The Internationalization Strategies, Opportunities, and Challenges in the Global Wine Industry - Term Paper Example

The Internationalization Strategies, Opportunities, and Challenges in the Global Wine Industry 1. The Internationalisation process Firms seek to expand overseas for various reasons which could range from market seeking, resource seeking, and efficiency seeking to strategic asset seeking. The internationalization of the wine companies follows the same pattern according to Vrontis and Papasolomou (2007). As the domestic market matures, the firms look for overseas expansion. Mergers and acquisitions are very common in the wine industry and if a larger wine company acquires a smaller winery, it benefits due to economies of scale. It is able to reduce staff and the smaller winery benefits due to the distribution network established by the larger company. The wine industry has been highly fragmented which is evident from the fact that the 15 leading wine producers were based in eight different countries. Consolidation in the industry has been taking place since 2005. Internationalisation and Product Life Cycle theory states that once a new product matures in the domestic market and reaches the standardization level, it expands overseas as it seeks new markets. This theory assumes that innovation takes place in the parent company’s country but recent research suggests that innovation is driven by the globalization and is dispersed within multinationals. Britain has always been a very attractive market for wines and France has been the main supplier but New World wine producing countries like Australia, through aggressive sales campaign could overtake France in the white wine market in Britain (Campbell & Guibert, 2006). According to the Uppsala model internationalisation starts with least and gradually expands into more psychically distant countries. This is a paradox since starting internationalisation in psychically close countries can be detrimental to performance. Australia for instance exported to Britain, which demonstrates that distance is not important in internationalization. There are other factors that stimulate the process of internationalization. The Euromonitor states that consumption trends have changed due to lower prices and wider availability of wine, increased consumer knowledge and sophisticated marketing techniques have led to the expansion of the wine industry. Augmentation in the supply chain as well as health factors has added to the expansion of global sales of wine. The business environment is constantly changing and the internationalization patterns change with it. Australia is able to supply good quality wine at relatively low prices. Import tariffs have reduced in a number of key markets and increasing number of super markets has contributed to the global sales of wine. Consumer consciousness and the government warnings against the consumption of alcohol is also responsible for the growth of the wine industry. The producers have learnt and acquired tacit information through experience and this is central to the internationalization of the wine industry. For instance, increased competition at home drove privately-owned E&J Gallo to grow organically or through partnerships, with limited acquisition activity (Euromonitor). Thus, the wine industry does not follow a set model of internationalization and firms change strategy depending upon the circumstances. 2. Strategy and structure As New World wine producing countries penetrated the market the Old Wine producers like France found a declining share in the market. The market responded by adopting different strategies. The degree of adaptation varied across firms. Some companies are acquired by larger concerns and they redesign their market strategies through brand or signature development (Guibert, 2006). Risk was diversified through developing relations with winemakers and an enhanced selection of suppliers. This helped them to overcome the barriers of standardization in the industry. Vertical integration was found to be the most effective governance mechanism. The adaptation strategy leads to reduction of uncertainty and resource dependency. They even positioned themselves better through product differentiation as some firms in France produced only prestige wines. Similarly, Constellation Brands filled out its wine portfolio with brands ranging from the table wine category to the luxury category with distribution in both the on- and off-premise channels in both the USA and the United Kingdom. As distribution is spread across different countries, it minimizes business risks and created diversification. Such strategies allow the firms to take advantage of macro-economic factors like exchange rate. Organizational structure is a control mechanism that makes all the units in the organization work cohesively. To bring about success in the internationalization process restructuring has been taking place in the wineries. Firms are moving towards decentralization as it allows greater flexibility and results in better decisions although it is more expensive. It also enables the top management to concentrate on core issues. This trend is adopted by the New World wine producers and the Old World producers too have started thinking along these lines. Constellation Wines, U.S. has decided to have three business units, each with a distinct focus, and each with the appropriate strategy and resources to succeed in its respective market segments (Wine Business, 2008). All these units will be supported by a common platform of shared services in the different organizational functions. The Old World producers are also reinforcing inter-company networks as they apply Mark Granovetter’s theory of embeddedness, which focuses on strategies to develop more coherent inter-organisational structures (Campbell & Guibert, 2006). In Italy the wine producers are forming cooperatives. Pooled resources and management have become essential to combat the threat posed to the Old World producers by the New World producers. These help the Old World producers both in terms of marketing and risk reduction. Old World producers have started restructuring along the lines of the New World producers, in the sense they adopt vertical integration. The intermediaries too employ a range of control mechanism within their own network of distribution. Marketing tie-ups with international brands gives each company considerable scale and together they form a strong force among the top players. Les Grands Chais de France distributes San Pedro’s brands in the UK market and is also seeking to build strong Bordeaux brands. Hence, apart from acquisitions and joint ventures, such arrangements lead to a mutually beneficial association. Due to changes in the consumer behavior and tastes and changes in the distribution chain, the wine industry has adapted different strategies. The New World wine producers often opt for joint ventures with local companies. They can thus get land at comparative price for vineyard production (Spawton, n.d.). Joint ventures take place between wineries in different markets and acquisition of smaller firms is another strategy extensively used by larger firms. Companies seek to strengthen their domestic and international competitive position by catering to all consumer tastes and providing full market coverage, for instance Penfolds acquired Lindeman Wines which provided Penfolds Wines with strong branded products across the white and red table wine sectors across Australia. It also helped to strengthen Penfolds’ global market position. Beverage companies like Pernod Ricard and Bacardi have a strong established distribution network (Euromonitor). They use this network to generate wine sales. Brand adds value to a product. Wineries can cultivate long-term relationships with customers through continued patronage and customer loyalty. The wine industry has myriad brands that creates problems in brand recognition and complicates the sale process (Vrontis & Papasolomou, 2007). Consolidation has improved sales and the margins but has led to increased number of brands to be managed. Only the Old Wine producers have strong brands and the New World wine producers are yet to develop their brand equity. Fair pricing can lead to brand equity in the wine industry (Nowak, Thach & Olsen, 2006). Wineries generally use three types of pricing strategies – skim (for premium and reputed wines), penetration (lower than competitors but good value for money), and neutral (price is not used as a decisive factor by the consumers). 3. Key success factors The climatic conditions have become unstable and maintaining adequate supply levels is a big challenge in the changed business environment. Markets are increasingly dominated by the buying power of the giant retail super markets and expanding the already tight margins is seen as a challenge in this industry. The challenges that the industry faces is decrease in wine consumption in the Old World countries which could possible be affected due to conflicting medical opinion on the health benefits associated with modest wine consumption. Competition has increased due to alternative alcoholic drinks and healthy soft drinks available in the market coupled with the issue of developing global brands in the price-sensitive market. To face global competition and changes in the consumer demands, firms have to alter their marketing strategies. Celebrity endorsement and sport sponsorship are central strategies in wine marketing. Potential of branding in the wine industry is still not fully taken advantage of. A strong brand allows a company to enjoy cost-effective marketing campaigns, greater trade leverage, higher margins, and generate customer loyalty. While promoting a brand, especially the New World countries, should create awareness through emphasizing about the country’s mythology and culture. A powerful brand leads to high brand equity and hence firms should concentrate on building strong brands. Since consumers are increasingly health conscious, wine should carry ingredients that promote well-being like reduction of blood pressure or prevention of weight gain. Specific consumer groups should be targeted with specific marketing techniques. More women and the older consumers are likely to consume wine and hence strategies should be devised to attract women. Consolidation in the premium wine categories is expected particularly in the US as dollar has gained strength due to which the products are cheaper for the local people. The premium wine segment is expected to experience extensive growth. This segment is fragmented since the top wineries control a small percentage of the total category. Wine consumption in the United States has grown and there is demand for the New World wines. Thus Australian brands should consider entering the US market at this juncture as they prefer the California wines or those from English-speaking countries. In Russia wine sales are still dominated by local companies although a few international brands are available. The leading New World countries should penetrate the Russian market where consumption is expected to grow phenomenally. Even Asian countries like China, India and Korea have registered growth and hence these countries should also be approached by the larger wineries using their existing distribution network. To penetrate and establish in the Asian and the Russian markets, the global players should adopt the neutral pricing strategy as the per capita income in each of these countries is on the rise. The consumers are health conscious but not very price conscious. Their decisions would not be based on price but on the value they receive. The lifestyles are changing in these economies and hence early-mover benefits could be reaped. Global brands would be able to make a breakthrough in these economies. References: Campbell, G. & Guibert, N. (2006). Old World strategies against New World competition in a globalising wine industry. British Food Journal Vol. 108 No. 4, 2006 pp. 233-242 Euromonitor (2007). Wine - World. Euromonitor International Guibert, N. (2006). Network governance in marketing channels. British Food Journal Vol. 108 No. 4, 2006 pp. 256-272 Nowak, L. Thach, L. & Olsen J. E. (2006). Wowing the millennials: creating brand equity in the wine industry. Journal of Product & Brand Management 15/5 (2006) 316–323 Spawton, T. (n.d.). Development in the Global Alcoholics Industry and its implications for the future Marketing of Wine. Elton Mayo School of Management, South Australian Institute of Technology. Vrontis, D. & Papasolomou, I. (2007). Brand and product building: the case of the Cyprus wine industry. Journal of Product & Brand Management 16/3 (2007) 159–167 Wine Business. (2008). Constellation Wines U.S. Announces New Organizational Structure. Accessed 12 March 2008 Read More