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 🙂