Background, cont’d.E&J Gallo Winery was founded
1933.
Competition was pretty stiff. More than 800 companies in CA alone
$6,000 startup capital Ernest borrowed it from his mother-in-law.
Background, cont’dBrothers learned the craft of
commercial winemaking from pre-Prohibition pamphlets.
Published by UCAL, retrieved from Modesto Public Library basement.
E&J has grown into the largest family-owned winery in the world.
Also, largest exported of CA wine.
U.S. Wine MarketU.S. is:
◦#1 market for wine sales (in dollars)◦#2 in volume of table wine
consumed (not per capita basis)◦#4 producer of wine overall
282 million cases sold in 2009 767 million gallons consumed in
2009
Wine MarketU.S. wine market growth due to:
◦Increasing number of people in newer generations
◦Increasing popularity of wines from Australia, New Zealand, Argentina, Chile, Portugal, and South Africa
◦Increasing production of U.S. wineries
ProductionCalifornia
◦Supplied 61% of all wine consumed in the U.S. 2009 (30% imported)
◦2,972 wineries (6,705 total in U.S.)◦90% of all wine produced in the U.S.
Texas ◦#5 wine producer in U.S.◦170 wineries (5 in Lubbock)
Llano Estacado Winery is 2nd largest
Favorite Wines in ProductionTop 5 varieties produced in
California:◦Chardonnary◦Cabernet Sauvignon ◦Zinfandel (white and red)◦French Colombard◦Merlot
U.S. Exports Top Five Countries to export:
◦Canada (up 23%)◦United Kingdom (up 22%)◦Hong Kong (up 117%)◦Japan (up 2.6%)◦China (up 101%)
E & J Gallo is the largest exporter of California wine
Chinese Wine Market(2010) China’s retail consumption in
social consumer goods– $2.26 trillionRising demand for wine in China 8th
largest wine market in the worldImport wine sales are growing at a
faster annual rate than domestic brands
Wine consumption is expected to increase 32 percent, up to 1.26 billion bottles – or 105 million 9L cases in the next few years
Retail Channel – Hypermarkets
Walmart – U.S.
Carrefour – France
Metro – Germany
New World Department Store – Hong Kong
Auchan - France
Tesco – Britain
OverviewLiquor and beer’s popularity in
1990sIncrease in wine consumption
within the middle age group – presence of female
Polarized view on wine
Preferences & Purchasing HabitsPreference for domestic brands
because:◦Cheap prices◦Patriotic support◦Satisfied sippers – do not know much
about wine so they will usually purchase the same brand
◦Heavy in-store price promotion◦Insufficient knowledge on imported
brands
Preferences & Purchasing Habits(cont.)Preference for French imports
because:◦symbol of status perception◦Taste preference (many prefer dry,
red wine)◦Trust in their quality products◦Previously received as a gift from
family or friends and enjoyed it
Other PreferencesWhite wine sales during summer
timeBeer consumption during the
summerRed wine perceived as luxurious
and are surprised or even confused to find some imports costing less than100 RMB (<$15)
Perceived health benefits (beauty & skin care)
Other Preferences (cont.)Restaurants
Upscale restaurants do not always allow outside beverages
50 – 100 RMB ($7 - $15) corkage feesCasual restaurants DO allow outside
beveragesOnly bring liquor or beer, unless
females are presentMen at the table will pour wine for
the women to drink, but will only drink liquor themselves
Other Preferences (cont.)Young population (Ages 20 – 25)
Casual environment with friends – drink beer
Drink at casual restaurants or at home because it is cheaper
No acquired taste for wine – mix soda and add ice cubes wine cooler
Price and taste more important than brand recognition
Television ads & word-of-mouth
Competitive Rivalry·Domestic wines
·Penfolds
·The Wine Group
·Constellation brands
Competitive Rivalry·Domestic wines
·Penfolds
·The Wine Group
·Constellation brands
Buyer Bargaining Power·Retailers
·Retail shoppers
Buyer Bargaining Power·Retailers
·Retail shoppers
Supplier Bargaining Power
·Third party grape growers
·Glass & bottling
Supplier Bargaining Power
·Third party grape growers
·Glass & bottling
Substitutes·Beer
·Liquor
·Tea
Substitutes·Beer
·Liquor
·Tea
Threat of New Entrants·Old World & New World
·Domestic companies
Threat of New Entrants·Old World & New World
·Domestic companies
Five-Forces Model
Threat of New EntrantsProduct inspection and
certification, product labeling and packaging, product licensing, tariffs, import taxes, etc.
Distribution – distributors are the “middleman” before an importer’s product reaches retailers and end users
High costs (retailer listing fees)
Intensity of CompetitionTotal Global Exports (2009)
EU – 36% Australia – 17% Chile – 15%South Africa – 10% U.S. – 9%
Australia: Foster’s (Penfolds & Wolf Blass) & Jacob’s Creek
U.S.: The Wine Group & Constellation brands (Robert Mondavi)
Customer price sensitive & zero switching costs
Bargaining Power of SuppliersGallo’s resources – strong R&DOwns many vineyards and employs its
own growersLarge production scale & supplier
contractsDrought season – Small wineries must
increase prices of their wine due to the lack of sufficient grapes from suppliers.
Gallo can absorb much overhead costs and does not need to increase prices
Price consistency better relationship with Chinese distributors & retailers
Bargaining Power of BuyersRetailers & retail shoppersRetailers have limited shelf space
& competition from other suppliersRely on local distributors to
negotiate contractsProvide own in-store promotersIf a product does not sell well,
retailers can pull the product off its shelf
Bargaining Power of Buyers (cont.)Retail shoppers are price sensitive
domestic purchases“Enthusiast” drinkers have sufficient
knowledge on wine: moderately-high bargaining leverage because of the sheer number of competitors in the market
Zero switching cost – can pick & choose based on a very small price difference from competitors’ products
Threats of SubstitutesNo specific market segment that
consumes wine on a daily basisBeer or liquor during social
gatheringsNonalcoholic beverages: juice or
tea