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THE SPANISH COMPANY FREIXENET is the world's largest producer and exporter of ccfoa (sparkling wines). In September 1985, management needed to decide a new distribution .strategy for the US market. There wss much concern and uncertainty regarding the decision. Freixenet had enjoyed spectacular growth from 1983 to 1985 and the management questioned the wisdom of implementing far-reaching changes so soon.

The Freixenet management team had two main responsibilities for the US market. These were the distribution system, and the development of strategies to market and advertise the brand. International wine and liquor producers that export to the American market typically choose one company, usually in New York, as a national importer. This distribution company buys the goods from the international supplier and then sells to a network of wholesalers located in each state or territory. The margin typically charged by these importers was 15 per cent of the US-landed price. Under this system, a brand manager employed by the import company usually heads the marketing of brands. He or she is responsible tor the annual advertising and promotional budget allocated by the brand owner and the supplier.

The Company

Kreixenct, SA is a family-run business located at Sant Sadurni d'Anoia in the Region del Cava (the sparkling wine region), about 35 kilometres south-east of Barcelona in Catalonia, Spain. Freixenet's annual sales in 1985 were about Ftal7,100 million, 28 per cent of which are from exports. Freixenet's products sold in 40 countries; it had commercial branches in the United Kingdom, Germany and the United States, and production facilities in Spain, Mexico and California.

The Product

Cava-type sparkling wine is produced by the methode champenoise, where the second stage of the fermentation process occurs in the original bottle. Only

University of California Berkeley Haas School of Business, USA-

sparkling wines produced by the methnde chcempenoise in the Champagne region of France could bear the name 'champagne'. Wines produced outside the region can only use methods champenoise on their label. However, a decision by the FIT forbade the UNO of this description and established a transitional period of eight years.

Another method of producing sparkling wines is the granvas method (sometimes called the cuve-close method), in which the second stage of fermentation is in large tanks instead of the original bottle. It is faster and less expensive than the champenoise method, but yields a lower-quality wine. Freixenet produces five c-tt'uas: Carta Nevada, Cordon Negro, Brut Nature, Brut Barroco and Brut Rose. Each cava has a distinctive quality resulting from its production process.

Expanding Internationally

At the end of World War II, Freixenet began significant international expansion. Jose Ferrer, president and general manager, [ravelled to various European countries searching for opportunities to sell his products. Fellow uava producers did not share his eagerness for international expansion. Jose Ferrer remembered: 'One day, at a cwua producers' meeting, a colleague ... stated, "This business of exports is a joke. What you like is to travel. Forget this business - outside of Spain you won't sell a single bottle."'

The country initially targeted for export was the United Kingdom because of its high champagne consumption and need to import due to its lack of vineyards and local brands. Unfortunately. Freixenet met with difficulties resulting from a British bias towards French products and the poor image of Spanish products. Jose Ferrer explained:

We believed it necessary to join forces with a British company to distribute our products because no one wanted to buy from a Spanish distributor. After two years, the British company became tired of losing money and was replaced by two other associates who also became tired of the business. At this point we took over the whole operation.

The new British company was named Direct Wine Supply. Freixenet's hopes for the British market were overinflated. In 1984 the Freixenet group sold only about 45,000 cases of its product in the United Kingdom (25,000 Freixenet and the remainder Freixenet's Castcllblanch brand). These results were poor considering the eight years of work invested in developing the brand. Jose Ferrer further explained:

Direct Wine Supply was essentially a deadweight. We should have dropped them, but we haven't done it yet because we believe that in the end it will work out when we implement a more dynamic and creative management team instead of the conservative one which we had for eight years. If this doesn't work, we might sell the company to some of the 'admirers' who recognize our success domestically and internationally. If we do this, we can recoup the £200,000 to £300,000 that we have already invested.

The first phase of international expansion lasted over 30 years, during which Direct Wine Supply (DWS) began to export to several European countries. In the United States. Freixenet hired a representative in New Jersey to import products and market them nationally. This distribution system, which employs only one import representative for the whole country, followed the system that Freixenet used in Europe.

The second phase of international expansion began during the early 1980s with the establishment of two commercial branches, one in the United States and the other in Germany. Freixenet's exports to the United States had grown slowly during the 1960s and early 1970s. Management realized that one representative located on the east coast could not adequately cover the whole country because of diverse regional markets. In 1978 the company decided to hire a wine consultant to help the representative establish distribution to untapped states and to increase sales in states where distribution was already established. In 1980 the contract with this representative expired. Instead of renewing it, Freixenet opened a US branch in New Jersey called Freixenet USA, inc. The new national distribution system emphasized decentralization by assigning roughly one import-distributor to each state. This structure allowed the company to establish a significantly more active presence in each market by having a more concentrated market focus through each distributor. Freixenet L'SA provided marketing support for these importer-distributors. Ramon Masia, the export manager of the Freixenet group of companies, described the work of Freixenet USA:

The office helps the importer-distributors by solving problems related to advertising, shipments and internal logistics, [t provides support for advertising in four ways. First, it negotiates national advertising contracts. Second, it co-ordinates these advertising campaigns with regional distributors. Third, it manages all of the co-operative advertising that Freixenet USA uses with direct distributors. Fourth, it develops point-of-sale materials. The office also manages stock between distributors and does follow-up work for Freixenet, SA.

Twelve Americans currently work in the subsidiary. The annual cost of running this office, including personnel and regional agents' salaries, is approximately {3600,000. This amount does not include advertising and promotional expenses.

The third phase of international expansion began with setting up two production facilities: one in Mexico and one in the United States. The first bottles produced in Mexico would be available for sale in 1986. The operation included about 50 hectares of vineyards and a production plant with a 1 million bottle capacity. The total investment was Pta500 million. This facility supplied the Mexican and Latin American market. The rationale for this investment in Mexico was that the Mexican market had been closed to foreign sparkling wines for more than 20 years.

The American production facility, Freixenet Sonoma Champagne Haves, opened at the beginning of 1985. This facility was in the Garneros area of Napa Valley, just north of San Francisco. It consisted of 180 acres considered to have the best vineyards and bad a 1 million bottle capacity. Completed in 1986, it required an initial investment of £(> million. The wine produced here would be a Californiancaua, named Gloria Ferrer, in honour of Jose Ferrer's wife.

Export manager, Ramon Masia, headed the international Freixenet branch. He supervised the export managers of Castellblaneh and Scgura Viudas, as well as the managers for the US, German and British DWS commercial branches. The Mexican and US facilities were not under his management.

Establishing Joint Ventures and Subcontracting

Freixenet wished to explore new ways of expanding its business through jointventure and subcontracting opportunities. It also bought two businesses from the well-known Spanish company Rumasa, which included an immediately available idle production facility in Sant Sadurni d'Anoia. Freixenet used this plant to produce wine for an American company that owned the Paul Cheneau brand. Jose Ferrer described this subcontracting operation:

They began to entrust its production to Freixenet, but they soon told us that they liked neither our product nor our price and they looked for other subcontractors. After a while, they came back to Freixenet under the same conditions.

In 1984 Freixenet was contacted by Domeci], a large Spanish producer of wines ,-md brandies, which had 19 sales representatives and distributors in the United States. Domecq's sales force sold well-known Spanish and Mexican brands of wine and liqueurs. They soon discovered that they needed more products to sell and hoped to form a joint venture with Freixenet. The two companies created a new French brand name, 'Lembey', and equally shared marketing expenses and profits. Freixenet produced this cava in Sant Sadurni. The brand hud a. successful start in the United States and was forecast to achieve a .sales volume of over H0,000 cases in 1985. .lose Ferrer commented on the joint ventures:

The experience with 'Paul Cheneau' demonstrated the dangers of subcontracting. In a market with established surplus capacity, rhe subcontractor is totally at the mercy of his client, who can constantly pressure him on prices. On the other hand, with a brand joint venture, the first-year promotional expenses correspond to the second-year price discount involved in subcontracting. The difference is thai in a joint venture you own 50 per cent of the brand and if business has been good, this investment will have gained in value.

International Market for Sparkling Wines

In 1984 the world production of .sparkling wines was about 120 million cases, an increase of 16.8 per cent from 1979. The main producers were France (25 per cent), Germany (17 per cent). USSR (17 per cent), Italy (13 percent) and Spain (8 per cent). These six countries controlled 91 per cent of the total world production and the tatter Jour countries showed a large increase in their production compared to 1979. The top sparkling-wine exporting countries were France with 13 million cases a year, Italy with 10 million and Spain with 2.9 million. The top importing countries were the United States with 7 million cases a year, Germany with 6,8 million and the United Kingdom with 2 million. The industrialized production methods (the 'cuve-close' and 'transfert' methods) accounted for most of the total production.

Germans market was the largest with 28 million cases sold per year, followed by the United States with 17 million eases, France with 16 million cases and the USSR with 15 million cases, Germany also led with a per capita consumption of 5.5 bottles per year, followed by the United Slates' 3.7, France's 2.3 and the USSR's 1.7.

The US Market for Sparkling Wines

The United States is one of the main world producers, consumers and importers of sparkling wines. Although per capita consumption is not high, it shows regular and rapid increases, especially in the large urban areas of California, the East Coast and Texas. Between 1978 and 1982. annual per capita consumption increased from 1.75 to 2,69 bottles in the District of Columbia and from 1.31 to 1.77 in California. Between 7975 and 3984, consumption of sparkling wine increased from 7.1 million to almost 16.3 million cases. The top ten states accounted for almost three-quarters of the total consumption in the United States.

Sales by month reveal an interesting pattern. October was the top month in 1984, with 18.2 per cent of the year's sales. November and December had more than 12.0 per cent and May registered 10.1 per cent. February was the lowest sales month of the year with only 4.2 per cent. This data pattern shows a strong seasonality that is typical for this industry.

The US sparkling wine market had four price segments. American pret'erence is clearly for wines costing less than S4. Spanish and Italian wines dominated the $4-9 segment; Italian and Califomiaii dominated the S9-15 segment and French champagnes dominated the over $15 segment. The first two segments, those costing less than *S9, represented 86 per cent of market share,

American sales of sparkling wine increased noticeably between 1979 and 1984. Italian sparkling wines, especially Asti Spumame, took first place for imports in 1984 with 50.1 per cent of total sparkling wines. French champagnes followed with 24.5 per cent and Spanish c&vas with 21,9 percent. Total imported brands with the highest sales in 1984 were Freixenet, Tosti and Martini & Rossi.

Freixenet Marketing in the United States

Starting in 1973, Freixenet's sales to the United States grew explosively. Prom 1980 onwards. Freixenet's average sales increased by over 50 per cent per year. For 1985, the US market represented more than 70 per cent of Freixenet's exports. This figure included the sale of Freixenet brands and joint ventures, Paul Cheneau and Lembey.

Five types of distributor operated in the American market: nation-wide importers; regional importers; 'brokers' or brand-representatives; wholesale distributors; and retailers. Retail trade has three categories; retailers that specialize in wines and liquors; supermarkets and small retail shops; and 'clubs' patronized by wine connoisseurs. Two large distribution channels handled Freixenet's products in the United States. Approximately 75 per cent of sales were to supermarkets and liquor stores, known as 'off premises'. The other 25 per cent of sales were to restaurants, bars and hotels, known as 'on premises'.

According to a Freixenet executive, advertising was one of the principal components of Freixenet USA's marketing strategy. For 1985, Freixenet budgeted $4 million to promote its products to the American market and .SI million for the remainder of the export markets. Of the §4 million that would be invested in the United States, SI million was for television commercials in the 12 main regional markets, $2 million for national magazine advertisements, 8500,000 for co-operative advertising (the same amount being invested by the importers-distributors), 8300,000 for public relations, $100,000 for a gigantic blimp that travels throughout the country, and #100,000 for the yearly importers' convention.

Other imported sparkling wines had smaller budgets. Among these, the most popular French champagne sold in the United States is Most et Chan don, which had a SI million budget for public relations involving social events and benefit projects and a SI million budget for print and television advertising.

A key reason for success in the United States was the design of the Freixenet bottle. Ramon Masia explained:

We did marketing research on Cordon Negro, the most popular sparkling wine sold in the US. The research indicated dial Cordon Negro's black bottle exerts an immediate attraction for people. Americans perceive it as an indicator of high prestige and since it sells for only S6, they see it as a great bargain. Since the word 'Freixenet' is difficult to pronounce, Americans ask for il by asking for the black bottle.

The president of Freixenet USA, Inc., Rill Kroesing, summarized some of the most important factors regarding the company's strategy:

The success achieved in the US is due to the bottle, the promotion, the distribution system and the proper quality/price relationship. Regarding the latter factor, Fretxenet has filled the void left by the French and the American producers.

Ramon Masia added:

We realized that there were four markets for co-vet in the US. The first market is for a sparkling wine with low quality and price, the second is for an average wine, the third is for a wine with high quality and price. and the fourth is the super-high-quality market. American producers who, like Gallo, produce a low-quality gran-oas wine, supply the low-price national segment. The higher-price segment is controlled by California producers and the highest-quality segment by French champagnes. There was no participant positioned for the middle segment and this is where we entered with Carta Nevada and Cordon Negro and we now dominate this segment of the market.

Low lahour and material costs allowed the Spanish producers to he more price competitive than the French, Italians and Californians. The price of 1 kg of grapes in the uavct region was Pta25-30. In contrast, 1 kg of grapes in the Champagne region costs Ffr23 (there are about 25pta to Ffrl). In the United States, the prices of French champagnes fluctuated between $15 and £20, prices of Spanish c-tiwis between >S4 and «S'5 a bottle and the Cordon Negro between $6 and $1 ft bottle. Both use 750 ml bottles. The American tariffs on Spanish cava imports were 15-20 per cent of the landed-price, varying from state to state. Of the total cost of Freixenet products, 60 per cent consisted of raw materials, labour and production. The remaining 40 per cent covered administration and marketing activities. Freixcnet was not content with the budget's allocation.

Management felt that they were not getting a good return for their advertising dollar. Armando (lavidia, the vice-president for the north-east region of Freixenet USA, who had a big portion of the co-operative budget to invest, was not satisfied with the service he was getting from the advertising and public relations companies. He suggested to Jose Ferrer that Freixcnet should create its own advertising and public relations company to service all the Freixenet brands in the US market. His reasoning was as follows:

Our advertising and public relations budgets are small for the big advertising and PR companies, so they assign junior account executives to our accounts who do not know the wine market and business. They also have a high personnel turnover rate. Whenever one of these people gets familiar with our company and the wine business, he or she jumps to another company and we have to start from scratch again and again. If we hire a couple of advertising managers, we could create our own advertising 'shop'. The creative part will be handled by freelancers. The media buying will be performed by one of the well-known media buying services and then we will assign our own people to create and maintain our own database tor public relations. In this way, we will get the proper return for the money \ve allocate. Our people will be more concerned with the small brands, like Segura Viudas, and they will ensure that they get the service and attention each deserves to maximize each brand's potential.

Entering the US High-Price Segment

Freixenet decided to launch the Gloria Ferrer brand in the US high-price segment. This positioned cava against the California producers. Even though the cava would not be available until 1986, California!! producers made a small amount that was sold in 1984. The Gloria Ferrer brand sold for $13-16 a bottle. Jose Ferrer explained the decision to produce a California cava:

We expect that our distributors will be able to offer the whole range of products that the market requires and there is a large market for California cava. There are restaurants and bars that sell only California wines. This includes some California carets which sell for higher prices than French cava-s ... We could have entered the lower-price (under $4} segment with Dubois, but we did not want to risk devaluing the image of Spanish champagne ... We have set up our own vineyards and production facilities to promote and improve our image. This helps our sales efforts in the US. All of the prestigious wineries have their own vineyards in California ... Furthermore, producing in California protects us from any increases in the American import restrictions from the EU.

Gloria Ferrer was sold through the same importers who distributed the cava brought from Spain. These distributors sold a wide range of products and some had separate sales forces to sell to 'off premises' and 'on premises' locations.

The New Distribution System

In September 1985, Freixenet USA needed to set up a new US distribution system. The new proposed structure employed no national 'agent', 'broker' or brand-assigned nominee. Freixenet would retain all rights of administrative coordination, marketing and advertising. This system also extended certain responsibilities to the primary US importers. These importers would be not only distributors, but also Freixenet's representatives in their respective marketing areas.

This new import-distribution system aimed to eliminate the 'national importer' and create one wholesaler per state, acting as the direct importer, brand representative and wholesaler for his or her territory. The Freixenet USA office would assist the national network of direct importers by sending their orders to Spain and communicating with the winery regarding shipments1 and transport problems.

The Freixenet USA office would also handle the national marketing budget for advertising and public relations and assist the local importers in developing their regional and local advertising and promotional campaigns. This system also established a co-operative advertising budget in which Freixenet USA would match each local importer's investment. Armando Gavidia explained:

With this new distribution structure, Freixenet will get more involvement with the brand from the importers and they will create their own local advertising and promotions. This will motivate these managers to achieve better results. The beauty is that this co-operative investment programme will not cost Freixenet any extra money because it will be funded by the 15 per cent profit margin that would have been paid to the national importer.

A new contract had an explicit description of the Freixenet primary importers' obligations and rights. If implemented, each primary importer would sign this contract. Under the terms of the contract, the importers had a number of obligations;

1. The primary importer must have current licences to service its assigned territories.

2. The primary importer must solicit and distribute all brands throughout assigned territories.

3. The primary importer must order sufficient stock of all basic items to ensure adequate inventory to service expected demand for a minimum of 90 days.

4. Cheques must be sent with each order.

5. The primary importer must give Freixenet immediate notice of its selection of wholesaler distributorfs). Importers must also notify Freixenet of any sales made by a distributor to wholesalers or retailers located outside the importer's assigned territory.

6. The primary importer must provide Freixenet with monthly depletion reports.

7. The primary importer must perform operational supervision of the distributor(s), including personal visits as necessary.

S. The primary importer must agree always to apply 'its very best' efforts on an equal basis to all of Freixenet SA's brands.

9. The primary importer must co-ordinate marketing and promotional programmes with the Freixenet USA Marketing Office and advertising with Freixenet's Advertising Agency.

10. The 'basic six' Freixenet sparkling wines must be inventoried and offered for sale by all distributors,

11. The primary importers' advertising and marketing must be in reasonable conformity with Freixenet's international find national programme and trademark protection interests. Product segmentation is an important part of this - this is why Carta Kevadas is available in two bottle sixes.

12. At least every six months, the primary importer must provide a copy of its posting or price list and that of the distributor(s) for Freixenet brands to Freixenet USA and to ail regional vice-presidents.

13. Primary importers must not provide false or misleading information to Freixenet or the regional vice presidents. Freixenet must receive 60 days' notice of the planned or aetual sale of the primary importer's company.

According to its proponents, this strategy would eliminate a layer of management and reduce costs significantly. With the savings. Freixenet would offer a 'managerial service performance allowance' to reimburse each importer as a brand representative and to pay for brand-management costs incurred by each importer/marketing representative.

Proponents of the new distribution system expected it to be well received by the national wholesale network. They believed that, with this system, all importers would feel more involved with the brand than in the past. They would appreciate the allocation of the marketing budget according to their local market needs. The proponents believed that the importers would consider Freixenet's strategy a big improvement on the other brands' systems that used national importers. This was largely because? the national brand managers in New York never really understood the local needs of each market. This was the key reason that proponents expected everyone in the network to be pleased with this new Strategic distribution design.

Proponents also hoped to have a National Importer Convention in Lanzarote, Spain in May 1986, and planned a special recognition ceremony for the following achievements; no. 1 importer of the year, best promotion of the year, best local advertising of the year, and best on-premises promotion of the year (promotions related to restaurants and bars). During this convention, each importer would present and explain his or her accomplishments and results to the rest of the network. It would give each importer the chance to share different strategies and policies that were effective in different markets. Another important objective was to create a 'family' feeling among the distribution network members. Armando Gavidia explained:

I expect that most of our distributors will become friends with each other and also will develop a very positive attitude towards the brand. This will create many positive feelings and generate loyalty to the company. This will help our future growth and increase the speed for expanding our market share in the USA.

However, critics of the plan had serious misgivings:

1. Freixenet did not currently have enough managers with adequate experience to implement the system.

2. The financial risk would be significantly greater because the company would have to ship to 50 different companies in the United States and the risk involved would be very difficult to assess.

3. The money that would be saved by eliminating the importers would be spent in the organization of Freixenet USA.

4. The new system would not be well received by the wholesalers, which are used to the 'old boy' network.

5. If the implementation of the new distribution strategy failed, it could permanently damage the US marketing operation.

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