Robert Mondavi Corporation

 

Murray Silverman
Professor of Management
College of Business
San Francisco State University
1600 Holloway Avenue
San Francisco, CA 94132
Phone: 415-338-7489
FAX: 415-338-0501
Email: msilver@sfsu.edu

 

Armand Gilinsky, Jr.
Associate Professor of Business Administration
Director, Wine Business Program
Sonoma State University
College of Business
Phone: 707-664-2709
Email: armand.gilinsky@sonoma.edu

 

Michael Guy, MBA
San Francisco State University
College of Business
Email: MGuy@ttsfo.com

 

Sally Baack
Assistant Professor of Management
San Francisco State University
College of Business
Phone: 415-338-6421
Email: sbaack@sfsu.edu

 

 

June 20, 2001

In January 1999, Michael Mondavi, the 55-year-old CEO of the Robert Mondavi Corporation (RMC) and son of its founder, Robert Mondavi, announced the reorganization of the company and the layoff of 4 percent of the workforce. RMC had experienced a shortfall in supplying its Woodbridge Chardonnay brand. Disgruntled distributors had begun substituting competing Chardonnay brands on retailers' shelves. Once Woodbridge production levels returned to normal, distributors remained reluctant to carry the brand, further reducing company sales. Subsequently, RMC’s stock was downgraded by Wall Street analysts, and its stock price fell nearly 60 percent. [Recent company financial data are shown in Exhibits 1-5].

At the same time that Michael Mondavi announced the layoffs in January 1999, senior management was completing the process of reconfiguring RMC’s future strategies. One camp argued for a return to the original vision, complaining that because RMC had been so busy focusing on launching new brands and pursuing international ventures, it had neglected its core domestic brands, which made up 90 percent of revenues. Another group of managers argued for continued diversification. After all, RMC had introduced three new brands in the previous year: two through global partnerships in Chile and Italy and one domestic brand. Many of the managers in this camp had been involved in orchestrating the development and launch of new brands in the domestic and global markets. Michael Mondavi was caught between the two camps.

Robert Mondavi, the son of a poor Italian immigrant, founded the Robert Mondavi Winery in 1966 at the age of 54, after his bitter departure stemming from a dispute over control of the family-owned Krug Winery. Using personal savings and loans from friends, Mondavi founded his Napa Valley winery with a simple vision: "To do whatever it took to make great wines and to put Napa Valley on the map, right alongside the great winemaking centers of Europe."

Wine in the United States was classified into the following categories: table wine (7 to 14 percent in alcohol by volume), sparkling wine/champagne, dessert wine, and other wine products, which include wine coolers and sherry. Table wine represented approximately 66 percent of US volume and was further divided into varietal and non-varietal wine. In order to classify a wine as varietal, the law stated that 75 percent of the juice that went into it had to be from a single grape variety. The current most popular white varietal was Chardonnay. Cabernet Sauvignon and Merlot were the standards in red wines and white Zinfandel in blush wines. Table wine also was categorized into price brackets: Jug wine (under $3 per 750-ml bottle) and premium wine (over $3 per 750-ml bottle). The premium wine segment was further subdivided into popular premium, super premium, and ultra-premium categories. While the jug wine category accounted for 44 percent of the table wine market by volume, it accounted for only 17 percent of the revenue by 1999 [See Exhibit 6]. Wines also were classified by their appellation, the geographic area in which the grapes were grown. This was because the climate and soil conditions imparted different characteristics and tastes to the wine. The winemaking process provided many opportunities to affect a wine’s characteristics, increasing the potential for differentiating wine brands.

Mondavi set out to be the first in California to produce premium wines that were intended to compete with the premium European brands. At the time, many wine industry observers considered Mondavi’s venture to be financial suicide. In his 1998 book on the history of the company, Robert Mondavi Harvest of Joy – How the Good Life Became a Great Business, Mondavi recalled:

We in California had enormous potential; I knew we could become one of the great wine-producing regions of the world. But the American wine industry was still in its infancy, and no one seemed to have the knowledge, the vision, or the guts to reach for the gold, to make wines that could stand proudly next to the very best from France and Italy, Germany, and Spain.

Robert Mondavi’s initial business plan called for building RMC’s reputation by producing a limited quantity of super to ultra-premium wines using the most prestigious noble varietal grapes: Cabernet Sauvignon, Pinot Noir, Chardonnay, and Johannesburg Riesling. At the time, these four varietals commanded the highest prices in the marketplace and had the highest profit margin per bottle. In order to generate cash flow to expand the business, RMC planned to produce less expensive wines in high volumes to be sold in the premium market. Mondavi felt that the path to success in producing super to ultra-premium wines began with high quality grapes, so he set out to find the best vineyard in Napa Valley to locate the new RMC. A 12-acre portion of the famous To-Kalon vineyard in Oakville was purchased for the winery location. This vineyard was able to supply RMC with high quality estate-grown Cabernet Sauvignon grapes in its first year of operation. The To-Kalon vineyard has provided Cabernet Sauvignon grapes ever since, enabling RMC to create a prestige label.

To meet initial production targets, Mondavi began purchasing grapes from other growers around the Napa Valley and convinced many of Krug’s top grape suppliers during these early years to sign long-term contracts with RMC. Mondavi then worked closely with each grower to improve grape quality and structured each grower’s contract so that their compensation was tied to the grape quality and crop yields. Mondavi also was able to convince Krug’s top two suppliers to take a financial stake in his new winery.

Next, Robert Mondavi set out to build a state-of-the-art winemaking facility that was both functional for making premium wines and unique enough to make a statement about the wines the facility would produce. Mondavi enlisted Cliff May, a highly respected architect, to design an eye-catching Spanish mission-style landmark. May’s design for the winery became the backdrop of every wine label RMC has since produced. In his 1998 book, Mondavi wrote about his design requirements for the new winery:

The winery I envisioned was to be a showcase for the most advanced wine-making techniques and equipment in America, if not the world. Aesthetic would be key. In France, the great chateaux were temples of style, tradition, and refinement. This was the lead I wanted to follow. I wanted my winery to have elegance and style, to be a place that would properly highlight our talents and the work going on inside. I also wanted it to be a place that would attract streams of visitors.

The winery became a laboratory for developing what were to become some of the California wine industry’s best practices in the production of world-class premium wines. Among these best practices were: (1) assembling a team of experts in the areas of viticulture and winemaking, from industry professionals to university professors; (2) developing new technology to permit gentle handling of wine grapes and cold fermentation of white wines; and (3) process innovations, such as steel fermentation tanks, vacuum corking of bottles, and aging of wines in new French oak barrels. These innovative practices have since become standard in the California wine industry. In his book, Mondavi described his pursuit of excellence.

From the outset, I wanted my winery to draw inspiration and methods from the traditional Old World chateaux of France and Italy, but I also wanted to become a model of state-of-the-art technology, a pioneer in research and a gathering place for the finest minds in our industry. I wanted our winery to be a haven of creativity, innovation, excitement, and that unbelievable energy you find in a start-up venture when everyone is committed, heart and soul, to a common cause and a common quest.

Although Mondavi had managed to slowly improve the quality of RMC‘s wines throughout the 1970s, he struggled to get his super to ultra-premium RMC wines into reputable five-star restaurants and top wine shops across the country. Mondavi spent lavishly on entertaining influential people within the industry and invited the top wine writers to the RMC for free meals. He then would conduct blind tastings of the RMC wines against reputable French and Italian wines so that the wine writers could taste for themselves what RMC was producing. For over a decade, Mondavi traveled extensively throughout the country and abroad as the company’s chief salesperson, promoting his vision for RMC and Napa Valley. Often, while dining alone on business trips, Mondavi invited the chefs, sommeliers, wait staff, and restaurateurs to blind taste RMC wines against the restaurant’s best European wines. One restaurant at a time, Mondavi managed to get his wines on the wine lists of the best five-star restaurants in the United States. By the close of the 1970s, Mondavi’s persistence began to pay off. Restaurant owners, famous wine connoisseurs, and the press were now very interested in RMC’s products. With increasing recognition of and demand for his wine, Mondavi began slowly raising the prices his products until they were selling for as much as comparable French wines.

RMC ultimately reached the capacity to produce approximately 500,000 cases annually of premium to ultra-premium wines. These wines were composed of reserves and district-designated and varietal wines, such as Cabernet Sauvignon, Pinot Noir, Chardonnay, and Fumé Blanc. Approximately 40 percent of the wines produced at RMC were made from estate grown vineyards in the Stag's Leap, Carneros, and Oakville districts of the Napa Valley. The winery progressively expanded the breadth of its wines by releasing ultra-premium reserves and district-designated varietal wines in more limited quantities. In the works was a vineyard-designated wine program to produce limited releases of popular varietals, such as a Cabernet Sauvignon from Marjorie’s Block of the To-Kalon Vineyard. These ultra-premium wines were available on an allocation basis, that is, in smaller quantities and at higher prices, than the regular RMC wines.

In the 1998 fiscal year, RMC sold 6.8 million cases of wine throughout the United States and in some 90 countries worldwide, grossing $341.1 million in sales. RMC now employed more than 1,000 people. Essentially all of RMC’s domestic sales came through its top 16 distributors, which represented approximately 96 percent of 1998 gross revenues. Brokers and agents handled product sales into export markets, and worldwide wine sales in 1998 accounted for eight percent of the company’s gross revenues.

Starting in the late 1970s and continuing throughout the 1980s, RMC set out to build a portfolio of premium wine brands to fill various price points and niches in the domestic wine market. Robert Mondavi became very interested in exploring the new appellations that had emerged throughout California and began looking for opportunities to develop new brands from emerging appellations. RMC began to diversify its brand portfolio via acquisition and development of the Woodbridge, Bryon, and Coastal brands, along the way acquiring new vineyard properties in California. RMC financed this expansion through long-term debt. By 1999, RMC owned five winemaking facilities and associated vineyards across California, marketing its wines under seven domestic brands and six international brands [see Exhibits 7 and 8].

Woodbridge. In 1979, RMC purchased Cherokee Vineyard Winery to expand the production of table wines under the RMC label. RMC remodeled the Cherokee Vineyard Winery and renamed it Woodbridge, after the small town in which the winery was located. Woodbridge now would produce high volume premium wines using the same quality-driven winemaking techniques employed by RMC. Over the course of the 1980s, the Robert Mondavi Table Wine brand, previously made at RMC, was transformed into the Woodbridge by Robert Mondavi brand. Wines sold under the Woodbridge label represented approximately 55 percent of company revenue by 1998. The brand had become the second largest premium wine in United States food stores, as measured by AC Neilsen/Adams Business Research. Woodbridge produced six moderately priced varietal wines - Cabernet Sauvignon, Zinfandel, Chardonnay, Sauvignon Blanc, Merlot, and White Zinfandel - which were sold in the popular premium to super-premium wine market segments. RMC projected that Woodbridge sales would continue to grow in the 10 to 15 percent a year range indefinitely. Management believed that acquiring more vineyards to supply the brand would be needed in the future to ensure production goals and to control costs.

Bryon. To supply the Woodbridge brand, RMC also started searching for additional sources of grapes in the central California coastal regions in the mid-1980s. In the late 1970s, winemaker Bryon Ken Brown had recognized the tremendous promise of the region's cooler ocean-influenced climate to grow high quality Pinot Noir and Chardonnay grapes, and he was one of the first to introduce these Rhône-style grape varietals to the appellation. Mondavi was so impressed by the wines Brown was creating that in 1989 he purchased the Byron Winery and 55 acres of vineyards in Santa Barbara and Santa Maria counties. After the purchase, Brown was left in charge of Bryon while RMC injected needed capital and expertise into the winery and vineyard operations. Tim Mondavi, the company’s wine maker, was then sent to work closely with Brown to incorporate the winemaking and viticulture techniques developed at RMC into Bryon's operations. The new 80,000-case Bryon Winery was completed in August 1996. RMC also expanded the vineyard holdings at Bryon, bringing the total acres in production up to 1,420 acre by 1998, by replanting the estate vineyards with high-density plantings. In addition to the Bryon brand, RMC planned to release a new brand produced out of the Bryon winery under the label "Io." Io was to be a limited-production Rhône-style wine, consisting of a unique blend of Syrah, Mourvedre, and Grenache grapes. It was to be priced at $40 a bottle and sold exclusively to RMC's top accounts.

Coastal. The Robert Mondavi Coastal wines were developed in May 1994 to fill a niche in the premium to super-premium market below Bryon’s wines. Wines under the Coastal label retailed from $8 to $12 and featured Cabernet Sauvignon, Merlot, Pinot Noir, Zinfandel, Chardonnay, and Sauvignon Blanc varietal wines. In the face of opposition from others in the wine industry, RMC intended to differentiate the California coastal regions by creating a new Central Coast appellation. As part of this effort, it emphasized the Coastal origin of source grapes used in the wines and featured a sea-meets-land motif as a backdrop to the brand's labels. RMC did not maintain an exclusive winery for the production of the Coastal brand, but instead contracted with Golden State Vintners of Soledad to crush the grapes, while the wines were made and bottled out of the RMC and Woodbridge wineries. Several larger competitors in the premium market were also known to be developing vineyards and wineries in the coastal regions, and RMC management foresaw stiff competition ahead for its Coastal brand. In order to maintain retail shelf space, RMC sought to lower its production costs and to increase the volume of wine produced as the brand entered nationwide distribution. A major constraint to the brand’s growth was grape supply, as most grapes for the Coastal brand were sourced from 25 growers, accounting for approximately 2,500 acres of vineyard production. RMC owned an additional 1,200 acres of land in the Salinas Valley, of which only 35 percent were planted. RMC sought additional vineyard acquisitions in the region so that 80 percent of grape sourcing for the brand in the future would come from company-owned vineyards. Sales for this brand were expected to surpass one million cases by 1999, a full year ahead of projections.

La Famiglia di Robert Mondavi. The La Famiglia di Robert Mondavi brand was introduced in 1995 and was devoted to producing Italian-style varietal wines in California for the ultra-premium market. After decades of growing traditional French varietal grapes in California, RMC decided to experiment by growing Italian varietals such as Sangiovese, Barbera, and Pinot Grigio in California. Management felt that the Napa Valley might be suited for cultivating these Italian varietals and was especially interested in making wines from Sangiovese grapes, because Sangiovese was one of the most popular Italian varietal wines in Italy. RMC produced small quantities of seven wines under the La Famiglia di Robert Mondavi brand. This brand featured Barbera, Sangiovese, and Pinot Grigio varietals. Wines under the La Famiglia label were produced at the former Oakville Vichon Winery, which RMC renamed the La Famiglia di Robert Mondavi Winery.

RMC also began pursuing global ventures and looking for suitable partners in France, Italy, and Chile. By the mid-1990s, the company had entered into three multi-national partnerships, one in Napa with the Rothschild family, one in Chile with the Chadwick family and the other in Italy with the Marchesi de' Frescobaldi family. These partnerships yielded several new global brands, including Opus One, Caliterra, and Lucente.

Opus One. RMC took the initial steps to expand its brand portfolio when it entered into a joint partnership with Baron Philippe de Rothschild, owner of the famed Château Mouton-Rothschild in Bordeaux, to form Opus One. The Opus One partnership began one morning in 1979, when the two men were dining in the Baron’s bedroom in Bordeaux, France. In his 1998 book, Mondavi outlined the basis for their partnership:

We agreed to form a fifty-fifty partnership with one guiding ambition: to make a great wine, a wine that would stand alone in spirit and quality. The idea was to take our different cultures and traditions, along with the best materials and know-how from Bordeaux and California, merge them, fuse them, and see if we could find that touch of magic that produces a wine great enough to be referred to as ‘bottled poetry.’ We’d draw our inspiration from Mouton’s Premier Grand Cru Classe and the Mondavi Cabernet Reserve, but our aim was to create a wine like no other, a great wine with its own style, character, and breeding.

No one in the past fifty years had done more for French wine than the Baron and everyone knew it. The fact that he wanted to have a joint venture with our winery immediately elevated us into a unique position in the California wine industry. The Baron wanted to do business in America, with a Napa Valley winery as a partner, and we were chosen. He said:

"I want a fifty-fifty partnership. Because I don't know the local culture. I don't know the local history. I don’t know the local people. And those three will make the difference between producing wine and producing great wine."

The prestige value was enormous - and so was the publicity. When we announced the creation of the joint venture, I'd say we got over a million dollars' worth of free advertising. At the same time, this partnership gave us real international standing, and it set the stage for a series of other foreign ventures that we developed in the years ahead.

Work to create the first vintages of Opus One wine commenced immediately with RMC selling 35 acres of the company’s best vineyards from the To-Kalon block. The partnership then purchased two more vineyards across Highway 29 from RMC, where the Opus One Winery would eventually be built. Château Mouton-Rothschild’s winemaker, Lucien Sionnea, and Timothy Mondavi began working together at RMC to make the first vintage of Opus One. Over the next five years, the two winemakers worked closely to blend the two different cultural styles and techniques of winemaking. Ten years in the making, the Opus One Winery was completed in 1991. The winery featured a state-of-the-art barrel room where temperature and humidity were kept at precise specifications using an electronic climate control system. Opus One, a Bordeaux-style Cabernet Sauvignon, consisted of a blend of 80 percent Cabernet Sauvignon mixed with Cabernet Franc and Merlot. Production was limited to 30,000 cases per year, and bottles of the wine sold for between $90 and $100 in more than 65 world markets. Due to its limited production, demand for Opus One exceeded supply. Distributors and individual customers had to order well in advance of the wine's release. Opus One thus became America's first ultra-premium wine. By the mid-1980s, it had made the transition into the French, English, German, and Swiss markets. Not only was this a first for American wines, but also an opportunity for RMC to showcase its other wines in those markets.

We saw the same potential in Chile that we saw in Napa Valley 30 years ago. But most importantly, with Caliterra we saw people who are dedicated to producing wines that belong in the company of the greatest wines in the world.

After forming Viña Caliterra, each partner provided suffcient capital to expand the Caliterra operations and to purchase the 1,000 hectare La Arboleda Estate in Chile’s Colchagua Valley. Viña Caliterra planned to source additional grape supplies from independent growers located throughout the Colchagua Valley’s various appellations. RMC anticipated that the new Caliterra Winery would be completed and in full production by 1999 harvest. The Viña Caliterra partnership produced four varietal wines under the Caliterra label — Cabernet Sauvignon, Merlot, Sauvignon Blanc, Chardonnay — and two reserve varietals. These wines were priced between $7 and $10 a bottle. Despite a slowdown of imported wines to the United States market in the late 1990s, the Caliterra brand was one of the fastest-growing import brands. Worldwide sales of Caliterra in 1997 reached an estimated 300,000 cases.

Italy's Marchesi de' Frescobaldi In 1996, RMC formed a partnership with Marchesi de' Frescobaldi family, a highly respected Italian viticulture family with three generations of winemaking experience, to produce Italian style wines in the Tuscany region, using traditional Italian varietals. The partnership purchased the 11-hectare Solaria Estate Vineyard in the Montalcino region of Tuscany. The partnership produced approximately 20,000 case a year of ultra-premium wines under the Luce and Lucente labels in Italy. Luce was first introduced to the international wine markets in June 1997, and this Tuscany-style blend of Merlot and Sangiovese varietals recently was listed as one of the world’s top 40 red wines by Wine Spectator magazine. Lucente was later released in 1998. Both wines were priced in the $55 to $60 price range and were available in select United States and European markets.

By the early 1990s RMC began to develop severe financial constraints brought on by the combination of expansion, increased competition, and phylloxera infestation.¹ Several of the company's Napa County vineyards were dying from phylloxera, forcing the company to replant many of its vineyards at a time when the company’s heavy debt load was already high from the acquisitions of the 1980s. Further compounding problems for the company, there were now some 200 new wineries in the Napa Valley, many of which were now producing premium to ultra-premium wines that directly competed with RMC brands. A growing number of these wineries in the premium market were owned by multinational corporations that could afford to replant phylloxera-infested vineyards and to pay higher prices for grape supplies until the replanted vineyards returned to production. Smaller family-owned wine operations were at a financial disadvantage against larger, fully integrated and in many cases conglomerate-owned firms, and were faced with either selling off assets or borrowing heavily to finance existing operations. Due to dwindling capital resources, Robert Mondavi felt that RMC wouldn’t be in the position to take advantage of future opportunities and that it risked being forced aside in the premium market by larger competitors - unless additional capital could be obtained.

After five years of careful study of other family-controlled public companies, Robert Mondavi, with the help of the investment banking firm Goldman Sachs, devised a deal to raise enough money for RMC to continue expansion while maintaining family control. An initial public offering (IPO) for the company was structured with two classes of stock: a Class A common stock to be issued to Mondavi family members, and a Class B common stock to be offered to the public. Class A shares carried ten votes per share, and Class B one vote per share. Providing Mondavi family members retained their shares, the family could retain control over RMC's destiny.

On June 10, 1993, RMC issued 3.7 million shares at $13.50 a share and began trading on the NASDAQ exchange under the symbol MOND. The IPO raised approximately $49.95 million, giving the company a market capitalization of $213.3 million. Within days, the stock was trading at around $8 a share and six months later at $6.50 a share, wiping away over half of the company’s value and half of the Mondavi family’s fortune. Investors and analysts alike had difficulty valuing RMC, due to a lack of information on the company and the wine industry as a whole. At the time, only two other publicly traded wine companies existed, both of which were in the low-end jug wine market segment and not in the premium wine segments. In addition, the California industry was facing large expenditures and uncertainty related to the phylloxera infestation. In his 1998 book, Robert Mondavi approached the stock valuation problem much as he approached marketing wine:

The wine industry was not highly regarded by the investment community. So I knew we had to educate them, show them we had the knowledge and know-how to build a strong, enduring business, based on a product line of the highest-quality wines, plus quality table wines we could sell in very high volumes. And we had to explain to them what we were doing globally. Opus One was a huge success; it had cemented our international prestige. We had to make investors understand that Opus was only the beginning. We had to explain that we were going to establish other joint ventures of similar quality, in many parts of the world - something no other winery had ever done. I also realized that to get our message across we had to put on major presentations for the top stock analysts around America. We had to send a team to New York, Boston, and Chicago to put on first-class presentations, receptions, and tastings - all to show them, in the most visceral, penetrating way possible, what we were doing.... Well, we had to mount an effective campaign and take it right to them, and not just explain our approach but put our wines right in their hands! Let them taste, in their own mouths, our expertise and commitment to excellence.

The United States wine industry was composed of approximately 1,500 wineries. The industry, however, was highly concentrated, with the top 10 wineries accounting for 70 percent (by volume) of US production, according to the 1999 Adams Wine Handbook. [Market shares for some of the larger wineries are shown in Exhibit 9.] Wine was produced in every state except Alaska. California dominated the US wine industry in many that it had over 800 wineries and accounted for more than 90 percent of the wine produced in and exported by the United States. Northwest wineries (Washington, Oregon, and Idaho) were composed of approximately 200 wineries and were developing an export presence, as well as an excellent reputation for quality wines.

Wine was sold through a three-tier distribution system. Wineries (the first tier) or importers sold wine to wholesalers (the second tier), who provided legal fulfillment of wine products to local retail businesses (the third tier) within a certain state. Wine was a controlled substance, and laws in each state differed regarding how wine could be sold. Typically, wine passed through each tier of the distribution system, making direct shipping to retailers or selling wine through the Internet difficult or impossible in most states.

The third tier of the distribution system consisted of retail and non-retail outlets. Supermarkets, convenience stores, club stores, mail order and Internet retailers, specialty stores, and wine clubs accounted for 78 percent of total sales volume. Supermarkets alone accounted for 52 percent of retail wine sales and were very influential in wine distribution. They were dominant in food and drink retailing and made one-stop shopping an appealing concept for consumers. Furthermore, supermarkets had considerable bargaining leverage with wholesalers. The role of specialty stores in wine distribution diminished due to the increasing power of supermarkets. Specialty stores' share of retail wine sales was about 30 percent in 1998. Nevertheless, specialty stores were not likely to disappear soon because they provided superior customer service and their sales staff had extensive knowledge of wines. They also carried specialty brands and limited production labels, attracting wine connoisseurs and enthusiasts. Non-retail outlets accounted for the remaining 22 percent of wine volume in the United States, according to Adams.

The Wine Institute estimated that 1999 United States wine market retail sales were $18 billion, growing from $11.7 billion in 1990. The United States wine market ranked third in the world behind France and Italy. However, the United States ranked thirtieth in the world in per capita consumption of wine in 1999. The greatest concentration of table wine consumers was in the 35 to 55-age bracket. About the same proportion of men and women consumed wine. While all income levels consumed wine, higher income was associated with greater wine consumption. In 1998, adults in families earning over $75,000 annually represented 18.7 percent of the population and 31.4 percent of the domestic table wine consumption.

Export markets. In terms of international markets, wine was produced commercially in over 60 countries with 23 percent (by volume) of the wine produced in the world being exported to international markets according to Wines & Vines. Leading wine producers included the Old World wineries in France, Italy, and Spain, which were also the leading exporters. New World producers, such as the United States , Australia, Chile, Argentina, and South Africa had been making both production and export inroads globally over the past few decades. For example, France, Italy, and Spain all export more than 25 percent of the wine they produced, Australia exported over 40 percent, and Chile over 80 percent of its production. Many observers attributed these export numbers to the small size of the home markets.

Until the mid 1990s, the United States wine market remained largely a domestic industry, with some imports from France, Italy, and Spain competing with United States wineries. By 1999, however, imports had risen to 20 percent of the United States market share, which was seven percentage points above where it was in 1995, according to Wine Business Monthly. Tremendous inroads had been made by Australian and Chilean wines, in particular, into the United States market. For example, from 1995 to 1999, Argentina increased the value of its exports to the United States by 243 percent and Chile by 152 percent. Since 1995, the unfavorable balance of trade for wine in the United States has increased by 78 percent according to the 2000 World Vineyard, Grape, and Wine Report.

United States wine exports also grew consistently, from a base of $137 million in 1990 to $548 million in 1999, according to the United States Department of Commerce. Also, the United States industry enjoyed the highest rate of increased wine exports (19.3 percent) in 1998 among the major wine producing countries according to the 2000 World Vineyard, Grape, and Wine Report. While this export growth was impressive, United States wineries also face increasing threats to their domestic market share due to globalization in the wine industry.

Wines & Vines reported in 1999 that the United States had only 4.2 percent (by volume) of the world export wine market, while producing 8 percent (by volume) of the wine produced in the world. The United States wine industry exported only 13 percent of the wine it produced, while other countries had more intensely developed their export markets. Tariffs and trade barriers played a pivotal role in obstructing United States wineries' access to various country markets. Ten United States wineries accounted for more than 89 percent of exports. Nearly 50 percent of United States wineries exported their products. The leading United States exporter by volume was E&J Gallo, accounting for about half of United States exports and more than four times the volume of its nearest export competitor. E&J Gallo exports approximately 13 percent of its total production. United States wineries typically exported only a small percentage of their production. Wente Vineyards was a notable exception. Wente made exports a cornerstone of its long-term strategy, as 60 percent of its annual case sales were from 147 country markets.

Competition. The nature of competition within the United States wine market varied by wine category. While the basis of competition in the lower segments of the wine market (jug to premium) was primarily driven by price, retail shelf space, and brand imaging, competition at the higher segments (super-premium and above) was driven more by quality and brand image. Wine producers in the jug to premium market segments relied heavily on the retail chains for most of their sales. Retail chains demanded that these wine producers be able to produce an adequate supply of the most popular varietal wines within specified price ranges (price points) because consumers of these wines tended to be price sensitive. In addition, the lower segment wines required sufficient consumer demand (depletion rates) for retail chains. Although many retail chains carried super-premium to ultra-premium wines, obtaining shelf space was of lesser concern for producer of these brands.

Typically, the higher-end segment wines were made in smaller quantities, and demand often exceeded supply for acclaimed wines. Wholesalers could increase their markups on top-selling super-premium to ultra-premium wines by moving these wines through alternate distribution channels, such as restaurants, hotels, and specialty wine shops. For the top super-premium to ultra-premium brands, wholesalers were often willing to enter into future contracts with producers to buy the most popular wines before they were released, thereby generating advance revenue for the producers. Producers also were able to sell their best super-premium to ultra-premium wines through direct sales at the winery or through mail order wine clubs that were allowed by law in selected states.

Building brand awareness to drive sales for the lower market segment wines was typically done through traditional advertising campaigns and retail promotions; whereas, for the higher market segment wines, brand awareness was built more through 'pull' marketing strategies. Rarely did producers resort to television or mass print advertising to promote their super-premium to ultra-premium brands. Instead, these producers built awareness through wine competitions, public relations campaigns, direct marketing, and wine tourism. Most super-premium to ultra-premium wine producers entered their best wines into local, state, national, and international wine competitions, with some going far as holding back portions of their best inventory to be released later at prestigious competitions. Medal winners often were featured in magazine articles, newspapers, and wine enthusiast newsletters. These write-ups helped to build the public’s awareness for the best super-premium to ultra-premium wines each year.

Historically, the jug wine segment was almost completely dominated both in the United States and global markets by Gallo, a family-owned wine business since 1933. However, during the 1980s, large alcoholic beverage companies, such as Canandaigua, The Wine Group, and Brown Forman, were able to enter and compete with Gallo in the jug market segment. Although Gallo was still the single largest wine producer in the world, making up approximately 45 percent of California wine sales, Gallo had failed to capitalize on changes in consumer demand toward a preference for premium wines. In recent years Gallo, like many of the other jug wine producers, sought to enter the premium wine market, choosing to develop and launch new Gallo brands from 2,300 acres of prime vineyards in Sonoma County acquired to supply the new brands.

Besides the alcoholic beverage companies, several large food and beverage conglomerates, like Nestlé, Pillsbury, Suntory, PepsiCo, and Coca Cola, entered the premium market by acquiring premium to ultra-premium wineries in the 1970s. However, during the 1980s, many of these food and beverage companies have divested their wine holdings, choosing instead to focus on their core businesses. The beneficiaries of these divestitures were the wine and alcoholic beverage companies that continued to build their portfolios of wine brands. Wine industry analysts expected further consolidation in the wine industry as large wine and alcoholic beverage companies continued to acquire smaller winery operations to gain access to premium and ultra-premium brands.

The super-premium to ultra-premium market was highly fragmented, composed of hundreds of individual, small to large wine-producing operations that were all competing to produce the most acclaimed wines each year. Although larger producers held advantages in scale and capital, the smaller wineries were able to compete by consistently producing high quality wines in limited quantities that gained critical acclaim by wine enthusiasts. Smaller wine producers, however, were at a disadvantage when trying to compete for grape sources against larger better-financed competitors, such as Beringer, RMC, Kendall-Jackson, Sebastian Vineyards, UDV NA Wines, Gallo, and Canandaigua. Many of these rival firms owned portfolios of brands, invested in wine making facilities and vineyards across California and abroad, and produced wines across the price spectrum of the premium, super-premium, and ultra-premium market segments.

Michael Mondavi remained confident that future releases of small lot ultra-premium wines from RMC could help to build the company's overall image of prestige and quality. RMC had spent $50 million during the early 1990s replanting the RMC estate vineyards with high-density plantings in the traditional French planting style. RMC hoped to showcase these higher quality grapes with special small lot, vineyard-designated wines once those vineyards came into production after 1999.

Throughout the mid-1990s, RMC had struggled to secure an adequate supply of grapes to meet domestic production targets. RMC had been unable to purchase sufficient quantities of Chardonnay grapes for its Woodbridge brand during the 1996 harvest, and management foresaw a revenue shortfall in fiscal year 1998 (the year in which its 1996 vintage Chardonnay was scheduled for release). Due to poor growing conditions and phylloxera infestation in 1996, many other Chardonnay wine producers suffered the same grape supply problems. RMC had been especially hard hit, as only 12 percent of its grape sources came from company-owned vineyards. RMC purchased the remaining supply from some 300 independent growers across the State of California, increasing the company's susceptibility to fluctuations in price, quantity, and quality of grapes on the open market.

However, RMC was currently at capacity and required an estimated $27 million remodeling to add capacity for small lot ultra-premium vineyard and district-designated wines. With additional production capacity, RMC could produce more high-end reserve and vineyard-designated wines at higher price points.

At the same time, Mondavi had spent considerable time in 1998 traveling to Chile and Europe promoting RMC's new brands. He said at the time:

Our globalization started, I believe, from my father's quest to learn how to make wines better. All the time we were growing up, he was always tasting wines. Not just the wines of Charles Krug, the Napa Valley, or of California, but from around the world. And he wasn't tasting them to say which was better. He would taste these wines to study them, to say 'what in this wine was soil? What was the climate? What was the grape variety, or the clone of that grape variety? What was the pruning technique? What was the art of the winemaker.' In essence, he was asking 'What do we have to learn from the way this wine was made? And how can we improve on it.'

Mondavi believed the formation of global joint ventures would become an integral part of RMC's future business and a way for the company to continue to innovate and develop world-class wines. He wanted RMC to become a truly global company by growing, producing, and selling wines in all the best wine-growing regions in the world.

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