BarossaWineryCase

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INTERNATIONAL

BUSINESSASSIGNMENT 1

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About the Company

The Barossa Winery was established in early 1960s by Mr. Rolf Mann in the Barossa

Valley of South Australia (depicted in the second image on the cover page) Since 1970, Barossa had won several accolades in the form of awards for both its red

and white wines at regional and national wine shows. By 1980, Barossa came to be known as a consistent producer of high quality premium

table wines. The firm had experienced rapid growth in the early 1980s but the slowing growth

rates during the 1986-1987 period opened doors for a new opportunity for Barossa. Inearly 1988, the senior management of the company decided that a growth opportunityexisted in export markets.

A strategy was required to be proposed for the next 3 years for the international

expansion of Barossa in some or all of the short-listed geographies: USA, U.K. andCanada.

PART A: Current Stage of Barossa Winery Mr. George Steen, marketing manager for the Barossa Winery, has been assigned a

project: to evaluate the feasibility of launching a major export drive.

Barossa Winery is an Australian producer of quality table wines located in the Barossa

Valley of South Australia and started in the early 1960s by a winemaker, Mr. Rolf

Mann.

By 1980, the company had established a solid reputation in Australia as a consistent

producer of high quality premium table- wines by using the finest grapes from over

4000 grape growers and using latest technology to produce many award winningwines.

In 1986 and 1987 sales and profits had slowed down considerably.

The company was also famous for its marketing skills where the various marketing

initiatives including a series of labels which were regarded by industry analysts as

exceptional in terms of communicating the quality of the wines.

They had also established a distribution system that resulted in the prominent display

of companys products in many retail outlets.

Between 1980 and 1985, sales increased from $ 18,500,000 to $ 33,900,000 and profit

before tax from $ 1,600,000 to $ 3,100,000. But in 1986 and 1987 sales grew moreslowly and profits were unchanged. Also as a policy, the Barossa Winery did not

engage in price discounting.

Products offered:

The Barossa Winery made six different white wines with two brands, Barossa

Chardonnay and Barossa Rhine Riesling, making up over 80 % of the companys

white wine sales.

The company produced five different red wines and, again, two brands, Barossa

Cabernet Sauvignon and Barossa Hermitage, accounted for the majority of sales. Dry white wines accounted for 85% of total company sales. Barossa Winery

competed in the bottled table wine markets.


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Target Market was relatively sophisticated wine drinker who was somewhatknowledgeable about the wines and was likely to drink wine with his or her evening meal two

or more times a week.

Competition: Barossa Winery competed in the bottled table wine markets which was themost profitable segment. Wolf Blass and Leasingham were the only companies as successful

as Barossa Winery within this segment in Australian markets.

Export Activities:

With respect to export activity, up to now the company was a passive exporter. There

wasnt an established export strategy in the company.

The companys export sales were mainly generated by the wine importers who had

approached the Barossa Winery.

In 1987, the company exported 37,400 cases of wine valued at $ 2,094,400, anincrease of 42% in volume and 70% in dollar value compared to 1986.

In 1987, the company received the same average price for its wine in both domestic

and export markets.

Barossa Wineries Analysis1. UPSALA Model

Commitment

Market

Sporadic

Export

Regular

Export

Export

Through

Agents

License or

Franchise

Sales

Office

Joint

Venture

Mfgr/

Sales/

Subsidiary

UK

1981-84

Star importers

1985-87

Reid Company

USA

6 importers

with sales

ranging

from 400 to

4500 cases

per year

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Canada

Rest of the

world

About 10000

casessold

through 2

Australian

exporters

The UPSALA model is used to understand a firms choice of market and form of entry forgoing abroad. It had been observed that companies appeared to begin their operations abroad

in nearby markets and then gradually penetrate into more far-flung markets. Most companies

entered new markets via exports rather than through sales organisations of manufacturing

subsidiaries of their own.

We learnt that the level of internationalization for a company depended on the means it

adopted to export. Accordingly, the UPPSALA model suggests 4 stages of

internationalisation:

Stage 1: No regular export activities (sporadic export

Stage 2: Export via independent representatives (export models)

Stage 3: Establishment of foreign sales subsidiary

Stage 4: Foreign production/ manufacturing units

We analysed each of the aforementioned 3 geographies to assess which stage of

internationalisation Barossa had reached in them so as to better design a future expansion

strategy.

U.K.

Sales made through 2 importers, Star Importers and Reid Company in past 3 years

Between 1981-1984, Star Importers purchased upto 10,000 cases of Barossa Wines in

a year

In 1985, Reid Company started buying and purchased 18,000 cases in 1987

U.S.A.

Sales made through 6 importers

Sales ranged from 400 - 4500 cases over the years with 9000 cases being sold in 1987

through 4 importers

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Sales made through 2 sales agents for about 4 years

Sales of over 800 cases in Ontario and Alberta

Rest of the world

Sold 10,000 cases through 2 Australian Exporters mostly in New Zealand, Micronesia

and the Far East

Thus, we realised that though Barossa had undergone significant geographical diversification

its amount of resources committed still remained low. This deficit in the amount of resources

allocated could be because of a low degree of market knowledge due to inexperience in them.

Nonetheless, Barossa occupies a small share in these markets and thus our analysis was not

affected much by interdependencies among markets of these 3 markets, thereby overcoming

the limitation of the model.

2.

OCF modelSTAGES I II III IV

D F D F D F D F

Ownershi

p

Control

Facilities

As per the OCF model, Barossa Winery is presently lying in Stage I. This is because the

manufacturing facilities and the Headquarters for Barossa are located within Australia. Moreover,

Barossa uses latest technology at these production setups and has a robust distribution network within

the Australian market. As far as the foreign markets are concerned, Barossa hasnt signed any official

contract with any importers. This coupled with a lack of any exclusivity clause with its current sales

agents in foreign markets make Barossas sales sporadic. Barossa doesnt own any property outside of

its native market, Australia and hence we can conclude that it is currently in stage 1.

In the long term, Barossa may export to certain geographies in large numbers necessitating

establishment of sales offices, exclusive sales agreements, and possibly setting up a manufacturing

plant abroad. For a manufacturing company like Barossa, gradual steps would help in understanding

market specific quality expectations, resource requirements and distribution structures to match the

customers requirements. This would imply a steady shift across stages on the OCF model.

3. Functional Model

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Based on the Functional Model, the company is in Stage I where it has full setup (R & D,

Engineering, Manufacturing, Marketing, Sales, Service) are in the home country, Australia

and it distributes and serves the requests of imports as and when they come.

With respect to export activity, the company is a passive exporter and did not aggressively

pursue the export market and there is no explicit export strategy established. The companys

export sales had been generated by wine importers who approach the Barossa Winery.

So according to the functional model, all the functions of the company are completed in the

Home country and the requests of exports to the overseas markets are completed through

distributor. The company relied on its network of distributors for selling its products in

foreign markets.

In the second stage: Having started its activities in several or more countries, a company

seeks to find new ways for growth and development and thus further internationalizes itsactivities. The situation in foreign markets such as U.K, U.S.A and Canada differs

substantially from the situation in the local market, and all foreign markets are different, so

the companys experience that has been gained during operation in the local market is not

sufficient. When making strategic solutions local as well as foreign markets become equally

important, so Barossa Winery will have to change the export strategy for strategy of

activities, developed according to separate countries.

The main aim of this stage is to create a strategy that would help to create mass production

economy in each country where the company operates, and the acquired competencies would

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stimulate growth of the local market. In this stage of the functional model, Barossa Winery

needs to set up its sales office in any of the foreign markets: U.S.A, U.K, Canada.

In the last stage of internationalization of activities of companies, with the change of

companys inner factors and the influence of the outer environment, the companys

orientation changes into a global one, i.e. attention is concentrated on increase of operationefficiency, development of the mechanism of activity coordination, and strategy integration in

all countries of activities. The company creates marketing solutions and allocates resources

with regards to the needs of the global business. In this stage, both the manufacturing and the

service functions move to the foreign market. Barossa Winery might not be interested in this

because of the challenges involved.

Requirements for producing good quality wines which are: Appropriate climate and soil

conditions, Skilled Winemaker and ability to market the companys wines might be difficult

to achieve.

4. Scale Scope Synergy Model

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Barossa winery is in Pre-international phase of global marketing and is deciding to move to

Phase 1 i.e. Initial Entry. The company is planning for entry in the foreign market. It is

currently evaluating opportunities in USA, UK and Canada.

SCALE:

Thrust

Cost of wine in foreign markets was very close to those of the Barossa Winery.

The production cost for a 750 ml bottle of good quality Chardonay was $3.02 and the

estimated retail prices: UK-$15, US-$9.4, Canada-$14.2. While the cost of grapes for

some of the varieties is considerably less, most of the price of bottle of wine was

made up of margins and taxes. So company should export more to companies where

taxes are less in order to keep product affordable to many.

Consumption in USA and UK is increasing.

In the 1985-86 period and 1986-87 period, exports increased drastically to around 21

million liters. Primary reasons were more favorable exchange rate, Chernobyl nuclear

incident across Europe which raised concerns of contamination of European Grapes

and growing awareness of the quality of Australian Wines in many countries. So the

company is in a good position to leverage its domestic position.

Trigger

Wine experts from around the world had started appreciating the quality of Australianwines.

The domestic market in Australia was getting saturated.

Due to more favourable exchange rates, as Australian dollar has fallen sharply against

most foreign currencies, export was becoming a more viable option.

In 1986 and 1987, sales grew slowly and profits remained unchanged. This was due to

a slowdown in the growth of both the overall market and the table wine market. As

well, increased competition in the quality premium bottled table wine market had led

to price discounting by some wineries. The total wine sales in Australian Wine market

plateaued at 329 million litres which is just 1.5% increase over 1986 figures. Thisincrease has been around 5% earlier.

Contamination of European grapes because of Chernobyl nuclear incident and

growing awareness of quality of Australian wines.

Foreign markets

Canada was an attractive market because the domestic wine industry is not well

developed and was not recognized as producing quality wines.

The largest Australian wine exporters operation in Canada: Hardy Wines had over

40% share of the Canadian table wine market for Australian wines. It also had about a

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50% share of the all-other wines category. It had achieved a good position by

spending approximately $200,000 each year in Canada.

In United States, with respect to market, the top 10 markets for table wine accounted

for 65% of all sales.

The company doesnt have strong links with its importers or exporters and they arefree to buy or sell from anyone. As company has little expertise in exporting it want to

diversify the risk of losing the partners.

5. Transaction Cost Analysis

With relation to Transaction Cost Analysis and the internationalization aspect of the

companies, the organization will seek the internationalization of activities, which economizes

the transition costs.

In TCA, a firm will tend to expand until the cost of organizing an extra transaction within the

firm will become equal to the cost of carrying out the same transaction by means of an

exchange on the open market. Asset specificity refers to the extent of redeployability of

assets used for a particular transaction.

A firm will perform internally those activities it can undertake at lower cost throughestablishing an internal management control and implementation system while relying on the

market for activities in which independent outsiders (such as export intermediaries, agents or

distributors) have a cost advantage.

Asset Specificity

Frequency of

Transaction

Low Medium High

High Externalization

(Market Turn=

distributor/importer

)

Bilateral

Agreements(Joint

Ventures)

Internationalization

Vertical Integration

WOS

Low Occasional

Transactions

Contracts Turnkey Projects

Per case costs,

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Australia ($)

UK

($)

USA

($)

Canada

($)

Cost of Production

$36.24

Retail Price

132.96

180.4

112.65

170.4

Per bottle costs,

Australia

($)

UK

($)

US

($)

Canada

($)

Cost of

Production

$3.02

Retail Price $11.08 $15.00 $9.40 $14.20

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As we can see, the retail price in The US is lesser than that of a wine bottle in Australia,

hence it will not be a good option to source the unit to the US. But in the UK and Canada, the

retail price is more than that in Australia; hence Barossa Winery can look at establishing units

in these countries.

Transaction cost= ex ante cost+ ex post cost

= (search costs+ contracting costs) + (monitoring costs + enforcement costs)

According to the cost analysis, if the transaction cost through externalization i.e. through an

importer or agent is higher than the control cost through an internal hierarchical system, then

the firm should seek internalization of activities, i.e. implementing the global marketing

strategy in wholly owned subsidiaries. Or if the friction between the buyer and the seller is

higher than through an internal hierarchical system then the firm should internalize.

PART B: Triggers for Barossa Winery

Product Favourability

Glowing reports written by wine experts on the quality of the Barossa winery

products created brand awareness in the other countries.

Barossa had the finest grapes and the latest technology in producing world class wine

quality. Barossa has been appreciated as one of the outstanding companies in terms of quality

of wine produced with a series of labels by Industry analysts

Company

Barossas production capability was much higher than the local Australian demand,

thereby allowing for exporting Barossas products.

Total of 480 million litres of wine was produced in Australia, and per capita

consumption was a mere 21 litres during 1985-86, hence maximum was exported.

Environment

Growing awareness of Australia because of Crocodile Dundee and Bicentennial

Celebration

There was the growing awareness of the quality of Australian wines due to frequent

visits by the foreign wine experts to the country

Favourable exchange rate due to the sharp fall in Australian dollar against foreign

currencies.

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The government taxation policies in Australia impacted the price sensitivity of the

market and this resulted in a decline in the market growth rate. To break this barrier,

Barossa had the option of internationalizing its operations.

Chernobyl nuclear incident in Ukraine in 1986 had raised concern in a number of

countries about the contamination of European grapes, which was dominating thewine market until then.

PART C: Best Internationalization framework for Barossa

Winery

The 5 frameworks used so far were constructive tools to understand the expansion strategy in

terms of costs involved, ownership rights, manufacturing facility location and functional

scale. We believe that the Uppsala model lends a logical order to be followed by Barossa in

its expansion strategy. However, the feasibility of the same is brought to the fore using theTCA Model. Hence, our recommendation is to use the TCA Framework as a base to chart out

the internationalization strategy for Barossa over the next 3 years.

The TCA model considers human error costs, error of limited knowledge, and assigns

numbers to them in the form of transaction costs so as to perform benchmarking. The model

helps allocate friction costs to facilitate decision making regarding internalizing operations as

subsidiaries or externalizing them. This model provides insights keeping both long and short

term perspective in mind. .

The Road Ahead for Barossa:

Acquire a wine making facility in Europe and implement same winery technology as

that in Australia

Barossa must consider opening its subsidiaries abroad.

Marketing campaigns stressing on Barossas quality must be invested in.

Exclusive agreements must be signed between sales agents and distributors to ensure.

Barossa gets maximum share of shelf, which may convert into share of wallet.

Participating in wine exhibitions abroad to improve visibility in international markets Tie-ups with Australia tourism board and airlines. Barossa wines would be served to

tourists so that it creates a long lasting impression on them and they would purchase

Barossa wines in their home country

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