Luxury wine versus other luxury industries

This week, I was struck by our conversation around the core DBR brand identity as aspirational, highly exclusive, and almost unattainable. I had heard of Domaines Barons de Rothschild before this class and yes had always thought of them as a highly sought-after, high quality, and prohibitively expensive wine (especially the wine of Chateau Lafite). What I didn't know, however, was how broadly DBR has expanded their business into other regions and other labels, in particular the collections. With other luxury brands that have expanded down-market, the quality I perceive in their brand erodes as it becomes more and more accessible. Alternatively, as evidenced by the Starbucks example we discussed in class, I think it's nearly impossible to build a reputation for superior quality if your brand started in the mass-market. So, luxury brands are rather stuck, then, when figuring out how to expand their business while protecting their aspirational brand identity. Certainly, sub-brands are needed so as not to erode the equity of the original heritage brand, but even that may not be enough. At the same time, however, I don't believe that DBR's Bordeaux Chateaux wines suffer from the same risk to their association with aspriational luxury due to DBR's business expansions. So why is that? What do they have that other luxury brands don't? After reflecting on this question, I think it's due to the scarcity of their most precious resource - the Bordeaux estates. Maybe it's the name Lafite that people are shelling out thousands of dollars for, but there's no other brand that is able to provide the same product, because simply no other brand has access to the same resource that produces such an exquisite (not that I've had the good fortune to validate this assumption) wine. I certainly don't mean to downplay the important of the winemaker here, but they do seem to have a good starting place. All this to say, it feels like luxury wine is different from other luxury industries because of this dynamic. I'll be curious to look out for any examples that refute this conclusion - are there luxury wines that made poor strategic decisions and irreparably eroded their brand and their reputation? 

Brand Protection: A Lesson from Target and Neiman Marcus

A striking part of this week's case was the class discussion on brand protection: once you have built a brand, you need to maintain that part of your identity as it is critical to your business. During class, we discussed a number of brands who had established specific reputations that then tried to expand, whether it was Starbucks trying to elevate to higher-end locations or Thomas Keller developing the more affordable Bouchon restaurant. Executed well, these strategies can help to expand a company’s audience but done incorrectly, it can hurt the overall brand.

During my summer internship at Target in 2012, I had the opportunity to see the execution of Target’s collaboration with Neiman Marcus. The value proposition of this initiative seemed so obvious. Place Christmas gifts designed by Neiman Marcus quality designers (e.g., Marc Jacobs) in Target shops so that:

• Neiman Marcus could enjoy the scale of Target’s retail footprint and open itself to a different audience

• Target could bring higher-end products to its customers and differentiate itself from other retailers (e.g., Walmart)

What seemed to be a homerun idea ended up being one of many financial disasters that ultimately led to Target’s public layoffs in 2014. There were a number of key mistakes that were made in this initiative:

• Quality vs. Price: Target and Neiman Marcus emphasized that the success of this initiative would be attributed to the cross-traffic that each retailer would receive from the others’ audiences. Both Target and Neiman Marcus placed the products in its stores to improve each other’s brand recognition but this ultimately ended in failure. Neiman Marcus customers reported seeing the products in-store and noticing the lower quality compared to other Neiman Marcus designer products. Target customers perused the gifts and noted the much higher prices compared to what they would typically allocate to a Target. The mismatch of quality and price resulted in high inventory levels that ended up having to be highly discounted.

• Consumer Needs: In internal discussions, Target and Neiman Marcus mentioned how their customers were similar in both wanting high-quality items. This was an incorrect assumption as even if customers shopped at both locations, the products they were purchasing at each were not the same. Customers shopping at Neiman Marcus for gifts were not also shopping for similar items at Target and this idea of a “common customer” was a key part of the initiative’s downfall.

In relating this to our DBR case, it is critical to keep brand image in mind when executing any type of initiative that is attempting to extend the brand or reach a different target audience. Placing a brand on another product does not translate to success. If the new product is not in the customer’s preferences, this could lead to brand dilution and customer confusion. Although DBR's Collection line is bringing in high revenues for the overall company, this short-term success could come at the cost of a long-term strategy.

Family Business

This post is about a reaction to something that came up for me when our speaker for the class, Christine Wente Von Metsch, came in.

Christine started the class by explaining that she is a part of the 5th generation of the Wente family working on their vineyard. She joked that her business card states just that. 

In light of our conversation around perceived quality as a strategy for DBR, I started wondering why it was that when Christine mentioned "part of the family," I immediately perceived Wente to be of high quality.  As I've reflected on why that is, I've found myself thinking:

Well, if it''s a family business, they must have a secret sauce that's passed down that keeps working. 

or

Well, if it's a family business, each new leader of the company knows their stuff down pat. 

I found, though, that it's not as much a rational reason as it is some association in my head with the idea of a "family business" and trustworthy.

As we continue to discuss players in the industry, I'd like to keep an eye out on family wineries and their competitive advantages -- is perceived quality the common theme?

Understanding Why Beer Companies Buy Wine Companies

In a prior life of mine, I was a investment analyst at a hedge fund in New York City. Tasked with finding good investments in the global consumer and retail industries during my time there, I went on to lead our firms sizable investments in the beer industry. At one time, we were a major shareholders in Constellation Brands, Anheuser-Busch Inbev, Molson Coors and SAB Miller. Our firms thesis was that global consolidation would continue and lead to a "duopolistic" like pricing structure whereby pricing and margins would increase for the entire industry. I spent countless hours mapping out the entire global industry, talking to industry participants and research analysts, placing assets with different companies using a physical map and pins. I became the beer guy at the firm.

Throughout all of this, one thing that continued to puzzle me was why Constellation Brand was building a wine portfolio. I didn't know much about the wine industry but in my view it was a lifestyle industry. No one went into the wine business to build a billion dollar business. It was a hobbyist industry, nothing more, nothing less. Yet Constellation was investing millions of dollars into their wine businesses and I couldn't figure out why. The beer business was a concentrated sixty percent gross margin with pricing power whereas the wine business was extremely fragmented. You had pricing power but consumers had far to many options for pricing power to matter. I needed to know why they were investing here instead of the beer business. Any chance I got, I inquired about the wine business, suggesting that the company get rid of it but time after time I was rebuffed, told that the company was committed to it's wine business. As if I needed further clarification, the company then bought The Prisoner Wine portfolio and I remember being utterly confused. As far as I could tell, the company just wasted three hundred million dollars, choosing to allocate it here instead on in the higher-return beer business.

I ultimately left the firm for the GSB without ever getting a good understand of the wine industry or what made it so attractive. Throughout this class I'm hoping to understand the history of the industry and why it evolved in the a manner so different from the beer industry. I also want to understand the underlying motivations of actors in the industry as a means of understanding the industry better in general. At the end of the class, I hope to be able to see why Constellation was so committed to the business.