A Night at The Nell

Last Saturday night I had the privilege of dining at element 47, the superb restaurant located in Aspen’s The Little Nell. The evening was a delectable showcase of the finest food and wine on offer, but perhaps the most memorable part of my night was meeting Master Sommelier, Carlton McCoy, or “Chubby” as he is fondly referred to by his colleagues. For those of you who are unfamiliar with the term ‘Master Sommelier’ allow me to provide you with a little background. There are only 149 professionals in the Americas who have earned the prestigious title of Master Sommelier, 236 in the entire world. In order to qualify, you must sit a three-part exam which includes a blind tasting of six wines before a panel in which you must identify the grape, country, region, sub-region, appellation, quality level and exact vintage of the wine! Unsurprisingly, only a miniscule percentage of applicants actually pass. As far as membership goes…it is arguably one of the most exclusive clubs in the world. So you can imagine my excitement when Carlton talked us through the wines he had selected for our evening meal.

To begin, we were served a buttery white burgundy from Meursault (2007, Château de Puligny-Montrachet). I think I’ve officially discovered my new favourite wine! Our mains were paired with a beautiful Syrah from the Rhône Valley (2003, Michel & Stephane Ogier, Cote Rôtie). Following dinner, we were taken downstairs to the Nell’s private cellar. It was a cool, dark room, stocked floor to ceiling with exquisite bottles from all over the world (over 20,000 bottles, we were told!) The ceilings and walls were covered in the illegible scrawl of guests who had written their names in sharpie pen, in an attempt to leave their mark on this underground vinicultural gem.  Of course, I made sure to leave my signature as well! We were told that this room was where the magic really happened. Outstanding food aside, element 47 is renowned for its extraordinary wine program and collection. Remarkably, 10 of the 149 American Master Sommeliers have graduated from The Little Nell, more than any other establishment in the United States.

It was a very special evening and one I will remember for many years to come. I was simply blown away by Carlton’s knowledge of his craft and the passionate way in which he informed and educated his enraptured audience. Despite my limited knowledge of wine, I was thankful that I could at least talk to him about our class!

What brand building activities are most effective?

     It was great having Christine Wente come into our class. As I listened to her, I wondered what are the effective/efficient ways to build a U.S. based wine brand? We talked about the experience aspect of visiting her winery to create the brand. However, that can only reach so many customers. So I was wondering if having those experiences, some of which are cost centers, at the winery are just considered necessities to build rapport with top critics and/or customers? I liked her wine but am not sure how I would have heard about it if I hadn’t tasted it in our class.

     My SO (in the picture attached) and I went to find the wine down in SoCal for a family party. Unfortunately, Wente’s website said Riva Ranch wasn’t available at the stores near us. So, being a relatively uniformed wine consumer (though that is changing with each class!), I googled “best wines at Trader Joe's” because I was making a grocery run there anyways. I was going to pick one from the list I found based on the description that sounded most intriguing. As it turned out, Trader Joe’s had the Riva Ranch, I bought it, and my SO’s family loved it!

     From this experience I wonder, how do wineries track where there wine is across multiple retailers who all have their own inventory systems? Clearly there are issues as I was led astray by the Wente Vineyards’ own website. The second thing I was wondering was, are there a few blogs that drive a lot of purchases? Or is influence disbursed? And how do you get in front of top bloggers/reviewers?  To me, being in some of the first google result searches has got to be a high priority but I’m not sure how wineries are addressing the challenge outside of just having high quality wine and reaching out to reviewers they know.  These are questions that I will ask other wineries that visit our class.

The next rosé?

The cases of Inniskillin and Domaines Barons de Rothschild illustrated brands that captured and maintained market share as a result of their emphasis on quality and focus on the high-end of the wine market. When discussing DBR specifically, many of us concluded that instead of expanding their Collection offering in the lower-cost segment, the company should instead continue expanding by doing what it does best: growing and producing the highest quality wines at French chateaux. In fact, moving down the quality/cost frontier might erode their competitive advantage of being a leader in the high quality, luxury wine space.

This begs the question: how can companies successfully establish a competitive advantage in the affordable wines category? Establishing a competitive advantage is especially important in this segment given extreme fragmentation. Constellation Brands seems to be attempting to find the answer to this question. The company recently reported Q4 earnings and revealed that beer revenues increased quarter over quarter. In contrast, the company expects wine and spirit sales to decrease 4-6% over the 2018 fiscal year. How might the company try to increase wine sales? One idea is a cannabis-infused wine offering. In October, the company announced that it obtained a minority stake in the Canadian medical marijuana company, Canopy Growth. While cannabis-infused wine might be a few years down the road, at least in the US, it would certainly have greater impact than bringing a new canned wine or rosé to market. I think this class provides a good opportunity to look at other ways companies are attempting to differentiate and grow in the affordable wine segment.

Who has the power?

I was struck by two comments made by Christine Wente during our class on Thursday. First, she stated that she felt lucky they were above the fray and selling for more than $15/bottle. This seemed to suggest that the low-cost segment is very competitive, and most consumers are buying based on price as opposed to brand reputation or loyalty. Shortly thereafter she discussed how difficult it is for Wente to raise prices, and that they’re investing a lot in their wines and probably not charging enough.

These two statements seemed contradictory to me. As one of the oldest wineries in California, Wente is clearly established as a brand. If consumers view it as higher quality, and they’re willing to pay above the ~$15 low-cost threshold that Christine identified, why is it so difficult to incrementally raise prices?

As I reflected on this question I began wondering if:

1.     The middle market is becoming more competitive? It was suggested that most mid-size producers did not want to be acquired by large players, and many are family businesses. Are mid-size producers going to continue to expand as multiple generations become involved in the industry?

2.     The difficulty raising prices stems from the power held by consolidated distributors? It was mentioned that it was hard to get attention from distributors if you weren’t a large brand. If the majority of a winery’s sales are not direct to consumer, how much power do they have to dictate pricing?

3.     The demographics of their customers are changing? We discussed in our first class how boomers are the largest consumers, but their consumption is slowing. Could replacement consumers with lower disposable income be contributing to the problem?

Wine & Finance: Well-Established, High Quality Brands Adding More Affordable Products

There is always a trade-off when a luxury brand considers expanding by adding an affordable product to its offering. I worked through this problem in my role at Morgan Stanley prior to the GSB. Morgan Stanley Wealth Management provides quality investment advice and resources to its clients and has historically targeted a high net worth clientele ($2M+ in assets). Recently, however, with robo-advisors disrupting the industry, Morgan Stanley has had to decide whether it too would enter into the robo-advisor space. This expansion would give the firm access to a high volume of mass affluent clients and the next generation of high net worth clients who currently favored an easy, low cost digital offering. When the next generation clients inherited or accumulated wealth, they could then easily transition into an advisor-assisted offering, Morgan Stanley's bread and butter. The downside is the potential effects on Morgan Stanley's brand and the cannibalization of its current business in the advisor-assisted model.

This same thinking could be applied to the wine industry. When DBR considered expanding to Chile to offer a more affordable product, they too needed to consider the impacts on their brand. They chose to label differently, adding a new brand to their portfolio rather than diluting the reputation of the current luxury brand name. Morgan Stanley, on the other hand, would need to leverage the power of its name to persuade even mass affluent customers. The offering could have its own labelling but it would be more obviously tied to the MS brand. Still, both are able to use their well-established reputations to market even their affordable products as high quality.

While there are many similarities in MS's and DBR's approach to branding their affordable product lines, cannibalization concerns do not affect both in the same way. MS needed to be concerned that customers would abandon more expensive advisor-assisted channels to opt for the digital offering. This is because digital offerings were brand new and were not an option before and especially not an option from a traditional, reputable brokerage firm. People would leave expensive channels in favor of cheaper ones. DBR on the other hand didn't have this concern. Affordable wine was already accessible and is now even more accessible. It is very easy for customers to purchase a $10 bottle of quality wine. DBR expanding its offering to meet this demand did not necessarily cannibalize its luxury product offering because when people purchase affordable wine their alternative is not expensive wine but instead other affordable wine. Therefore, DBR could expanding into this segment of consumer demand, leveraging its brand to ensure quality without harming the success of its more expensive products.

Though brand dilution and cannibalization are valid concerns, the availability of alternatives in both industries makes it essential for both companies to adapt to the accelerating changes in consumer trends in order to ensure their success in the future.

Consumer Behavior in China - Some Answers, More Questions

I really enjoyed our conversation around DBR's strategy in China and was left ruminating about whether or not Chinese consumers are ready to start purchasing and consuming Chinese wine. As discussed in class, the mistrust of domestically produced pharmaceuticals and infant formula has been a real sticking issue. A 2008 scandal in which melamine was discovered in infant formula led to serious mistrust of the domestic dairy industry and prompted increased regulation of food and beverages. This was one of the many contributing factors to an emerging desire (by those who can afford it) to buy imported goods from reliable names. I saw this trend in action in 2013, when I worked on the team that advised Smithfield (America's largest pork producer) on their acquisition by Shuanghui Group to form the largest pork company in the world. Much of the acquisition thesis revolved around the value of marketing and selling an American branded product in China, with quality implicit in the American name and packaging.

However, based on my recent visits to China and conversations with people on the ground, I think that this trend is starting to change. Part of the issue has been a general attitude that Chinese companies make low quality copies of existing products rather than innovating and creating something new (and tailored to the local market). Xiaomi, an electronics company, is a great example of how that is changing. Xiaomi has long been thought of as a maker of low cost, knock off Apple products. However, a recent visit to corporate headquarters and their new retail concept has convinced me that this is no longer the case. There is true innovation taking place, most notably evidenced by the recent launch of their Mi MIX phone (in advance of Apple launching the iPhone X). I think the same trend is occurring across industries, including fashion, personal care and food & beverages. In November, I visited a mall in Beijing that had a store selling locally grown produce and prepared foods. The store would have been at home in Williamsburg or Palo Alto, right down to the signs showing the provenance of each item and the eye popping prices. Consumers are starting to appreciate that "Made in China" can mean high quality, with the added benefit that these products are made at home by people who have an authentic understanding of the local market. I look forward to learning more about how this emerging trend will translate to the nascent Chinese wine industry.

Margaret Greenberg

Empires Can Fall

In our last class, what really struck me was professor Rapp’s comment “that no matter how much empire you have, it can fall.” There is a perception of the wine industry, at least in my opinion, that old distinguished brands control the market and because of this, there is very little room for fresh contemporary ideas and cutting edge brands to thrive within this “old boys club” of sorts. I was familiar with Domaines Barons de Rothschild and like many others in the class associated the wine with quality, wealth, exclusivity and cache. And I was not wrong in my assumptions and associations. As we learned in class, the strong value of this wine company lies in its brand identity and superior quality.

Domaines Barons de Rothschild is a global brand we as business students can look at fondly and potentially model our future businesses around. More importantly though, as young entrepreneurs hoping to build sustainable companies post GSB (with superior quality products and/or strong brand identities) it is important to take careful note of one of the key lessons I took away from this case; with great product and great branding, also comes great responsibility to protect the competitive advantage (Peter Parker is not the only one whom the quote applies). Building a strong product and a brand is simply not enough, and is only part one of the process. We must also be mindful of the many threats to dominance within a market and know how to protect the brand. Of course it is important to not dilute quality, but it is also important to continue learning, expanding and challenging the company to grow in new ways. Because no matter how great or dominant a company becomes, the lazy monopolist always has the potential to fall.