Critically evaluate the structure of the wine industry and discuss any potential changes in the competitive environment and their the implications for the company.

Critically evaluate the structure of the wine industry and discuss any potential changes in the competitive environment and their the implications for the company. read the case study and answer the question below: Critically evaluate the structure of the wine industry and discuss any potential changes in the competitive environment and their the implications for the company. ELIE OFEK ERIC E. VOGT Château Margaux: Launching the Third Wine “Down Zorba!” “Come here Souvlaki!” Corinne Mentzelopoulos commanded lovingly to her two beagles as she strode across the raked white gravel in front of her château at a brisk pace. It was midFebruary, 2013. The ground fog from the nearby Gironde estuary still lingered over the legendary terroir of Château Margaux. Mentzelopoulos was on her way to the tasting room, located just beside the wine cellars, to partake in some critical decisions regarding the 2012 vintage. Upon her arrival, she was greeted by General Manager Paul Pontallier, Technical Director Thomas Dô Chi Nam, Cellar Master Philippe Berrier, Commercial Director Aurélien Valance, Chief Financial Officer Olivier Pinon, and their consulting oenologists Jacques and Eric Boissenot. Her eyes quickly turned to the twenty glasses neatly arranged along a table in the middle of the room. “With some luck I think we can settle on the assemblage of the Grand Vin today. Shall we begin tasting?” Pontallier asked. Mentzelopoulos nodded as she lifted her first glass. The vineyards on the estate were divided into distinct plots and the grapes harvested from each of them during the fall were processed separately. The resulting wines were kept in carefully labeled barrels. After four months of cooling, Pontallier and his team mixed samples of the young wines in an effort to determine the “perfect” blend, or assemblage, which balanced exquisite taste and quantity. As weather conditions differed from year to year, with each plot’s unique soil, elevation and drainage affecting how the grapes developed, so did the selection for blending. It took three or four iterations to arrive at the final composition of the château’s first wine, the Grand Vin du Château Margaux. The gravity of making the right call on the assemblage of the first wine weighed heavily on Mentzelopoulos. She felt as though the reputation of Château Margaux was at stake each year anew. Yet the Grand Vin’s final composition had additional implications not lost on her mind. The decision today would determine which of the château’s eighty hectares would remain for making the second red wine, Pavillon Rouge du Château Margaux. And following a similar process of blending and tasting, what was left, anywhere from 0-35% of the total production, would constitute the third red wine. Historically, management had not bothered much with this “left over” wine, leaving it in barrels and selling it in bulk to local merchants who mixed it with other bulk wine from the Margaux region. But the 2009 vintage had changed things considerably. That year’s third wine tasted so good, that Mentzelopoulos decided to retain it all, giving her the option of selling it as a Château Margaux wine when it was deemed “pleasurable to drink.” In each of the subsequent two years she and her team sampled the 2009 third wine and were not disappointed, which led to keeping a portion of what was left after the first and second wine assemblages of the 2010 and 2011 vintages for similar purposes. _______________________________________________________________________________________________________ Professor Elie Ofek and Research Associate Eric E. Vogt prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 513-107 Château Margaux: Launching the Third Wine When the 2009 third wine was tasted in early 2013, it was quite obvious that it would be ready for commercial sale by early fall. What was less obvious was how best to market it. Mentzelopoulos, Pontallier and Valance had been engaged in heated debates for several weeks on the matter. One straightforward option they contemplated was to sell the third wine to the Bordeaux merchants, called négociants, and entrust them with maximizing the market opportunity. Early conversations with a number of prominent négociants suggested that they would be delighted to do so. A different option was for Château Margaux to develop a complete marketing plan for the new offering. Although this option seemed attractive at first, the more they dug into it the more questions began to surface. Who should be the target market for the third wine? What should be its brand image relative to the château’s first and second wines? What were the best channel and communication approaches? What price should the consumer expect to pay for a bottle? Even seemingly simple issues, like what name to give it and what color to select for the label, proved difficult to resolve. Unlike reaching consensus on the assemblage for the château’s traditional wines, a process she had been overseeing annually for over 30 years, reaching consensus on the launch strategy of an entirely new wine was something Mentzelopoulos had never done before. The Global Wine Industry As of 2013, the global wine industry was estimated between $60-65 billion in revenues annually, with hundreds of thousands of wineries across the globe producing over 30 billion bottles.1 Supply Few barriers existed to making wine, as virtually anyone between the latitudes of 30 and 50 degrees in both hemispheres, with a reasonably warm and dry summer, could plant a varietal of the common grape vine in their back yard. Yet until recently, almost all wine was made in Europe, with France and Italy as the main “Old World” producers. This pattern changed in the second half of the 20th century, as wine making dramatically increased in the New World, which primarily consisted of the US and southern hemisphere countries. Names like André Tchelistcheff and Robert Mondavi shaped the fine wines of Napa Valley, while Ernesto and Julio Gallo built up volumes of table wines in the Central California Valley region. In the 1980s, Argentina became one of the largest producers of wine in the Americas, and Chile began building sizable domestic and export wine businesses. In the 1990’s, Australia harnessed large tracts of land in the south and declared wine an export imperative. New Zealand followed suit, leading with its sauvignon blanc from the Marlborough region. By the turn of the 21st century, New World producers began taking meaningful market share of global wine exports from Old World producers. (See Exhibit 1 for data on worldwide wine production.) The increased number of wine producing locations resulted in excessive quantities supplied to market, forcing many wine makers to lower prices, curb yields or exit the business altogether. In several countries, such as France and Australia, the government actively stepped in. Measures ranged from subsidizations to help clear excess capacity, to imposing restrictions on the planting of vines. Indeed, between 2008-2011 tougher EU policies led to 269,000 hectares of vines being dug up.2 Global wine exporting was dominated by EU countries, with Italy, France and Spain accounting for 55% of all wine traded by volume, while Argentina, Chile, Australia and New Zealand made up roughly 33% combined; the US accounted for 8% of exports. As for wine importing, the UK and Germany were the largest by volume, followed by the US. Fine wine tended to be exported in bottles to areas of high willingness to pay, whereas low-end wines were often shipped in bulk in containers. It was common practice for large UK retail chains to import bulk wine, and then bottle and sell it 2 Château Margaux: Launching the Third Wine 513-107 under their own private labels; a trend that was growing in other countries as well.3 Demand Global demand for wine was highly uneven. Annual per capita consumption in 2012 was still the highest in Old World countries such as France, Italy, Portugal and Spain, yet was gaining momentum in other parts of the world, such as Australia, the US, and China. In 2011, for the first time, the total volume of wine consumed was higher in the US than it was in France. (See Exhibit 2 for trends). In many European countries, wine was tied to a tradition that incorporated it into everyday life and was a common part of family meals. However, the erosion of typical family structures and a movement away from alcoholic beverages were undermining this tradition, leading to a decline in wine consumption in recent years. By contrast, in many New World countries wine consumption was more occasion-driven and took place away from home, and there was also a marked correlation between the tendency to drink wine and various demographics. In countries like the US, UK, and Australia wine drinkers tended to be older, have higher disposable income, greater education levels, and were female.4 Consumption location impacted spending. In the US, for example, about 50% of wine purchases by dollar amount occurred in bars and restaurants (called “on-premise”). But because of the high mark-up at these venues, this represented only about 20% of volume sold.5 The 80% of wine volume purchased “off-premise” was through liquor stores, grocery stores, fine wine shops, domestic wineries that sold direct, and increasingly internet retailers, such as Wine.com and Lot18. Although per capita wine consumption in China was considered low by western standards, its pace of growth over the last five years was impressive— more than triple of that in the US. In the past decade wealthy Chinese developed a taste for fine wine and in 2008 Hong Kong eliminated all taxes and restrictions on wine imports. These factors created a surge in demand, and by 2012 China displaced the UK as the fifth largest market by volume, with nearly 2 billion bottles consumed. It became common for affluent Chinese to buy an expensive wine for a special occasion or for gifting. For example, business deals were often sealed by opening a first-growth Bordeaux wine. There was also a very active after-market in China, with prices of leading wines often quadrupling in the space of three years’ time. For instance, a 12-bottle case of Château Lafite Rothschild 2009 recently sold for £43,000 in a Hong-Kong auction, and counterfeiters were paying up to $450 for an empty bottle of a high-end wine, refilling it with cheap wine and reselling it as an original at market prices. As one wine dealer put it, “This is always going to be a danger when people are drinking not out of passion but because they think that fine wine is what they should be seen drinking.”6 Buyer Behavior and Influencers The vast range of wine prices, from under €3 at a local French supermarket to upwards of $3000 at a high-end Chinese restaurant, suggested considerable heterogeneity in consumer wine buying patterns. Several criteria seemed relevant for segmenting wine buyers: Drinking frequency, information sources, consumption setting (private vs. social), purchase channel, and price sensitivity. A recent study partitioned wine consumers into six segments: Traditionalists, Enthusiasts, Image Seekers, Savvy Shoppers and Overwhelmed. (See Exhibit 3 for a description of each segment.) Fine wine buyers were often categorized as either “connoisseurs” or “luxury” consumers. The former tended to be knowledgeable about wines and able to discern between different regions and vintages; their sophistication and appreciation for quality were a source of pride. Luxury consumers, on the other hand, typically lacked deep knowledge of wines and their choices were intended to portray an image of wealth and stature. Many attributed the run up in prices of fine wines to luxury buyers in emerging markets, such as China and Russia. A third, but growing, segment of premium 3 513-107 Château Margaux: Launching the Third Wine buyers were willing to spend more on wines that fit their desire to be perceived as distinctive, trendy and adventurous; as one blogger put it: “A fashionable wine from a faraway region that allows them to stand apart, will get this group reaching for your bottle (and their wallet).”7 Taste and quality were important criteria in wine selection. However, because wine is an “experience good,” the ability to assess these attributes prior to purchase is limited. Although sampling was sometimes possible (for example, on a visit to a winery), for the majority of purchases consumers used extrinsic cues. Some relied on previous consumption experiences, while others held preconceived notions of where and when good wines were made. Many trusted the advice of others to learn about wines they might like and to reduce the risk of buying an unsavory bottle; especially since the relationship between wine quality and price was often seen as distorted. Recommendations could come from friends, retail sales associates, sommeliers, or wine journalists. Critics were yet another group with a strong voice, and the one with perhaps the most influence was Robert Parker. In 1978, Robert Parker Jr. was working as an attorney at a bank in Baltimore, Maryland. His passion for wine led him to start a newsletter called the Wine Advocate that year. In 1983 Parker had the opportunity to taste the 1982 vintage in the trade tastings held in Bordeaux. The established critics were unimpressed with the new vintage, commenting that the wines lacked acidity and tannic structure, were not age worthy, and unlikely to hold their fruit flavors over time. Parker disagreed. His descriptions and ratings of the vintage captured the enthusiasm of the emerging US market for Bordeaux. By the time the 1982 vintage was bottled and tasted by consumers in 1984, the world sided with Parker, and prices were reset to a much higher level than a year earlier. His newsletter jumped in circulation and he decided to quit his job at the bank to work full time on his passion.8 Each year Parker sampled around 10,000 wines and published his comments and rating scores in his newsletter. He assigned each wine a number between 50 and 100, awarding 50 points for “just showing up,” up to 5 for color and appearance, 15 for aroma, 20 for flavor and finish, and 10 for overall quality or aging potential.9 When asked how he was able to apply a seemingly objective standard for the many wines he tasted, he replied, “A wine goes in my mouth, and I just see it…The textures, the flavors, the smells they just jump out at me.10” From the US to Hong-Kong, Parker’s impact was felt throughout the wine eco-system; wines could see their price tumble on a bad rating or skyrocket on an especially good score. Wine makers commonly believed that, “If my Parker rating is under 90, I cannot sell it, if it is over 90, my traditional customers cannot buy it!” Other well-known critics included James Molesworth of the Wine Spectator and Jancis Robinson of the Financial Times. The Wine Advocate and Wine Spectator ratings, which did not always agree, were often displayed in retail stores or restaurants (“WA 90/WS 92”).11 Some in the industry didn’t approve of these singlenumber ratings and felt they treated wine like a basketball game. They believed critics like Parker wielded too much power and pushed the industry in the direction of their particular preferences. The Bordeaux Wine Region In French, “Bord” “d’eaux” means “beside the waters.” Bounded by the Bay of Biscayne on the west and the Gironde estuary on the east, much of the Bordeaux wine region is a large peninsula surrounded by water, which serves to mediate temperature fluctuations, thus improving conditions for growing grapes (see Exhibit 4 for a map of the region). The area north of the city of Bordeaux and west of the Gironde is referred to as the “left bank.” Here the soil is mainly gravel and sand, a combination well suited to develop the tannins of the Cabernet Sauvignon grape. The region to the east of the Gironde is referred to as the “right bank.” The soil there contains more clay and limestone deposits, favoring the nourishment of Merlot and Cabernet Franc grapes. Bordeaux is the largest “origin-controlled” wine region in France and has about 60 “appellations,” or named sub-regions, in 4 Château Margaux: Launching the Third Wine 513-107 which wine is produced. Bordeaux consists of over 11,000 châteaux, 118,000 hectares of vineyards, and produces on average 730 million bottles of wine a year.12 The vast majority of this wine was sold in supermarkets for less than €10 a bottle. But the leading wines sold in specialized shops and upscale restaurants around the world at prices that often exceeded €1,000 per bottle. Bordeaux fine wines were typically blended from different grape types, a process believed to add complexity in texture and flavor, and tended to improve with age, sometimes for several decades. The 1855 Classification In 1855, Napoleon III decided to hold a World Fair. He asked the Bordeaux wine merchants, or négociants, to send “the finest Médoc wines to Paris, and to classify them so the very best could be easily distinguished.13” Faced with this task, the Négociants Council invoked a trusted metric: market prices. They reviewed prices that had been recorded since the 17th century and created a fivetier ranking or classification scheme: Premier Cru, Deuxième Cru, Troisième Cru, etc. They declared the wines from the Châteaux of Lafite, Latour, Margaux and Haut-Brion as Premier Cru, or first-growths. Although wine critics voiced reservations from time to time as to whether this ranking was still valid over a hundred and fifty years later, often proposing alternative rankings, the general opinion was that the 1855 classification got it right—the superiority of the “terroir” at the first-growth estates would always come through. This French term referred to the summation of the soil, the sub-soil structure, the tilt of the vineyard, the drainage properties and the position of the water table. Vineyards that make their vines “work hard,” to send out roots through difficult soil to find water and nutrients for their grapes, tend to make more concentrated juice. Vineyards that are sloped towards the river but not beside it, tend to drain well and keep the grapes from getting bloated with water after a rainstorm. All of these factors combined to favor some parcels of land over others. The vineyards of the first-growth estates were believed to be blessed with respect to these characteristics. Common belief is that terroir trumps technique. Yet viticulture experience, grape selection during harvest, and careful winemaking all contributed to great wines. And several châteaux had consistently punched above the weight of their allotted “growth ranking.” For example, Léoville-Las Cases, Palmer, Lynch-Bages, Pontet-Canet, Cos d’Estournel, and Ducru-Beaucaillou were often referred to as “Super Seconds” for their outstanding wines. Nevertheless, there had been only one change to the 1855 Classification. In 1973, Château Mouton Rothschild was elevated from Second to First Growth, in a complex and political process. (See Exhibit 5 for information on first growths.) The Sale and Distribution of Fine Bordeaux Wine In keeping with a time-honored tradition, the leading Bordeaux châteaux distributed their wines through the négociants. And although most wineries sold their wines after bottling, the top 50 or so châteaux in Bordeaux sold the majority of their wine while still in barrels in an en primeur, or futures, market system. For example, the wine produced from grapes harvested in the fall of 2012 would only be delivered by the châteaux in late 2014 or early 2015, but Bordeaux négociants were given the opportunity to purchase allocations of it during the spring of 2013. The sale of wine futures to these merchants came on the heels of an annual tasting ritual. In early April, the leading châteaux hosted a week-long event, informally called “en primeurs week,” where journalists, critics, importers, and merchants were invited to taste samples of the newest vintage still in barrels. The industry waited anxiously for the top critics to place a score on each of the hundreds of wines they tasted. Mentzelopoulos described the scene and its pricing implications, “We do our best during en primeurs week to feel the excitement level for our wines. We pay close attention to the chatter of the négociants and wine critics. We also factor in our yields and assessment of consumer trends and global economic 5 513-107 Château Margaux: Launching the Third Wine conditions. This helps us set the price.” Valance added, “Once we have all this information we also check which of our past vintages received a similar critic evaluation. The release prices for those wines were set in expectation of future demand, but the popularity and willingness to pay for them could differ considerably once consumers tasted them. Hence, we look to see what those previous vintages sell for at retail now. Then, given typical markups by the various channel members, we back out what price makes sense for us to charge négociants for the new vintage.” From year to year the opening en primeur release prices could vary wildly, from a low of €60 all the way up to €500 per bottle. (See Exhibit 6 for Parker scores and en primeur prices for Château Margaux wines.) The new vintage was sold in several offerings, called tranches, during the late spring. Hundreds of négociants were eager to buy classified growth wines. The châteaux had to decide which merchants to sell to, what quantity to allocate, how much, if at all, to keep for the second and third tranches, and whether to hold back some wine in their own cellars to sell in years to come. With a good vintage, the châteaux would release a limited quantity at a first tranche price. Reactions, if enthusiastic, usually resulted in successive offerings at much higher second and third tranche prices. In average-quality years there would be only one tranche. The châteaux dealt with a limited number of négociants and relationships mattered. Those merchants that had shown commitment to the château’s image, sold to reputable importers in a number of important markets, and that came through in good as well as bad years were favored. The first-growth châteaux typically held back some of their first and second wine production each year, usually in the range of 10-20%, and sold it to the merchants after bottling. Mentzelopoulos summed up the process, “Because market and weather conditions varied so much from year to year every vintage is like the IPO of a new company, and the négociants are in a position to invest in its shares. We have to decide how many shares to put up and at what price.” After agreeing to purchase allocations from the châteaux, négociants quickly turned to large importers and distributors around the world and re-sold part of their futures. In turn, these channel members sold to smaller distributors and retailers in their local markets. Valance estimated that each player in the chain sold about 80% of their allocation. Négociants marked up futures by about 15-20% while other players in the chain by 10-15% depending on the tranche (see Exhibit 7). Mentzelopoulos declared, “Because the market value of first-growths can climb so much over time, each player stashes away some to make more money than in the en primeur market. Many people wonder whether these margins truly reflect their costs of doing business.” Indeed, on the quantities held back négociants’ profits could more than double for the same vintage depending on when they sold it. The use of négociants dated back to the 18th century. The practice spared châteaux owners from the commercial aspects of the business and let them focus on winemaking. Owners remained “behind the scenes” and were thus not held accountable for final price fluctuations or product availability. Some defended the négociants’ role, observing that they had the scale economies to maintain a global sales force, develop new markets quickly and deal with hundreds of importers, some of whom might not pay on time or be of dubious reputation. Moreover, the leading châteaux were often able to sell their entire production in one day and collect the cash almost two years before shipping a single bottle. However, many regarded the négociants as an anachronistic phenomenon, arguing that the highly profitable châteaux had less need today for a financial buffer, and personally knew many of the importers and key global purchasers. Moreover, due to global warming and advanced viticultural and oenological practices, truly “bad” vintages were rare. “The négociants’ job has gotten easier yet their profits have increased,” Valance quipped. Lastly, the Internet had emerged as an efficient vehicle for direct communication and sales, which could replace many functions of the négociant. 6 Château Margaux: Launching the Third Wine 513-107 Château Margaux The Château Margaux estate was located on the left-bank of the Gironde estuary, in the heart of the Médoc region (see Exhibit 4). Although ownership records of the land date back to the 12th century, the estate’s reputation for great wine was established in the 16th century by the Lestonnac family. Future owners continued the tradition of exceptional winemaking and, fueled by strong demand for Bordeaux wines by the British, Château Margaux experienced a golden age during the 18th century. The estate changed hands several times, and it was in 1810 when new owner, the Marquis de la Colonilla, redesigned the estate’s buildings. The result, which constitutes the property seen today, was considered an architectural masterpiece. The estate’s castle (see Exhibit 8 for a photo), nicknamed the “Versailles of the Médoc”, was placed at the center of a small “viticulture city.” On one side of it was the tradesmen’s yard and on the other the cellars and vat room. In 1977 André Mentzelopoulos, owner of a successful French supermarket chain, purchased Château Margaux for about $16 million. At the time, Bordeaux wines were experiencing a decline in popularity. The estate had been up for sale for over two years with little interest. But André immediately fell in love with the property and believed he could restore its glory. The conservative Bordeaux community was taken aback that one of the most prestigious châteaux in France had fallen into the hands of a Greek. However, their skepticism was soon put to rest as he orchestrated a complete overhaul of the vineyards, improved drainage, built the first underground cellar, and initiated new plantings. He re-introduced the château’s second wine, Pavillon Rouge, which was created in 1906 but forgotten for years, and redefined the Pavillon Blanc white wine. The estate’s 1978 vintage, the first he had overseen, was recognized as exceptional and one of the best that year. André’s vision, attention to quality and innovation inspired many Bordeaux winemakers. A Dynamic-Duo Takes Control Unfortunately, André Mentzelopoulos died abruptly of a brain aneurism in 1980. Corinne, his 27year-old daughter, inherited the estate. She felt compelled to follow in her father’s footsteps, “We continued my father’s work out of love for Margaux; we simply didn’t have the right to let it fall.” In 1983, she hired Pontallier to succeed the retiring general manager, Philippe Barre. Pontallier received a doctorate degree from the prestigious Talence Institute of Oenology in Bordeaux and was 27 years old when he applied. Mentzelopoulos recalled, “The other leading châteaux would have dismissed Pontallier’s application as he had no experience. But I was impressed by his entrepreneurial spirit, his passion for Bordeaux wines, and his commitment to improvement. I did not hesitate to hire him.” Fairly quickly the Mentzelopoulos-Pontallier combination proved to be a winning one. Practices that would become commonplace only in the 1990’s were ushered into Château Margaux in the 1980’s. Ideas, like waiting beyond sugar ripeness before harvesting, strict temperature control during fermentation, and novel techniques for extracting softer tannins, led to finer wines. Mentzelopoulos reflected, “Paul and I always believed in the potential for increasing first-growth wine quality. One of my proudest moments was when our picture made the Wine Spectator cover in 1984.” Buoyed by Parker’s highly favorable reviews, Americans’ newly found enthusiasm for classified first growths and the rekindled interest by connoisseurs in the UK and Germany, the leading Bordeaux châteaux saw an explosive rise in demand from the early 1980s onwards. The enthusiasm in the west for these wines was but a precursor to the astonishing fascination from the east in subsequent decades. Mentzelopoulos commented, “Our wine, even though it had been appreciated for centuries, had never known such success; enthusiasts from all over the world were coming to visit, taste and compare.” Among the many distinguished visitors were the president of China, Hu Jintao, the King 7 513-107 Château Margaux: Launching the Third Wine of Sweden, Carl XVI Gustaf, and Bono, “after a few bottles of Château Margaux 1982 we were all singing U2 songs at the top of our voices,” Mentzelopoulos recounted with a wide smile. Making Château Margaux Wine Although the estate grounds comprised some 250 hectares, the terroir suitable for growing grapes was limited. Specifically, 80 carefully chosen hectares were devoted to vines for red wine and 12 hectares for white wine. In 2013 the estate employed about 100 people, mainly in production. Other expenses included equipment and maintenance. An industry expert estimated that a bottle of firstgrowth wine cost between €25-€50 to produce depending on weather, yield and selectivity. Dô Chi Nam commented, “In a vintage like 2009 things went smoothly. Spring rains came in time for vine flowering to occur in May, summer was warm but not oppressive, the grapes ripened on schedule in September and the harvest was completed before fall rains began. Costs were on the low side that year. But with the 2008 vintage, early fall rains delayed ripening. Had we not reduced the number of grape clusters per vine we might have lost the harvest altogether. Costs were higher that year.” Over the past thirty years, management had been trending towards putting less of the production in the first and second wines and also reducing yields overall in the vineyard, concentrating the flavors in the remaining grapes. Thus, while 51 hectoliters of wine were produced per hectare in the 1980s, this number had gone down to 35 by 2012. These decisions had led to fewer bottles, but with increasing quality. Pontallier explained, “In responding to the market we found ourselves in a vicious cycle. The more consumers were willing to pay for a Bordeaux first growth, the more incentive we had to increase our quality by being more selective, which resulted in stronger reviews and hence even higher willingness to pay, which prompted us to be even more selective, and so on.” Marketing Château Margaux Wine Until recently, if you had asked management about marketing, you would have gotten a simple answer: “we don’t do marketing.” Mentzelopoulos believed the 1855 classification, along with the quality and scarcity of the product, created the allure for wine aficionados. The château relied on the channel to serve as the distribution and marketing arms for its wines. Yet Mentzelopoulos took note of demand shifts, “Twenty years ago 100% of our wines were bought by connoisseurs. Ten years ago that changed to 80% connoisseurs and 20% luxury buyers. Today the split is 60% vs. 40%, and those 40% luxury buyers are mainly from China.” Valance estimated that in 2005 mainland China and Hong-Kong accounted for 4% of sales, but by 2012 that number had climbed to 35%. Conversely, sales in Japan and the US had dropped by about 10%; sales in France remained relatively flat. Dealing exclusively with the négociants simplified life, but it meant that Mentzelopoulos and her team were far removed from the end consumer. Valance outlined some recent steps taken to change this situation, “We began organizing events in key markets and invited journalists, wine experts and channel members. We made sure a representative from Château Margaux was present and we staged wine tastings. We engaged with the media and hired a PR person.” Valance estimated that 2000 bottles of Château Margaux wines were allocated to these events every year. But perhaps the biggest marketing initiative was in China. In 2010 the château appointed a dedicated person, which they referred to as an ‘ambassador’. Pontallier elaborated, “China is a large country with many distributors and retailers. We wanted to make sure they were aware of the quality of our wines, and we needed to better communicate the value of our brand.” The ambassador in China met with channel members, wine professionals and journalists to build relationships. He also organized events—the most spectacular to date was a gala dinner on the Great Wall of China. Since 2012, Château Margaux expanded the “ambassador” program to the UK and the US. 8 Château Margaux: Launching the Third Wine 513-107 The Third Wine Opportunity The idea to sell a third wine was planted in Mentzelopoulos’ mind in 2008 by a young Chinese visitor, frustrated at how difficult it was to obtain first-growths in China. Mentzelopoulos dismissed the idea at the time, “We didn’t think the quality of what was left after making our first two wines was good enough. Moving ‘downstream’ also went against everything we had done since my father acquired the château—to relentlessly increase quality and build a reputation for spectacular wines.” But then came the 2009 vintage. Pontallier described the sequence of events, “We were working on the assemblage of that vintage, which was one of the best we could remember, and realized that by being more selective we could bring our first and second wines to a truly exceptional level, which we believed was something the market wanted. A byproduct of that decision was that the volume of the third wine was more than 20% of the entire production. When I tasted it I was pleasantly surprised. It was so good that in some past mediocre years it could have easily qualified as our second wine. It seemed a shame to sell it as bulk, so we decided to keep it and see in a year if it was worth bottling.” As they thought about the prospects of the third wine, various trends struck management as noteworthy, Pontallier elaborated, “We had no control over final prices and in the past few years our second wine’s price had tripled. In talking to several merchants and experts it seemed that Pavillon Rouge went from being perceived as ‘the Grand Vin’s little brother,’ made from grapes that weren’t good enough for the first wine, to having a reputation as a high quality wine on its own.” Mentzelopoulos added, “Our core markets were shocked by the recent price escalation and believed they were unduly inflated by luxury consumers. Our second wine began disappearing from retail stores and restaurant wine lists, similar to what had happened to our first wine a few years ago.” A big “moment of truth” came in early 2011 when two tastings had to go well for the third wine concept to be further pursued: the 2009 vintage had to show it was aging well in the barrels and the recent 2010 vintage third wine had to be of sufficient quality. Both passed with flying colors. There was no doubt about what to do with the 2009 third wine, as Pontallier announced, “Bottle it!” The Future Marketing of the Third Wine Mentzelopoulos and her team brainstormed about what to do when the third wine was ready to hit the market. The simplest option was to sell the bottled third wine to a select set of négociants, in exactly the same way the château gradually sold the 10-20% of first and second wine production that it held back from the en primeur process. Valance explained the appeal, “We have a good sense of these merchants and what drives them, they will accept a high price for the third wine because they want allocations of our first and second wines. They would likely pay us up to 50% of what they pay for Pavillon Rouge.” Mentzelopoulos added, “I don’t think they will have a hard time selling this wine. This option can maximize profits, but most of the wine will probably end up in China.” As the team thought more about the négociant option, they debated what it was they hoped to achieve with the third wine. Pontallier voiced his opinion, “Our wines have become inaccessible to our core customers in traditional markets, like the US, UK, Japan and France, who used to buy our wines regularly. We need to bring them back; a third wine can do that.” Valance expressed a different view, “We do need more presence in traditional markets, but we should reach consumers new to the wine-loving world and introduce them to our brand.” Mentzelopoulos weighed in: I see the merits of going after each of these segments. I would like to regain the hearts of the loyals who have been ‘priced out.’ They admired our wine because of its uniqueness and excellence. But we need to think hard about how to position a third wine to them, as they 9 513-107 Château Margaux: Launching the Third Wine ‘grew up’ on our first and second wines. We can’t allow a perception that this is an inferior product. It is also important to breed the next generation. These are consumers with a certain profile and may in the future want to buy our top wines, despite the high prices; the third wine should let them understand what the magic of Château Margaux is all about. Place To target specific consumers, management believed it would have to bypass the négociants. This meant contacting importers or large distributors directly to try and reach the desired end consumers at the right time and place. Valance believed one such promising “place” could be restaurants, particularly high-end or trendy ones. He elaborated, “We would canvas the metropolitan cities we decided to go into and find the right venues for our wine. Sommeliers would be critical here by featuring our third wine on lists and promoting it to guests.” An alternative would be to focus on wine shops, primarily boutique ones. Sales associates could bring the third wine to the attention of customers, particularly those they knew intimately and who would find such an offering attractive. In France, Château Margaux could sell directly to consumer-facing outlets, but management felt it should work with one large distributor who would sell to restaurants or stores. Other EU countries would also involve two-steps. In the US, imported wine had to go through a three-step distribution scheme that involved an importer and state distributor prior to reaching the retailer or restaurant venue. Management assessed that importers or large distributors expected to earn a 25% margin, retailers a 30% margin and restaurants a 60% margin. US State distributors expected a 28% margin. Price Management had to come up with a price to charge the first channel partner buying the wine from the château— be it the négociants, importers or large distributors. If bypassing négociants, the team felt they should approach this task by working in reverse, that is, determine the price end consumers should pay and then back out the price to charge based on typical channel margins. Valance remarked, “We think the price consumers pay should fall somewhere between $100-$150 per bottle. If we lean towards $100, we are perhaps sending a message of affordability or ‘value for your money.’ At closer to $150, we are perhaps preserving the upscale image of our wines.” He continued, “Although we don’t have immediate control, we could select channel partners that shared our vision. We would explicitly articulate our strategy and monitor where our third wine ended-up and at what price. If things didn’t go according to plan we would consider switching partners the following year.” One benchmark was Latour’s third wine, Pauillac de Château Latour, which had been offered consistently since 1990. Its price had steadily climbed and a strong vintage bottle cost between $100$150 at retail, with much higher prices at restaurants. As far as Valance could tell, Latour used two négociants: one sold exclusively to the French market and the other to importers and large distributors abroad. Mentzelopoulos asserted, “The quality of our third wine should not be below that of Latour’s and our price should not be above theirs.” Promotion Proactively marketing the third wine meant influencing key decision makers. For example, having the wine offered at prestige restaurants required convincing sommeliers to order it. But the attitude towards Bordeaux wines among sommeliers seemed to have turned sour in recent years. Such was the case at the sleek Manhattan restaurant Rouge Tomate, where many Bordeaux wines had been taken off the list. In an article titled “Bored of Bordeaux” the beverage and wine director of the restaurant noted that authenticity in winemaking “is what Bordeaux used to be before it became a brand,” and that the traditional Bordeaux châteaux from Pauillac and Margaux could benefit from less “snob appeal.” In explaining the backlash against Bordeaux first growths, Eric Asimov, the New York Times wine critic, cited ”monstrous prices” and complacency toward the US market, adding that “They perhaps imagined that they would always sell all the wine they could want through the enthusiasm of Parker, not realizing that a generational shift was occurring.14” 10 Château Margaux: Launching the Third Wine 513-107 Mentzelopoulos acknowledged the negative attitude among sommeliers, “We became too expensive for them and it got harder and harder to get supply. They are better off telling a story that first growths are overpriced, not trendy and boring.” She believed sommeliers would welcome a reasonably priced third wine from Château Margaux, “I wouldn’t put my hand in the fire, as we have not done formal market research, but I think they will love it. Our third wine will give them a new and better story to tell, it will allow them to surprise and delight their clients.” Valance added, “If we hand pick a select set of restaurants in each major city we wish to reach and commit to sommeliers through our distributors that they will get consistent supply of the third wine, they will feel special.” Brand Name Mentzelopoulos asked her team to carefully consider what name to give the new wine, “How we call it will create expectations in the marketplace, including for those buying our first two wines,” and argued for a name that conveyed simplicity and authenticity. Pontallier advocated for a name that signaled that this was, after all, the third wine. One proposal was “Margaux du Château Margaux,” other names that had been floated were “Petit Margaux du Château Margaux” and “Esprit du Château Margaux” (“petit” means small or little; “esprit” means spirit.) Suggestions also included finding a way to leverage the Pavillon name or crafting an entirely new moniker. Product and Production Château Margaux was blessed with the 2009 vintage both in terms of the quality and quantity of the third wine. With the 2010 vintage, management decided to be more selective, hence less than half of what was left after blending the first two wines was deemed of high enough quality for the third wine, while the rest, now constituting a fourth wine, was sold in bulk. The overall lower quality of the 2011 vintage resulted in even less bottled third wine (see Exhibit 9 for wine production). This fluctuation in quantity raised several issues. In the short term, as there were fewer third wine bottles from the 2010 and 2011 vintages, the château faced a decision on how many 2009 vintage bottles to release in the upcoming launch. Valance proposed an approach, “If we want a consistent supply every year, perhaps we should not sell all the 2009 third wine bottles in 2013 and wait to release some of them with the 2010 vintage.” But what was the “right” amount to sell to smooth out the supply across robust and scanty years? And what if there were years where practically none of the wine left after blending the first two was of sufficient quality? In the long term, what if the third wine was so well-received that there was demand for more of it? How could supply be increased? Pontallier knew he could be even more selective in making the first and second wines, which would result in a greater “pool” from which to make the third wine—but was that wise? Increasing the yield of the existing plots was another option, but Mentzelopoulos was concerned about jeopardizing quality. She urged her team to think “outside the château box.” One possibility was to buy grapes or bulk wine from other estates within the appellation. Some second and third classified growth châteaux sold good quality bulk wine (see Exhibit 10 for bulk wine prices). This would allow retaining the “Margaux” appellation designation on the label. A more radical route would be to purchase additional land or even an entire estate. For instance, between 2005-2012 Latour had purchased individual plots within the Pauillac appellation to add 20 hectares and boost its third wine production. In 2011 second-growth Château Lascombes (118 hectares) sold for €200 million and in 2012 third-growth Château Calon Ségur (74 hectares) sold for €170 million.15 Because French regulations allowed classified growths to add hectares from within their appellation and sell the wines under their own name, an industry insider recommended that Château Margaux consider buying an estate in the Margaux region. For example, although the terroir at Château Malescot St. Exupéry was not considered as good, some plots of its first wine were comparable to Château Margaux’s second wine and other plots to the third wine. He believed that even if Château Margaux reduced yields at Malescot and was more selective, with bottled production going down by 10%, such an acquisition made sense (See Exhibit 11 for details on Malescot St. Exupéry.) 11 513-107 Château Margaux: Launching the Third Wine Pondering Other Moves Every morning I wake up and think— what am I missing? What can go wrong? - Corinne Mentzelopoulos Selling Wine to the “Masses” A number of first-growth châteaux had introduced wines targeted at a broad consumer base. The most prominent was Mouton Cadet. Disappointed in the quality of the 1930 vintage, Baron Philippe de Rothschild decided to sell Château Mouton Rothschild’s first wine of the vintage under a different name, Mouton Cadet, and at a lower price.16 The strong demand for the wine led him to offer it in subsequent years using grapes from all over the Bordeaux region to ensure supply. Demand kept increasing and by 2012 the wine sold between 12-15 million bottles a year in over 150 countries at an average price of $15 a bottle.17 The brand was aggressively promoted by associating it with wellknown events: Mouton Cadet was the official sponsor of a Winter Olympic games, famous tennis and golf tournaments (e.g., Roland Garros), and entertainment occasions (e.g., the Cannes film festival). The bottle’s label noted in bold font that it was made by “Baron Philippe de Rothschild.” Another example was Clarendelle, introduced in 2005 by Prince Robert of Luxembourg, owner of Château Haut-Brion. He commented, “[Consumers] might be overwhelmed by the number of wines coming from France or the so-called Old World but they want something that they can recognize…our background and history will give the consumer confidence and a promise of regularity of quality.18” Haut-Brion blended bulk wines from Bordeaux to create Clarendelle, which was named after Clarence Dillon, the Prince’s great grandfather who bought the estate in 1935. A bottle sold for about $20 at retail. Mentzelopoulos said, “I have heard that Clarendelle has not been a big success. Few consumers know who Clarence Dillon was, so the distribution pressured them to add ‘Inspired by Haut-Brion’ on the label; they also ran newspaper ads.” Valance noted, “I am not sure about the economics. They sell close to one million bottles a year. It probably costs them €3-4 to make each bottle and they flip it to the distribution for about €7-8. In the past we might have considered a similar launch, but now it may be too late as there are so many brands on the market.” First-Growths Go Global Château Mouton Rothschild was among the first to play in the global arena. In 1979 it formed a joint venture with Californian wine maker Mondavi to produce the premium wine Opus One. The label featured the signatures of Robert Mondavi and Baron Philippe de Rothschild and selling prices were typically $250-$300 per bottle depending on the vintage. Domaines Baron de Rothschild (DBR), which managed the famed Château Lafite Rothschild, was probably the most entrepreneurial among first-growths when it came to pursuing interests outside of Bordeaux. Under the direction of Baron Eric de Rothschild, DBR acquired the Los Vascos estate in Chile in 1988, partnered with Argentinian wine maker Catena starting in 1998 to co-produce CARO wine (CA for Catena and RO for Rothschild) and later the Amancaya and ARUMA wines, and bought Château Aussieres in the south of France in 1999. Perhaps DBR’s boldest move was to partner with a Chinese investment company to produce a fine wine in China’s Shandong province. Planting had begun by the summer of 2012 and the first wine production was expected in 2015.19 DBR had created a logo, which appeared on all its wines regardless of where they were produced (see Exhibit 12). The wines sold at various price tiers. For example, one could buy a Los Vascos Cabernet Sauvignon for under $10 at a local US wine store. A web of global distributors helped DBR brings its wines to market. 12 Château Margaux: Launching the Third Wine 513-107 Pontallier remarked, “Our skills and expertise are similar to Lafite’s. We could bring our knowhow and successfully run an estate in say South America. And I must admit it would be an intriguing challenge for our team.” But Mentzelopoulos cautioned, “I worry about spreading ourselves too thin. I can see why Mondavi wanted the Opus partnership, but what does it bring to Mouton Rothschild? As for Lafite, is selling cheap wines, which are directly associated with the Rothschild and Lafite names, good for their brand? There is a fine line between leveraging a brand and diluting it.” Latour Shakes the Fine Wine World In April 2012, immediately following the 2011 vintage futures market, Château Latour announced that it would no longer sell its wines “en primeur”. A Latour source said: “We want to kill the speculation side of the market.20” Many in the industry, such as James Miles, founder of Liv-Ex, reacted with bewilderment, “The decision is impossible to fathom. Not because it is bad for the market and the consumer, which it is, but because it makes no sense for the owners. When you can sell your wine for €500 per bottle in a single phone call…with minimal distribution or marketing cost…why would you want to change a thing? It is a high risk, low return strategy.21” Valance believed that for Latour, which was owned by one of the richest men in France, the motivation to get paid early to fund work on next year’s vintage was not strong, “and why settle for a lower price en primeur when a good vintage appreciates in value considerably over time?” Pontallier pointed out that Latour’s decision did not mean that it would not use the négociants to sell the wine after bottling. Mentzelopoulos commented, “We have seen prices come down to levels below the en primeur release price, for example when the economy slows. In addition, if a new vintage is hailed as exceptional, everyone wants to get their hands on it. This can cause a previous vintage with a similar Parker rating to ‘get trumped’ and lose value. Latour wants to sit on their wine till they feel demand for it peaks. But what happens if they find themselves sitting on hundreds of thousands of bottles because the price isn’t ‘right’? Will they come crawling back to the négociants to take it?” Notwithstanding, Mentzelopoulos was intrigued by Latour’s move, “Every year we wonder about the merits of a distribution system that has not changed in 300 years and debate whether we should hold back more wine from the futures market than we currently do. Latour is serving as a guinea pig for us by in effect holding back 100% of their wine. I am dying to see how this experiment turns out.” Moving Forward Mentzelopoulos reflected on whether Château Margaux should follow in the footsteps of its peers, “My father left me with a jewel in the rough. We have tried to polish that jewel and we hope we have been a devoted steward of this precious terroir. People who drink our wines use words such as, ‘soft power’, ‘perfume’, and ‘harmony’ to describe their complex and subtle virtues. We bought the estate for $16 million and could sell it for much more today. Maybe that is what an MBA student would advise given the uncertainty on weather patterns, consumption trends, and shifts in critics’ opinions. Many in Bordeaux worry about the region’s popularity when Parker retires.” She concluded, “It boils down to whether I see myself in the wine business or in the Château Margaux business.” Mentzelopoulos had much on her mind as she pressed the first glass of wine she lifted from the assemblage table to her lips. She and her team had to carefully navigate the next few years. Although the destination was not altogether clear, it was becoming obvious to her that the marketing of the third wine fed into the complex mosaic of the château’s future. It was time to taste. 13 513-107 Château Margaux: Launching the Third Wine Exhibit 1 Worldwide Wine Production: Top 10 Producing Countries (thousands of hectoliters) 70000 60000 50000 40000 2000 30000 2005 20000 2011 10000 0 Source: Adapted from Statistical report on world vitiviniculture 2012, by the International Organization of Vine and Wine, http://www.oiv.int/oiv/info/enstatistiquessecteurvitivinicole#secteur, accessed on March 27, 2013. Exhibit 2 Per-Capita Wine Consumption in Liters (2007 vs. 2011) and Total Cases Sold (2011) 300 307 45 33 18 282 116 57 43 141 98 2011 2007 Total 2011 consumption in millions of 12-bottle cases 44 311 95 40 29 156 Source: Adapted from Grape expectations, March 22nd 2012, The Economist Online, http://www.economist.com/blogs/ graphicdetail/2012/03/daily-chart-15, accessed May 15, 2013. 14 Château Margaux: Launching the Third Wine Exhibit 3 513-107 US Wine Consumer Segments; % of total consumers (% of category spending) Enthusiasts: 12% (25%) ? Consider themselves to be passionate and knowledgeable about the total wine experience ? Entertain at home often and enjoy wine with friends ? Constantly seek additional knowledge and appreciate sophisticated wine information ? At retail, read labels and enjoy lingering in the wine section. Like to be offered both well-known as well as unique wine selections. On premise (=at restaurants) typically buy wine by the bottle Image Seekers: 20% (24%) ? For them wine is a status symbol. They only have basic wine knowledge, and are driven by awareness of the latest trends. They often use the internet as a key source of information ? When not sure about what to buy, they will typically go for the one that’s more expensive ? When going out to a nice restaurant, they will typically check out the wine list ahead of time online so they can impress their friends Savvy Shoppers: 15% (15%) ? Enjoy shopping for wine and discovering new brands and varietals on their own. Get a lot of personal satisfaction when they buy a great $15-20 bottle of wine and only pay $10 for it ? Shop in a variety of stores to find the best deals. Heavy users of coupons and rebates ? On-premise typically buy a glass of the house wine as it’s a better value for the money Traditionalists: 16% (15%) ? Enjoy wines from established wineries that they feel have perfected the art of winemaking ? Like to be offered a wide variety of well-known brands; influenced by marketing efforts ? Don’t try new brands often and shop at retail places that make it easy to find their preferred brands ? On-Premise always order wine brands with which they are familiar Satisfied Sippers: 14% (8%) ? Not very knowledgeable about wine. Usually buy the same brand they like, preferably domestic wine ? Don’t enjoy the experience of buying wine. Usually buy the same brand, and tend to shop at places that make it easy to find their preferred brands. Not interested in learning more about wine ? When dining out, typically order house wine and don’t worry too much about wine and food pairing Overwhelmeds: 23% (13%) ? Perceive that there are too many wines on the shelves. Sometimes will select a wine based on the label, but it’s confusing since they can’t always tell from the label how the wine will taste ? Look for wine information at retail that’s simple and easy to understand. They are very open to advice, so it’s frustrating when they go to a store and there is no one in the wine section to help them ? If it’s too confusing or there’s not any information, they won’t buy anything ? On-premise they are easily intimidated. Sometimes it’s safer not to order wine to avoid getting stuck with something that doesn’t taste good. Source: Adapted from Mike Vesath “What are wine enthusiasts looking for” The Wine Economist, April 5 2008. 15 513-107 Exhibit 4 Château Margaux: Launching the Third Wine Map of the Bordeaux Wine Region Source: Map copyright of Berry Bros. & Rudd, http://bbrblog.com/wp-content/uploads/2012/03/bordeauxmap.jpg, accessed May 13, 2013. 16 Château Margaux: Launching the Third Wine Exhibit 5 513-107 A Comparison of Bordeaux First Growths Château Lafite Rothschild Latour Margaux Haut-Brion Mouton Rothschild Baron Eric de Rothschild (and other family members) Francois Pinault, owner of Gucci, YSL and Christie’s auction house Corinne Mentzelopoulos Prince Robert of Luxembourg (and other family members) Baronne Philippine de Rothschild Pauillac Pauillac Margaux Pessac-Leognan Pauillac Red Wine Vineyard areaa 103 hectares 80 hectares 80 hectares 49 hectares 80 hectares Grape Varietals Planted 70% Cabernet Sauvignon, 25% Merlot, 3% Cabernet Franc, 2% Petit Verdot 75% Cabernet Sauvignon, 20% Merlot, 4% Cabernet Franc, 1% Petit Verdot 75% Cabernet Sauvignon, 20% Merlot, 3% Cabernet Franc, 2% Petit Verdot 50% Cabernet Sauvignon, 40% Merlot, 9% Cabernet Franc, 1% Petit Verdot 83% Cabernet Sauvignon, 14% Merlot, 3% Cabernet Franc Red Wines Produced: Name and Quantity (average ranges) First wine: Château Lafite Rothschild, 18-20,000 cases First wine: Grand Vin de Château Latour, 15-16,000 cases First wine: Château Margaux, 12-14,000 cases First wine: Château HautBrion, 10-12,000 cases First wine: Château Mouton Rothschild, 16-18,000 cases Second wine: Carruades de Lafite, 15-20,000 cases Second wine: Le Forts de Latour, 18,000 cases Second wine: Pavillon Rouge du Château Margaux, 14-16,000 cases Second wine: Le Clarence de Haut-Brion, 5-7,000 cases Second wine: Le Petit Mouton de Mouton Rothschild, 5-6,000 cases Owner Appellation Third wine: Pauillac de Latour, 6-9,000 cases 2009 Vintageb First wine: Parker Score 99 100 99 98 99 $1,530 $1,745 $1,280 $1,200 $1,100 Second wine: Parker Score 93 95 93 92 90 Price per bottle $335 $280 $185 $160 $195 Price per bottle Third wine: Parker Score 90 Price per bottle $97 Source: Jane Anson, Decanter.com, accessed May 15, 2013 and company data; 90plusWines http://www.90pluswines.com/Wine/1655E875/Latour/Pauillac-de-Latour-,-Third-wine-of-ChateauLatour.aspx, accessed May 22, 2013. a A hectare is a unit of area equal to 10,000 square meters (roughly the equivalent of 2.5 acres). b All prices are average US retail per bottle. The 2010 Latour third wine scored higher and was selling for $140. 17 513-107 Château Margaux: Launching the Third Wine Exhibit 6 Parker Scores, En Primeur and Current Retail Prices for Château Margaux Wines Parker Rating by Vintage 100 98 96 94 92 90 88 Château Margaux 86 Pavillon Rouge 84 82 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 80 En Primeur Prices and Current Retail Prices per Bottle (in Euros; €1=$1.32) Château Margaux Vintage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1st Tranche en primeur price (€) 120 85 60 120 80 350 270 200 110 450 500 300 Current price (€) 800 385 350 520 350 760 350 335 400 850 695 380 % increase 567 353 483 333 338 117 30 68 264 89 39 27 2000 2001 2002 Pavillon Rouge 2003 2004 2005 2006 2007 2008 2009 2010 2011 1st Tranche en primeur price (€) 22 18 16 23 18 30 30 30 22 50 90 75 Current price (€) 150 115 125 160 98 120 95 107 90 94 130 90 % increase 582 539 681 596 444 300 217 257 309 88 44 20 Vintage Notes: The estate also produced 12,000 bottles a year of the white wine Pavillon Blanc, and its current retail prices were similar to those of Pavillon Rouge. Current prices listed are average worldwide at retail. During 1991-1998, for a number of Pavillon Rouge vintages Parker ratings were not available; data for those years compiled from other critics. Source: eRobertParker.com, wine-searcher.com, accessed May 13, 2013, and company documents. 18 Château Margaux: Launching the Third Wine Exhibit 7 513-107 Channel en primeur Pricing of Château Margaux (Grand Vin) Wine Average Quality Vintage (2007) Château Bordeaux Merchant Importer/Distributor Retailer €200 (first tranche) €240 €260 €280 Exceptional Quality Vintage (2009) Château Bordeaux Merchant €450 (first tranche) €600 (second tranche) €750 (third tranche) Notes: €540 (first tranche) €660 (second tranche) €830 (third tranche) Importer/Distributor €620 (first tranche) €725 (second tranche) €915 (third tranche) Retailer €715 (first tranche) €800 (second tranche) €1000 (third tranche) 1. Formally, the châteaux had to work through a “Courtier” or broker who facilitated the sale to négociants and took a 2% fee. 2. In the US, an importer brings the wine into the country and sells it to distributors licensed to operate in each state. The state distributors sell to retailers. It was possible to bypass the importer by contacting each state distributor separately and using an importing clearing house that took a 3-5% margin. 3. Once bottles were delivered, actual retail prices could fluctuate over time depending on market conditions. In general, channel margins were higher when wine was not sold as futures. Source: Company data and estimates. Exhibit 8 The Château Margaux Castle Source: Casewriters. 19 513-107 Château Margaux: Launching the Third Wine Exhibit 9 Wine Production at Château Margaux (% of the Yield Used to Make Each Wine) Year % Château Margaux % Pavillon Rouge % Third Wine % Bulk Wine 2011 38 28 7-11 23-27 2010 38 38 8-12 12-16 2009 36 41 18-23 0-5 2008 36 53 - 11 Average 06-07 33 56 - 11 Average 03-05 39 56 - 5 Average 00-02 37 51 - 12 Average 97-99 41 49 - 11 Average 94-96 46 54 - 0 Notes: Average red wine production in hectoliters per hectare was: 51 in the 1980s, 48 in the 1990s, 44 in the 2000s, and 35 since 2009 (1 hectoliter=100 liters and the common bottle size contained 0.75 liters of wine). Storing and bottling the third wine instead of selling it in bulk bore an extra cost of €3-5 per bottle. Source: Company documents. Exhibit 10 Château Margaux Selling Price (€) per Hectoliter to the Bulk Wine Merchants Vintage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Price (€/hectoliter) 712 677 600 723 723 777 777 833 723 723 833 889 Notes: 1. If Château Margaux wanted to buy bulk wine from within the appellation, they could coordinate with a broker to purchase from specific estates (at a 2% broker’s fee). 2. If Château Margaux bought grapes or bulk wine from within the appellation, they could use the ‘Margaux’ appellation designation on the label but could not use its classified château as part of the name, i.e., they could not say “du Château Margaux.” 3. If Château Margaux bought bulk wine from other regions in Bordeaux, the designation would be ‘Appellation Bordeaux Controlee.’ 4. Among first-growths, Château Margaux was the only one where the name of the estate contained the name of the appellation. This complicated copying peers’ naming strategies. For example, if wine was externally sourced, it would be illegal to call the wine ‘Margaux Cadet’. Though it might be possible to use a different name altogether and note on the label ‘Inspired by Château Margaux.” Source: Company documents. 20 Château Margaux: Launching the Third Wine Exhibit 11 513-107 Malescot St. Exupéry: Parker Ratings, Prices and Estimated Production Third Growth (Troisième Cru) 23.5 hectares 50-55 hectoliters/hectare 60% 1855 Classification Vineyard Area Average Yield 1st Wine 2nd Wine 30% Bulk Wine 10% Vintage Parker Rating 1st Wine Current Retail Price ($) 1994 87 78 1995 90 96 1996 90 93 1997 82 52 1998 90 81 1999 90 87 2000 95 138 2001 88 70 2002 92 73 2003 92 89 2004 90 64 2005 97 155 2006 91 66 2007 89 58 2008 93 64 2009 96 118 2010 95 104 2011 92 52 Notes: The average retail price for Malescot St. Exupéry’s 2nd wine was about $30-$35. An industry expert estimated average production costs of €15 per bottle at Malescot St. Exupéry. Source: Data compiled from Stephen Brook, The Complete Bordeaux; Robert M. Parker, Bordeaux: A Consumer’s Guide to the World’s Finest Wines (Fourth Edition); eRobertParker.com and Wine-Searcher.com, accessed May 13, 2013; company and casewriter estimates. 21 513-107 Château Margaux: Launching the Third Wine Exhibit 12 Domaines Baron de Rothschild Logo on a Los Vascos Bottle of Wine The back label said: “Los Vascos, one of Chile’s oldest wine estates, is managed by Domaines Baron de Rothschild (Lafite), who began a comprehensive modernization and investment program in 1988. The 560 hectare vineyard is located in the Caneten valley of the Colchagua province which offers a healthy microclimate for its ungrafted pre-phylloxera Bordeaux rootstock. Under the direct technical supervision of the Domaines, Los Vascos is committed to producing the finest consistent and balanced wines whose elegance and harmony are to be shared with discriminating connaisseurs around the world.” Notes: The logo also appeared on the cork, the seal, and the back label of the wine. Los Vascos produced upwards of 500,000 cases of wine each year. Source: Casewriters and Pasternak Wines, 202013.pdf, accessed June 9, 2013. 22 http://www.pasternakwine.com/pdfs/Los%20Vascos%20Packet% Château Margaux: Launching the Third Wine 513-107 Endnotes 1 IBISWorld, Industry Report C1123-GL, Global Wine Manufacturing, December 2012. 2 Sybille de La Hamaide, “World wine output down, hit by weather and EU curbs”, Reuters, March 21 2013. 3 IBISWorld, Industry Report C1123-GL, Global Wine Manufacturing, December 2012 4 ibid 5 Vins de Provence, “The U.S. Wine Market: Facts & Figures”, January 2012, http://res.franceguide.com/us/press_2012/weblinks/vin_de_provence_facts_figures.pdf, accessed June 12, 2013; and Mary-Colleen Tinney, “Survey of Top On-Premise Wines Released,” Wine Business.com, http://www.winebusiness.com/news/?go=getArticle&dataId=44085, accessed June 12, 2013. 6 Malcolm Moore, “Empty wine bottles sell for £300 in China,” The Telegraph, Jan, 7 2011. Bruce McGechan, May 31 2011 http://www.mylocalwinestore.com/winery-marketing/wine-research/, accessed April 4 2013. 7 8 William Langewiesche, The Million Dollar Nose, The Atlantic Monthly, December 2000. 9 The Wine Advocate Rating System, https://www.erobertparker.com/info/legend.asp, accessed June 8, 2013. 10 William Langewiesche, The Million Dollar Nose, The Atlantic Monthly, December 2000. 11 Wine Ratings Don’t Tell the Whole Story, New Orleans Times-Picayune May 20 2005. 12 Julia Pittam, Chinese connoisseurs buy up Bordeaux’s wines, BBC News, February 17 2013, http://www.bbc.co.uk/news/business-21292824, accessed June 8, 2013; and the Office de Tourisme de Bordeaux, http://www.bordeaux-tourisme.com/pl/coup_coeur.pl?lg=uk&id=239, accessed June 8, 2013. 13 Dewey Markham, 1855: A History of the Bordeaux Classification, John Wiley & Sons. 14 Alice Feiring, “Bored of Bordeaux”, Out & About, January 2013. Rebecca Gibb and AFP, Insurance Giant Buys Top Bordeaux Château, Wine Searcher, posted July 4, 2012, http://www.wine-searcher.com/m/2012/07/insurance-firm-buys-top-bordeaux-property-saint-estephe, accessed June 9, 2013. 15 16 Wikipedia, Mouton Cadet, http://en.wikipedia.org/wiki/Mouton_Cadet, accessed June 9, 2013. 17 Ibid and wine-searcher.com, http://www.wine-searcher.com/find/mouton+cadet/2009/-/-/u, accessed June 10, 2013. 18 Will Lyons, “The case of Clarendelle,” The Wall Street Journal, July 2, 2010. DBR News release, “Gerad Colin reports on DBR-Citic vineyard,” posted March http://www.lafite.com/eng/News/Gerad-Colin-reports-on-DBR-Citic-vineyard, accessed June 9, 2013. 19 2012, 20 Victoria Moore and James Hall, “Good news for Wine Buyers as Château Latour exits decades-old ‘en primeur’ system,” The Telegraph, April 16, 2012, http://www.telegraph.co.uk/foodanddrink/wine/9207836/ Good-news-for-wine-buyers-as-Chateau-Latour-exits-decades-old-en-primeur-system.html,accessed June 9 2013. Jeff Leve, Liv-ex (London International Vintners Exchange) Wants to Change How Fine Wine is Bought Sold and Exchanged, the Wine Cellar Insider, February 20, 2013, http://www.thewinecellarinsider.com/2013/ 02/liv-ex-wants-to-change-how-fine-wine-is-bought-sold-and-exchanged/, accessed June 9, 2013. 21 23 PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT :)