E. & J. GALLO WINERY

Team #3Patat AyuwathanaAngela FarmerChris FishbackMelinda Lobaugh

BackgroundStarted by 2 brothers, Ernest &

Julio Gallo

Modesto, CA

Grew and sold grapes for years

PROHIBITION!

1920 - 1933

Background, cont’d.E&J Gallo Winery was founded

1933.

Competition was pretty stiff. More than 800 companies in CA alone

$6,000 startup capital Ernest borrowed it from his mother-in-law.

Background, cont’dBrothers learned the craft of

commercial winemaking from pre-Prohibition pamphlets.

Published by UCAL, retrieved from Modesto Public Library basement.

E&J has grown into the largest family-owned winery in the world.

Also, largest exported of CA wine.

Have YOU had E&J’s?

U.S. MARKET OVERVIEW

U.S. Wine MarketU.S. is:

◦#1 market for wine sales (in dollars)◦#2 in volume of table wine

consumed (not per capita basis)◦#4 producer of wine overall

282 million cases sold in 2009 767 million gallons consumed in

2009

Wine MarketU.S. wine market growth due to:

◦Increasing number of people in newer generations

◦Increasing popularity of wines from Australia, New Zealand, Argentina, Chile, Portugal, and South Africa

◦Increasing production of U.S. wineries

ProductionCalifornia

◦Supplied 61% of all wine consumed in the U.S. 2009 (30% imported)

◦2,972 wineries (6,705 total in U.S.)◦90% of all wine produced in the U.S.

Texas ◦#5 wine producer in U.S.◦170 wineries (5 in Lubbock)

Llano Estacado Winery is 2nd largest

Favorite Wines in ProductionTop 5 varieties produced in

California:◦Chardonnary◦Cabernet Sauvignon ◦Zinfandel (white and red)◦French Colombard◦Merlot

U.S. Exports Top Five Countries to export:

◦Canada (up 23%)◦United Kingdom (up 22%)◦Hong Kong (up 117%)◦Japan (up 2.6%)◦China (up 101%)

E & J Gallo is the largest exporter of California wine

CHINESE MARKET OVERVIEW

Chinese Wine Market(2010) China’s retail consumption in

social consumer goods– $2.26 trillionRising demand for wine in China 8th

largest wine market in the worldImport wine sales are growing at a

faster annual rate than domestic brands

Wine consumption is expected to increase 32 percent, up to 1.26 billion bottles – or 105 million 9L cases in the next few years

Retail Channel – Hypermarkets

Walmart – U.S.

Carrefour – France

Metro – Germany

New World Department Store – Hong Kong

Auchan - France

Tesco – Britain

CHINESE RETAIL CUSTOMERS

OverviewLiquor and beer’s popularity in

1990sIncrease in wine consumption

within the middle age group – presence of female

Polarized view on wine

Preferences & Purchasing HabitsPreference for domestic brands

because:◦Cheap prices◦Patriotic support◦Satisfied sippers – do not know much

about wine so they will usually purchase the same brand

◦Heavy in-store price promotion◦Insufficient knowledge on imported

brands

Preferences & Purchasing Habits(cont.)Preference for French imports

because:◦symbol of status perception◦Taste preference (many prefer dry,

red wine)◦Trust in their quality products◦Previously received as a gift from

family or friends and enjoyed it

Other PreferencesWhite wine sales during summer

timeBeer consumption during the

summerRed wine perceived as luxurious

and are surprised or even confused to find some imports costing less than100 RMB (<$15)

Perceived health benefits (beauty & skin care)

Other Preferences (cont.)Restaurants

Upscale restaurants do not always allow outside beverages

50 – 100 RMB ($7 - $15) corkage feesCasual restaurants DO allow outside

beveragesOnly bring liquor or beer, unless

females are presentMen at the table will pour wine for

the women to drink, but will only drink liquor themselves

Other Preferences (cont.)Young population (Ages 20 – 25)

Casual environment with friends – drink beer

Drink at casual restaurants or at home because it is cheaper

No acquired taste for wine – mix soda and add ice cubes wine cooler

Price and taste more important than brand recognition

Television ads & word-of-mouth

INDUSTRY ANALYSIS (CHINA)

Competitive Rivalry·Domestic wines

·Penfolds

·The Wine Group

·Constellation brands

Competitive Rivalry·Domestic wines

·Penfolds

·The Wine Group

·Constellation brands

Buyer Bargaining Power·Retailers

·Retail shoppers

Buyer Bargaining Power·Retailers

·Retail shoppers

Supplier Bargaining Power

·Third party grape growers

·Glass & bottling

Supplier Bargaining Power

·Third party grape growers

·Glass & bottling

Substitutes·Beer

·Liquor

·Tea

Substitutes·Beer

·Liquor

·Tea

Threat of New Entrants·Old World & New World

·Domestic companies

Threat of New Entrants·Old World & New World

·Domestic companies

Five-Forces Model

Threat of New EntrantsProduct inspection and

certification, product labeling and packaging, product licensing, tariffs, import taxes, etc.

Distribution – distributors are the “middleman” before an importer’s product reaches retailers and end users

High costs (retailer listing fees)

Intensity of CompetitionTotal Global Exports (2009)

EU – 36% Australia – 17% Chile – 15%South Africa – 10% U.S. – 9%

Australia: Foster’s (Penfolds & Wolf Blass) & Jacob’s Creek

U.S.: The Wine Group & Constellation brands (Robert Mondavi)

Customer price sensitive & zero switching costs

Bargaining Power of SuppliersGallo’s resources – strong R&DOwns many vineyards and employs its

own growersLarge production scale & supplier

contractsDrought season – Small wineries must

increase prices of their wine due to the lack of sufficient grapes from suppliers.

Gallo can absorb much overhead costs and does not need to increase prices

Price consistency better relationship with Chinese distributors & retailers

Bargaining Power of BuyersRetailers & retail shoppersRetailers have limited shelf space

& competition from other suppliersRely on local distributors to

negotiate contractsProvide own in-store promotersIf a product does not sell well,

retailers can pull the product off its shelf

Bargaining Power of Buyers (cont.)Retail shoppers are price sensitive

domestic purchases“Enthusiast” drinkers have sufficient

knowledge on wine: moderately-high bargaining leverage because of the sheer number of competitors in the market

Zero switching cost – can pick & choose based on a very small price difference from competitors’ products

Threats of SubstitutesNo specific market segment that

consumes wine on a daily basisBeer or liquor during social

gatheringsNonalcoholic beverages: juice or

tea

“When I read about the evil of drinking, I gave up reading…”

-Anonymous