Mondavi in the Wine Industry

A. Structure of the global wine industry

A.1. Competitive structure

Certain features of both the production and consumption of wine make the industry inherently conducive to market consolidation. On the supply side, large firms capitalize on significant economies of scale. They have the capital to invest in innovative production technologies, such as Mondavi’s pump-free gravity flow systems, which improve quality while reducing costs. Additional cost savings are captured through lower average input and overhead costs. Finally, they are able to leverage more extensive distribution networks for all of their product offerings. On the demand side, aggressive advertising and marketing have allowed a few brands to distinguish themselves from a crowded sea of unknown wineries. This has especially been the case recently, with the dramatic expansion of the New World market. With less experience in the industry, these customers are more receptive to branding, marketing, and labeling by grape variety, and less so to the geographic appellations that had previously granted the smaller Old World boutiques a scarcity advantage.

As a result, wine production in the New World demonstrates moderate to heavy consolidation. In Australia, 4 firms hold 75% market share, while the same is held by 20 firms in the U.S. Acquisitions in the past decade have made this consolidation even more pronounced.

The Old World market, however, remains highly fragmented and competitive, with several cultural and regulatory obstacles preventing a similar market consolidation. Due to wine’s entrenchment in European culture, various regulations control the entire wine production and marketing process. For example, the Comité Interprofessionnel du Vin de Champagne governs the usage of the “champagne” label in France, even explicitly dictating the allowed harvesting and pressing techniques. Such regulatory controls limit the adoption of technologies that would have otherwise provided scale advantages. Meanwhile, cultural nuances have similarly resisted consolidation. In 2000, Mondavi moved to acquire wineries in the small French village of Aniane. Having gained enthusiastic approval from both the wineries and the local town council, it backed out after facing fierce grassroots backlash favoring the traditional independent producers. These small Old World wineries are often subsidized, enabling them to still remain competitive in the global wine market.

Overall, since the Old World markets still dominate both the production and consumption of wine, the wine market remains fragmented, with even the biggest firm’s sales representing a drop in the industry’s $180 billion bucket. Despite the continuing trend towards consolidation, competition remains intense within the industry, especially in the jug, popular premium, and super premium segments where products are not