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Chateau Margaux
Launching the Third Wine
Background
Chateau Margaux is a winery located in the storied Bordeaux region of France. Over several decades, the Margaux company has built a prestigious, high-end wine brand that has a devoted following around the world. The company’s process to winemaking includes blending different types of wine to arrive at the final composition of the perfect wine. As the company’s winemaking process has been perfected and the quality of their wines has steadily improved, the company faces a decision about whether to create a third wine release to take advantage of the superior quality of what was normally considered “leftovers”
Current Situation & Trends
- The “Old World”: Consists of European countries. Consumption is declining driven by shifts in consumer behaviors primarily attributed to less time spent with the family eating at home.
- The “New World”: Consists of US, China, Brazil, and Russia. These countries are contributing to the lion share of growth in wine consumption, primarily led by China.
- 2013 Global Wine Industry estimated at $110 billion annually, over 30 billion bottles of wine produced annually.
- Industry has low barriers to entry. Producers in “New World” countries have the capability of producing fine wines that rival old world varieties. This competition has created downward pressure on pricing.
- Margaux’s various blends compete in different segments. First growth appeals to luxury buyers and the image conscious connoisseurs (32% of Market/49% dollar spend).
- The US consumers fall into the value-seeking segment (68% of market / 51% dollar spend).
- Price inflation and lack of product availability pushed many of the old world wines out of reach for on-premise consumers. This has also caused alienation among sommeliers who are a critical point of sale for wines in these price points.
- The company’s multi-step distribution scheme also inflates price because of margin accretion at each step in the distribution process.
Performance Assessment
- Margaux is considered one of the premier wine producers in the Bordeaux region.
- Margaux has steadily increased the quality of their grape yields and wine blends. This has allowed Margaux to command top price for their wines.
Key Issues
- The company has relied on a multistep distribution network that adds significant downstream cost to the consumer that has alienated many prospective buyers.
- “Negociants” who purchase bulk quantities of the wines and hold them for future release artificially manipulate supply which directly impacts the profitability of each vintage.
Consumer Analysis
Consumers of Chateau Margaux are enthusiasts and luxury buyers. Enthusiasts are consumers who have extensive wine knowledge and make purchasing decisions based on taste. Thus, the most important factor for this group when choosing a wine is the taste. They prefer to consume their wine in an environment where they have a variety of wines so they can compare and contrast before making their selection. Enthusiasts are insensitive to price as their main goal is to get a product that has the taste they are looking for.
Luxury buyers make buying decisions based on how brands align with their self image or represent their affluent lifestyles. The most important factor luxury buyers consider in wine selection is quality and exclusivity. These consumers do not want to drink what everyone else drinking. They prefer their wine consumption in the most prestigious five-star locations. Price plays an important role in communicating the quality of the wine. Luxury consumers believe that the highest priced wine is likely the highest in quality and therefore the best available option.
Enthusiasts and luxury consumers receive different forms of validation when making a purchasing decision. Both buyer types can wield influence over the other as long as the image that is evoked through the consumption of a brand aligns with how each buyer sees themselves.
Trend Analysis
In the last several years, luxury consumers have increased rapidly in Asia and Russia because of their expanding middle class and rising wealth. The demand in new markets has been growing steadily. Margaux realized that new geographical markets could allow them to grow outside of the confines of "Old World" markets, the risk associated with opening a new wine market has reduced with streamlined logistics, online sales have increased through the expansion of technology connecting consumers to brands. Chateaux Margaux also faces pressure from increased foreign competition, a reduction in wine consumption in France, and the growth of low price substitutes. Margaux has responded to external forces by promoting its traditional strategies, adopting price distribution, using penetration pricing in the new markets and embracing modern technology in wine production.
Influencer Analysis
The key characteristic of wine is the experience. At its core, the intrinsic value can only be determined by consuming and tasting it. Buyers select a wine brand based on sampling, reputation, and/or recommendation. It is almost impossible to quantify the quality of wine through physical examination. Both connoisseurs and luxury buyers consider a bottle of wine an experience-driven good . It is not possible to truly ascertain the value of a credence good/service with any certainty even after it has been consumed.
Influencers in the wine industry play the role of talking about a brand or sub-promoting a brand through product positioning in order to influence others to purchase it. Social media is the most common platform used by influencers to talk about or sub-promote a particular brand. Influencers can be grouped into three categories: mega-influencers, macro-influencers and micro-influencers. Macro-influencers are actors, artists, athletes and social media star that have over 1 million followers in their social media platforms with 2-5 percent engagement in a single post.
Macro-influencers are executives, bloggers and journalists with between 10,000 and 1 million followers who can drive 5-25 percent engagement in a single post. Micro-influencers are daily customers and employees with 500-10,000 followers and drive 25-50 percent engagement in a single post. Influencers can play an important role in marketing a brand because they can focus on their audience, making it more cost effective than dealing with a large target market.
The role of négociants is to gather the produce of small-scale growers and makers of wine and to sell it under their name. Their responsibilities include purchasing grapes, large volumes of juice and finished wine, bottling the wine, blending, and selling the finished products to consumers.
The advantages of using négociants in distribution of wine are low cost of sales and distribution, high sales and reduced risk. The disadvantages of using these merchants are lack of connection with consumers, little control over the distribution channel and low quality of wine because of blending with other types of wines to reduce the price charge to consumers.
Brand Analysis
Chateau Margaux wines controls a prestigious portfolio of wines with strong brand equity. The storied brand is well established in France and continues to build inroads by driving market penetration in Australia, Spain, Chile, Italy and the USA. The value proposition of Margaux is to provide quality wine at competitive prices using innovative marketing techniques.
Strategic Options
The decision criteria applicable to the evaluation of the three strategic options for Chateau Margaux are the definition of the problem, identification of the decision criteria, assessing the criteria, generating alternatives, assessing each alternative based on the established criteria and selecting an optimal path forward.
Strategic Option 1: Connoisseurs are experts in wine tasting and since they have experience with the wines, the company will not have to carry awareness campaigns. The biggest problem with this market segment is that they already know how to differentiate the best wines in the market and they may not like to consume the third wine because of its low quality. The strategic goal should be to create a pool of consumers who are loyal to the third wine because of its taste.
Strategic option 2: the next generation of connoisseurs does not have a lot of experience with wine and they are likely to be attracted by the low price of the third wine. However, they can easily abandon it for higher quality wines as they gain experience in wine tasting. The strategic goal of this option could be to lock up some consumers from moving to higher quality wines.
Strategic option 3: Luxury buyers are those consumers who look for prestige and they believe that the high price tag of wine is due to its high quality. The advantage of targeting these buyers is that Chateau Margaux can set up high prices of the third wine and make huge profits from it. The biggest issue with this strategy is that it the company must invest a lot of resources in marketing to present the third wine as prestige and this might affect the sales of the first and second wines. The strategic goal could be to present the third wine as a premium product and make supernormal profits.
I would recommend strategic option 2 of targeting the next generation of connoisseurs
Marketing Plan
Place
Chateau Margaux should continue to leverage their relationships with negociants and the existing distributions channels. If they focus on innovation and quality production they can maintain and enhance the final product across different product lines. They should prioritize the negociants based on strength of their distribution network across various channels, past performance, and margin percentages. If Margaux begins to measure the performance of their various wines (first, second, and third wines) individually, they can adjust their strategy for each to impact the performance of across categories.
However, if the company does not choose the negociants, it must prioritize in the two and three star restaurants and large retail wine stores in France, Australia, the U.S. and other countries where the brands have a market share of at least 5 percent.
Price
There are many wines that will compete with the third wine in the U.S. market. Some of these brands are well established and it will not easy to take up a market share from them. The most appropriate pricing strategy will be penetration where the price of a bottle of the third wine will be set below the market rate as this will attract customers who are price sensitive. The signals of the right prices are the competitors’ rates, bulk prices and the cost of production.
Product
I do not recommend for the growth of production of the third wine because the marginal profits are too low as compared to focusing on improving the quality of the first and second wine. The best option would be invest more on first and wine because they have the potential to boost profitability.
Promotion
The negociants should use advertising and influencers to promote the third wine to the next generation of connoisseurs. Advertising should be done through the TV and social media networks while mega-influencers should be used to drive traffic to the company’s websites where people can find more information about the product. The influencers should also create a positive image in the minds on potential consumers on the quality and taste of the third wine. Furthermore, it would be crucial to have an ambassador program where celebrities would promote the brand among their fans.
Brand name
Naming the third wine as Margaux du Chateau Margaux will help it to benefit from already established reputation of the first and second wine. Hence, some customers will see it as of high quality just like the other products from the company. However, in the long term, it might affect the sales of the first and second wine as customers will prefer it because of the low price. If the sales of the first and second wine go down, the overall profitability of the company will decrease because the marginal profits of the third wines are very low.
An alternative brand name of the third wine should be “Chateau Ordinary”. The advantage of this brand name is that consumers who have no experience in wine tasting will feel that it is their wine and they should try it because it is not complicated at all.
Additionally, the name resonates with its low prices and even consumers who are sensitive on their budget will feel that they are covered by it. The problem with the brand name is that it excludes luxury and connoisseurs consumers who look for uniqueness in the products they buy. “Chateau Ordinary” is for customers who have always felt excluded from the first and second wine because of their high prices.