Barossa Winery IB Assignment
Academic Group : 28
Chandan Agarwal Harsh Bedi Jyothi Krishnakumar Mansi Bhargava Neha Pareek Ponappa SM 1/21/2013
PGP-12-102 PGP-12-108 PGP-12-114 PGP-12-122 PGP-12-129 PGP-12-133
CURRENT STAGE OF BAROSSA WINERY The Barossa Winery, located in the Barossa Valley of South Australia, was started by Mr. Rolf Mann in the early 1960s. The company competed in the quality premium bottled table wine market and produced a variety of both white and red wines. The product portfolio of the company comprised of: • •
WHITE WINE
•
•
RED WINE
•
Produced six different varieties Chardonnay and Rhine Riesling were the two brands which accounted for over 80% of the company's white wine sales. Dry white wines accounted for 85% of the total company sales. Produced five different varieties Cabernet Sauvignon and Hermitage were the two brands which accounted for majority of the company's red wine sales.
SWOT ANALYSIS STRENGTHS Barossa Winery had solid reputation throughout Australia as a consistent producer of high quality premium table wines – it was renowned for using the finest grapes and latest technology in producing many award-winning wines. The company was known for its marketing skills (which had contributed to its rapid growth between 1980 and 1985): Marketing initiatives, which were regarded by the industry as exceptional in terms of communicating the quality of the wines and “standing out” among the many competitive brands Innovative advertising campaigns which contributed to the recognition and acceptance of the company’s brands Successful distribution system which resulted in the prominent display of products in many retail outlets THREATS There was a slowdown in the growth of both the overall market and the table wine market.
WEAKNESSES Market share of competitors like Wolf Blass and Leasingham was increasing at a faster rate than that of Barossa Winery. As the company did not engage in price discounting unlike its competitors, it was adversely affected (market is price sensitive). Barossa Winery had remained a passive exporter and hence, did not have an explicit export strategy in place. The company catered to the bottled table wine segment which constituted only 24% of the total table wine sales by volume (in Australia).
In the years prior to 1987, the export sales of
OPPORTUNITIES There was an increasing recognition by many knowledgeable buyers of the quality of Australian and the company’s wines. Growing awareness in many countries of
the company generated a price per case of approximately 15% less than the average price received in the domestic market. The European Community countries produced a surplus of wines and collectively exported over 4 billion litres annually.
the quality of Australian wines. The Australian wine exports were increasing due to a favourable exchange rate of the Australian dollar against most foreign currencies.
The value per liter of export sales varied considerably by country.
Triggers for Barossa Winery Barossa winery showed a rapid growth in 1980’s but the sales and profits had slowed down considerably in 1986 and 1987. Huge growth opportunities existed in export markets. Australian dollar had fallen against most other foreign countries and hence offered a favorable exchange rate. Australia was also becoming famous due to popularity of the Australian comedy film ‘Crocodile Dundee’ as well as ‘Bicentennial Celebration’. Australia had earned a reputation of producing great quality wines and had a good capacity for growth. Australian wines were better or comparable to European wines. Barossa winery also had a reputation as a consistent producer of high quality premium wines. They did not have a unique export strategy till now and were looking forward for one due to numerous growth opportunities in export market. Barossa wines were also getting recognized amongst the knowledgeable buyers for its good quality. UK wine experts also visited Australia and wrote reports praising them about their quality. European community which had a huge share in wine exports was suffering due to Chernobyl nuclear incident in Ukraine in 1986 which raised concerns about the contamination of grapes there and hence posed a good opportunity for Australian wines which were already becoming popular. Major factors for triggering export consideration by Barossa Winery: Australia’s reputation as a land favorable for producing great wines Barossa winery’s reputation for its good quality wines
European community losing its appeal due to nuclear incident Favorable exchange rates
Along with the ample opportunities for growth, Barossa winery also had certain drawbacks with its current system of exports. Drawbacks Importers/ Exporters were free to buy from or sell to anyone There was no strong link with importers or exporters in terms of contracts or exclusive agreements Company had little experience in exporting Most of the marketing was done by importer or exporter, so the company had no exclusive presence in the market
Triggers for Canada as an export destination Not well developed wine industry Not recognized as producing good quality wines Consumption increasing: Per capita consumption risen from 6.3 liters per year in 1976 to 10 liters per year in 1985
Triggers for United States as export destination Huge market for wine : Estimates for 1988 2 billion Current Australian market share was 0.06% 313 million liters import
Triggers for United Kingdom as export destination 10 liters per capita consumption in 1985 and increasing
Best Internationalization framework for Barossa Winery Barossa Winery had not pursued the exporter market aggressively till now, but they used to capitalize on every opportunity in that market. They made sure to serve good quality wines and good service to all importers who used to approach them. Therefore, they did not have a proper export strategy in place. Their export assignments can be analysed through the following models.
Uppsala Internationalization Model Commit ment Market UK
Sporadic Export
Regular Export
1981-84 Star importers (10000 cases per year) 1985-87 Reid Company (18000 cases)
USA
License or Franchise
Sales Office
Joint Venture
Mfgr/Sale s/Subsidi ary
Increasing Commitment
6 importers with sales ranging from 400 to 4500 cases per year
Canada Increasing Geographical Diversity
Rest of the world
Export Thru Agents
About 10000 cases thru 2 australian exporters to New Zealand, Micronesia and Far East
2 sales agents generating a total sale of 800 cases over 4 years Increasing Internationalization
United Kingdom: Sales to the importer were done through two different UK importers in three years. Between 1981-1984 Star Importers purchased up to 10000 cases of Barossa Wines in a given year. In late 1984, they moved to a winery in New South Wales. Hence, in 1985 Reid Company started buying Barossa wines which went up to 18000 cases in 1987. According to Uppsala Model, United Kingdom as an export destination is in the category of Sporadic Exports in terms of commitment . United States: Barossa winery conducted business with 6 different U.S importers in 5 years with sales in the range of 4004500 cases per year. In 1987 sold a total of 9000 cases through 4 importers to U.S market. According to Uppsala Model, United States as an export destination is in the category of Regular Exports in terms of commitment Canada: Barossa winery had 2 sales agents in Canada who had been importing wines for about 4 years. According to Uppsala Model, Canada as an export destination is in the category of Regular Export thru agents in terms of commitment . Rest of the world: Barossa winery had sold about 10000 cases to the ‘rest of the world’ through 2 Australian exporters. These firms approached the company and then sold the wines to the distributors as wholesaler or retailers to other countries.
According to Uppsala Model, we can say that sporadic export was done through agents but the level of commitment was only restricted to supplying orders which came from the exporters.
OCF (Ownership, Control and Facilities) Companies begin their operation of internationalization in the nearby markets and then enter into the farflung markets. Majorly companies enter into new markets through exports. It’s very rare that companies enter into new markets with sales organisations or manufacturing subsidiaries of their own. Wholly-owned or majority-owned operations were established only after several years of exports to the same. According to this model, there are 4 different stages through which a company goes from a domestic to foreign market. Initially the ownership, control and facilities of a company remain in the domestic market. Then, facilities, control and ownership move to the foreign market respectively in each stage. Barossa Winery is in the first stage with ownership, control and facilities in the domestic country only
FUNCTIONAL MODEL According to this model, Barossa Winery currently appears to be in stage 1 of evolution as a global company. The company has remained a passive exporter with no explicit export strategy in place. Functions like manufacturing, marketing, R&D and sales are carried out in Australia, while it exports wines on a small scale to countries like UK through its distributors (the export sales had been generated by the wine importers who had approached the Winery). To start off, the company should focus on expanding its markets in UK. The advantages of this strategy include:
UK is the prominent exporter for the company and the brand awareness can be built upon with the help of the good reviews of existing importers. Obtaining import license in the UK is relatively easier as compared to the US.
As the company does not have any formal contracts with imports, it should focus on strengthening its distribution network in UK. In order to leverage on the market size and face existing competition, Barossa should consider establishing its sales office in the country. The company would thus enter stage 2 of the functional model. To combat the existing threat of a change in the export policies, the company should also set up its manufacturing unit in the country. However, in view of the contamination scare in the region, the company should consider such an expansion after a few years (thus, entering stage 3). Since the climatic conditions in Canada are not conducive to grape growing, Barossa should refrain from setting up its manufacturing division there. However, to boost exports, it must strengthen its distribution networks in the US and Canada.
SCALE-SCOPE-SYNERGY MODEL Barossa Winery appears to be in the pre-international phase of global evolution as its operations are predominantly focused in the domestic market. The company does not have an explicit export strategy in place. As the first step of entering phase 1, Barossa has identified Canada, USA and UK as potential import markets. We consider the thrust and triggers for the company in the initial entry phase (scope): Thrust:
Expanding to new geographic locations where there is growing awareness and increasing recognition of the quality of Australian wines. Marketing initiative and innovative advertising campaigns of the company which contributed to the acceptance and recognition of the company’s brand in Australia (and resulted in Barossa’s rapid growth between 1980 and 1985).
Triggers:
There was a slowdown in the growth of both the overall market and the table wine market in Australia.
The new tax policies had hampered the growth of the price sensitive market in the home country. The favorable exchange rate of the Australian dollar against most foreign currencies due to which provide impetus to exporters. Increasing market share of competitors like Wolf Blass and Leasingham and the consequent price discounting. As the company lacks formal contracts or strong links with the importers, it has to strengthen its distribution network and leverage on its adept marketing skills to capture market share.
Transaction Cost Analysis (TCA) Friction between ‘buyer’ and ‘seller’ results in transaction costs. If transaction costs are higher than control cost through an internal ‘hierarchical system’, then the firms should seek internalisation of activities. Friction in Markets:
United Kingdom: Extensive advertising, point of purchase displays, price specials due to huge competition United States: High competition with European Community. Marketing activities included : advertising, in-store promotions, price specials. Canada: Restricted marketing activities Export Costs Export Sales Manager Overseas Trips Sales Clerks Promotion Costs Total Costs Recovered Expenses
$60000 $100000 $60000 $100000 $320000 $100000 $220000
Retail Price Production Cost : Australia Retail Price : Australia Retail Price : United Kingdom Retail Price : United States Retail Price : Canada
$3.02 $11.08 $15.00 $9.40 $14.20
Assuming 2% market capture in each of the export destinations: Export Destination United States United Kingdom Canada Total Profit Export Costs Net Profit
Total Import of Table Wines 15650000 4320000 126000000
Share of Barossa Winery 313000 86400 2520000
Profit Margin $1.65 $1.65 $1.65 $4817010 $220000 $4597010
Hence, it is a good idea to go forward with the export options. Based on our analysis, we can say that TCA Model is the best model for internationalization. It gives a clear idea about the benefits associated with a transaction in order to decide whether a company should go ahead with the process or not.
