Competition Takes Toll on Mondavi; Shares Fall
Shares of Robert Mondavi Corp., one of California’s largest winemakers, fell 6% on Thursday, a day after the company forecast a quarterly loss and said it would eliminate 10% of its workforce and introduce two low-price labels to try to reverse its sagging fortunes.
The disclosures late Wednesday sent Mondavi’s stock plummeting to a seven-year low of $18.53 in Nasdaq trading Thursday before it rebounded to close at $21.63, down $1.34.
For more than year, competition from less-expensive imports, along with a glut of grapes, has prompted some California vintners to slash prices. Mondavi, based in Oakville, resisted, instead choosing to pour more money into advertising its brands.
That strategy didn’t work, and now the company will shift those promotional dollars into discounts on existing brands and into the new labels.
“This is the most competitive cycle of the wine business that I’ve experienced in my 37 years” in the business, said Chairman R. Michael Mondavi. “People see wine that used to cost $12.99, and now they can get it for $6.99. We can’t just do business as usual. We have to respond to today’s customer who is value-conscious.”
Analysts said the moves were overdue.
“They realized they needed to remodel their business,” said Marc Spellane, an analyst with Pershing in Jersey City, N.J., whose firm does not have an investment banking relationship with Mondavi. “They are suffering worse than anyone else.”
Indeed, Mondavi has lost market share at both the high and low ends of the market. Its under-$10-a-bottle Woodbridge brand, responsible for nearly 60% of the company’s $441 million in annual sales, has been under attack from lower-priced domestic and imported rivals.
Meanwhile, sales of its higher-end wines, such as its Reserve line, which sells for $35 to $150 a bottle, have slowed as the war and terrorism concerns cut demand from hotels and fine restaurants by as much as 10%.
To recapture market share, Mondavi will introduce one label that will be priced $1 to $1.50 a bottle less than its Woodbridge brand. The other, to be produced from Napa Valley grapes, will sell for $15 to $18 less than its other Napa wines.
“Wine prices have all shifted downward when they were trying to shift upstream,” said Rich Cartiere, editor of the Wine Market Report, a Calistoga, Calif.-based industry newsletter. “Things fell apart for Mondavi a lot faster than anyone expected.”
The moves are tough to swallow for Mondavi, one of the pioneering names in California’s $13.4-billion wine industry. Michael Mondavi’s father, Robert Mondavi, founded the company in 1966 and helped make the Napa Valley one of the world’s best-known wine-growing regions.
The elder Mondavi, the company’s 89-year-old chairman emeritus, is credited with numerous industry innovations, including coining the term “fume blanc” for an inexpensive white wine.
The job cuts will amount to about 100 of the company’s 1,000-member workforce, including about two dozen at its food and wine center in Costa Mesa. Mondavi will continue to lease the wine-tasting and special-event facility but not staff or cater it.
In addition, the company said head winemaker Tim Mondavi, Michael’s brother, is taking a “personal development” leave to enroll in management and leadership classes. He is expected to return for the fall harvest.
The company forecast a net loss of 5 to 10 cents a share in its fiscal third quarter ending Monday. Analysts had expected the company to earn 32 cents a share in the current quarter. In the same period a year ago, Mondavi earned 46 cents a share, or $7.6 million.
Slow sales in January and February forced the company to lower its outlook for both the quarter and the year, the latter for the second time in just over two months.
Mondavi also said it would take a charge of $10 million, or 39 cents a share, in the current quarter to cover the job reductions and other expense trimming. Mondavi said it could potentially take another $10-million charge in its fourth quarter for other changes.
The company’s announcement dragged down the shares of other winemakers Thursday. Shares of New York-based Constellation Brands, whose brands include Inglenook and Arbor Mist, dropped 5.4%, or $1.25, to $22 in New York Stock Exchange trading.
In Australia, shares of Southcorp Ltd., that country’s biggest winemaker, fell 3.8%. Foster’s Group Ltd., which owns the Beringer brands of wines in Napa Valley, fell 1.4%.
The industry’s troubles have taken their toll on Mondavi stock, which is off 30% this year and 41% over the last 12 months.
The stock’s slide has been particularly painful for the five members of the Mondavi family who together own a 59% stake in the company. Their combined interests have lost $64 million in market value since January, including an $8.6-million decline Thursday.