From the viewpoint of “Porter’s 5 Forces” strategic analysis, how attractive is the U.S. budget and premium wine industry?

The attractiveness of the U.S. budget as well as premium wine industry started increasing through 1990s and peaked somewhere around the late 1990s and early 2000s. Post this period there was a steady decline in their prospects due to a variety of reasons like consumer indifference, oversupply and intense competition within the wine industry as well as from other alcoholic beverages. By the year 2000, there was a significant slowdown in the U.S. wine industry. If we analyze this situation from the viewpoint of Porter’s 5 Forces analysis, both the budget as well as premium wine industry were considerably unattractive. Let’s see why.

Threat of new entrants

In the year 2000, there were more than 6500 brands vying for consumer attention which was hard to come by, mainly due to indifference and lack of knowledge about wine. At the same time, wine producers from Italy, France and other countries from Southern Hemisphere were entering the U.S. market worsening the oversupply situation.

Industry rivalry

The intense competitive situation in the U.S. wine industry was evident by the fact that between 1995 and 2000, over 1000 new wineries entered the market. To add to all this, old world European winemakers and winemakers from Southern hemisphere also ramped up wine production.

Threat of substitutes

U.S. wine consumption was driven primarily by a small segment of committed wine enthusiasts. This was due to variety of reasons, primarily being lack of knowledge about wine and the resulting confusion, high prices, etc. Beer was the preferred alcoholic beverage followed by other distilled spirits.

Bargaining power of suppliers

There was a prolonged global oversupply of wine that ranged from 15% to over 20% throughout the late 1990s into 2000. Intense competition reduced margins particularly in case of small and mid-sized vineyards. This led to a wave of acquisitions and consolidation throughout the industry. By 2000, the five largest wine companies accounted for 50% of wine volume sold in the U.S .market with the remaining half split between thousands of smaller vineyards. As wine production has become more concentrated, a simultaneous consolidation of retailers and distributors also happened. Thousands of domestic and international brands were vying for space on the shelves of these fewer, larger and more powerful retailers. As a result, the bargaining power of distributors and retailers against winemakers rose substantially.

Bargaining power of buyers

The bargaining power of wine consumers was definitely more than that of wine producers. There were too many producers vying for fewer buyer attention. There were substitutes in the form of beer and other distilled spirits. It was clearly a buyer’s market as far as wine was concerned.

Would you characterize this market as a “red ocean”?

The wine market during that period can to some extent, be characterized as “red ocean”, although not very extreme. It had most of the characteristics. U.S. wine consumption was driven primarily by a small segment of committed wine enthusiasts. Majority of the consumers were indifferent and ignorant. To add to this competition intensified as wine producers from all over the world wanted to enter the U.S. market. There was a global oversupply and the focus was on beating the existing competition. Wine producers were vying for the attention of the consumers as well as distributors to market their products. They had to choose between differentiation and low cost.

How did most existing players compete? Distinguish by segment as appropriate. If you were planning to enter the U.S. wine industry, which segment would you choose and why?

Global oversupply intensified the price competition across all segments, pressuring margins particularly among small and mid-sized vineyards with subscale production. Smaller vineyards faced increasing difficulty getting their wine to market, as distributors sought to concentrate more of their purchases from large-scale, full-line vineyards to exploit distribution economies of scale. As a result, they started focussing only on a few varieties. They sold primarily to specialized wine shops, restaurants, and increasingly directly through the available legal means. They tried to concentrate on a few niche markets. Midsize vineyards were particularly threatened by adverse market and competitive trends, leading to a wave of acquisitions and consolidation throughout the industry. By 2000, the five largest wine companies accounted for 50% of the wine volume sold in the U.S. market with the remaining half split between thousands of small vineyards.

If I was entering the wine market at this stage, I would choose to be amongst the bigger players as they had relatively more bargaining power and the resources to fight it out in the intensely competitive market.

In what ways did Casella/WJD exploit “blue ocean” strategic opportunities in launching its Yellow Tail wines?

Casella and WJD spotted an opportunity to create a wine with a lighter new world taste at lower cost. New World wines from southern hemisphere countries typically utilized a less expensive oak chip winemaking process, but the resulting products were often too fruity or sweet to appeal to core wine consumers. At the same time, many New World winemakers were retailing wines at a price which was too expensive to appeal to price sensitive budget wine consumers.

Casella saw the opportunity to create an approachable, everyday wine that over-delivered on taste relative to its price, appealing not only to current wine drinkers but also to the far larger number of non–consumers who previously shunned wine because they didn’t like the taste, price, or complexity of traditional wines.

What factors did Yellow Tail Eliminate, Reduce, Raise, and Create in positioning Yellow Tail wine? What did its strategy canvas look like relative to competitors?

Yellow Tail shunned the standard industry practice regarding packaging and labelling of wines. They used premium packaging and replaced the jargonistic description used by it’s competitors with simple, everyday language. It was positioned as a fun, unpretentious brand. To top it all, it was priced attractively as compared to it’s competitors.

What explains the success Yellow Tail achieved over its first decade on the U.S. market?

Yellow Tail’s success can largely be attributed to it’s bold and unconventional positioning and attractive pricing. The fact that it was unpretentious inspite of offering a better product, worked wonders for it.

By 2010, has Yellow Tail’s opportunity to capture new customers largely run its course?

As a result of me too entrants, Yellow Tail’s opportunity to capture new customers largely run its course by 2010.

Out of the answered questions, state what the central issues for Yellow Tail are and what recommendations you would have for them.