market threats that must be considered, such as the economic decline of the US and larger competition growth in the wine industry.
Key issues for Mondavi at this point in time (end of Q2 FY2002) is competition of rival firms of premium wine, large-volume producers entering the premium wine category, and global alcoholic beverage companies who were entering the category through acquisitions. These multiple types of beverage companies are entering the premium wine category because the market opportunity and consumer behavior towards purchases of higher quality wines. For Mondavi, this trend could be the answer to their sales decline problems.
Exhibit 2 shows that Mondavi’s local Napa brands decreased in sales volumes during 2002 first 2 quarters, as well as in net revenue. However, its imports (which are priced higher) grew 10 case sales and 7.8% in net revenue. At the same time, producing premium wine independently includes multiple costs; such as land purchasing, development, crushing, barrels, and bottling. These costs are important factors to consider when deciding how to grow the Mondavi brand portfolio.
In detail, the cost of growing grapes includes land purchasing of $100,000 in Napa per acre. Mondavi owned 9,7000 acres of land in California. Additional costs are land development into vineyards, which were about $33,000, and $75 per day per worker. Post land development costs include $15,000 tanks (for 25,000 liters of wine, for 20 years)~$1.00 for bottling, and 2-3% of sales for marketing.
Exhibit 3 shows 2001 Mondavi sales up 18% from 2000, but as exhibit 2 shows, by Q2 FY2002 the company is already 9.8% negative in 2002 from 2001. Therefore, 2002 may be a loss in sales for the company. However, exhibit 1 shows that COGS are 15,556 less in Q2 FY2002 than by Q2 FY 2001 (or 11.9%). If the company can keep costs down, they may be able to offset the negative effect from the declined sales revenue. At the same time, if Mondavi can increase revenue, profit would also increase. Average super-premium wine retail price is $12.00. Winery makes $1.40 per bottle in gross profit EBIT (post EBIT, net profit = $.47) or 23% gross profit margin [1-(4.406.00)*100]. By decreasing cost and increasing revenue, Mondavi could increase profits for 2002.
Mondavi has two choices: Focus on expanding the sales of wine from grapes gown in their vineyards, OR, Focus on selling wine from new acquirements of grapes. Cost and Profit analysis: Land purchasing cost: 620 liters of juice per ton of grapes and ~5 tons of grapes per acre is produced (620*5), therefore, each acre can produce ~3,100 liters of juice, or 3,100,000mls. 1 bottle has 750mls, which means that each acre produces (3,100,000/750) 4,133 bottles of wine, or (4,133/12) 344 cases. At $1.40 per bottle in gross profit of premium wine, that equals $5,786 per acre, per harvest. Therefore, Mondavi would have to harvest each acre at least 18 times to pay off just the cost of purchasing the land (not including all additional production costs such as development, crushing, barrels, bottling, and sales force per harvest).
Buy grapes: Cost = $500 per ton of grapes (average California price for grapes p. 21)); Produces 620,000 liters of juice, or 827 bottles; at $1.40 gross profit per bottle (assuming gross profit quoted in exhibit 9 is omitted of land purchasing cost), that equals $1158 in revenue per ton or $658 in gross profit per ton (at premium gross profit average). If Mondavi were to acquire grapes, they may be able to produce wine at lower costs. Additionally, if they acquired imported grapes (if the cost justified the potential revenue and profit), they could leverage from the import sales growth they have been experiencing.
Although the initial cost of international joint ventures and buying grapes would need to be analyzed and contrasted with the cost and revenue potential difference from internal growing, Mondavi has seen a consumer interest in this wine category and therefore could jump on this market opportunity. Furthermore average pricing per bottle of import wine is set almost 80% higher than premium wines average prices (exhibit 13) and additionally, by buying or partnering with international vineyards, Mondavi could avoid land purchases, development, and some production costs (or only be responsible for 50% if within a JV) but be rewarded with higher gross profits and margins per bottle sold.
Finally, although industry forecasts that premium wine will grow among the consumer interest, so is competition and market sharing. There is an obvious market trend among Mondavi wine consumers for their import brands, which are higher priced, and potentially (depending on the strategic situation of buying grape sources) lower cost for Mondavi to produce.