Posted by: itm2011 | May 14, 2011

A Dilemma of Luxury and Marketing: The Case of Château de Margaux

A Dilemma of Luxury and Marketing: The Case of Château de Margaux 

By: Katie Werbowski


The Company:

The company Château de Margaux, located in the Bordeaux region of France is under the ownership of Corinne Mentzelopoulos.  This vineyard has been profitable for the past 30 years, since the 1980’s, and existed for over 75 years.  .

In the Chateau de Margaux brand, the current price point for a bottle of Premier Grand CruClassé Grand Vin is $999 for US consumers, and yet they are averaging 150,000 bottles sold each year.  The remaining grapes are used to make Puiné, their second wine, which is sold for between €100-€450, and averages a total sale of 200,000 bottles per year.  Any remaining grapes are sold to other producers anonymously and repackaged under other brand names (Dessain, 2011).

The Dilemma:

Using the aforementioned data, it is easy to conclude that the Chateau de Margaux brand is performing very well, yet there is always a question if a company can be doing even better than they already are.  In 1997, the Mentzelopoulos family and Margaux brand had to ask themselves this question- should they extend into the mass market or maintain their exclusivity? In order to draw a conclusion one must investigate alternative ways of expanding, marketing and distributing their brand- which is exactly what we will consider when examining the Château de Margaux business model.

New Idea for an Old Brand:

As a way to freshen up the traditional brand and to gain more exposure, the granddaughter of the Margaux family wanted to begin mass marketing a new wine brand.  The idea would be to use different grapes in order to be more accessible to the younger generation.   The target price range would be €20-€25 per bottle (Dessain, 2011).

There are a large number of young wine drinkers who cannot afford the high prices of the current Gran Vin brand and are therefore not being attracted to the Château de Margaux vineyards.   If these consumers were introduced to an affordable brand of wine from the Margaux estate, then they may be more likely to recognize and trust the brand.  That way, when they are looking for a more expensive wine, they will first go to their label of Grand Vin from the Château de Margaux collection.

General Concerns:

Some of the issues with this suggestion are: maintaining the exclusivity of the original brand, ensuring that consumers still feel motivated to pay the higher price point, and they will also now need a distributor, marketing team, and an ability to focus on more than one brand of wine.  In this particular case, the Margaux business has a close-tie who is very familiar with the distributorship and marketing of wine, and therefore this is a solution to one of the issues; however there are several of the other issues that remain very pertinent concerns, as we will discuss later on.

Possible Options:

The following are the options that should be considered prior to adjusting any marketing strategies or altering the brand, well as the pros and cons to each decision:

Option 1: Stay True to Tradition

The winery could ignore plans to enter into the mass market entirely, and instead focus on the luxurious aspects of their brand- exclusivity, exquisite blends and soil composite, as well as a limited scope and accessibility.  This would ensure the stability of their price-points and establishment of their brand as a high-end wine producer without there being a concern of devaluation of quality.

In the case of an economic recession, a natural disaster, or an unexpected strong competitor however, the Grand Vin could be completely destroyed from at least one season if not longer.   If, however they also had a lower price-point brand they would be able to increase sales during depressions, balance sales in the mass market in the case of a strong competitor in the high-end market, and find comparable land easier based on fewer specifications required of the lower grade soil.

Option 2: Expand Internationally

Another option would be to purchase a California Vineyard for the US market and use this as a way to break into the US wine market, as it is easier to penetrate than the French market, this would allow them to buy relatively cheap land and learn about the mass market.  If all went well, they could then establish a local (France) mass market winery and brand yet another inexpensive wine, but this time from the Bordeaux region.

The problem with this would be the amount of resources required to research the U.S. mass market, establish enough foreign staffing and pay for travel to oversee the production are a large investment without even having tested the market. It also could prove to be vastly unprofitable and deter the family from purchasing land in Bordeaux for a similar market and save the company from wasting money on land there –as it is more expensive and also more easily traced to their original brand.  If the brand failed, it could be devastating to the Grand Vin wine to be so closely linked to a failing low-end brand.

Option 3: Joint-Venture or Partnership

There are alternatives to the lack of market research and resources available in the US.  One option would be opting for a joint venture or partnership with an already established US vineyard.  The resources and research would have already been provided for Château de Margaux by the host country, and therefore it would be a smaller investment and an easier transition.

The dilemma with a joint venture or partnership is always the lack of control that you have over the company.  While decisions, of course, are still part of the origin company’s responsibilities, there is a great deal of compromise which must occur when two companies or people work together.  Fantastic ideas often come out of joint ventures or partnerships due to multiple perspectives; however, the quality of the brand may also suffer if both parties are not on the congruence.  Additionally, profits are divided which can end up being less worth the risk of expanding.

Option 4: Minimal Risk

A fourth option would be for the company to distribute a mid-range wine both domestically and internationally.  They would use grapes that were produced on the plots of soil that were not cultivated to the Château standards, and therefore cannot be sold under the ‘first- pick’ label.   If they decided to distribute their mid-range brand to higher-end wine distributors within France, they could establish their name as an affordable value wine.

After they established a strong reputation in the first two years, they could then distribute their lower price-point brand into foreign markets starting first with the US and Canada.  This would be a good example of how to build your brand and research new markets simultaneously.

Focusing first on expanding within France would allow them to test foreign markets while establishing the brand domestically.  This would allow for a better product suited for each market as well as very little investment in advertising and expansion initially.  If the product proved to be worthy of development, then more investment would be provided, possibly by foreign investors in order to make it a global brand.

 

Option 5: The Best of the Best

Alen Gojceta, midmarket sales manager from IBM Croatia, suggests that rather than adhering to any of the aforementioned ideas, the company should create a wine that is even more exclusive than their already present wines, and sell directly from the Chateau (Dessain, 2011).  This would create an even higher profit margin, but it ignores the new ideas presented for the brand, which were to expand the brand in another direction.

The drawback would be that there is a large part of the market that would still be left untouched by the Château de Margaux brand.  However, it would also be an easy addition to the already prosperous brand, and it would produce an almost guaranteed revenue source.

What did the experts do?

Corinne Mentzelopoulos, the owner and CEO of Chateau Margaux, utilized the first suggestion as her model for her business under “Stay True to Tradition.”  She felt that this was the best approach and employed this method going forward (Marketing Chateau Margaux, 2006).  She believed that while it is important to explore new alternatives for your company, due to the high profits and success of the Grand Vin it would be a waste and risky to expand into a mass market.

Analysis:

I believe that in this case the company would benefit from branching into the branded wines mass market.  I think that they should do this by hiring a family member already immersed in the company to oversee production and distribution and have the young granddaughter who came up with the original idea, oversee the development of the branded wine.

This should be run as a subsidiary of the parent company, Château de Margaux.  Much like Pernod Ricard is the parent company of several different liquor brands varying by type, taste, class and location, Château de Margaux, would oversee the Grand Vin, the mass-market brand etc (Pernod Ricard/Brands, 2011).  Philippe Sereys de Rothschild who is the Vice Chairman of Baron Philippe de Rothschild seems to sway heavily in this direction (Dessain, 2011).  The benefits of this method range from diversity, to sustainability but can only be accomplished through brand differentiation as to ensure continued valuation of the Grand Vin.

Château de Margaux should purchase inexpensive Bordeaux region land where they can produce 1million bottles per year.  These bottles should be used to penetrate the European, North American and South American markets, as suggested by Vivek Kochikar, associate vice president and principal researcher, Infosys Technologies.  These markets are easier to penetrate and lack the ability to as easily effect the reputation of the Grand Vin as the demand for mid-range wines is higher.

Furthermore, they should use the Bordeaux label and a completely separate Brand name and logo.  Under the Château de Margaux company name this new brand would be listed as a subsidiary company.  In order to be successful, the company would need to utilize current employees and have them cross-train or head-up the new brand. This is an important part of expansion so that the brand culture is not lost.  For example, the employee who oversees quality control at Château de Margaux vineyard should be in charge of initial start up quality control at the new branded wine vineyard and then train a successor to take over that location.  The granddaughter will be in charge of managing the new brand as it caters to a demographic that she fits within, she will have insight to the needs and wants of the market.

I think that ultimately running the two companies separately but maintaining the same expectations and quality for each brand will increase revenue and brand awareness.  I also think that high-end clientele will continue to purchase the higher-end brand as they wouldn’t switch to the less expensive brand due to obvious inadequacies, and simultaneously they may not even be aware of the lower-end, completely separate alternative brand.

Real Brand Examples:

Similar to those who shop at Max Azria versus BCBGeneration, or Armani versus Armani Exchange- though the latter has an almost irrefutably similarly branded name- the clientele is still very different and in the case of the wine, the names will be distinctly different.  Also, the marketing strategy should be modern and relevant however, it shouldn’t compromise the class of the Château de Margaux brand.  This way, regardless of which brand consumers are purchasing, they value the high quality of each.

Another example of a successful expansion into the lower market is the case of Frette, an Italian luxury fine linens company, which can retail for up to $110,000 for a premium bed set.  In 2008, they came into a similar situation to the Margaux family- Should they extend the brand to reach a mass market, or maintain exclusivity?

In 2009, they launched the Edmond Frette line, a more cost effective brand targeting a younger market.  Frette Company has been able to maintain exclusivity in the standard Frette line, while growing into the mass market.  They have utilized specific merchandising layouts in-store and marketing strategies to distinguish one type of consumer from the other.  This would be a good business model for the Margaux brand to study.  They can branch into the mass market but only to higher-end department stores or in Margaux’s case, wine retailers, so that the brand is not damaged, and simultaneously they should promote a high brand image on all fronts.

Not Everyone is a Winner:

Unfortunately, there have been cases where luxury suffered losses when expanding into the mass market.  For example Fredrick Fekkai, a once exclusive hair care line for Sephora, announced its launch of major products into the mass market entering stores such as Target.  After the announcement Sephora, dropped the Fekkai line in their stores.  This may seem like a negative impact, however, soon after Sephora took Fekkai back and the sales have increased in both sectors.  They offer only basic products at Target and more luxurious, elaborate products at Sephora and in the salon (Fekkai and Sephora Split, 2009).

Conclusion:

Ultimately, I think that Château de Margaux will continue to excel in the high-end luxury brand as well as develop a successful brand for the mass markets.  The most important part is to run the businesses separately so that high end clients don’t feel ripped-off for spending an exorbitant amount on a wine that is made from similar grapes as at €25 bottle.

In reality Chateau Margaux decided to ignore the idea to expand into the mass market because they knew little to nothing about it and felt that there was a better use of their resources- they did however begin selling their third wine in bulk to select distributors though it hasn’t developed into a brand of its own (Marketing Chateau Margaux, 2006).  Contradictorily, the Rothschild estate opted to dive into the mass market and use a subsidiary.  The Margaux estate sells approximately 370,000 bottles annually while Rothschild sells 22millions bottles annually- of the 22 million, 700,000 are from the high-end sales (PFV, 2005).

Due to these statistics, I think that it is important to note the difference that a new venture can make.  If  entering a new market with caution and research, companies are able to maximize profits and conquer an entire market- in this case, wine, and not only niches- such as, high-end or mass markets.

Bibliography

Dessain, D. B. (2011, January). HBR Case Study: Preserve the Luxury or Extend the Brand? Retrieved April 20, 2011, from http://www.hbr.org: http://hbr.org/2011/01/hbr-case-study-preserve-the-luxury-or-extend-the-brand/ar/1

Fekkai and Sephora Split. (2009, December). Retrieved May 10, 2011, from stylist.com: http://www.stylelist.com/2009/12/11/fekkai-and-sephora-split-up/

Marketing Chateau Margaux. (2006). Retrieved May 1, 2011, from hbr.org: http://hbr.org/product/marketing-chateau-margaux/an/507033-PDF-ENG

Pernod Ricard/Brands. (2011, May 5). Retrieved May 6, 2011, from http://www.pernodricard.com: http://www.pernod-ricard.com/

PFV. (2005). Rothschild History. Retrieved April 30, 2011, from http://www.pfv.org: http://www.pfv.org/html/rothschild-history.html

Silverthorne, S. (2007, January 3). HBS Working Knowledge. Retrieved April 25, 2011, from First Look: http://hbswk.hbs.edu/item/5597.html

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: