1. E. & J. GALLO WINERY Team #3 Patat Ayuwathana Angela Farmer Chris Fishback Melinda Lobaugh

2. Background Started by 2 brothers, Ernest & Julio Gallo Modesto, CA Grew and sold grapes for years

3. PROHIBITION! 1920 - 1933

4. 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.

5. Background, cont’d Brothers 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.

6. Have YOU had E&J’s?

7. U.S. MARKET OVERVIEW

8. U.S. Wine Market U.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

9. Wine Market U.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

10. Production California ◦ 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 2 nd largest

11. Favorite Wines in Production Top 5 varieties produced in California: ◦ Chardonnary ◦ Cabernet Sauvignon ◦ Zinfandel (white and red) ◦ French Colombard ◦ Merlot

12. 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

13. CHINESE MARKET OVERVIEW

14. Chinese Wine Market (2010) China’s retail consumption in social consumer goods– $2.26 trillion Rising demand for wine in China  8 th largest wine market in the world Import 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

15. Retail Channel – Hypermarkets Walmart – U.S. Carrefour – France Metro – Germany New World Department Store – Hong Kong Auchan - France Tesco – Britain

16. CHINESE RETAIL CUSTOMERS

17. Overview Liquor and beer’s popularity in 1990s Increase in wine consumption within the middle age group – presence of female Polarized view on wine

18. Preferences & Purchasing Habits Preference 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

19. 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

20. Other Preferences White wine sales during summer time Beer consumption during the summer Red 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)

21. Other Preferences (cont.) Restaurants  Upscale restaurants do not always allow outside beverages  50 – 100 RMB ($7 - $15) corkage fees  Casual restaurants DO allow outside beverages  Only bring liquor or beer, unless females are present  Men at the table will pour wine for the women to drink, but will only drink liquor themselves

22. 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

23. INDUSTRY ANALYSIS (CHINA)

24. 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

25. Threat of New Entrants Product 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)

26. Intensity of Competition Total 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

27. Bargaining Power of Suppliers Gallo’s resources – strong R&D Owns many vineyards and employs its own growers Large production scale & supplier contracts  Drought 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

28. Bargaining Power of Buyers Retailers & retail shoppers Retailers have limited shelf space & competition from other suppliers Rely on local distributors to negotiate contracts Provide own in-store promoters If a product does not sell well, retailers can pull the product off its shelf

29. 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

30. Threats of Substitutes No specific market segment that consumes wine on a daily basis Beer or liquor during social gatherings Nonalcoholic beverages: juice or tea

31. “When I read about the evil of drinking, I gave up reading…” -Anonymous