Nathan Washburn Associate Professor Jon M. Huntsman School of Business Blue Ocean Strategy Nathan Washburn Associate Professor Jon M. Huntsman School of Business

5 forces in the US wine industry Budget Wines Premium Wines New Entrants Unlikely. Access to distribution channels – 1933, 21st amendment with three-tier system (distributor has the power). Economies of scale – capital requirements – capex for Robert Mondavi was 78 million in 2000 Lower barriers – use smaller distribution channels. Can charge higher prices to get around economies of scale Substitutes Large threat - Beer and other drinks can substitute at family picnics and other casual gatherings. Low switching costs Small threat – Differentiated drink that is complex and for special occasions Buyer Power High – distributors are very powerful (250 distributors) High power Supplier Power Low – grape glut in US NA – they produce their own grapes Competitive Rivalry High rivalry (E&J Gallo and Constellation Brands dominate). They are also diversifying their offerings and shifting up market Moderate to high rivalry – differentiation limits rivalry. However, supply was overwhelming demand by 15-20%. US is 4th largest producer, but 34th in consumption per capita

The American Dream – Strategies for US Success Entrants need to be niche-focused: Volume opportunities “played out” Major distributor books full Alliance partners with distribution muscle scarce Acquisitions prohibitively expensive Value opportunities are opening up Build appellation awareness – industry Deploy top-end Shiraz Target “on-premise” – hand sell Seek out “regional” distributors Take Away? Strategy for success in the US Market: “Niche-Market…Up Market!” Presentation by John Grant (President of Kendall-Jackson Wine Estates) to the Australian Wine Marketing conference in 2001

Blue Ocean Strategy Identify the factors of competition (attributes or benefits of the product/service) in the industry Rate companies based on what they offer on each of those factors Look across customers, strategic groups within industries, alternative industries, etc. to identify alternative strategies Decide which factors to eliminate, reduce, raise and create Make sure the strategy is focused, differs from others, and has a compelling tagline that speaks to the marketplace

Strategy canvas: On what factors does the US wine industry compete? High Low

On what factors does the US wine industry compete? High Premium Wines Budget Wines Low Price Label Terminology Marketing Aging Quality Vineyard Prestige Wine Complexity Wine Range Easy Drinking Ease of Selection Fun

To create a new value curve, focus on alternatives and noncustomers Price Label Terminology Marketing Aging Quality Vineyard Prestige Wine Complexity Range Low High Budget Wines Premium Wines A New Value Curve Which factors should be reduced should be eliminated should be raised created?

To create a new value curve, focus on alternatives and noncustomers Price Label Terminology Marketing Aging Quality Vineyard Prestige Wine Complexity Range Low High Budget Wines Premium Wines A New Value Curve Which factors should be reduced should be eliminated should be raised created? Casella wines looked at noncustomer Americans who thought wine was intimidating and pretentious Rather than creating a sophisticated wine for special occasions, their problem was to make wine fun and easy to enjoy every day

Casella created [yellow tail], a wine that appealed to Americans who didn’t understand wine (intimidating and pretentious). Targeted every day consumption by these noncustomers Price Label Terminology Marketing Aging Quality Vineyard Prestige Wine Complexity Range Easy Drinking Ease of Selection Fun Low High Budget Wines Premium Wines [yellow tail]

Results of their Blue Ocean Strategy First year goal was 25,000 cases – actually sold 500,000 cases By 2005, selling 7.5 million cases to US market (compare to 10.9 – the total number of cases imported from France) Fastest growing wine in the history of the US #1 imported wine Compare to the 6,500 other wine brands sold in the US. 96% of these brands sold less than 100,000 cases Competitors responded with hundreds of ‘critter’ brands: Monkey Bay, Little Penguin, dogs, wallabies, etc. – nearly 1 in 5 of new wines introduced in the US from 2003-2006 featured an animal on the label

Three characteristics of a strategy that can unlock blue oceans Focus: does not diffuse effort across all key factors of competition Divergence: differs from the other players value curves Compelling tagline: a simple story that is believable

Focus, divergence, and a compelling tag line that speaks to the marketplace Price Label Terminology Marketing Aging Quality Vineyard Prestige Wine Complexity Range Easy Drinking Ease of Selection Fun Low High Budget Wines Premium Wines [yellow tail]

Blue Ocean Strategy Identify the factors of competition in the industry Rate companies based on what they offer on each of those factors Look across customers, strategic groups within industries, alternative industries, etc. to identify alternative strategies Decide which factors to eliminate, reduce, raise and create Make sure the strategy is focused, differs from others, and has a compelling tagline that speaks to the marketplace