The paper is a case analysis of Frog’s Leap Winery. The company has gained unmatched reputation in the industry because of its organic farming and traditional ways of winemaking. The paper is divided into six sections. The first section analyses the business strategies of the company in each consumer segment. The second section discusses its sustainability strategy. The third section performs a five-force analysis to understand competition outlook in the industry. The fourth section highlights the key factors contributing to the firm’s success. The fifth section explains how well the strategy is working in terms of financial performance. The sixth section of the paper proposes strategic recommendation for future growth.
Business Strategies in Each Consumer Segment
The United States emerged as the largest consumer of wine in the world and Italy as the largest per capita consumer in 2008. The people in the age group 25-44 years became the largest segment of wine consumers in 2008, surpassing the younger population. The white (Caucasian) ethnicity people and college graduates dominated in wine consumption. There was an emergence of a new segment of consumers that was health and sustainability conscious. These consumers were relatively rich, educated and young in profile.
The firm adopts a three-tier distribution system. The majority of selling is done through resellers, including wine experts, supermarkets and restaurants. Since the resellers would be selling competition brand as well, the firm has made efforts to provide quality and “green” wine to attract customers. The firm is present in the export market in a limited way. The balance is sold directly to customers through wine tours, lab tasting and wine clubs. In this segment, the wine lovers get to indulge in a variety of good quality wine.
The concept of sustainability has been around and companies talk about it. But, Frog’s Leap Winery approach to sustainability was unique. Sustainability was at the core of the company’s business strategy as it implemented these strategies early and thereby building sustainability in its foundation. In farming, there is direct impact of environment to its produce and this fact was very well built into the strategy of Frog’s Leap Winery. To reduce the carbon footprint and to have a positive impact on environment and business, they adopted a sophisticated Environmental Management System by implementing solar and geo-thermal initiatives for energy needs, reduced water and CO2 emission. They also adopted bio-dynamic farming techniques that reduced degradation and lowered costs. Frog’s Leap Winery is not only able to retain talent but also nurture and train the employees to be highly knowledgeable and skilled workforce. All this was possible as it established strong and sustainable employee practices, wherein they provided top working conditions, full time employment, health benefits and retirement plans in an industry that is seasonal. With above measures, they were able to establish a direct impact on positive financial outcome.
The balance sheet of Frog’s Leap Winery does present its strategic focus in a number of ways. The firm has been focussing on building sustainable capabilities by investing heavily in long-term projects that will have positive and long-term effect on the ecology, society and economy. The investment made in long term projects is obvious as long-term loans and fixed assets have shown substantial increase in 2009. The working capital of the firm has also increased in line.
Competition Outlook in the Industry
The 2016 wine industry reports a declining consumption after 20 years and the growth for fine wine industry is pegged at 9-13% (Silicon Valley Bank, 2016). Competition in the industry is fierce. With dollar getting stronger, opportunity of import is further increasing the competition. The demand of premium wine has increased over the years, but wineries offering premium and sustainable wine have also increased.
Bargaining power of buyers: Medium. Sustainable production of wine gives it a
Threat of new entrants is Moderate. In winery business the economies of scale apply, but capital investment not being high, the threat is moderate. Smaller wineries can depend on grape suppliers instead of backward integration.
Threat of substitutes is high. The consumers have cheaper source of substitutes like beer and other spirits. The substitution is predominantly due to price. It is observed that higher income group prefer wine and wont switch often compared to lower income group.
Bargaining power of suppliers is low. Number of grape suppliers is higher than buyers, hence no bargaining power for suppliers. Moreover most of the established wineries prefer backward integration for steady and guaranteed supply of quality grapes. This also helps in maintaining quality, one of the important features for building great brand and gaining customer loyalty.
Bargaining power of buyers is great. This is due to oversupply of low priced wines and ease of entry for new entrants. Consumption is lagging behind production adding to oversupply. Of late, with increased plantations and with favourable weather, the production has been high.
Intensity of rivalry is moderate. The wine industry is marked by very few dominant and big players. It is estimated that the top 10 wineries account for almost 70% of the business. Differentiation in this industry is possible to some extent and mainly depends on taste, quality and brand. Differentiation due to sustainable production and caring for environment can also help in building strong brand. Customer switching cost is not high. The lower segment is predominantly driven by price and retail space, whereas the higher segment is driven by quality and brand.
So, the bargaining power of buyers is the strongest and bargaining power of suppliers is the weakest of the five forces.
Key Success Factors of the Company
There are three key factors that determine the success of Frog’s Leap Winery. First, the firm’s relentless focus on reducing carbon footprints by adopting technologies that reduced water and energy consumption and kept environment clean left a positive impression in the consumers mind, that too, in an era of environment-conscious consumers. The firm has always adhered to the premise that those that truly reflect their terroir (Frog’s Leap, 2016). Competitive advantage is about matching environment and internal structures (Nilsson & Rapp, 2005). And Frog’s Leap has utilised this to its advantage. Second, the company was able to retain the best workforce talent in the industry by offering sustainable employee benefits to them, like full-time employment, health safety and paid vacations. This ensured that farming and wine making was done by skilled and experienced workers, improving the quality of wine. Third, the firm was able to implement the sustainability strategies in a cost-effective manner that was economically viable.
Financial Performance of the Company
The financial performance of the Frog’s Leap Winery needs to be understood in the context of its growth, profitability, liquidity and leverage. The sales revenue of the firm rose from $ 9.18 million in 2001 to $12.15 million in 2010, which is an increase of over 30%. This is commendable as the winery was able to recover well after the recession period (2008-2009). So, the firm’s differentiation strategy seems to have supported it. The profitability of the firm also improved significantly in 2010, after rebounding from recession. In fact, Frog’s Leap Winery reported pre-tax profit of 7.8% that was better than the industry average of 6.7%. This can be attributed to firm’s sustainability strategy that was able to bring down the cost of goods sold from 44.1% in 2001 to 40.8% in 2010. The gross profit of the firm was 59.2%, way better than the industry average of 53.7%. Another indicator of firm’s growth is the substantial increase in its current assets and fixed assets. The property, plant and machinery of the firm almost doubled between 2001 and 2009. The current assets increased by more than 60% during the same period.
However, the substantial increase in long term debt (from $7 million in 2001 to $19.5 million in 2010), stretched quick ratio (from 0.3x in 2001 to 0.08x in 2010), higher inventory holding (from 805 in 2001 to 1533 days in 2010), reduced debt servicing capabilities (from 3.9x in 2001 to 2.4x in 2010) are critical issues that the company needs to take care of. Companies have to undergo these issues during the expansion phase when external debt in the balance sheet rises and leverage increases. This exposes companies to greater financial risk in near future.
There are three recommendations for Frog’s Leap Winery’s future growth. First, the firm needs to focus on the emerging LOHAS consumer segment. Frog’s Leap Winery has been able to achieve leadership in the sustainability conscious premium winery segment. This is the firm’s strength, an edge that helps the firm differentiate from its competitors (Griffin, 2008). The core competency of the firm matches with the expectations of the upcoming youth segment that focuses on health and lifestyle. This segment can be engaged by adopting the route of social marketing.
Second, Frog’s Leap Winery needs to build its retail strategy to increase direct sales to consumers. Currently, direct sale contributes to only 13% of the firm’s total sales revenue. Focus on direct sales to consumers will boost the firm’s growth. As margins are higher in this business segment, the firm’s profitability will improve, enhancing its debt serving capabilities. It will also reduce the inventory holding and improve its financial performance. Direct sales can be boosted by exploiting online marketing and increasing wine tours. The firm can also cater to export consumer markets through online marketing.
Third, Frog’s Leap Winery should use “green” reputation as a lever to differentiate. As the debate for organic and eco-friendly products are on the rise, the firm should use sustainability-focussed “green” image to target the larger audience. The firm has gone beyond the normal route to achieve its sustainability strategy, incurring huge investments. This unique capability of the company needs to be turned into its competitive advantage, by active social marketing and product innovation.
Frog’s Leap Winery, 2016. Our Wines. Retrieved from http://www.frogsleap.com/our-wines.php
Griffin, Ricky (2008). Fundamentals of Management (5th Ed). New York, NY: Houghton Mifflin Company
Nilsson, Fredrik & Rapp, Birger (2005). Understanding Competitive Advantage: The Importance of Strategic Congruence and Integrated Control. Sweden: Springer
Silicon Valley Bank (2016). 2016 SVB Wine Report. Retrieved from http://www.svb.com/wine-report/