WAC Report on

Château Margaux
2006

Submitted by: Section A GROUP 3

HARSHITA BANSAL (P18006)
SAURABH BHATIA (P18007)
ANIRUDH DEWADA (P18010)
DIVYANSHU GARG (P18013)
ASWIN SAJEEV (P18036)
AKSHAY SONKUSARE (P18045)
Memo
To: Antony Sr., Senior Consultant

From: Brad Jr. Consultant

Date: 01/02/2006

Subject: Analysis of Wine industry and Château Margaux’s future prospects

This report is in response to our discussion that we had on 20th of January 2006 concerning the
analysis of the wine industry and future prospects of Château Margaux. The report contains data
collected from various trustworthy sources, to support claims that have been made in the report.
This report contains the analysis of the wine industry globally and Château Margaux’s position in the
market, evaluation of various options that were discussed in our last meeting and the proposed
action which needs to be taken to strengthen the market position of Château Margaux.
Executive Summary
Chateau Margaux has been facing a threat from new world wine producers and from a shift in
consumer preferences. In order to address the above mentioned issues, the company needs to
adopt a new strategy to retain the loyal customer base as well as increase the revenue. So, we have
considered four different options like continuing with the same process, taking over the distribution
system from negociants, launching the third wine with own grape produce and outsourcing the third
wine grapes with different signature. We have finally chosen outsourcing the grapes for third wine
as a viable option after evaluating the options based on different criteria like preserving Brand
Image, Increase in customer base and increase in revenues.

The recommended option is most likely to ensure a CAGR of 6.6% over next 15 years. This would
also address the issue of retention of loyal customer base as now they will be able to afford the
product. The action plan suggested is to outsource grapes of highest quality and have a joint venture
with US based Wine manufacturers to have rapid market penetration and have better understanding
consumers.
Situation Analysis
Chateau Margaux Analysis:

Company produces following three types of wines: Chateau Margaux, Paviliion Rouge, Pavillion
Blanc. Chateau Margaux wine (First wine) is of best quality and drives the major part of the demand
and revenues. [Exhibit 4a]

As the land for vine production is constant, company’s revenue is driven by prices. As the customers
are now perceiving the first growth wines as ‘luxury’, the price premium commanded by first
growths over other classified growths is substantial. [Exhibit 4b]

Competitive Position of Chateau Margaux:

As the factors behind Wine quality are a grand terroir, right grape variety, climate, high quality
human work, the first growth wine is unique and thus, has a competitive advantage because of the
mentioned factors affecting its taste and quality.

Wine Industry Analysis/ Bordeaux’s Place in the Global Wine Industry

Overall demand of French wine has declined because of competition from new world wines.
Recently, in US market, prices of French wines have fallen, whereas prices of first-growth Bordeaux
have risen rapidly. This has resulted in the imbalance in the dynamics of wine prices, leading to non-
affordability by Connoisseurs (forms 80% of the volume share).

Demand Drivers of wine: The demand of each vintage in global market is primarily driven by Parker
points. The risk posed by this system is that Parker has biases towards denser and seductive wines.
As the French wines are balanced, these wines stand a chance of not getting fair points. This may
lead to sudden dip in the demand for Bordeaux wines as Parker writes for connoisseurs segment
customers, which form the major share of customers of Chateau Margaux.

Distribution Channel:

Currently, distribution of wines is exclusively done by Negociants or the merchants.

Continued distribution via Negociants

Advantages: The company doesn’t have to worry about distribution of wines, insurance and
delivery and hence, can focus on their production of wines. Also, it buffers the chateau from
incurring greater loss from mediocre vintage

Disadvantages: The company will have no direct control over the pricing of wines. Also, this
limits the potential of profit margin for chateau.

Distribution without Negociants

Advantages: The company will have total control over distribution and hence, greater profit
margin. Also, there will be opportunities to know the customer and thus, this will enable to
take long-term strategic decisions.

Disadvantage: The company does not have any knowledge of customer base. Also, the
availability of wines directly from the company will dilute the brand image.
Customer Analysis:

The entire market along with the newer ones can be categorised into two different customer
categories:

 Connoisseurs: These customers carry in-depth knowledge about the subtlety of wines and
derive deeper, more complex pleasures from wine. Customers from Britain, America, France
and other European countries generally fall into this category.

The major advantage of selling wines to these customers is that they act as market
stabilisers as they are regular buyers and are loyal in nature, and they constitute about 80%
of the total existing customer base. But the flip side is that their price affordability is
narrower and falls in the lower range of the set market price.

 Luxury customers: The customers fall for more immediate, seductive first impression offered
by wines. Generally, they don’t prefer to age their wines. Customers from Asian markets like
those of Taiwan, Singapore, China, Russia belong to this category. The factors that influence
the buying patterns of luxury customers are: Association of brand as Status symbol and the
label & price on the bottle.

The major advantage of selling wines to these customers is that there is no price barrier for
them as they attach the brand image with their status. Higher margins can be extracted out
of this customer segment (Luxury customers constituting around 20% of total market can
outweigh the margins offered by connoisseurs’ 80%).

Problem Statement
Adoption of a new strategy to retain the loyal customer base, add new customers and increase the
revenues.

Options available
1. Continuing with the present system

2. Taking over the distribution from the “negociants” and selling it directly

3. Developing the third wine from their own terroir or from other Margaux-appellation vineyards

4. Developing the third wine from outsourced grapes

Criteria of evaluation
1 Preserve the Chateau Margaux Brand image

2 Increase the Customer base

3 Increase the Revenue generated

Evaluation of options
1. Continuing with the present system
The present competitive position of Chateau Margaux is strong. The price is increasing every
year because of the increasing demand. This increase in price will increase the revenue.
But, because of this the connoisseurs will find it difficult to buy the first growth. Hence it can
possibly reduce the connoisseur customer base who constitute 80% of current customer base.
Also, the new generation will not be familiar with Chateau Margaux because of high cost. So, it
is difficult to increase the customer base with this option. In present system, the company is
paid two years in advance, which is used to finance next crop. The brand image will be
preserved.

2. Taking over the distribution from the “negociants” and selling it directly
The company will have more control over selling of the wine and the pricing. The profit margins
and revenue will increase, since there will be no middle men involved. But the company will
lose the benefit of well established distribution channel of negociants. These people were
acting as supplementary cushion for the selling even in some bad production years, so it will
lose that benefit. Also, this will shift focus from wine making to marketing, hence impacting the
quality. So there is a risk for the brand image. The customer base will not be impacted.

3. Developing the third wine from their own terroir or from other Margaux-appellation
vineyards
Third wine will be cheaper, so it will affect their brand value negatively. It will have positive
impact on revenue due to more number of people affording low priced third wine and will
increase their customer base. A third wine will help to compete with the new world wines.

4. Develop third wine from outsourced grapes

Outsourcing grape production for third wine will not have any impact on the brand image of
the company, since the label will not be showing the Margaux appellation. This provides the
ample amount of raw material, hence, provides the opportunity of increasing supply. Also, the
third wine, being less expensive will increase the customer base who could not afford to buy
the first and second wine.

Recommendation
So, in order to increase the revenues, the company must launch the third wine from outsourced
grapes. This option will help the company to increase the revenue from 61 million USD to around
152 million USD in a span of 15 years registering a CAGR of around 6.2%. Production capacity will
increase around 100 folds.

Action Plan
Outsource the grape production to a region that produces high quality grapes. Establish a joint
venture with the wine producers in US to diversify risks and get better understanding of customers.
Launch the third wine with a new label under the umbrella of Chateau Margaux. This strategy was
chosen by other competitors in the past and they have registered almost equivalent CAGR in the
past 15 years.
Word Count (1200)
 Exhibit 1

Avg Cost of production (in €) 40

Land for Red Wine (in hectares) 80
Land for White Wine (in hectares) 12
Avg Yield in hectolitres per hectare 42.5
Total Red wine yield (in litres) 340000
Total white wine yield (in litres) 51000
Total Yield in litres 391000
Quantity per bottle In litres 0.75
Total Red Wine Bottles Capacity 453333
First Growth/Red Wine which can be sold in Bottles 408000
   
Avg volume sold after bottling 10%
Avg volume sold in barrels in future market 90%

Exhibit 2

Exhibit 3

Last 11 Years
No. of Years
Category
(estimated)
Very Good vintage 5
Medium Vintage 6

Exhibit 4 (a)
Exhibit 4 (b)

Exhibit 4 (c)

Exhibit 5

Exhibit 6