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Mondavi Challenged by "Two Buck Chuck"
Thursday March 27, 2:45 pm ET
By Matt Richey
Somebody pass a bottle to Robert Mondavi (Nasdaq: MOND - News). Last night, the California winery chopped earnings expectations by nearly 25%, plus restructuring charges on top of that. An oversupply of grapes combined with weak demand for expensive wines is spelling disaster for the premium wine maker.
This is the second time in three months Mondavi has scaled back its expectations for the current fiscal year (ending in June). Originally, the company called for EPS of $2.55 to $2.60. Then, in January, management trimmed that number to $2.30 to $2.35. Now, the ax has really come down, and EPS before charges is expected at $1.76 to $1.81. After charges for excess inventory and employee severance costs, the final number could be as low as $0.91.
Even in normal years, the wine business is inherently difficult, subject to the vagaries of each year's grape harvest and huge inventory requirements as the wine ages. But this past year has been especially tough on upscale wine makers like Mondavi because of the weak economy, which has depressed the wine-important travel and entertainment sector.
And while demand has been weak, grape supply has been strong, resulting in a proliferation of lower-price wines. One new brand, in particular, has taken the market by storm: Charles Shaw, more popularly known as "Two Buck Chuck," which offers cabernet, chardonnay, and sauvignon blanc, each for just $1.99 a bottle. It may be cheap, but this is no Boone's Farm. Charles Shaw is delivering a quality wine that's getting rave reviews and stealing share from higher-price competitors.
On this morning's Mondavi conference call, Charles Shaw was the first topic of discussion in the Q&A. The caller asked about the size of Charles Shaw's competitive threat, to which management had the following to say (courtesy of Fair Disclosure Financial Network):
[Charles Shaw is] rumored to be somewhere in the neighborhood of a 1.5 million to 2 million case brand. And in the context of the California premium wine market in the U.S., which is somewhere in the volume of 95 [million] to 100 million cases, you are talking about a brand that has come in and taken about 2% of the share in a very quick period of time. And probably a good portion of the growth, because if the market is growing at 4% to 5%, let's say that's 4 [million] or 5 million cases, and this new brand has taken 20% to 40% of that growth.
Charles Shaw has done the unthinkable -- taken wine's high-price snob appeal and turned it on its head, creating a certain hipness to cheap wine. Whether this proves a fad or a long-term phenomenon will be critical to the future of Robert Mondavi's business
Mondavi Challenged by "Two Buck Chuck"
Thursday March 27, 2:45 pm ET
By Matt Richey
Somebody pass a bottle to Robert Mondavi (Nasdaq: MOND - News). Last night, the California winery chopped earnings expectations by nearly 25%, plus restructuring charges on top of that. An oversupply of grapes combined with weak demand for expensive wines is spelling disaster for the premium wine maker.
This is the second time in three months Mondavi has scaled back its expectations for the current fiscal year (ending in June). Originally, the company called for EPS of $2.55 to $2.60. Then, in January, management trimmed that number to $2.30 to $2.35. Now, the ax has really come down, and EPS before charges is expected at $1.76 to $1.81. After charges for excess inventory and employee severance costs, the final number could be as low as $0.91.
Even in normal years, the wine business is inherently difficult, subject to the vagaries of each year's grape harvest and huge inventory requirements as the wine ages. But this past year has been especially tough on upscale wine makers like Mondavi because of the weak economy, which has depressed the wine-important travel and entertainment sector.
And while demand has been weak, grape supply has been strong, resulting in a proliferation of lower-price wines. One new brand, in particular, has taken the market by storm: Charles Shaw, more popularly known as "Two Buck Chuck," which offers cabernet, chardonnay, and sauvignon blanc, each for just $1.99 a bottle. It may be cheap, but this is no Boone's Farm. Charles Shaw is delivering a quality wine that's getting rave reviews and stealing share from higher-price competitors.
On this morning's Mondavi conference call, Charles Shaw was the first topic of discussion in the Q&A. The caller asked about the size of Charles Shaw's competitive threat, to which management had the following to say (courtesy of Fair Disclosure Financial Network):
[Charles Shaw is] rumored to be somewhere in the neighborhood of a 1.5 million to 2 million case brand. And in the context of the California premium wine market in the U.S., which is somewhere in the volume of 95 [million] to 100 million cases, you are talking about a brand that has come in and taken about 2% of the share in a very quick period of time. And probably a good portion of the growth, because if the market is growing at 4% to 5%, let's say that's 4 [million] or 5 million cases, and this new brand has taken 20% to 40% of that growth.
Charles Shaw has done the unthinkable -- taken wine's high-price snob appeal and turned it on its head, creating a certain hipness to cheap wine. Whether this proves a fad or a long-term phenomenon will be critical to the future of Robert Mondavi's business
