Assumptions: Land prices will not dramatically increase and nothing will cause a devastating crop shortage or crop disease. The wine industry will continue to expand, particularly the premium wine industry will grow at the expected 8-10% per year. European production will continue to decrease, creating opportunities for New World producers.
Threats of Potential Entrant: While the wine industry has experienced steady growth at 1-2% per year since 1994, the wine industry is highly capital-intensive which indicates that the degree of this threat is low. The cost of land varies depending on location and land quality ranging from $8,000-$150,000 per acre in the United States and up to $250,000 per acre in France. Once the land is purchased, it will cost investors an additional $25,000-$40,000 to develop the vineyard. Finally, though the vines will last over 50 years once they are planted, they will require 2 years from the original date of planting to bear fruit and will not mature for 5 years.
Threats of Supplier: Because grapes represent 50-70% of the cost of the wine produced, the threat of suppliers for firms who produce their own grapes is low. However, if companies rely on importing grapes or procuring them in the market, the threat of suppliers is higher because of potential crop shortages and diseases. Regarding the suppliers of bottles, the threat is low, as wineries can easily
Threats of Buyer: The threat of both individual consumers and wholesale distributors is high. Because the US requires wine producers to go through a distributor and only 5 distributors control the majority of the market, the distributors have a lot of power. Additionally, final consumers have power because brand loyalty is low and consumer preferences change the demand for specific types of wine produced.
Threats of Substitutes: Beer, liquor, and spirits serve as alternatives to wine. Beer is likely the greatest threat due to the fact that it is cheaper than wine. However, producers have focused efforts on educating consumers and making them more familiar with wines, creating an appeal, appreciation, and loyalty for wine. Thus, the threat of substitutes is moderate.
Threat of Rivalry: There are over one million wine producers worldwide, but in United States the top 20 firms control 75% of the market and there has been a continuing trend of consolidation in the industry. Thus, the many exiting competitors indicate that is already high and the increased consolidation will cause larger firms to force out smaller firms, making the threat to smaller firms even greater.
Implications, Business Opportunities, and Risks: While the wine industry is currently dominated by Europe, as they account for 75% of production and consumption, New World wine companies' share of the market has increased and European production has declined. This suggests that New World companies have an opportunity to continue expanding their share of the market, furthering the existing trend of consolidation. Because of the lack of brand loyalty in the industry, consolidation is a way in which a firm can ensure a larger market share. In order to expand globally, wineries can either merge with existing global wine companies or purchase land in other countries and implement their existing procurement processes. One possibility that firms might consider is expanding into more New World regions in which there is a cost advantage of labor, such as Chile, where workers are paid $10-15 per day which is significantly lower than wages in the US and most Old World countries. Wineries should also focus on producing premium wines, as the demand for such wines is expected to grow 8-10% per year for the foreseeable future. However, companies should invest in monitoring and predicting consumer preferences, as these change frequently and can affect the quantity of each type of wine produced. Firms should also continue to invest in other research, technology, and automation, as this enhances quality and reduces operating costs. Additionally, wineries should continue to emphasize marketing and promotion that educates consumers and familiarizes them with the wine industry through wine tastings, vineyard tours, and brand promotion. This is crucial to reaching as many consumers as possible and bringing previously uninformed consumers into the market as new buyers.
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