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 How Vintage Price per UWV score

name many (wine bottle in $ (= quality points)
Michelin year)
stars?

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

  Quanti Tranc Tranc Tranc Quantit Quantit Quantit Revenue Cost (€)
ty he 1 he 2 he 3 y y y (€)
price price price tranche tranche tranche
(€) (€) (€) 1 2 3
(bottle
s)

2003                  

First 183,04 120 160 200 61,013. 61,013. 61,013. 29,286,400 6,864,000.
wine 0 33 33 33 .00 0
(99*)

Secon 262,82 23 23 23 87,608. 87,608. 87,608. 6,045,013. 9,856,000.

d 7 89 89 89 33 0
wine
(92*)

Bulk 23,467 5.42 5.42 5.42 7,822.2 7,822.2 7,822.2 127,189.33 786,133.3
wine 2 2 2

Total 469,33                
numb 3
er of
bottle
s

Total               35,458,602 17,506,133

.67 .3

Total                 17,952,469
profit .33
s

2009                  

First 134,40 450 600 750 44,800. 44,800. 44,800. 80,640,000  

wine 0 00 00 00 .00
(99*)

Secon 153,06 50 23 23 51,022. 51,022. 51,022. 4,898,133.  

d 7 22 22 22 33
wine
(92*)

Bulk 85,867 5.42 5.42 5.42 28,622. 28,622. 28,622. 465,397.33  

wine 22 22 22

Total 373,33                
numb 3
er of
bottle
 s

Total               86,003,530 17,506,133

reven .67 .33
ue (€)

Total                 68,497,397
profit .33
s

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 48,533.33

qualify for the third wine

  Bulk wine Third wine

Price per bottle or bottle 6 35

equivalent (€)

Marginal cost for bottling (€) 0 3

 Gross profits 291,200.00 1,553,066.67

Marginal profits for launching the   1,261,866.67

third wine

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 Option 1: Option 2: Next Option 3: Luxury buyers

criteria Connoisseurs generation of
connoisseurs
Definition of Connoisseurs are The next generation Luxury buyers are those
the problem experts in wine of connoisseurs consumers who look for
tasting and since does not have a lot prestige
they have of experience with
experience with wine
the wines, the
company will not
have to carry
awareness
campaigns

Identification Market segment is Low price of the They believe that the high
of the decision that they already third wine price tag of wine is due to its
criteria know how to high quality
differentiate the
best wines in the
market

Assessing the Customers may not Abandon it for Chateau Margaux can set up
criteria like to consume the higher quality wines high prices of the third wine
third wine because as they gain and make huge profits from it
of its low quality experience in wine
tasting

Generating Differentiation Low pricing, The company must invest a

alternatives strategy, low extensive marketing lot of resources in marketing
pricing to present the third wine as
prestige and this might affect
the sales of the first and
 second wines.

Rating every Difficulties in Low pricing may Extensive marketing might

alternative product convey a message of bring new consumers on
using each differentiation and low quality. board.
criterion low-quality Extensive marketing
perception may increase overall
costs

Computing the Differentiation Low pricing will Marketing is the best way to
optimal strategy can be help the product attract the luxury buyers.
decision achieved through penetrate in the
additional services market

Strategic goal To create a pool of To lock up some To present the third wine as a
consumers who are consumers from premium product and make
loyal to the third moving to higher supernormal profits
wine because of its quality wines
taste

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.