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Case Study Analysis: Chateau Margaux

Part 1: Analysis of Case Facts

Section 1: Consumer Analysis

The consumers of the wine of Chateau Margaux (CM) are mostly connoisseurs and luxury buyers. Connoisseurs are consumers who have profound knowledge on the taste of wine and they make their decisions on the wine to consume based on its taste. Thus, the most important factor when choosing a wine is the taste. They prefer to consume their wine in an environment where they have a variety of wines so that they can choose the one that will meet their taste expectation. Connoisseurs are insensitive to price as their main goal is to get a product that has the taste they are looking for.

Luxury consumers make their buying decisions based on how the brands address their unique lifestyles. The most important factor they consider in wine selection is the quality and uniqueness. They do no it want to consume what everyone else consuming. They prefer to take their glass of wine in the most prestigious places such as five-star hotels. Price plays an important role in communicating the quality of the wine. Luxury consumers believe that the highest priced wine is the best and go for it.

Connoisseurs and luxury consumers look for different things while making their buying decisions. However, the prominence of connoisseurs can influence the luxury consumers and the latter would start considering taste as an aspect of their unique lifestyle.

Section 2: Trend Analysis

In the last few years, the luxury consumers have increased rapidly in Asia and Russia, the demand in new markets have been growing, the company has discovered new geographical markets, the risks of the wine market has reduce and online sales have increased. Chateaux Margaux has also faced increased competition from other countries, shrinkage of wine consumption in France and expansion of substitutes. CM 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.

Section 3: Influencer Analysis

Wine is an experience good because its value can only be determined in the true sense by consuming or experiencing it. The buyers choose the brand of wine depending on its reputation and recommendation. It is almost impossible to determine the quality of wine through physical examination. Both connoisseurs and luxury consumers consider a bottle of wine as an experience good and not credence good. It is not possible to truly know the value of credence good with certainty as it is a matter.

The role of influencers in the wine industry is to talk about the brand so that they can influence other people to buy it. Social media is the most common platform used by influencers to talk about 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 buy 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 are very important in marketing because it focuses on the specific individuals, making it more effective than dealing with the 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.

Section 4: Brand Analysis

The Chateau Margaux wines are regarded as prestige brands with strong brand equity. The brand is well established in France and it is making inroads into other countries such as Australia, Spain, Chile, Italy and the USA. The value proposition of CM is to provide quality wine at competitive prices using innovative marketing techniques.

Section 5: Price-quality relationship of the first wine

Step 1: Data collection on current prices of bottles of Chateau Margaux

Table 1: Relationship between price and quality

Restaurant name

How many Michelin stars?

Vintage (wine year)

Price per bottle in $

UWV score

(= quality points)

First wine: Chateau Margaux (find at least twenty different entries of the wines in the wine lists)

1

Jean-Georges

3

2003

2650

96

2

Jean-Georges

3

2000

5000

97

3

Jean-Georges

3

1996

2650

95

4

Jean-Georges

3

1995

2500

94

5

Jean-Georges

3

1989

1700

93

6

Jean-Georges

3

1986

2000

92

7

Jean-Georges

3

1985

1800

94

8

Jean-Georges

3

1982

4000

95

9

Per Se

3

2000

3900

97

10

Per Se

3

1995

2975

94

11

Aquavit

2

2005

325

97

12

Aquavit

2

2010

450

97

13

Atera

2

2010

210

97

14

Atera

2

1996

1326

95

15

Atera

2

1986

1020

92

16

Atera

2

1970

840

90

17

Daniel

2

2005

2700

97

18

Daniel

2

2000

3500

97

19

Daniel

2

1999

1750

93

20

Daniel

2

1995

1500

94

Step 2: Data Analysis

Step 3: Interpretation

The R2 is very low at 0.076, meaning that there is a very weak relationship between quality and price.

The price of a bottle of Chateau Margaux increases by $173.6 per quality point.

Part 2

Section 6: Analysis of the effect of selectivity on profits

Step 1: Completing the table

Table 2: Relationship between selectivity and profits

 

Quantity

Tranche 1 price (€)

Tranche 2 price (€)

Tranche 3 price (€)

Quantity tranche 1

Quantity tranche 2

Quantity tranche 3

Revenue (€)

Cost (€)

(bottles)

2003

 

 

 

 

 

 

 

 

 

First wine (99*)

183,040

120

160

200

61,013.33

61,013.33

61,013.33

29,286,400.00

6,864,000.0

Second wine (92*)

262,827

23

23

23

87,608.89

87,608.89

87,608.89

6,045,013.33

9,856,000.0

Bulk wine

23,467

5.42

5.42

5.42

7,822.22

7,822.22

7,822.22

127,189.33

786,133.3

Total number of bottles

469,333

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

35,458,602.67

17,506,133.3

Total profits

 

 

 

 

 

 

 

 

17,952,469.33

2009

 

 

 

 

 

 

 

 

 

First wine (99*)

134,400

450

600

750

44,800.00

44,800.00

44,800.00

80,640,000.00

 

Second wine (92*)

153,067

50

23

23

51,022.22

51,022.22

51,022.22

4,898,133.33

 

Bulk wine

85,867

5.42

5.42

5.42

28,622.22

28,622.22

28,622.22

465,397.33

 

Total number of bottles

373,333

 

 

 

 

 

 

 

 

Total revenue (€)

 

 

 

 

 

 

 

86,003,530.67

17,506,133.33

Total profits

 

 

 

 

 

 

 

 

68,497,397.33

Source: Ofek and Vogt

Step 2: Interpretation

The most striking thing in this calculation is that in spite of the lower production in 2009 than 2003, the profits were higher.

The most profitable wine is first wine generating over €22 million in 20003 and €63 million in 2009.

The effect of scarcity is to drive prices high and this ultimately increases profitability as long as the production costs remain constant and the reduction on production quantities does outweigh the price increase.

It is more important to be more selective in 2009 because the higher the quality of wine, the higher the price the consumers were willing to pay. For example, 134,400 bottle of first wine were produced which generated over €80 million in revenue in 2003 as compared to 183,040 bottles which generated only €29 million in revenue in 2003.

Therefore, using the outcome of this financial analysis, I would advice Chateau Margaux to focus their efforts on quality as it is through the reduction of yield of grapes and using only the best grapes to make the first and second wines that will fetch high prices in the market. I would discourage any attempt to increase the quantity of bottles with little regard of quality as this can only result in low profitability.

Section 7: Calculating the profitability of the third wine

Step 1: Completing the table

Table 3: Marginal profitability of the third wine (vintage of 2009)

Relevant yield (percentage)

13

Total number of bottles

373,333

Number of bottles (or bottle equivalents) that would qualify for the third wine

48,533.33

 

Bulk wine

Third wine

Price per bottle or bottle equivalent (€)

6

35

Marginal cost for bottling (€)

0

3

Gross profits

291,200.00

1,553,066.67

Marginal profits for launching the third wine

 

1,261,866.67

Source: Ofek and Vogt

Step 2: Interpretation

The marginal profits that could be realized from launching the third wine are €1,261,866 while the total profits in 2009 were €68,497,397. Hence, it is not worth it to lauch the third wine as this may negatively affect Chateau Margaux’s ability to focus on quality of the first and second wines.

Section 8: Branding Effects

The introduction of the third wine might have positive effects on the branding of the first and second wines by making them popular among all market segments including the low-income consumers. On the other hand, it might erode the perception of the first and second wines as premium brands and their prices are likely to drop if the bulk wine is bottled. Furthermore, some customers may be confused when selecting three categories of wines from the same company and this might lead them to move to other brands.

Part 3: Strategic Options

Section 9: Evaluation of 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, rating every alternative using each criterion and computing the optimal decision.

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

Table 4: Analysis of strategic options

Decision criteria

Option 1: Connoisseurs

Option 2: Next generation of connoisseurs

Option 3: Luxury buyers

Definition of the problem

Connoisseurs are experts in wine tasting and since they have experience with the wines, the company will not have to carry awareness campaigns

The next generation of connoisseurs does not have a lot of experience with wine

Luxury buyers are those consumers who look for prestige

Identification of the decision criteria

Market segment is that they already know how to differentiate the best wines in the market

Low price of the third wine

They believe that the high price tag of wine is due to its high quality

Assessing the criteria

Customers may not like to consume the third wine because of its low quality

Abandon it for higher quality wines as they gain experience in wine tasting

Chateau Margaux can set up high prices of the third wine and make huge profits from it

Generating alternatives

Differentiation strategy, low pricing

Low pricing, extensive marketing

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.

Rating every alternative using each criterion

Difficulties in product differentiation and low-quality perception

Low pricing may convey a message of low quality. Extensive marketing may increase overall costs

Extensive marketing might bring new consumers on board.

Computing the optimal decision

Differentiation strategy can be achieved through additional services

Low pricing will help the product penetrate in the market

Marketing is the best way to attract the luxury buyers.

Strategic goal

To create a pool of consumers who are loyal to the third wine because of its taste

To lock up some consumers from moving to higher quality wines

To present the third wine as a premium product and make supernormal profits

Chosen option

No

Yes

No

Part 4: Marketing plan for the third wine

Section 10: Marketing Plan

Place

Chateau Margaux should continue to use negociants because they have already established distributions channels and they allow the management to focus on wine production which is critical in improving the quality of the final products. The negociants would be chosen on the basis of their experience in wine industry, past engagements and their prices.The agreements for the third wine would be separate from the first and second wine contracts so that the company can be able to monitor the performance of each category.

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.