Bonny Doon Analysis Essay Sample
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- Category: Drink
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Bonny Doon Analysis Essay Sample
Bonny Doon currently has an enviable position in the 1990’s Californian wine-producing industry. The company has successfully differentiated itself from its competition and achieved a first mover advantage in terms of selling “undervalued” wines. However, due to increased rivalry and a changing and increasingly challenging market, Bonny Doon must determine how it will grow its market share. Industry Analysis
The wine making industry in California is fragmented, composing of 847 brick and mortar wineries. Approximately 88% of their production is sold domestically in the United States, which demonstrates the high level of demand for Californian wine in the U.S. Furthermore, demand for Californian wine outside of the U.S has risen “rapidly,” due to its “ripened” flavor. Historically and moving forward, the key success factor in the wine industry is the flavor of wines – or in other words, product quality. Traditionally wine was seen as a “pretentious” product in U.S, but by the late 1990’s to early 2000’s, wine started to become a popular social drink for the masses. In addition, the market became more adventurous, demanding unusual “undervalued” wines instead of the traditional wines such as Chardonnay. The adventurousness was driven by “Generation X” and created a significant opportunity for wineries to meet this new unconventional demand.
As the industry is still currently in its growth stage, the industry attractiveness is high. Wine is a relatively high margin product, and there is increasing demand domestically and internationally. Because of industry attractiveness and its pace of growth, we can surmise that there are low barriers to entry (Figure 1). However, the wine-producing industry is highly dependent on its upstream suppliers: grape growers. The taste and type of wine depend on what grapes are available, and whether the grapes are grown correctly to the specifications of the winery. Therefore, it is crucial to maintain strong and cohesive relationships with grower-partners to prevent any chances for disruption in the wine making process. Furthermore, the majority of wine is sold through distributors. Due to the consolidation of wine distributors in the U.S, distributors possess enhanced buyer power and bargaining power relative to wine producers such as Bonny Doon. (Figure 1) Therefore, the continued profitability of wineries is contingent upon the scalability of their supply and demand relationships with both upstream and downstream partners. Firm Analysis
Business Level Strategy
The firm’s business level strategy is focused upon achieving and maintaining product differentiation. While most California wineries sell pure varietals like chardonnay, cabernet and merlot, Bonny Doon offers “undervalued” Rhone-style blends. The firm also sets prices lower than its competitors to create value for consumers. Bonny Doon was a first mover to popularize non-traditional wine blends. The firm created a culture where wine is now seen as a fun, affordable, high quality drink for the masses, as opposed to its traditional pretentious image in the United States. This approach has given them a strategic advantage in the industry, as they have proactively reached out to the general U.S domestic population– a relatively untapped market, in addition to maintaining effective cost control while expanding their operations.
A key capability and strength of Bonny Doon is the reputability and wine-making ability of its founder, Randall Grahm. In addition to creative genius, Grahm is also an expert in “Microbillage Technology.” Wine critics, like Grahm, have been very influential and have accentuated the success Bonny Doon, especially the D.E.W.N line. However, Bonny Doon is vulnerable and reliant on its suppliers, as 80% of the firm’s grapes are bought from external growers. Bonny Doon requires unpopular grape varieties and grapes that meet high quality specifications (which decreases agricultural yields and creates a trade-off for growers). They need to develop long-term relationships with the growers to ensure uniformity and high production quality with respect to the firm’s key product input: grapes. On the other side of the value chain, the firm has preferred small-medium sized distributors for their product. This has enabled them to retain higher profits, despite selling wine in smaller quantities. Profitability Analysis
During the last two quarters of 1999-2000, the company has experienced increasing revenues but profit margin contraction. There is insufficient information disclosure in the financials to source the driving factor. However, the largest driver of sales is through its distributors and Bonny Doon’s EuroDoon products (Figure 2). From a P/L standpoint, we believe that the margin fluctuations can be ignored, with a view of focusing on strategic initiatives to maximize revenue and the quantity sold. Although there is a need for expansion financing, Grahm (82% ownership) does not want to lose control of how he produces wine through diluting ownership. Finding an appropriate source of financing continues to be an issue for the company. Strategic Issues
The issue for Bonny Doon is how to grow in a competitive market. Products can be imitated – wineries are now creating “silly” labels (ie. The Adventures of Zinsky) and selling unusual wine types (ie. Wine Brats). The firm also needs financing and experienced management to lighten the load on Grahm. Bonny Doon must find a financially feasible way to grow while staying true to its philosophy and competencies as a wine maker. Evaluation of Alternatives
Firstly, Bonny Doon can expand its EuroDoon project. The Domaine des balgeurs collection is their best selling product. This means there is an opportunity for importing European wines. As competitors in California imitate Bonny Doon, selling “eclectic” wine from Europe follows Grahm’s philosophy of “following value.” It is also financially feasible with low capital expenditure required. However, since Bonny Doon is essentially acting as an importer of European wines, this may cause a competition threat with its distributors. Distributors account for approximately 90% of Bonny Doon’s sales so this relationship needs to be handled carefully. Secondly, expanding via retail has growth potential but is not in line with the competencies of Bonny Doon and Grahm. Approaching the 2000’s, there is a change in the market where wine bars and food pairings are increasingly popular.
It is a good opportunity to showcase “elective” wines and create an experience for the customer. However, this option requires significant capital expenditure, so Grahm will need to attain financing and risk losing control. The largest risk is that Grahm doesn’t have the competencies to run a retail business. He is renowned for his winemaking ability but running a restaurant is an entirely different line of commerce. The last option is to expand D.E.W.N. This represents about 1% of the cases sold (Figure 2), but it is a great way to expand an existing product’s sales without production. Grahm has a valued reputation and customers trust his judgement. Therefore Grahm will be able to sell “high quality” wines through D.E.W.N. However, this alternative may also create a risk via alienation of distributors since D.E.W.N is essentially acting as a distributor. Recommendations
Given evaluation of alternatives, the best choice for growth in market share is to pursue an expansion of EuroDoon and also an expansion of D.E.W.N By leveraging Grahm’s many European contacts and friends, there is significant potential for growth in European expansion. EuroDoon has proven to be successful, and the business model can be replicated in other areas of Europe. Also, the expansion of EuroDoon will complement the expansion of D.E.W.N and serve as a testing tool to identify best sellers.
Both expansions require little capital and no production but increase sales. The suppliers that Grahm has in mind are “creative and engaged in experimentation”. This aligns with Grahm’s philosophy and Bonny Doon’s value proposition of offering high value and unconventional wines. We believe small-medium sized distributors will follow Grahm’s lead and avoid competition with large distributors. Lastly, Grahm should produce other premium wines, like the Le Cigare Volant, which was sold out. The premium wines sales will assist in covering expansion costs. Retail expansion shows potential, but market research is needed.