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Harvard Business Review Preserve the Luxury or Harvest the Brand?

 

 

 

by Daniela Beyersdorfer and Vincent Dessain 

The owner of the prestigious Château de Vallois must decide whether to launch a more affordable wine.

Editors’ Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your email address.

Gaspard de Sauveterre shivered as he stepped out of a side entrance of his château. While the late September days were still warm, he could feel autumn approaching. The 75-year-old owner of Château de Vallois, a famous wine-producing estate in the Bordeaux region of France, felt a familiar thrill. This was the season he and his team had worked toward the whole year; any day now the bell for the harvest period, the famousvendanges, would ring. He quickened his pace down the long, well-kept alley through the wrought-iron gates to start his ritual morning walk through the vineyards.
He loved these hours when the rising sun bathed the misty landscape in shades of yellow and gray. The quiet, cool air also cut through the thoughts swirling in his head since his granddaughter had burst into his study yesterday with an audacious proposal.

Claire de Valhubert had grown up on the estate but had moved to Paris following the sudden death of her mother, Gaspard’s daughter, seven years ago. After graduating from one of France’s elitegrandes écoles she had worked for a top consulting firm before earning an MBA at INSEAD. Gaspard had expected her to come for the harvest, of course — she never missed it — but he had been surprised to hear about her plans to join the family business and radically change the centuries-old enterprise.

Claire had explained her idea as simply as possible. In her opinion, younger wine enthusiasts were being priced out of high-end French wines. And although she knew that de Vallois had been steadily profitable since the 1980s, she worried about what might happen if the estate allowed less-expensive, lower-quality wine makers, particularly those from outside the traditional wine-making regions of Europe, to capture and retain the next generation of customers. She wanted de Vallois to enter the “affordable luxury” market, selling directly to customers, as some of the other top traditional Bordeaux estates had done.

When Gaspard mentioned the encounter to François de Sauveterre — his son, Claire’s uncle, and the château’s CEO — later that evening, François’s first reaction was to raise a skeptical eyebrow. But he agreed to give his niece a hearing; after all, she had inherited her mother’s 25% share of the estate, the same stake he held. Gaspard had the remaining 50%, and although François had taken over day-to-day operations five years ago, the elder de Sauveterre would certainly weigh in on any change in strategy, particularly one as dramatic as Claire’s.

A Rare Vintage

Turning into the fields, Gaspard was not surprised to see Jean-Paul Oudineaux, his estate manager, crouching over a vine and carefully examining its grapes. He had hired Jean-Paul, then a young agricultural engineer, 30 years ago after buying Château de Vallois.

The estate had fallen into a slow decline under its last owner, but together, Gaspard and Jean-Paul had restored it to its former glory. The essential ingredient had always been there: a terroir with the ideal soil and microclimate, which, according to the French, determines a wine’s character. In a ranking of Bordeaux wine estates that recognizes their long-term track record in quality and reputation, de Vallois had in 1855 been classified as a Premier grand cru classé (First Growth), which allowed the estate to command top prices for its wines.

Gaspard and Jean-Paul had overhauled the vineyards, improved the drainage, and subtly adjusted the blend. In time, the château produced perhaps the greatest of Bordeaux’s five grands crus classés. Today, it sold about 150,000 bottles each year of its Grand Vin du Château de Vallois, a combination of carefully selected cabernet sauvignon, merlot, petit verdot, and cabernet franc grapes. The estate used the best of the remaining grapes to produce a second wine, the Puiné, averaging 200,000 bottles per year. The rest were sold to other estates on condition that their origin would not be revealed. It was a good business and had kept his children comfortable, but he sometimes worried whether it would sustain future generations of de Sauveterres.

“I think we are almost there,” Jean-Paul called out as Gaspard approached. “Just look at these grapes! This year could be even better than 2005.”

Gaspard was not surprised; the weather had been warm and fairly dry all summer. Jean-

Paul continued, “We could start picking Friday, but I’d prefer to wait till after the weekend.

The weather forecast is for a few showers and a drop in temperature, and I think that would add a little freshness.” Plucking a few grapes himself, Gaspard concurred.

As he felt their tannic sweetness tease his palate, Gaspard asked Jean-Paul if he had seen Claire. Jean-Paul smiled, “No, but I’m sure I will. She hasn’t been here the whole summer, so she’ll inspect every corner of the place to make up for it.”

“Well, you’d better prepare yourself,” replied Gaspard. “She wants to make a branded wine and sell it directly.”

Jean-Paul sighed, “You know what I’m going to say. Vines are like children, they need to be looked after very carefully. It’s the same with selection and the blending. Without 100% dedication to excellence you cannot make outstanding wine. We already do two wines. Isn’t that enough?”

Trusting in Tradition

Later that morning, Gaspard picked up a set of ancient keys and descended to the cellars. He entered the vaulted first-year section in which the best of last year’s harvest was ageing in neatly aligned oak barrels stamped with the château’s emblem.

Around seventy percent of this still-maturing wine had already been sold to specialist merchants called négociants under a centuries-old arrangement designed to let noblemen stay out of the business of commerce. The négociants bought the wine a year before bottling and then sold it to distributors and importers. Visitors were always surprised when told they could not purchase a bottle of wine directly from the château.

Prices for fine wine fluctuated widely, depending on the quality of the vintage, the reputation of the producers and négociants, and the expected demand, and they were increasingly influenced by the opinions of expert critics. Château de Vallois collected between €100 and €450 up front for a bottle of Grand Vin for which a U.S. customer, for example, might pay $999 now for delivery in a year’s time. Some of Gaspard’s fellow grand cru classé owners complained about the négociants’ margins, but Gaspard accepted them. He knew he could rely on the négociants to buy up Château de Vallois’s total output, even in bad years, in order to maintain the relationship. What’s more, since growers were paid in advance, the income from the sale made financing production a lot easier.

Gaspard unlocked the door to the private cellar, which housed almost every vintage the estate had produced. As he walked between the ceiling-high racks, he looked up at the last two bottles from 1848, both covered in dust.

“I thought you’d be here, Papa.” François said, walking in. “I wanted to talk privately. Claire’s idea is not going to work. In a good year, we don’t have enough grapes for a third de Vallois wine, so we’d have to buy more and make a branded wine. If word gets out about that, people could start worrying that we’re mixing those grapes in all our wines. Also, there are risks to marketing our wine ourselves. We can charge a high price for it because it’s exclusive and customers can only get it through a few, up-market providers. If people think we need to push it, they might not be willing to pay so much.”
Gaspard temporized: “Claire has thought about this, too. She’s thinking of keeping the new wine separate.”

François shook his head: “Well, that’s no answer. You know some of the négociants may not like to see producers of grands crus classés adding branded wines. So not only would we have to invest in a distribution channel for which we have neither the experience nor the means, but we’d also be risking the goodwill of the people who sell the wine we’re currently making.”

Gaspard knew his son was a traditionalist. Although he himself still felt like a stranger in Bordeaux after three decades, François had become well connected through his marriage to the daughter of an important négociant family. “Take Cécile’s family,” François added. “They have been in the business since 1739. They are as experienced in distributing wine as we are in making it. They take care of all the marketing, insurance, and transport stuff that we’d have to manage otherwise, and they can tell just where to draw the line between exclusivity and scarcity. They know to whom we should be selling and who to avoid. How would we even determine what price to set each year? Granted we might get bigger margins selling directly in a good year, but what are we to do in a bad one?”

A Case for Change

That evening, Gaspard walked up the main staircase to the first floor and entered the salon jaune, a tall room with long windows. The rich, polished furniture glowed in the candlelight, and the fire was piled high with vine branches that scented the air. He took a seat and was reaching out to a dish of almonds on a side table when his granddaughter came in. Gaspard noticed once again how much she resembled her mother.

“Are you all right, grandpapa?” Claire looked at him closely. “Am I first for once?”

Gaspard smiled, “It is good to have you back here, my child. Sit down, and tell me what you have been up to today.” She was about to answer when François, his wife, and Jean-Paul came in together.

“We just heard the latest forecast and we’ve agreed to start the harvest on Monday,” François announced. The three took their seats and Gaspard handed the almonds around. “I’ve asked for dinner in the kitchen tonight,” he announced. “It will be more intimate, and after all, we’re en famille.”

Dinner in the château’s authentically preserved kitchen, with its enameled ranges and open fireplace, was certainly more intimate than in the dining hall, but tonight’s table was nevertheless dressed with flowers, starched linen, and fine porcelain. Each place was set with silver and four crystal glasses for the different wines that would accompany each course.

Gaspard could tell that Claire was eager to talk business from the moment she sat down, but she managed to contain herself until the main course. She took a sip of the 2001 Grand Vin that accompanied the soft agneau de Pauillac on her plate and turned to her grandfather. “Grandpapa,” she announced. “I know what you were thinking yesterday: ‘Here she comes, her head all filled with business school nonsense.’ But I really believe that we aren’t realizing even half of what this estate is worth.”

Seeing his son frown, Gaspard quickly replied, “Not at all, I may look like a dinosaur, but I am always open to new ideas. I’m sure your uncle agrees.”

Sensing encouragement, Claire began, “Let me sum up. I propose that we introduce a branded wine at a price level of about €20 to €25 a bottle. Our first wine is way beyond what most people can afford, particularly the older vintages — even a bottle of the 2000 sells for about €1,000. And our second wine, at €100, is still too expensive for the average person, particularly younger people, to buy regularly.”

She looked at François: “I know this would work only if we produce at least one million bottles, so we’d have to buy grapes. If you’re uncomfortable with that, we could buy more land instead and grow them. We can’t claim a Château de Vallois origin on this wine’s label, but with Bordeaux grapes or land, we could at least state “Bordeaux origin.” OK, good land here is expensive, but we could also buy overseas, like some of our competitors. Why not make a branded wine with California grapes and a label mentioning that our de Vallois team is in charge of it? Why shouldn’t we capitalize on our brand, and if we can make such great wine here, why not make a wine for younger people somewhere else?”

She continued, “Second, we need our own distribution channel. We do in fact know many of our customers, particularly the specialized importers, from their château visits. For others we could set up our website to allow them to order directly. Many are already asking for this.”

Claire paused to taste her wine, letting its elegant, balanced flavor slowly develop in her mouth.

“Third, I know how we all feel about even the best New World wines — not aging well, too heavy, too fruity, no matter what Robert Parker says. But we can learn a lot from those producers in terms of marketing. They run great advertizing campaigns and do market research, which means they can adapt quickly to changing tastes by changing the flavors they offer. I’m not suggesting that we meddle with our first wine, but with a branded wine we could be much more flexible, and that would give us a chance to attract younger consumers, get ahead of drinking trends, and make sure that when they’re ready for more expensive wines, they come to us.”

François pushed his plate away. “My dear, please don’t take this badly,” he began carefully. “I do think about ways to touch young customers and enhance our revenues, every CEO does. But I think you’re completely misguided. We might not take full advantage of our reputation, but isn’t that partly why we have such a good one? And why spend money on a whole marketing and distribution machine for a low-priced wine?”

Jean-Paul stirred uncomfortably. “Who will make this branded wine anyway?” he growled. “I have neither the expertise nor the interest in making fruity wines with other people’s grapes.”

Gaspard took advantage of the silence that followed to call a halt: “I think that’s enough for now. Let’s discuss this in the boardroom tomorrow.”

Time to Harvest?

Gaspard found the boardroom empty when he returned from his walk the next morning. He had woken up early, playing and replaying last night’s conversation in his mind.
His son was right to worry. The aura of exclusivity around the first wine could easily be destroyed if people started to think the estate was tampering with it. But Claire had a point, too: They had gotten too caught up in their routine of creating the perfect grand cru classé. Well, if nothing else, he reflected, she was making them think and would be a good sparring partner for François in the years ahead.

The two were at loggerheads, but Gaspard had not completely retired yet. It would be up to him to cast the deciding vote on whether or not to launch a branded wine.

Q: Should Château de Vallois begin producing a more affordable wine?

Daniela Beyersdorfer is a research associate at Harvard Business School’s Europe Research Center, in Paris. Vincent Dessain is the center’s executive director.

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About bertousman

Many people say that to be different is exclusive, it is in line with what my friend had already said to me "Form is temporary, but Class is permanent". I absolutely agree with this one.

Discussion

One thought on “Harvard Business Review Preserve the Luxury or Harvest the Brand?

  1. We look at what others are doing and think it is what we should be
    doing. Reading them can help in the choice of appropriate products.
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    You can also benefit from slower activities such as walking or easy swimming, but you must
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    Posted by Latasha | September 17, 2014, 10:00 am

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