The Ambara Wine Producing Industry is one of the largest industries in the world with an annual revenue of $20 billion. The industry is dominated by three large wine producing firms such as Yellow Tail, Casella Wines and Perlon Wines. Many smaller firms also exist in the industry, producing about 20% of the total annual wine sales.

In the face of fierce competition, with all firms trying to hold on to their consumers through retaliatory promotions, Yellow tail succeeded in setting itself apart through its specialised table wines and catchy labels thus converting traditional beer drinkers to become consumers of its specialty wines. As a result, Yellow Tail commands a third of all wine sales in the industry.

Ambara Wine Producing Industry is capital intensive as wine processing equipment are sophisticated and costly. Companies who have invested in the industry recoup their investment in no less than a decade. In view of this, wine producing companies strive to produce at maximum capacity so as to make up for the high fixed cost.

Wine produced in the industry is distributed by three distribution companies: Carte Blanc, Merhot and Sannes Distribution Companies. Distributors are powerful due to consolidation and the wine producers have realised that it is in their interest to form value chain partnerships for distribution.

New entrants are increasingly attracted to the wine industry as the industry appears to be very profitable.

Key suppliers to the industry are wine grape growers and bottling companies. Wine grape growers have been known to build up switching costs as a result of the unavailability of substitutes for wine grapes. Bottling companies are large companies who supply the majority of their products to six other industries besides the Ambara Wine producing industry.

Consumers of the Ambara Wine Producing Industry can be categorised into two groups. The hotel and restaurant operators patronise the products of the industry to complement meals served to their numerous customers. These buyers purchase in bulk and take more than 60% of the wines produced in the industry each year. The second group comprised of individual consumers who are price sensitive but may appear to have little individual buying power. However, many individual buyers have been known to switch to the purchase of fruit juices when the price of wine is deemed unaffordable, causing a significant reduction in industry profit.

(Source: Adapted from Carpenter et al, (2011) Strategic Management, A Dynamic Perspective, New Jersey, Pearson Prentice Hall)

1. State and explain two (2) conditions that imply that rivalry is intense in the Ambara Wine Producing Industry.
2. Identify three (3) barriers that may prevent new entrants from entering the industry
3. What two (2) factors describe the high bargaining power of buyers in the Ambara Wine Producing Industry?
4. Explain two (2) factors that give the supplier groups power over the wine producers in the industry.

Identify one (1) substitute product of the wine industry and explain why it poses a threat to the profitability of the industry.