Competitive Analysis 1

Competitive Analysis:

The Wine Industry and its Influence on UST Inc.

Steven Burgess

Rachel Frederick

Allison Richter

David Zeigler

Team 6

Business Cornerstone, Section 10

M/W 3:30

Professor Lee

October 17, 2007

The wine industry has always been associated with higher society. This industry does not advertise as much as other alcoholic beverages, but it maintains high revenues and continues to grow.There are several leading companies that seem to have a high amount of control over the industry. However, there are many small competitors that influence the wine industry as well. Even though the wine industry started out small, it keeps on growing despite small setbacks, making it a smart industry to invest in.

Competition Research and Analysis

Although it has had problems in the past, the wine industry is a growing business. Since the mid-2000s, the U.S. wine industry has increased steadily (“Wines,” 2006). Expensive fine wine sales have helped with the industry. The fine wine sales increase has accounted for 64 percent of the wine industry revenues (“Wines,” 2006). Wines around $11 and up rose by 19 percent from 2004 (Quaid, 2005). There was a 6 percent increase in sales for wines ranging from $7-11, while wines costing less than $7 only increased by 1.4 percent (Quaid, 2005). Although wines are produced in wide variety of areas in the United States, California is responsible for more than 90 percent of all the United States production of wine (“Wines,” 2006). Americans purchased a retail value of wine around $23 billion in the mid-2000s (“Wines,” 2006). Out of the total amount of wine purchased, 88 percent was table wine, 7 percent was dessert wine, and 4 percent was sparkling wine or champagne (“Wines,” 2006). In the United States, table wine is the favored type of wine (“Wines,” 2006). Chardonnay is the leading type of wine with a 29 percent market share (“Wines,” 2006). Cabernet is second with a 19 percent market share, followed by Merlot with 15 percent, and White Zinfandel/Blush with 13 percent ("Wines,” 2006). There are a wide variety of wines for a consumer to choose from, making the wine industry very diverse.

What hasinfluenced the Wine Industry?

In the past, there have been several factors that have influenced the wine industry. When there is not a steady economy or when specific events take place that effect consumer’s spending, like September 11, 2001, the wine industry takes a hit (“Wines,” 2006). This affects the wine industry because consumers spend less on travel and recreation which is related to wine drinking. Another event surfaced between 2000 and 2003, which affected the wine industry. Grapes were overproduced during this time period, decreasing the price of grapes as much as 75 percent, which therefore indirectly dropped wine prices (“Wines,” 2006).

The two leading competitors in the wine industry are Ernest & Julio Gallo (E & J Gallo) and Constellation Brands (“Wines,” 2006). E & J Gallo controls about 40 percent of the U.S. wine market and has led every wine category that is has competed in (“Wines,” 2006). This company started out as a little winery founded by brothers in Modesto, California in 1933 (“Wines,” 2006). At first this winery was not able to obtain bank financing, but with their strong partnership, they became very successful (“Wines,” 2006). Ernest marketed the wine that Julio made (“Wines,” 2006). In 1965 Julio Gallo created the first Growers Relations Department and allowed area growers access to the information, which spread news of their company (“Wines,” 2006). In 1995, Constellation Brands became the second seller in the United States wine market (“Wines,” 2006). Constellation Brands is a father and son business which started in 1945 and is located in upstate New York (“Wines,” 2006). This company grew because it acquired other small industries, such as Almaden and Inglenook (“Wines,” 2006). At first the company only sold wine in bulk until the founder, Marvin Sands, created his own brand, Richards Wild Irish Rose, which made virtually all of the company’s sales in the 1960s (“Wines,” 2006). Constellation Brands became a lead competitor because they started to acquire already established brands of wine (“Wines,” 2006).

What are the Current Trends in the Wine Industry?

There are several trends in the wine industry that have recently developed. One trend that wine industries are doing is bringing winemaking to the public (“Wines,” 2006). Some industries are creating make-your-own wineries and classes to educate the masses and make people more aware of wines (“Wines,” 2006). Wine vintners are also moving away from corks and using plastic corks (“Wines,” 2006). Although this would be drastically different, it would be cost effective and help with leakage and mustiness (“Wines,” 2006). Red wine has become more popular due to a study conducted by Queen Mary’s School of Medicine and Dentistry in London showing that they contain procyanidin, which has a protective effect on blood vessels (“Global Trends,” 2006). All of these trends show that the wine industry is continuing to grow and create innovative ways to stay competitive.

Who is a competitor of UST Inc.?

Foster’s Group Limited is an international publicly traded company that sells beer, wine, spirits, and other drinks. According to the Annual Report of Foster’s Group Limited (2007), Foster’s currently has 25% of their sales volume in the wine industry with an average 17 million cases sold in the United States (“Fosters Wine Estates”, 2005). Over the past year, stock prices have increased:

  • October 12, 2006: $6.31
  • April 12, 2007: $6.74
  • October 12, 2007: $6.62

Over the past two years, Foster’s Group has focused on expanding and strengthening their wine market share, which has attributed to the steady stock price growth. In 2005, Foster’s Group purchased all of Southcorp’s shares resulting in Foster’s being the largest Australian wine company (“Fosters Wine Estates”). Currently, drought has destroyed large percentages of grape harvests and the increasing Australian dollar value has decreased the value of export earnings. Analysts indicate that these market conditions may reduce earnings per share by 1.9 cents in 2008 to 2009 (Speedy, 2007, p. 1). Foster’s Chief Executive Officer, Trevor O’Hoy states that the wine industry will improve after the drought due to a lack of oversupply and an end to a massive discounting trend (Speedy, 2007, p.2). Overall, Foster’s Group Limited has increased profitability through acquisitions, focused business strategy, and a solid wine sales mix with a final dividend declaration of 11.75 cents per share (Datamonitor, 2007, p.18).

Foster’s main strategy currently is to successfully become a “great drinks company” (Datamonitor, 2007, p.18). Foster’s Group has restructured their business to allow quick response to changing market conditions. Now, Foster’s has a regional sales structure in key geographical areas supported by global capabilities. “Regional directors [can] focus on their customers, distributors, and respond quickly and flexibly to market threats and opportunities,” (Datamonitor, 2007, p. 20). Through the sale of underperforming market segments and the acquisition of market opportunities, Foster’s Group has created a solid market mix for future growth. With a focus on growth, Foster’s Group plans on strong marketing innovation to compliment well-known brands and to expand specific market gaps. In 2007, the top five wine brands drove 68 percent of total global sales. According to marketing director Anthony Heraghty, “Foster’s Group has cut in half the number of brands it will support with marketing dollars this year but will double the amount it spends on each brand,” (Sinclair, 2007, p.1). In regards to market opportunities, Foster’s Group plans to launch 20 new products by the 2007 holiday season to focus on consumer interest in a healthy lifestyle. In 2007, Pure Blonde, the low-carbohydrate beer, has increased exponentially in sales volume resulting in paid dividends (Sinclair, 2007, p.1). Also, Foster’s will launch certain wine products in recyclable plastic containers called PET. With a focused business structure and solid sales mix, Foster’s Group Limited has formed strategies that have successfully satisfied the demanding consumer and have solidified future growth.

Who are UST Inc.’s Key Competitors?

Ste. Michelle Wine Estate is the wine division of UST Inc. that is ranked in the Top 10 US Wine companies in 2005. “Their mission is to craft premium wines of distinction and have an unwavering commitment to quality (“Overview,” 2007). Ste. Michelle Wine Estate’s key competitors in the wine industry are as follows: Jackson Family Wines, Foster’s Wine Group, and Beam Wine Group. These companies compete with Ste. Michelle Wine Estate for the reason that, all of the competitors target the same niche market. This niche market is the target as a result of similar budget, taste, and satisfaction goals. Indirectly they also compete with members of the beer industry and non-alcoholic cider industry such as Anheuser-Busch Co. and Zeigler’s Beverage Co. This competition has developed with these substitute products due to variations of consumers taste and budget.

How do Key Competitors Remain Profitable?

Some of the successful strategies Ste. Michelle Wine Estate’s competitors are using to maximize shareholders wealth begin with repositioning product lines (“Kendall-Jackson,” 2007). This strategy is cutting production costs and using only top quality supplies to increase quality assurance by eliminating product defects. For example, competitors are using over-delivery to increase consumer satisfaction, as a result of increased quality for a decreased price. Acquiring successful business in the industry has lead companies such as Foster’s Wine Group to a larger market share with their acquisition of Beringer-Blass Wine Estates (“Fosters Wine Estates,” 2007).

Over supply situations have caused businesses to lower their prices, which in turn will decrease unit revenues. This becomes a problem due to a potential lower market share which decreases the company’s ability to compete with competitors. On the other hand, if the product is over priced consumers will begin to slowly purchase from other competitors because of the fault in over pricing.

Company’s such as Foster’s Wine Group use “consumer-led and customer-driven” goals as one of their profitability strengths (“Fosters Wine Estates,” 2007). This goal has proven to be a strength because they listen to the customer’s by letting them influence the company’s product line and pricing. Recently Jackson Family Wines has broadened the company’s base which they accomplished by owning vineyards internationally in countries such as Italy and France (“Kendall-Jackson,” 2007). This acquisition has proven to have strengthened Jackson Family Wines overall product mix due to a larger variety of fruits for wine production.

One of the most common weaknesses that all competitors face is the lack of control over inclement weather. This could result in loss of production through fewer grapes to harvest for wine production. Some other weaknesses include, water shortages, power shortages, waste issues, and chemical usage. All of these weaknesses are uncontrollable to the competitors which can make environmental awareness a massive company issue.

Today there are many competitors that createlarge influences the wine industry. The wine industry started out small, but is now an industry of growth which makes it a good industry to start investing in. With the developing trends in the wine industry, competitors are focusing more on generating new strengths and eliminating weaknesses to help execute successful strategies. During this process competitors are trying to increase their market share and ultimately maximize shareholder wealth. Utilization of successful business strategies should prove to be lucrative throughout the wine industry in the future.

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