This post is the first in a series of posts designed to discuss an intriguing industry and quite possibly the most challenging analysis I conducted during my masters program.
Part I- The Assignment and Industry
Now that the rush of my final semester in B-School has well passed, I can actually take time to write about some interesting research, case studies, and other material that I found interesting. One such project was my final project in my capstone class. In my Global Competitive Strategy class, the mother of all classes, the assignment was simple. As a cohort, choose an industry. Then, each team chooses a company within that industry to analyze, determine a strategy, and present it to the cohort. The interesting component here is the presentation. As a participant, you critique your presentation against others, look at their strategy, and then have an opportunity to come back to the group and present any adjustments to your strategy. Simple enough in theory but more difficult to execute.
Without much thought of the actual assignment, the cohort unanimously chose the Distilled Spirits industry- for the obvious reason- taste testing. However, if you actually think about the evolution of the industry, it turned out to be very intriguing. Here you have a mature industry, highly regulated and taxed, which competes against other social pleasures, where the product is a commodity (or is it?). On top of that, the industry is globally competitive with a twist of specialization when you consider micro-brew shops are popping up all over the place. Additionally, add the “brew your own” people who do just that, brew and drink their own spirits.
Once we started peeling back the onion we realized this is a highly complex industry with many pressures. There are tons of suppliers for raw materials and packaging world-wide. The costs of entry are quite high, especially with the licensing piece so threats of new entrants is relatively low. Buyers have high bargaining power and many choices. Shelf space in on-site service (e.g. bars) is tight. Distilled spirits can be substituted with wine, beer and other legal and non-legal drugs. Rivalry among competitors is high. Depending on the geographic location there are more than 4,000 distilled spirits brands at various pricing levels.
The industry as a whole is a highly profitable oligopoly. The primary issues are companies have a traditionally high advertising spend. The sales to advertising ratio is 6-9% compared to a 3% US industry average. Trading up to higher priced brands is the key to industry growth. The US Industry is also regulated through a Three Tier Distribution Structure which screams inefficiency.
The Company we selected was Constellation Brands. With all of these complexities in the industry, how would we put together a competitive strategy for a firm we didn’t even know? Unless you’re IN the industry really, Constellation Brands isn’t a well-known company… until you research their brands especially their wines. Robert Mondavi, Arbor Mist, Black Velvet, Svedka, Blackstone, and Corona Extra are a few of the more prominent brands.
In my next post I’ll discuss the value chain, rent appropriation, and who makes the money within the Distilled Spirits industry.
- Heavenly Spirit’s Newest Import Blanche Armagnac Awarded Five Stars (prweb.com)
- Bloom Gin, Blended By World’s First Female Master Distiller, Makes Its U.S. Debut (prweb.com)
- Whiskies of the World Expo Announces 2011 Event (prweb.com)
- Hold the lime: U.S. migrates to premium tequila (canada.com)
- Lawmaker wants to turn state liquor stores over to private industry (pennlive.com)
- Brewers and Distillers Get in on Branded Bars/Lounges (1ntheknow.wordpress.com)
Sources for this post:
- Trading-Up patterns from 2006-2009; State of the Industry – www.BeverageWorld.com, http://www.discus.org
- Standard and Poors’ Industry Survey Journal for Alcoholic Beverages, page 27, May 7 2009 Publication
- Statistical Report for Distilled Spirits for July 2010 found at http://www.ttb.gov/statistics/201007dsp.pdf