Luxury Wine Industry in the US

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Table of Contents

Introduction
Porter’s Five Forces Analysis
Success of Russian River Ranches
Key Elements of a Luxury Brand
Conclusion
References

Introduction

This paper will present a detailed sectoral analysis, which focuses on the luxury wine industry in the US. Russian River Ranches Chardonnay is the luxury wine brand that will be analyzed. The brand is manufactured and distributed by Sonoma-Cutrer in the US.

Russian River Ranches is a luxury brand because it is made of high quality grapes and advanced brewing technologies (Sonoma-Cutrer 2014). As a premium product, Russian River Ranches is sold in luxury restaurants and hotels in the US.

In addition, it was the second most expensive among the top 20 luxury wine brands in the US in 2013 (Sonoma-Cutrer 2014).

Porter’s five forces model will be used to analyze the competitiveness of Russian River Ranches in its industry. Other elements of the brand that will be analyzed include price aesthetics, product, communications, and branding.

Porter’s Five Forces Analysis

Suppliers’ Bargaining Power

The luxury wine industry has several suppliers, which include manufacturers of packaging materials, producers of labeling materials, producers of grapes, and shipping companies. The suppliers have a high bargaining power due to the following reasons.

First, there are more wine producers than suppliers of key inputs such packaging materials. In the last five years, vineyard acreage reduced significantly as famers used their land to produce more profitable crops such as almonds.

This problem is exacerbated by the fact that there are no substitutes for grapes in luxury wine production (Demeter Group 2013).

The demand for grapes has significantly increased as producers of high-end wine increase their production capacities. The resulting shortage of grapes has significantly increased farmers’ bargaining power.

Second, differentiation of inputs is a key determinant of the quality of luxury wine. Producers of high-end wine must consistently use the best grapes and packaging materials to attract customers (Sonoma-Cutrer 2014).

Third, most suppliers in the industry have low switching costs since there are many buyers for their products. For example, suppliers of packaging materials also sell to manufacturers in the soft drinks industry.

Thus, they give priority to buyers who are able to offer high prices and to make bulk purchases. The high bargaining power of the suppliers means that they can easily increase their prices, thereby reducing the competitiveness of Russian River Ranches and other brands.

Buyers’ Bargaining Power

The buyers (consumers of wine) have a high bargaining power due to the following reasons. First, brand loyalty is very low since customers are interested in trying new products (Brun & Castelli 2013, pp. 823-847). This limits the ability of producers of luxury wine to retain their customers.

Second, nearly all manufacturers of wine are focusing on product differentiation. This increases the number of products that are available in the market, thereby increasing buyers’ bargaining power.

Third, buyers of luxury wine have low switching costs. Thus, they can easily change brands in order to satisfy their needs. The high power of consumers of luxury wine means that producers have to focus on product differentiation and aggressive marketing to retain their customers.

The producers of luxury wine have a moderate bargaining power. One of the factors that improve their bargaining power is ability to make bulk purchases. This enables producers to negotiate for favorable prices for their supplies.

The threat of backward integration is also high since companies such as Sonoma-Cutrer produce grapes on their own (Sonoma-Cutrer 2014).

The main factor that reduces the bargaining power of wine producers is the mismatch between the demand and supply of their inputs (Demeter Group 2013). Specifically, undersupply limits manufacturers’ ability to bargain since the available inputs have to be rationed through high prices.

Threat of Substitutes

The main substitutes of luxury wine include soft drinks, beer, and spirits. Luxury wine also competes with the regular wine brands. The threat of substitutes is low due to the following reasons. To begin with, luxury wine performs better than other alcoholic drinks in terms of quality.

Specifically, the people who drink alcohol prefer wine because of its superior taste. Consumption of luxury wine is also associated with high social status in the society (Brun & Castelli 2013, pp. 823-847).

Apart from taste, wine has several health benefits that cannot be enjoyed through consumption of other alcoholic beverages.

Specifically, moderate consumption of wine helps in prevention of heart diseases, stroke, anxiety, and lose of memory in old age (Brun & Castelli 2013, pp. 823-847). These benefits make wine the best option among consumers of alcohol.

However, excessive consumption of wine can have negative health effects. Moreover, some religions prohibit consumption of alcohol.

These factors reduce the competitiveness of luxury wine as customers opt for soft drinks. Generally, luxury wine is more expensive than other alcoholic beverages and soft drinks (Brun & Castelli 2013, pp. 823-847).

However, the high price does not have negative effects on the demand for luxury wine, especially, in the affluent market segment where customers are not price sensitive. Since Russian River Ranches has a superior quality, it is likely to overcome the low threat of substitutes in the market.

Threat of New Entrants

The threat of new entrants is low because of the following factors. First, the cost of entering the luxury wine industry is prohibitive.

New companies that intend to establish production plants require significantly high financial capital, which is not easily available. Second, the incumbents have high economies of scale (Demeter Group 2013).

In the last decade, major producers of luxury wine focused on consolidation through mergers and acquisitions. This has enabled them to achieve “economies of scale in production and distribution” (Chevalier & Mazzalovo 2012, p. 56).

As a result, they have high production capacities and cost advantages that make them more competitive than new entrants.

Third, the incumbents have control over the distribution channels. In the last five years, distributors of luxury wine such as wholesalers, specialty restaurants, and retailers embarked on consolidation to strengthen their market power (Demeter Group 2013).

The incumbents in the wine industry have long-term distribution contracts with the available distributors. This means that new entrants will have to incur high costs to access the distribution system.

Finally, access to inputs such grapes is difficult, since the incumbents have long-term supply contracts with famers. The low threat of new entrants is a growth opportunity to Russian River Ranches as demand continues to rise.

Threat of Competitive Rivalry

High competition in the US luxury wine market is explained by the following factors. First, the industry is highly concentrated. In 2013, the top 4 largest producers of luxury win accounted for 70% of the market share (Demeter Group 2013). This means that only 30% of the market is left for the remaining producers.

Second, the industry is characterized by high fixed costs. Specifically, the cost of labor and warehousing is on the rise, thereby reducing the profits of producers of luxury wine.

Third, there is overcapacity in the industry. This is explained by the fact that liberalization of the US wine industry has resulted into an increase in importation of luxury wine from countries such as China, Italy, and France (Demeter Group 2013).

Wine products from countries such as China are sold at low prices since their producers have production cost advantages.

Although the industry is characterized by high competition, it is still experiencing strong growth. In the last three years, the market for luxury wine in the US grew at an average annual rate of 12% (Demeter Group 2013). This strong growth is expected to continue in the next four years as economic growth improves.

The implication of the high competitive rivalry is that Russian River Ranches must be able to satisfy customers’ needs in order to maintain its competitiveness. Specifically, the marketing mix strategy that is used to market it must be aligned to customers’ needs.

Success of Russian River Ranches

The factors that account for the success of Russian River Ranches in the luxury wine market include the following.

First, the brand is successful because of its unrivaled quality. Since its inception, Sonoma-Cutrer acknowledged the fact that high quality is one of the major factors that determine the success of luxury wine brands. Consequently, the company strategically chose to produce its own grapes.

This enables it to improve the quality of Russian River Ranches by selecting the best grapes to manufacture it (Sonoma-Cutrer 2014). Moreover, the company focuses on incremental product innovation to improve the quality of its wine.

As a result, it has been able to produce several flavors that meet the expectations of its customers. As a premium brand that is known for high quality, Russian River Ranches is able to achieve high sales despite being one of the most expensive brands in the market (Sonoma-Cutrer 2014).

Second, Russian River Ranches is successful because of its strong brand image. It has been rated as the most popular luxury wine brand in the US for over ten consecutive years (Sonoma-Cutrer 2014). The brand personality of Russian River Ranches reflects the attributes that customers in the luxury wine market look for.

These include authenticity, premium quality, good reputation, and excusive brand history (Brun, Castelli 2013, pp. 823-847).

These attributes have enabled Russian River Ranches to command a high brand loyalty in a market where customers are constantly shifting to new products. High brand loyalty enables the brand to overcome competition from other luxury brands and substitute products.

Third, Russian River Ranches owes its success to the multi-level distribution channel that is being used to distribute it in the US. As the most popular luxury brand, all high-end restaurants and hotels strive to serve Russian River Ranches to maintain their competitiveness (Sonoma-Cutrer 2014).

The wholesalers also have the incentive to distribute the brand because its premium price enables them to earn a decent profit margin. This enables Russian River Ranches to overcome competition by denying its competitors access to third-party distribution channels.

In addition, Sonoma-Cutrer has its own retail and online stores that it uses to distribute the brand. This enables its sales team to offer excellent customer service, which in turn improves brand loyalty and sales.

Finally, Russian River Ranches is successful in the luxury market because of the marketing strategies that have been adopted by its producer. The brand’s premium positioning strategy has been reinforced through innovative marketing communications initiatives.

The brand is marketed through digital platforms such as the social media, the internet, and smartphones that allow its marketers to convey personalized messages to a niche market segment rather than the mass market (Sonoma-Cutrer 2014).

This enables customers to identify with the brand and to recommend it to their colleagues, thereby increasing its sales and brand credibility (Reyneke, Pitt & Berthon 2011, pp. 21-35). In addition, Russian River Ranches is marketed based on value rather than price.

Although most companies are trying to gain market share by reducing the prices of their wine, Sonoma-Cutrer has focused on marketing the benefits that are provided by its brand. As a result, Russian River Ranches has been able to overcome brand dilution in the market.

Key Elements of a Luxury Brand

Price

Pricing has a significant influence on the way customers perceive luxury brands. Consciously or sub-consciously, customers often develop a psychological luxury image based on the price range that is used to market a brand (Chevalier & Mazzalovo 2012, p. 78).

Most consumers of luxury brands believe that price has a positive correlation with value. This explains the high price of Russian River Ranches in the luxury wine industry. Specifically, the high price is meant to protect its brand image from being compromised.

Undoubtedly, consumers of luxury brands are interested in obtaining high value for their money (Brun & Castelli 2013, pp. 823-847). They will not pay more for a product that has no superior functionality. As a result, the high price of Russian River Ranches is justified by its premium quality and good reputation.

Apart from compensating producers for the high product quality, pricing in the luxury wine industry is used to ensure exclusivity.

This perspective is based on the fact that consumers of luxury products focus on maintaining their self-esteem by purchasing products that others cannot afford. Since Russian River Ranches targets affluent customers, its high price serves as a mechanism for excluding the mass market from consuming it.

Product

A luxury brand must have a high quality (Brun & Castelli 2013, pp. 823-847). This requirement is justified by the fact that a luxury brand must achieve superior performance at the product level and experiential level. This explains Sonoma-Cutrer’s focus on product innovation to maintain the high quality of Russian River Ranches.

At the product level, the brand satisfies functional and utilitarian attributes of wine in terms of taste, packaging, alcohol content, and acidity. As a luxury brand, Russian River Ranches also performs at the experiential level by creating an emotional appeal to customers.

The emotional appeal distinguishes the brand from the regular brands of wine. The high quality of Russian River Ranches has to be maintained because its consumption signifies high status.

The affluent customers consume the brand partly to express their status in the society (Brun & Castelli 2013, pp. 823-847). For instance, the brand is often bought as a special gift for loved ones or during special occasions such as weddings as a way of expressing appreciation.

Communications

Luxury brand communications must be dynamic and versatile in order to attract the attention of the market without hurting brand image (Reyneke, Pitt & Berthon 2011, pp. 21-35).

Adopting a dynamic marketing communications strategy is justified by the fact that a luxury brand must retain its pedigree status while keeping up with contemporary trends and newness. In a nutshell, the brand must adjust to emerging tastes and preferences without compromising its original attributes that make it unique.

This enables the luxury brand to remain desirable and inspirational. Russian River Ranches has been able to maintain its brand relevance because its adverts focus on conveying emotional and sensual messages. This creates a distinction between the brand and its competitors that target the mass market.

In addition, the adverts focus on creating an aura that is genuinely exceptional to the brand image. In the digital marketing platform, Russian River Ranches is advertised using long-form commercials to attract customers’ attention.

The main strength of this strategy is that it improves brand awareness and motivates customers to take action by purchasing the wine.

Branding

In the luxury market, brand presence focuses on creating memorable shopping experiences. A luxury brand has to be retailed in a high-end store that reflects its superior attributes. Every customer touch-point has to enhance the brand experience to strengthen the aura of luxury (Chevalier & Mazzalovo 2012, p. 98).

In this regard, the marketers of Russian River Ranches utilize great aesthetics and craftsmanship to improve the ambiance of the stores where the wine is sold. Public relations also “plays an important role in branding luxury brands” (Chevalier & Mazzalovo 2012, p. 102).

The use of public relations is justified by the fact that it enables marketers to influence public opinion favorably in order to strengthen brand image. In addition, it helps in enhancing the credibility of luxury brands, especially, if the brands are reviewed by renowned public figures.

As a result, the marketers of Russian River Ranches use celebrity endorsements to influence public opinion about the brand. Specifically, the public associates the brand with the superior qualities of the celebrities that endorse it.

This strategy has significantly improved customers’ confidence in Russian River Ranches, thereby making it the luxury brand of choice in the US.

Conclusion

The main threats to the competitiveness of Russian River Ranches are the high bargaining power of suppliers, high bargaining power of consumers of wine, and high competition in the luxury wine industry.

The suppliers have a high bargaining power because of the shortage of key inputs such as grapes and the large number of producers of wine. The consumers of wine have a high bargaining power because of their low switching costs and access to a variety of brands.

Competition is high in the market because of the high concentration of the industry and increased importation of luxury wine. The opportunities that are available to Russian River Ranches include the strong growth of the luxury wine market, as well as, the low threat of substitutes and new entrants.

The factors that account for Russian River Ranches’ success include its high quality, strong brand image, and access to established distribution networks. In order to overcome competition in future, the quality of the brand should be improved consistently through product innovation.

References

Brun, A & Castelli, C 2013, ‘The nature of luxury: a consumer perspective’, International Journal of Retail and Distribution Management, vol. 41. no. 11, pp. 823-847.

Chevalier, M & Mazzalovo, G 2012, Luxury brand management, McGraw-Hill, New York.

Demeter Group 2013, State of the wine industry. Web.

Reyneke, M, Pitt, L & Berthon, P 2011, ‘Luxury wine brand visibility in social media: an exploratory study’, International Journal of Wine Business Research, vol. 23. no. 1, pp. 21-35.

Sonoma-Cutrer 2014, Our craft. Web.

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