Frog’s Leap Winery Competitive
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I want to outline some of my strategy ideas for you. Frog Leap has a real opportunity to increase market share over the coming years, but we also have to address some serious problems with the company. I think addressing the debt issue starts with an evaluation of our assets and the real growth opportunities in the market.
Frog’s Leap has a few strengths on which to draw upon. The company has all three of sustainable practices, green land and green winery certification. The winery has a healthy size right now, and has an experienced staff that we have retained with forward-thinking HR policies. In addition, the brand is older than many on the market, which helps us when it comes to distribution. There are weaknesses, however. We doubled our land and increased our volume by 5%. That means we have a lot of low-production land. We have a lot of debt and that is going to affect how much money we have to plow back into expansion. Our prices are pretty high, but the most credible reviewers aren’t talking about us – we probably lack buzz. Another weakness is that we really haven’t modernized our marketing. We have been too hesitant in embracing the younger, wired consumer and this is allowing other wineries to reach this audience better than we are.
That said, there is a real opportunity with the younger consumer. The current 21-44 demographic is going to drive growth for the next thirty years, and really the younger end of that demographic is much larger than the front end. They have not yet established their drinking preferences, but if the success of microbrews and high-end cocktails is any indication they prefer high quality and are willing to pay for it. The problem is that our industry is intensely competitive – there are wines as good as our available for half the price, and savvy consumers will recognize that. So our price points are a weakness, and competition is a threat. The economy is also a threat – in a downturn people switch to Three Buck Chuck, and we see know that Whole Foods has their own version of that. The direct-to-consumer channel is a big opportunity, but the online space is cluttered and there are sometimes issues with selling across state lines. That limits us to competing in California with a few thousand other wineries.
I’ve identified our price points as an issue. Let’s talk about that. As a vertically-integrated company, we face high fixed costs associated with our land, and do not have good control over those costs. So we have limited pricing power over inputs. We have even less bargaining power over buyers. They are educated, price sensitive, have zero switching costs and almost no brand loyalty. The threat of substitutes is very high, not just from other wines but from other drinks. Savvy younger drinkers choose between Frog’s Leap, a pint of IPA or some crazy single farm mescal. The threat of new entrants is still high. There are a lot of players in the market, and just when the local production area gets tapped out, Australia, South Africa and Chile start taking our market share. The intensity of rivalry is high, because we all have high stakes and the industry has significant overcapacity. All told, this is not a favorable industry in which to operate.
Frog’s Leap rests a lot of its laurels on the green angle. This has saved the company a lot of money, but in terms of marketing there isn’t much evidence to support this. We must stand on the quality of our wine, especially considering that green wineries are a dime a dozen in northern California. We make pretty good wine, so we are in decent shape there. We have a good distribution business, and that is definitely an asset. This isn’t much to work with, honestly, and there are a lot of wineries that do the same things we do better than we do them.
The wine market is becoming globalized, and that has invited competition from all over the world, and they all want into California, which is one of the biggest markets in the world. This is bringing about a glut of cheap, decent wine into the market at a time when Napa real estate is pricey and our wines expensive as a result. Economically, we have a price sensitive market and our sales as a result can be expected to decline in the event of a difficult economy. The Congressional Budget Office is expecting slow growth for another two years. We face a couple of key domestic risks as well. The first is that some of the best retail outlets for our audience (like Trader Joe’s and Whole Foods) are driving costs down with their own budget lines. In addition, we still face challenges in developing a direct-to-consumer business across state borders.
We need to sell our less productive land and use the funds to pay down some of the debt. The debt was created in part because we bought a bunch of land but didn’t increase our sales. We are probably selling grapes on the secondary market; we’re better off selling the land. Another recommendation is to reposition the brand for the younger audience. We cannot rely on older consumers in the long run, but we have done little to cultivate the 20-something and 30-something crowd. Competition is tough – we need to put some real money into marketing to this group. Lifestyle marketing is a good starting point, along with a much improved social media campaign. But we also need to look at our distribution channels – are we getting into the restaurants this market likes? We should also look at branding. We’ve been around a while, and Frog’s Leap is associated – if there is an association at all – with $30 bottles and an older demographic.
I want to see an entirely new brand. Production-wise, we might even have to buy grapes once we sell our land, but these grapes will be much cheaper. A new brand should be positioned to grow for the next thirty years, as our current brands fade through maturity and into the decline stage of the product life cycle. We can talk about our sustainability practices, but make sure that the brand and product are distributed well and at a price point that is good for the younger market. I borrow this approach from New Belgium brewery – they do all the right eco things, but they are growing rapidly because their distribution and branding are spot on. We need to take that sort of approach – marketing first, production second, and “green” third. By adding a brand, hopefully we’ll be adding a lot of new sales as well. The result of this is that we can pay down some debt right away, and then start into a long-term growth trajectory that allows us to grow our revenues by appealing to new markets.