Penfolds Wine - Porter's Five and SWOT Analysis
|✅ Paper Type: Free Essay||✅ Subject: Marketing|
|✅ Wordcount: 2566 words||✅ Published: 3rd Jan 2018|
Penfolds is one of the oldest Australian wine brands, founded in the mid-19th century by the English immigrant and medical doctor Rawson Penfold. Starting with wine growing for medical purposes and the production of fortified wines and brandies, the business has developed very quickly and by 1920, the company already had a 50 per cent market share in Australia. After World War II the company has changed its direction and started producing red table wines with the commencement of white production in 1990. In the same year, the company has been acquired by Southcorp, which made the company the biggest Australian owned wine producer as well as the fifth largest producer in the world. In 2005, Fosters acquired Southcorp. (Calkins, 2005). The analysis of the case study should address the issues that Penfolds is faces and provide recommendations for a marketing strategy to overcome these issues.
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1.2 Economic background
South Australia has the fifth largest population as well as the fifth largest economy in Australia. As for the wine segment of the economy, the wine cluster, South Australia is the largest producer and exporter of wines in Australia (Nipe et al., 2010). From the 1990s, the wine sector has been growing steadily due to the strong exports. Nevertheless, the rising number of competitors in the low-cost wine segment and the worldwide recession in the recent years challenges the industry. Simultaneously, dominant supermarket giants have gained enormous market power reducing the power of the industry. Furthermore, the changing preferences of consumers and a huge oversupply of wine grapes is a major problem for the wine industry. The oversupply in wine grapes has reduced prices, lowered the profit margins and even got many wine producers to leave the market (Dobie, 2012).
The exports have dropped for e.g. in 2010-2011 to 747 million liters compared to 788 million liters in the year 2009 – 2010 (Figure 1). On the other hand, the demand for wine in the domestic Australian market has been growing steadily since over 20 years and domestic producers mainly supply the market. The imports of wine have risen by 4.2 %, to 67 million liters in 2010-2011 (Australian Bureau of Statistics. 2012). However, to be prepared for the future, the Australian wine sector has to undergo some changes, to stay competitive on the domestic market and to start growth on the export market again. Therefore, the sector has to deal more effectively with the oversupply of grapes and the quality of low cost wines in the key export markets, which has affected the reputation of Australian wines in a negative way (Dobie, 2012).
2. Analysis of the Case study
2.1 Porter five forces analysis
The Porter five forces analysis was introduced by Michael E. Porter, which helps to identify and to analyse the competitiveness, profitability and the attractiveness of an Industry (Investopedia, 2012). Therefore, this model should be used for the Penfolds case study to assess the wine industry in Australia and to able to place give adequate recommendations on Penfolds future marketing strategy.
Threat of Entry:
The threat of entry for new wine producers in Australia is quite high, especially from large global liquor companies (Pugh & Fletcher, 2002). Nevertheless, there are some barriers for new entrants in place, as for example the price of land and the high capital investments that are needed for the equipment. Another barrier is the time component, as newly planted wines need several years to grow mature and to be able to be brought to the market on a profit-making basis. This barrier makes the return on investment quite slow and it is only possible by big companies, who can afford waiting on their return (Adamo, 1997). Government regulations on alcohol, like licencing and taxes, existing distribution channels and already existing brands with high loyalty users, are also barriers for new entrants to the wine market in Australia. However, the high profit margins, low entrance costs due to a large number of substitutes will still attract some new producers, although only on a small scale (Blees at al., 2003)
The Australian wine industry is subject to high competition with a high number of competitors, which implies that also the price competition is very high. In Australia, there is also a high consolidation of the large brands, which are mainly bought by large global liquor companies, which helps these producers to use their power to undermine the small manufacturers (Pugh & Fletcher, 2002)
Threat of Substitutes:
The threat of substitutes in the wine industry is very high as there is a high amount of other alcoholic beverages on the market. Nevertheless, wine is still the fastest growing segment in the alcohol market. Compared to the rest of the world, Australia has an advantage in the ability to produce innovative high quality wines and to attract new consumers on the export market, as wine can be consumed regardless its aging (Wood and Anderson, 2002). The biggest problem in the area of substitutes is the absence of brand loyalty in the wine industry as most of the beer producers can count on. Therefore, the high amount of other alcoholic products which are more often cheaper in price and an assumed rise of health concerns by the consumers create a high threat of substitutes for the wine industry.
Bargaining power of buyers:
The wine industry’s buyers are categorized into two groups: the distributors and the retailers. Supermarkets, restaurants and clubs most likely represent the buyers of wine. Although this buyer group is able to change their offered brands quite easily, the change is offset by the acquisition of a large product palette from the seller of the company as it ensures lower prices and because the buyers have to be prepared on the various consumer preferences (Adamo, 1997). Nevertheless, the bargaining power of the buyers is relatively high, because the whole market is well crowded, and the securitization of the distribution is even more problematic for the producers when major liquor chains and large supermarkets dominate the major distribution channels in overseas markets (Pugh & Fletcher, 2002).
Bargaining power of suppliers:
The suppliers in the wine industry are the wine growers with their vineyards. Their bargaining power is very low as the global market has been flooded with grapes from different regions of the world and mostly with cheaper grapes than they can be produced in Australia (Davis, 2005). Consequently, there is a very high competition on the grapes market and the oversupply of grapes has given the Australian wineries the opportunity to produce cheaper wine with high quality. (Wood and Anderson, 2002) Because of the absence of differentiation on the raw materials, wine producers have decreased the bargaining power of suppliers significantly.
2.2 SWOT analysis
The following SWOT analysis reveals the strengths and weaknesses and well as the external factors for opportunities and threats for Penfolds, which has a major problem as stated in the Case study in the shrinking of the profit and the poor financial return over the last years.
Penfolds strength is its long lasted reputation for the high standard quality red wine, with a high range of vintage red wines that are very popular among its consumers and which gives the company an overall good reputation for its wine making (Veseth. 2007). The ultra-premium wines are a result of a long lasting tradition of allowing their winemakers to experiment and to research new vines and new wine styles. Moreover, the success in the premium segment is the outcome of a unique style of multi-regional vineyard blending, which means that the development of Penfolds wines is the blending of different wines from different vineyards across South Australia (Caillard, 2007). The company invented a so-called star-system to classify the vineyards and the grape quality of the vineyards, which helps to identify the best blend for a certain category of wine. This system also ensured to solve the principal agent problem, by handing out bonuses to wine growers in line with the quality of their grapes (star system) (Wood & Andersen. 2002). This unique blending, gives the winemakers more opportunities to broaden the company’s portfolio and to differentiate the wines into different categories of wine quality and price. This ensures a high standard of quality and provides the company with an overall market advantage (Caillard, 2007).
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The weakness of the Penfolds Company is the affordable and cheap wine section. Especially the cheap wine segment has a poor quality in taste (Calkins, 2005). This triggers the reputation of the whole company into a negative direction and damages the reputation especially in the overseas market, which affects the exports of the company. Moreover, the high competition in the cheap wine segment is reducing the profit margin of the company. The premium red wine section has also weakened in recent years, as it has not the same cachet as it used to have among the premium wine producers (Caillard, 2007)
As Penfolds wine portfolio is much focused on the red wines, the opportunities that the company has for the future is to broaden their white wine and sparkling wine portfolio. This would ensure a broader consumer base. This portfolio enlargement would also mean to improve the wine making techniques for the white and sparkling wine. However, not only the white and sparkling wine section needs improvement, but also the winemaking techniques for red wine should be improved to ensure the high quality standard in the premium segment of the wine industry (Wood & Andersen, 2002). The biggest opportunity that the company faces at the moment is the market expansion into China. Especially the premium and ultra-premium wine market is well demanded in China and Penfolds already makes the lion share in this market segment (Shaw, 2012). Therefore, the opportunity lies in the expansion of this market and also to build up reputation in one of the biggest economies in the world. The built-up reputation could help in the future to export not only the premium wines but also the cheap and affordable wines into China.
The probably biggest threat to Penfolds is the very high competitiveness in the South Australian wine regions, especially in Riverland where low quality wine is produced. Recession makes the ultra-premium wines less affordable and the high Australian dollar makes exports less competitive (Barrett, 2011). Another threat is the current structural oversupply of wine in Australia and therefore low prices, which makes the brand less attractive with its high price level (due to brand name) (Dobie, 2012). The changing consumer preferences can also be a threat to the company especially if it does not react with a broadening of their portfolio, especially in the cheap wine segment.
3. Issues and Problems of Penfolds in the market
Derived from the Porter’s five forces and SWOT analysis it can be said that Penfolds major problems and issues in the Australian and the global market is its segmentation of wine, the world economy and the consumer preferences change. As seen in the SWOT analysis one weakness of the company is the poor quality and the easy substitution of bulk wine, which is due to the fact that the wine demand is relatively elastic. Especially in times of economic instability and a worldwide recession with falling incomes, people tend to switch their preferences towards cheaper products and substitutes for the more expensive premium wines. Penfolds portfolio is now targeted more towards the high-income consumers who can afford a bottle of red wine for $30 or more. The great focus on the US and UK export markets are affected mainly by the worldwide recession and therefore by the change of the consumer preferences in these export markets. In addition, there seems to be a problem with their selection and grading star system, which leads to bad opinions about the quality of the wine. As mentioned in the SWOT analysis the cachet of some red wine series seem to have lost the cachet of the older wine series. There is no other conclusion to this problem than that the company lacks in their selection process for their wine blends.
4 Alternative Evaluation and Recommendations
Concluding the issues and problems of the company, there can be made some recommendations towards a future marketing strategy of the company. First, the company has to broaden their wine portfolio significantly. This recommendation is probably the least problematic as the company already is in the market and just needs to focus in another direction. Another recommendation for Penfolds would be a high promotion of their premium wines in life style magazines or magazines in the business class of airlines. Further, they should focus on a one on one marketing strategy with their current clients. All this would ensure that the company would gain more customers, especially those that are willing to pay more for a bottle of wine. For the premium and ultra-premium wines, the company should try to reduce the supply to the market, so that their product will not become a usual commodity. The prices for the premium wines should also be kept high to ensure the high premium range of the brand. Also D&R should be highly supported from the organization to secure a constant grow of new innovations and technologies. Higher advanced innovations and techniques can help Penfolds in the future to achieve higher margins and better reactions to changing weather conditions without the scarifying the quality of the wine/grapes. In my opinion this strategy of a promotion and D&R mix is the most valuable, as it attracts new customers and enhances the wine quality without spending too much of their resources.
The problem of Penfolds with the affordable and bulk wine market is that it is not the focus of the company. In order to gain market shares in this segment the company should try to acquire a rival that has a good reputation among the cheap wine segment. In this way, Penfolds would gain more knowledge about this segment and would also have one competitor less. Further, Penfolds would not need to print their brand name (which stands for premium wines) on a bottle of cheap table wine (Halliday, 2012). However, the profit would be Penfolds’. By acquiring another rival the company would be also able to be more focused on only one segment of the market and therefore ensure better quality of the high premium wines. This option of a strategy will be the most expensive and probably the least likely, as it needs too much resources in times of a recession and financial problems of the company. Therefore, in my opinion the best strategy to enhance profits and to resolve the issues that Penfolds has is to have a mix of different promotions coupled with a D&R enhancement strategy and the exclusion of their bulk wine segment under the brand name of Penfolds.
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