The chardonnay shortage at mondavi winery Case study
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Mondavi Winery: Chardonnay Shortage
Questions to Answer:
1. If you were Mondavi Management, when would you notify outsiders of the potential wine shortage? Which stakeholders would you need to consider in making this decision? Are your answers different, depending on when management became aware that a shortfall was likely? For example, if management was aware of potential issues six months in advance versus one month in advance?
2. How would you make the announcement? That is, publicly, or attempt to communicate privately to different constituent groups? How much detail would you provide to outside stakeholders?
3. What do you think of Mondavi’s handling of the new analyst who visited the companyon January 12th?
4. Analysts seemed very upset with Mondavi’s repeated missing of forecasts. Why are analysts so focused on having the “correct” earnings number? Does it matter that most of the reasons for missing the forecasts were one time shocks? Should Mondavi establish a policy of never giving guidance? Always updating if analysts forecasts are out of line?
5. What do you think of the decision to change the accounting method? Does the timimg make sense?
6. How do the communication issues in this case compare to the issues in the IPO case? What do the combined cases suggest about the need for a sustained communication policy?
REV: DECEMBER 20, 2005
GREGORY S. MILLER
The Chardonnay Shortage at Mondavi Winery
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It’s Mother Nature’s way of reminding us that we’re farmers.
— Ray Sittig, Education Director, Pine Ridge Winery
Intoxicating Harvest
August 24 was unseasonably early for Robert Mondavi Winery to call its employees, family, and
the Napa Valley community to its annual blessing of the grape harvest. Thus far, California’s 1997
weather pattern had been nearly perfect for grape growing: a wet January followed by an extended
dry period with little mold-inducing rain and no notable hot spells that strain the vines. The harvest
the last two years had been poor, but Mondavi Winery expected a bumper crop of grapes for the
ceremonial stomping and crushing.
Do
No
tC
Mondavi’s early investors also had reason to celebrate. Robert Mondavi Corporation (MOND)
went public in June of 1993 at $13.50 per share but lost half its value during a tumultuous first year of
trading. After this rocky start Mondavi stock climbed steadily to $45.13 by the beginning of the 1997
harvest. “Mondavi has been an enormous stock,” said Timothy Ramey, a consumer products analyst
at Deutsche Morgan Grenfell in New York. “I picked up coverage in June 1993 when the stock was at
8½ and it’s now at 47. The company has had only one year this decade with revenue growth less than
15%. I don’t follow anything in consumer products that has anything like Mondavi’s growth.”1 By the
end of the 1997 harvest the stock had climbed even higher, closing at a record high of $56.75 on
October 22, 1997.
1 Scott Reeves, “Promising Harvest Awaits Investors in Wine Stocks—Beringer is likely to be an autumn IPO,” Barron’s,
August 11, 1997, accessed on Factiva, March 21, 2004.
________________________________________________________________________________________________________________
Professor Gregory S. Miller and Research Associate Thomas Doyle prepared this case. This case was developed from published sources. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
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The Chardonnay Shortage at Mondavi Winery
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Change of Fortune
After a visit with Mondavi management on January 12, 1998, Salomon Smith Barney upgraded
Robert Mondavi to a “buy,” based on long-term fundamentals that continued to be strong for the
industry.2 Ten days later, Mondavi released its second-quarter fiscal results:
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While case sales volume in the second quarter was level with last year, net revenues
increased 7% due to price increases. . . . Looking forward, we expect that our overall rate of
earnings growth for fiscal 1998 will be affected by several factors. We are experiencing a
temporary shortage of our Woodbridge Chardonnay, which is also affecting sales of other
Woodbridge wines. This shortage will be alleviated when the 1997 vintage is released in
March. We are also seeing intense competition in the imported wine segment, requiring
significantly higher promotional spending.3
The following day, Mondavi stock fell 16%, dropping to $40.125. The second day after the
announcement, the stock fell another 9% to $38.
Robert Mondavi History
Robert Mondavi was introduced to the world of wine at an early age by his father, who was a
grape broker and owner of a portion of a bulk wines company. When the Charles Krug Winery fell
on hard times during World War II, Robert convinced his father to borrow and purchase the 500-acre
Napa Valley winery where they would bottle and sell their own wine.
tC
A 1962 tour of Europe’s finest wineries convinced Robert that Napa Valley could produce wines
on par with the finest in the world. Over the next four decades, Robert Mondavi became the
champion and ambassador of American premium wine. But Robert’s commitment to high quality,
entailing high risks and expenses, eventually became the wedge that separated him from his younger
brother Peter. Following a heated dispute with his brother, Robert Mondavi left the family business
in 1966.
No
Robert Mondavi’s quest for excellence began with the purchase of the To Kalon property in the
Napa Valley. He pulled together a team to combine the best science from the New World wines with
the art of Old World wineries. Mondavi, a tenacious marketer and salesman, traveled domestically
and internationally, personally placing his wines in front of five-star restaurateurs and famous wine
connoisseurs. While he was marketing his bottles to the wine establishment, Robert Mondavi Winery
was actively promoting wine to individuals through education and winery tours in the Napa Valley.
Do
Mondavi’s efforts were successful in building a well-regarded wine company. To finance further
growth Mondavi went public with an offering that raised approximately $50 million, valued the
company at approximately $180 million, and left the Mondavi family retaining 95% of the voting
rights.4
2 “Robert Mondavi Upgraded by Salomon Smith Barney to ‘Buy,’” Dow Jones Online News, January 12, 1998, accessed on
Factiva, March 21, 2004.
3 “Robert Mondavi Reports Second Quarter Results,” PR Newswire, January 22, 1998, accessed on Factiva, April 8, 2004.
4 Unless otherwise cited, historical information is drawn from Robert Mondavi and Paul Chutkow, Harvests of Joy: How the
Good Life Became Great Business (New York, NY: Harcourt, Brace & Company, 1998).
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The Chardonnay Shortage at Mondavi Winery
Building a portfolio Over the years Mondavi expanded their portfolio of wines to service
different niches in the American market. While all of their wines fell into the “premium varietal”
category, their products covered the range of price points in that category (Exhibit 1). By 1997 they
were sourcing grapes from a diverse set of areas (mostly California, but also Europe) and making
wines in several locations (Exhibit 2).
The wines of lower price points capitalized on the Mondavi name while simultaneously selling in
a high-volume segment of the market. By 1997 Mondavi had more than 90 individual brands. As
Mondavi’s lesser-quality labels grew in popularity, there was concern that Mondavi’s ultra-premium
brands could be affected negatively:
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Cheap wines may have made them great, but now some of California’s biggest wineries are
quietly dropping their names from all but their most expensive wines. . . . Robert Mondavi
Winery, which started at the premium end of the business and then broadened its product line
to lower priced wines, is also removing its founder’s name. The winery’s lower-priced
Woodbridge line is printing “by Robert Mondavi” in smaller type and will remove the name
entirely from the Robert Mondavi Coastal brand.5
Mondavi’s Woodbridge line was the anchor of both volume and revenue, so the trick would be to
keep the Woodbridge and Coastal lines close enough to benefit from the Mondavi name and far away
enough not to impair it.
By mid-1996, the value of Mondavi’s premium-portfolio strategy was clear. Premium wines made
up about 40% of industry sales, compared with 6% in 1980. Mondavi’s stock rose almost 60% in the
12 months prior to July 15, 1996. The only two other publicly traded wineries had comparatively
disappointing results. Chalone Wine Group, Inc. continued to trade at its prevailing 1990 price of $9,
and shares of Canadaigua Wine Co. had fallen more than 40% after a big run-up nine months earlier.6
tC
Woodbridge Chardonnay: Mondavi’s growth engine When Robert Mondavi Winery
went public in 1993 investors got their first look into the company finances. Although Mondavi was
best known for its super-premium wines, the popular premium wine Woodbridge had been its
growth engine. In 1990 Woodbridge accounted for 55% of Mondavi’s revenues. By 1992, aided by its
aggressive exclusive distributor Southern Wine & Spirits, Woodbridge accounted for 70% of
Mondavi’s revenues7 (Exhibit 3).
Do
No
Woodbridge was very well positioned to take advantage of growth in the market for wines under
$10 per bottle. In 1992, the case volume of varietal sales in U.S. grocery stores surpassed that of
generic wine for the first time. Robert Mondavi Woodbridge grew at 22% in grocery stores and
showed the 10th-fastest growth rate among the 30 largest companies.8 In 1993, chardonnay sales
increased by 34% in supermarkets over the prior year. In 1994, chardonnay was America’s most
popular wine among restaurants with 37% of the market. By 1995, Mondavi Woodbridge was the
most popular wine-by-the-glass program in restaurants; such programs accounted for more than one-
5 Peter Sinton, “Wineries Drop Names From Cheap Brands,” San Francisco Chronicle, September 25, 1997, accessed on Factiva,
March 21, 2004.
6 Sewell Chan, “Mondavi Uncorks Strategy to Build on Surging Demand,” The Wall Street Journal, July 15, 1996, accessed on
Factiva, April 12, 2004.
7 “Stock Offering Peeks Into Mondavi Business Affairs,” Wine Business Insider, April 23, 1993, accessed on Factiva, May 3, 2004.
8 “Varietal Wine Sales Overtake Generics,” Wine Business Insider, Renaissance Communications, Inc., June 10, 1993.
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third of restaurant’s sales.9 Despite higher prices and stiff competition from established brands,
Robert Mondavi Woodbridge varietals gained a formidable presence on the supermarket shelf. In
1995, “Woodbridge [chardonnay] was in a dead heat for the market lead with Gallo Cabernet” as the
top-selling varietal in supermarkets.10 In September 1998, Mondavi Winery began construction on a
new 15,000-square-foot wine-making and laboratory building. The Mondavis planned to double the
size of the Woodbridge facility within the next decade.
Rebounding from the 1995 and 1996 Harvests
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California wineries, which produced 90% of U.S. wines, needed a bumper 1997 crop to satisfy the
growing thirst for premium wines. The sale of premium wines had exploded, with sales of many of
the leading wineries’ labels growing 20% to 40%.11 Short grape supply led to depletion of inventories,
and many wineries were forced to sell wine on allocation.
tC
The 1994 grape harvest had been down 6% from 1993’s. Harvests in 1995 suffered from a cold, wet
spring, and the average summer temperatures did not sufficiently compensate for the crop’s slow
start. The North Coast (the coastal area north of San Francisco, which included the Napa and Sonoma
Valleys) harvest was off approximately 20%, and in the Central Coast (location of Byron Wineries)
yields were only 65% of normal in many areas, with some chardonnay crops only half of normal. Rick
Theis, executive director of the Sonoma County Wine Growers, observed, “This [shortfall] couldn’t
have come at a worse time. [Robert] Mondavi is on allocation for all his wines, we’ve got a number of
wineries out of stock on Chardonnay and Sauvignon Blanc and they needed a bumper crop to even
be a player in this market. What they got was worse than anyone expected.”12 Despite the low
volume, the quality of the grapes was very good. The shortage of wine grapes pushed grape prices in
1995 to their highest level in years, and wine producers were forced to make difficult decisions about
pricing as well as whether, with dwindling inventories, they would protect their restaurateurs or
their retailers.
No
Things went from bad to worse in 1996. A mild winter, which did not allow the vines to
sufficiently freeze; a wet spring, which made pollination of the grape flowers less effective; and the
hottest summer in eight years contributed to a weak harvest. Chardonnay, merlot, and cabernet
sauvignon grapes were in such short supply that there was no official spot price in Sonoma or Napa
Counties. Wine Business Insider reported that Kendall-Jackson was paying bonuses of 25% to 40% to
some chardonnay growers. Statewide, the price of grapes rose as much as 50% above the 1995 prices,
up to $2,500 a ton. David Freed, president of UCC Vineyards, observed, “That is an incredible
shortfall in the fastest-growing segment of the market—$7–$10 per bottle popular premium wines.”13
Do
9 Mort Hochstein, “Chardonnay Losing its Lead in Restaurant Sales,” Nation’s Restaurant News, March 21, 1994, accessed on
Factiva, May 3, 2004.
10 “Stock Report: MOND & WINEA,” Wine Business Insider, September 16, 1995, accessed on Factiva, May 3, 2004.
11 Tim Tesconi, “Record Value Seen for Grape,” The Press Democrat (Santa Rosa, California), June 29, 1995, accessed on Factiva,
April 6, 2004.
12 Dan Berger, “Grape Gap Means Higher Prices,” The Press Democrat (Santa Rosa, California), November 8, 1995, accessed on
Factiva, April 6, 2004.
13 Peter Sinton, “’96 Grape Harvest Unfruitful,” San Francisco Chronicle, August 27, 1996, accessed on Factiva, April 4, 2004.
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The Chardonnay Shortage at Mondavi Winery
Wine broker Joseph Ciatti commented, “Many wineries will not receive grapes they had expected
from long-term contracts with growers, and will have less wine to sell than a year ago.”14 In an
interview discussing the 1996 harvest and the business challenges of an increase in demand coupled
with a decrease of supply, Timothy Mondavi commented about Mondavi’s decision to import 600,000
gallons of French wine to be bottled at the Woodbridge facility under the Vichon Mediterranean
label, “There are two reasons for this—one, our wines are terrific, but I also think that we are able to
augment an otherwise short crop, and even though we’re—we like to look upon ourselves as artists,
as wine growers—we are still a business, and we need to be healthy and continue to do well
financially.”15 Wine makers did what they could, but in the end they knew, “It’s all Mother Nature.
This year we are reminded once again that grape growing is farming.”16
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Making a Bottle of Chardonnay
By the mid-1990s chardonnay had become virtually synonymous with “white table wine.” In 1997,
approximately one-third of all California vineyard acreage was planted with chardonnay grapes.
The chardonnay grapes were harvested and sorted for quality. Sorted berries were sent through a
crusher, and the clear juice flowed into fermentation tanks. Yeast was added to the tanks to begin the
process of fermentation, starting the natural process of converting sugar into alcohol and carbon
dioxide. Fermenting could occur in stainless steel tanks (which produced a crisp, clean wine) or oak
barrels (which contributed tannins, vanillin, and other complex flavors). The juice fermented until all
the sugar had been converted or until the wine maker stopped the process.
tC
After fermentation, barrel aging imparted the aromatic flavors of the wood to the wine. Barrel
fermentation and aging were a significantly labor-intensive process because the barrels needed to be
stirred frequently by hand to mix the sediment and yeast that descends to the bottom of the barrel.
The racking of the barrels and topping off to compensate for evaporation were additional skilled
tasks that added to a wine’s quality and cost. At Mondavi, aging of chardonnays took approximately
8–15 months, and even longer for red wines.17
No
Many experts claimed that the quality of the land and the oak barrels were the two most
important delineators in quality for most red, and many white, wines. “No two chardonnays are alike
out there. . . . Chardonnay with [oak] barrel fermentation, aged in new French oak, tastes oh-somuch-better than chardonnay fermented in stainless steel tanks.”18 In 1993, the cost per barrel was
about $500–$600, and Mondavi had more than 50,000 French oak barrels in its system. An oak barrel
had approximately five years of useful life for “super” or “ultra-premium” brands.19 Oak costs were
exceeded only by the cost of the land and grapes for super-premium wines.
14 Ted Appel, “Higher Wine Prices Likely Vintners Believe Boom Will Stay,” The Press Democrat (Santa Rosa, California),
October 31, 1996, accessed on Factiva, April 6, 2004.
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15 Interview by Brooke Gladstone, “California Wine Grower Discusses Poor Grape Harvests,” All Things Considered, Segment
Number: 03, Show Number 2323, September 1, 1996, accessed on Factiva, April 6, 2004.
16 Tim Tesconi, “Heat Propels Grape Harvest,,” The Press Democrat (Santa Rosa, California), October 9, 1996, accessed on
Factiva, April 6, 2004.
17 Timothy S. Ramney and C.J. Lawrence, “Robert Mondavi Corp.,” September 30, 1993, p. 6.
18 Lee Svitak Dean, “Wines of the World,” Star Tribune (Newspaper of the Twin Cities), November 6, 1996, accessed on Factiva,
April 5, 2004.
19Timothy S. Ramney and C.J. Lawrence, “Robert Mondavi Corp.,” September 30, 1993, p. 5.
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Barrel aging was rare in lower-price-point wines. Mondavi had the unique ability to reuse older
barrels from its Oakville operations in its lower-priced wines. Mondavi’s extensive vineyards in Napa
also created an advantage for Woodbridge by providing cost-effective access to Napa grapes that
were only slightly below the strict quality standards of Mondavi’s high-end wines (e.g., Oakville,
Vichon, or Opus One). In 1992, the Mondavi Winery in Oakville produced 21% of its total grapes in
the Napa Valley but used only 14% in its Mondavi Napa Valley appellation wines. Woodbridge and
Vichon utilized about 280,000 cases of bulk wine from grapes grown in Napa. Thus, Woodbridge
wines had uncharacteristically high quality within their price segment.20
Wine Distribution
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In 1996, the U.S. wine industry was composed of approximately 1,500 wineries, nearly triple the
number from 20 years earlier. The industry was dominated by the eight largest wineries, which
produced over 70% of the table wine volume. Mondavi Winery was the fourth-largest producer and
accounted for 3.6% of the domestic market. 21
tC
Because wine was a controlled substance, wine distribution was a carefully regulated and highly
taxed industry at both the federal and state levels. Wine was sold through a three-tier distribution
system. The first tier, wineries or importers, sold wine to wholesalers. The second-tier wholesalers
provided legal fulfillment of wine products to third-tier local retail businesses. Typically, wine passed
through each tier of the distribution system, making direct selling and shipping difficult or
impossible in most states.22 Mondavi dealt with over 100 independent, nonexclusive wine and spirits
distributors, but its 20 largest distributors represented 75%–80% of its revenues. Mondavi employed
approximately 70 people to sell to its distributor network. Managing the relationship between
producer and wholesaler was critical to both businesses as “a distributor’s worst nightmare is to lose
rights to a brand that it has been investing in for many years.”23
No
The third tier consisted of supermarkets, convenience stores, club stores, mail-order and Internet
retailers, specialty stores, and wine clubs, which together accounted for approximately three-quarters
of total wine sales volume. Supermarkets, which accounted for approximately half of retail sales,
possessed a great deal of leverage over distributors. Robert Mondavi’s sales were not typical of the
industry. Through a broad network of independent, nonexclusive distributors, Mondavi wines were
sold to fine restaurants (40% of sales), supermarkets (25% of sales), wine specialty stores (15% of
sales), club stores (8% of sales), and a variety of other smaller channels.24
Demand for the Robert Mondavi Napa and Woodbridge brands often exceeded supply. In
general, the Mondavi name allowed the winery to charge a premium of $1 or more per 750-milliliter
bottle over non-Mondavi wines of comparable quality. From 1994 through 1997, Mondavi sold its
wines increasingly on allocation. “For years, healthy demand and a tight supply situation put
Mondavi in the enviable position of being able to raise its prices.”25 When wines were sold on
Do
20 Timothy S. Ramney and C.J. Lawrence, “Robert Mondavi Corp.,” September 30, 1993, p. 9.
21 Murray Silverman, Armand Gilinsky, Jr., Michael Guy, and Sally Baack, “Robert Mondavi Corporation. BIE Grant,” Web
site, http://online.sfsu.edu/~castaldi/bie/mondavi.htm, accessed April 2, 2004.
22 Ibid.
23 Caroline Levy and Suzanne Lutz, “The Robert Mondavi Corp.,” Schroder Wertheim & Co., May 16, 1997.
24 Michael J. Rietbrock, “Beverages: Robert Mondavi,” Smith Barney, October 16, 1997.
25 “Robert Mondavi Corporation,” Deutsche Bank Research, October 22, 1998, p. 2.
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allocation, the on-premise distribution channel of hotels and restaurants was favored because that
channel placed less emphasis on price and also served as a venue for consumer trial.
In its early years, Mondavi Winery marketing efforts were rooted in its tours, education
conducted through its Napa Valley winery, the charisma of its founder, and media support. As of
1992, Mondavi had no ad agency; by 1997 it employed five. In fiscal 1997, Mondavi spent about $2.5
million on advertising. With the end of the grape shortage, analysts predicted that Mondavi would
need to spend $3 million–$4 million in 1998 and as much as $6 million–$8 million by the year 2000.26
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Although Mondavi had long enjoyed leverage over distributors, the winery needed to manage its
relationship carefully. In a 1996 Wines & Vines article, Melanie Donaghy warned wine producers of
“The Seven Deadly Sins of Wine Marketing.” Among the seven things she said wineries should not
do to distributors were, “#3 Do not alter prices with abandon” and “#4 Do not insult allocation
integrity.”27 Changing price and/or volume changed a distributor’s and retailer’s financial forecasts,
annoyed restaurateurs who printed their wine list, and threatened lost retail shelf space because
customers were fickle and had short memories.
Earnings, Optimism, Chardonnay Shortages, and Moving On
In the midst of the 1997 grape harvest, The Robert Mondavi Corporation published its annual
report. Net revenues climbed 25% to $301 million. Net income rose more than 15% to $28.2 million.
Mondavi sold over a billion more cases of wine in 1997 than it did in 1996. In his letter to the
shareholders, Michael Mondavi painted an optimistic picture about the future:
tC
We’re off to a strong start in fiscal 1998 and are very optimistic about the short- and longterm outlook of our company. With the completion of the second phase of our Woodbridge
expansion, our new Byron winery, and our new Coastal and Chilean production facilities later
this year, our winemaking capacity will be significantly greater. In terms of supply, the postphylloxera replanting of our Napa Valley vineyards continues; we have significantly increased
our vineyard holdings; and, through our strategic partnerships, we have secured excellent
international sources of grapes and wine. But having adequate grape supply and production
capacity is only the beginning.28
Do
No
Three months later, Mondavi announced on January 21, 1998 that earnings for the second quarter
of 1998 would be $0.66 per diluted share, as opposed to $0.59 from the prior year. The news was in
line with analysts’ consensus expectations. But the announcement of the possibility of a temporary
shortage in 1998 quickly evoked investors’ displeasure. The following day, shares traded down
15.6%, with volume of 1 million shares compared with the daily average of 76,000. A Wasserstein
Perella analyst commented that the shock factor was a significant contributor to the drop in the stock,
adding, “Earlier dissemination of the news could have brought the stock down to a softer landing.”29
The company said the chardonnay shortage and intense competition issues had only very recently
come into focus, but investors and analysts seemed unforgiving.
26 William Maguire, Wasserstein Perella Securities, Inc. Equity Research, March 11, 1997.
27 Melanie Donaghy, “The 7 Deadly Sins of Wine Marketing,” Wines & Vines, August 1, 1996, accessed on Factiva, April 29,
2004.
28 Michael Mondavi, “Letter to the Shareholders,” 1997 Annual Report, September 1997.
29 Gaston F. Ceron, “Robert Mondavi –2: Shares Drop on ’98 Earnings Growth Warning,” Dow Jones Newswires, January 22,
1998, accessed on Factiva, April 8, 2004.
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In a call with analysts, Chief Executive Michael Mondavi said that the winery asked retailers such
as Costco to cut Woodbridge supplies to some of their stores in order to keep some of the brand on
the shelves. But the retailers decided to keep selling what they had until they ran out. “Chardonnay is
a leader, and you can’t get store displays without chardonnays,” said analyst Jeane Kraus. The
shortage had a ripple effect on wine sales because chardonnay was one of the most popular varieties
of white wines and was often promoted heavily to attract shoppers and encourage them to buy other
wines. 30
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In April 1998, Mondavi released its third-quarter 1998 earnings. At $0.41 per share they were one
penny higher than the prior year’s and appeared to meet the expectations of investors on the heels of
Mondavi’s second-quarter announcement. Michael Mondavi said, “I’m happy to say that these
temporary shortages are behind us. . . . We expect to see higher growth beginning in April in other
markets after the [Woodbridge] wines have worked their way through the distribution channels to
customers.”31
tC
Fourth-quarter disappointment Mondavi ended trading on Friday, June 19, 1998 at $34.38
per share, down from the fall 1997 52-week high of $56.75. That same afternoon, the company began
to notify analysts that Michael Mondavi would be holding a call to update the markets on its
activities and earnings expectations for the fourth quarter. During the June 22 call, Mondavi
announced that earnings would be $0.15 below the quarter’s consensus earning estimate of $0.54 for
the quarter. Mondavi also indicated that he expected 10%–12% growth for the quarter, which
disappointed Wall Street given the expected 20%–25% rate. Mondavi added that the company would
lay off seven executives to prepare for the next decade and get down to “fighting weight.”32 In
addition to the sagging sales, analysts were concerned that Mondavi would have to increase its
selling expenses in order to “get Woodbridge back in circulation.”33 Skip Carpenter, an analyst from
Donaldson, Lufkin & Jenrette Securities Corp., responded by lowering his investment rating from
“buy” to “market perform.” Carpenter commented that he expected Mondavi stock to open trading
sharply lower on June 23 and that he had “lost some confidence in management and its ability to fix”
the slowing business trends in its Woodbridge brand.34 In July 1998, Mondavi reported fourthquarter earnings of $0.39 and called them “consistent with our expectations.”35
Disappointment, Confusion, and a New Vintage
No
Disappointing earnings were combined with confusion in October 1998, when Mondavi
announced that it would change its inventory accounting from LIFO to FIFO. “It better matches
revenues and expenses of the wines we are actually selling, and allows us to better link
30 Ted Appel, “Mondavi Stock Slips 20% as Shortage Slows Sales,” The Press Democrat (Santa Rosa, California), January 24,
1998, accessed on Factiva, April 8, 2004.
31 “Robert Mondavi Reports Third Quarter Results,” Dow Jones & Reuters PR Newswire, April 23, 1998, accessed on Factiva,
April 29, 2004.
32 Vanessa O’Connel, “Mondavi Says Net To Trail Estimates for the 4th Period,” The Wall Street Journal, June 23, 1998, accessed
Do
on Factiva, April 8, 2004.
33 “Mondavi Warns of Weak Earnings on Problems with Woodbridge Wine,” Dow Jones Business News Online, June 22, 1998,
accessed on Factiva, April 8, 2004.
34 “Robert Mondavi –2: DLJ Sees Stock Trading Sharply Lower,” Dow Jones News Service, June 23, 1998, accessed on Factiva,
April 8, 2004.
35 “Robert Mondavi Reports Fourth Quarter and Fiscal Year Result,” Dow Jones & Reuters PR Newswire, July 30, 1998, accessed
on Factiva, April 29, 2004.
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The Chardonnay Shortage at Mondavi Winery
management’s incentive compensation to P&L results.”36 Short-sellers, however, did not buy into the
change, chiding the company for switching practices in order to give an artificial boost to its profits.37
While analysts generally applauded the change in accounting method, they still expressed
frustration with Mondavi’s ability to meet forecast. “To lower expectations once is a disappointment.
To lower them a second time seems like poor planning—particularly when the reason for the shortfall
was a result of corporate decision making and not the result of market factors,” said an analyst from
Deutsche Bank. The analyst continued, “From now on, they will be rewarded based on the accuracy
of their forecast, not the amount they will grow.”38 At the same time, Deutsche Bank upgraded its
recommendation on Mondavi to “buy.”
op
yo
The first bottles of the bumper 1997 harvest hit the shelves in March 1998, but industry experts
were skeptical that Mondavi’s problems had vanished for the near or far term. Lew Purdue, an
industry expert, wrote, “ . . . regaining lost Woodbridge market share will likely mean competing on
price, which will impose its own penalty on the company’s future financial performance. The
problem is likely to get worse as vintners learn how to barrel ferment and use other vinting
techniques on wines from the Central Valley which were once thought to be inferior.” He continued
that Mondavi had not only lost shelf space but simultaneously lost the premium that it had been able
to exact from its name:
tC
The fact is that the popular premium wine segment ($3 to $7 per 750ml bottle) in which
Woodbridge competes is experiencing a glut of good quality wine and a steady erosion of
prices at retail due to: (1) a bumper 1997 harvest, (2) rapid expansion of vineyards, and (3) a
flood of decent quality imports, both in bulk and as case goods. In addition, this segment is
extremely price-sensitive and has less brand loyalty than any other price segment. Because of
this, price counts at least as much as the Mondavi name. Unfortunately those consumers who
migrated to competing brands have found wine at comparable quality to that they had
experienced with the Woodbridge line.39
Analysts and Institutional Investors
No
Mondavi began 1998 with 10 analysts reporting on the stock. This number climbed steadily over
the year, with 13 analysts reporting by early October of 1998. These analysts came from a diverse set
of firms and industry background. Combined, the 13 analysts covered 1 other beverage company, 8
food and food processing and 6 retail food establishments. The largest categories covered were
hardware and service provider communications industries (28 firms), followed closely by
banking/investments and computers (21).40
In January of 1998 58 institutional investors combined to own 84.5% of Mondavi’s common shares.
By June Mondavi still had 57 institutional investors, but their combined ownership was now 71.6%.
At the end of September 1998 54 institutions held 61.5% of the shares in Mondavi. Only 22 of these
Do
36 “Robert Mondavi Announces First Quarter Results,” Dow Jones & Reuters PR Newswire, October 22, 1998, accessed on
Factiva, April 29, 2004.
37 “Robert Mondavi 1Q Beats Views With Accounting Method Change,” Dow Jones News Service, October 22, 1998, accessed on
Factiva, April 29, 2004.
38 “Robert Mondavi Corporation,” Deutsche Bank Research, October 22, 1998, p. 3.
39 Lew Purdue, “The Investor’s Report: Stock of Wine,” Wine Trader Magazine, 1998, http://www.wines.com/
winetraderr/s2/s2gw3.html.
40 Analyst information collected from IBES.
9
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[email protected] or 617.783.7860
The Chardonnay Shortage at Mondavi Winery
rP
os
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105-021
Do
No
tC
op
yo
investors had held shares in January of 1998. Of Mondavi’s top 10 investors in January of 1998, only
4 remained by September, only 1 with an increased position. Two of the remaining investors had
decreased their holdings to nominal positions and a third had sold over 150,000 shares over the nine
month period. 41
41 Institutional investor information collected from 13-F filings accessed via Spectrum data base.
10
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[email protected] or 617.783.7860
105-021
Exhibit 1
rP
os
t
The Chardonnay Shortage at Mondavi Winery
Robert Mondavi Winery Inc.
1997 Premium Wine Offerings
Popular Premium
$3- $7
Caliterra
Vichon
Robert Mondavi Coastal
Byron
Robert Mondavi Napa Valley
Luce
Opus One
Super Ultra Premium
$20+
Compiled from S. Carpenter, “Equity Research: Beverages,” Donaldson, Lufkin & Jenrette, December 3, 1997; C.Levy
and S. Lutz, “The Robert Mondavi Corp.,” Schroder Wertheim & Co., May 16, 1997; and R. Rietbrock, “Beverages:
Robert Mondavi,” Smith Barney, October 16, 1997.
Do
No
tC
Source:
Ultra Premium
$14- $20
op
yo
Woodbridge
Super Premium
$7- $14
11
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[email protected] or 617.783.7860
Exhibit 2
The Chardonnay Shortage at Mondavi Winery
Robert Mondavi Company, 1997
Robert Mondavi Company
1997
Woodbridge
Coastal
Cabernet Sauvignon Coastal Cabernet
Chardonnay
Chardonnay
Sauvignon Blanc
Pinot Noir
Red & White ZinfandeSauvignon Blanc
Merlot
Grape Supply
3% Internal
* Vineyard Ownership5%
Opus One
Vichon Mediterranean
Cabernet Sauvignon
Bordeau-Style RedCabernet Sauvignon
Pinot Noir
Napa Valley Wine Merlot
Chardonnay
Chardonnay
Fume Blanc
Syrah
Caneros District
Viognier and Chasan
Pinot Noir
Chardonnay
Oakville District Cabernet
Stags Leap District Sauvignon Blanc
Robert Mondavi Reserve
op
yo
Variatels
Napa Valley
rP
os
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105-021
Byron
Pinot Noir
Chardonnay
15%-20% Internal 50% Internal
100% Internal
100% External
100% Internal
25%
45%
100%
0%
45%
Woodbridge
Internal
Woodbridge
External
Oakville
Caneros
Opus
External
Byron
Barrell &
Cellar
Woodbridge
Oakville
External
Oakville
Napa
Opus
Woodbridge
Byron
Bottling
Woodbridge
Oakville
Opus
Woodbridge
Byron
Distribution
Woodbridge
Woodbridge
Oakville
Woodbridge
Woodbridge
Woodbridge
Woodbridge
Woodbridge
Percent of Volume
77%
10%
6%
< 1%
4%
< 1%
Percent of Revenue
60%
15%
15%
6%
2%
tC
Crushing &
Fermenting
Source: “Beverages,” Smith Barney, October 16, 1997.
Do
No
*“Beverages,” Schroder Wertheim & Co. Incorporated, May 16, 1997.
12
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[email protected] or 617.783.7860
Exhibit 3
105-021
rP
os
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The Chardonnay Shortage at Mondavi Winery
Robert Mondavi Winery, Inc., 1993–1998 Volume and Revenues (by brand)
CASE VOLUME (Thousands)
Robert Mondavi-Napa Valley
1993
468
% Change from Yr. Ago
Robert Mondavi-Coastal
1994
447
-4.5%
n/a
27
3,406
% Change from Yr. Ago
Vichon
92
% Change from Yr. Ago
Bryon
25
% Change from Yr. Ago
Imports
-4.0%
30-Sep-96
1-Dec-96
1-Mar-97
1996
357
1Q 97
56
2Q 97
107
3Q 97
78
4Q 97
120
-16.8%
-39.8%
15.1%
11.4%
18.8%
184
399
66
200
581.5%
116.8%
20.0%
106.2%
3,281
3,767
4,466
1,175
1,485
-3.7%
14.8%
18.6%
44.3%
3.7%
96
143
172
30
45
4.3%
49.0%
20.3%
-16.7%
2.3%
% Change from Yr. Ago
Woodbridge
1995
429
22
27
32
7
9
-12.0%
22.7%
18.5%
0.0%
12.5%
11
34
48
5,437
1,368
1,894
19.5%
36.1%
13.1%
n/a
n/a
3,991
3,873
–
% Change from Yr. Ago
% Change from Yr. Ago
NET REVENUE ($ Millions)
Robert Mondavi-Napa Valley
1993
42.63
% Change from Yr. Ago
Robert Mondavi-Coastal
n/a
% Change from Yr. Ago
Woodbridge
115.12
% Change from Yr. Ago
Vichon
6.22
% Change from Yr. Ago
Bryon
2.57
% Change from Yr. Ago
Imports
n/a
% Change from Yr. Ago
Other
1.60
% Change from Yr. Ago
Total
168.14
1.1%
1994
42.33
1995
42.66
30-Sep-97
1-Dec-97
1-Mar-98
1Q 98
58
2Q 98
109
3Q 98
101
4Q 98
107
1.9%
29.5%
-10.8%
3.6%
1-Jun-98
Full Year
1998
375
3.9%
159
219
644
115
272
164
254
805
63.9%
46.0%
61.4%
74.2%
36.0%
3.1%
16.0%
25.0%
1,132
1,185
4,977
1,159
1,387
1,196
1,344
5,086
-0.5%
9.5%
11.4%
-1.4%
-6.6%
5.7%
13.4%
2.2%
89
89
253
32
80
59
76
247
122.5%
71.2%
47.1%
6.7%
77.8%
-33.7%
-14.6%
-2.4%
9
12
37
7
11
9
13
40
28.6%
20.0%
15.6%
0.0%
22.2%
0.0%
8.3%
8.1%
44
52
178
27
51
66
69
213
327.7
1518.2%
-20.6%
6.3%
50.0%
32.7%
19.7%
1,511
1,677
6,450
1,398
1,910
1,595
1,863
6,766
11.8%
19.3%
18.6%
2.2%
0.8%
5.6%
11.1%
4.9%
Full Year
1997
44.82
30-Sep-97
1-Dec-97
1-Mar-98
1Q 98
7.97
2Q 98
14.21
3Q 98
13.69
4Q 98
13.56
Full Year
1998
49
10.3%
30-Sep-96
1-Dec-96
1-Mar-97
1996
40.33
1Q 97
6.84
2Q 97
12.50
3Q 97
10.12
1-Jun-97
4Q 97
15.36
1-Jun-98
-0.7%
0.8%
-5.5%
-29.7%
26.4%
25.3%
21.6%
11.1%
16.5%
13.7%
35.2%
-11.7%
2.04
13.12
26.83
4.48
13.50
10.85
14.73
43.56
7.59
18.40
10.99
17.20
54
542.1%
104.5%
21.1%
107.0%
64.8%
46.9%
62.4%
69.5%
36.3%
1.3%
16.8%
24.4%
111.85
129.25
155.31
42.08
54.07
41.15
43.19
180.49
44.50
51.90
43.98
49.42
190
-2.8%
15.6%
20.2%
49.2%
8.9%
3.1%
15.0%
16.2%
5.7%
-4.0%
6.9%
14.4%
5.2%
6.65
9.47
11.60
2.12
3.12
5.61
5.75
16.60
1.96
4.25
3.01
3.76
13
6.9%
42.4%
22.5%
-10.6%
9.0%
104.3%
59.1%
43.1%
-7.4%
36.1%
-46.4%
-34.6%
-21.8%
2.53
3.11
3.82
0.85
1.24
1.12
1.59
4.80
0.87
1.26
1.04
1.66
5
-1.6%
22.9%
22.8%
12.2%
21.5%
33.8%
32.2%
25.7%
2.6%
1.2%
-7.3%
4.4%
0.5%
n/a
–
0.62
1.49
2.01
1.84
1.64
1.88
2.32
2.47
7.81
1.74
2.49
3.07
4.03
11
297%
1159.7%
16.6%
24.0%
66.6%
63.2%
45.0%
1.13
0.75
0.20
0.60
2.68
0.92
0.50
0.24
0.96
3
38.6%
-9.9%
-16.9%
40.0%
15.5%
-18.8%
-33.3%
22.0%
60.7%
-2.0%
167.04
199.49
240.83
58.99
87.19
70.89
83.69
300.76
65.55
93.00
76.01
90.60
325
-0.7%
19.4%
20.7%
29.5%
23.2%
21.4%
26.6%
24.9%
11.1%
6.7%
7.2%
8.3%
8.1%
tC
% Change from Yr. Ago
4,550
Full Year
1997
361
op
yo
Total
1-Jun-97
Do
No
Source: 1993–1997: Smith Barney, October 16, 1997; 1998: BT Alex. Brown Research, January 1, 1999.
13
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