Copy and Improve Upon: Wine Classification in St. Emilion

In class a couple weeks ago we talked about how rigid the classification system is for the Official Bordeaux Classification (and compared our reliance on it as a centuries old document to that of the US constitution).  Over 150 years there have been a whopping three changes to the classification: one due to lobbying to promote Mouton Rothschild into the highest tier, one due to a winery having to close and the last due to a winery's owner dying and not having a next of kin willing to run the operation.

If this is on one side of the rigidity spectrum, the classification of nearby St. Emilion is on the opposite side.  St. Emilion, probably the next biggest wine growing region in Bordeaux and a very short drive over the river away from Medoc, created its own classification system 100 years after the Official Bordeaux Classification (that's 1955 for those of you who don't remember the numbers like me).  But unlike the Official classification, the St. Emilion classification system is revised and updated every 10 years by rule.  Not surprisingly, this puts quite a bit of onus on St. Emilion wine producers to consistently produce top tier wines, as a set of poor vintages could result in a wine being dropped down a tier, which would have similar results to what we learned in the Chateau Pontet-Canet case.

On the other hand, having this sort of system encourages higher quality wine-making, as the promise of being promoted a tier during the next reclassification provides wineries with both pride and financial motivations to consistently produce higher quality vintages.  A great example of this is Chateau Angelus, which I had the opportunity to visit in 2016.  In 2012, Angelus was promoted to Premier Class A, the highest tier on the St. Emilion classification, after years of producing very high quality wine.  Upon their promotion, the Chateau renovated their winery and added a large bell-tower to celebrate the good news for the winery:







Given the various pros and cons we discussed in regards to the Official Bordeaux Classification never changing, I think studying it in comparison to the St. Emilion classification system and how that impacts both quality and price of wines produced in both regions would be a very interesting study to dig into in greater depth.

Marketing is Everything in Alcohol: Aperol as A Case Study

                The source article for this post is a bit dated, but I was pretty blown away when I read it last summer and thought it was worth resurfacing to try to better illustrate the point above: marketing is everything when it comes to alcohol!

                When I think of the last few summers before 2018, there is one alcoholic drink that is clearly associated with the warm weather in my mind: Rose.  But when I think about the summer of 2018, there is another drink that rises above for me and claims the spot of Drink of the Summer: the Aperol Spritz.  Last July, almost out of nowhere, it felt like the Aperol Spritz was the most ubiquitous drink on the market and could be found next to every pool, as an aperitif at every restaurant, and as a staple cocktail in every bar in the country.   The Aperol Spritz was everywhere and its appearance was no mere coincidence, but rather the result of a highly clever and effective marketing campaign by Campari, the makers of Aperol, that increased the sales of the beverage by 50% for the season!

                The marketing team at Campari clearly knew the demographic they were targeting and started their campaign on the coasts.  Dedicated Aperol Spritz booths were set up at major NYC events like Governors Ball and the Jazz Age Lawn Party while cute, Instagramable Aperol pop-up bars began opening in LA.  From there the company went after the Hamptons, setting up a mobile scooter turned bar that gave away free spritzes and even wrapping the Hampton Jitney in a full-sized orange Aperol add.  The marketing team doubled down on the drink’s distinct orange color for visual appeal and its Italian origin for signals about quality.  From there, the virality of the campaign took-off with the help of influencers and everyday drinkers.

                Aperol has been around since 1919 and has been a staple of many bartenders for decades, but one successful marketing campaign was able to totally rebrand the drink in the eye of American consumers and drive one of the latest alcohol crazes.  Here, nothing changed but the emergence of good marketing!

https://www.nytimes.com/2018/07/17/style/aperol-spritz-drink-summer.html

Celebrity owned brands

Recently, while at a tasting room in Sonoma county, the bartender came over to pour the last round of our tasting flight and noted "See that field over there? It's owned by John Lasseter of Pixar!" 

That experience seemed all too common, where a celebrity name or image is put on a bottle of alcohol to help drive sales and improve marketing. In this instance, the gentleman was likely just trying to small talk with us but it got me questioning, why is this so common and why do individuals care?

Jay-Z added his name to a French champagne label, where he eventually bought the brand. The champagne was called "Armand de Brignac, AKA Ace of Spades" and the retail price for a bottle was ~$296 -- one of the highest for celebrity endorsed alcohol. 

George Clooney has one of the most famous brands  -- Casamigos Tequila - a company that he founded with two other individuals. He eventually turned the brand into a unicorn, selling for $1 billion.

Besides celebrities increasing the brands as a status symbol, I think the role of celebrity endorsement is even more important as the role of the critic falls. More and more, individuals are looking for recommendations for wine that come from democratized sources but these can be challenging to weigh through. Celebrities personify attributes that are easy for consumers to relate to and help consumers navigate the murky waters of choice when it comes to wine. 

Source: https://www.businessinsider.com/celebrities-with-liquor-brands-ranked-by-price-2018-6#2-george-clooney-casamigos-tequila-5145-6813-12

Innovation in Wine

After the session with Palm Bay International, I was really intrigued by the latest innovations in the wine industry and how they were catching on. The wine industry is not known specifically for innovation - a lot of the technology that is used has been around for decades, if not centuries. Also, the artisan-ship of wine making means that embracing technology or challenging the status quo is often frowned upon.

However, there have been several interesting changes in the wine marketplace (including production, distribution and consumption). Here are some that I was able to dig up:

• Development of a Flat Wine bottle - Developed by Garcon Wines and the innovation won an award at the 2018 30th Awards for Packaging Innovation. The bottle was initially developed to solve the problem of delivery through the UK standard mail slot. Current thinking is that the new bottle shape will have applications to other products (such as spirits) and industries as well
• Source: https://www.foodandwine.com/news/garcon-flat-wine-bottle-dow-design-award

• Fiasco - A wine app that recommends the perfect bottle of wine based on occasion, not just food pairing. Users can also import additional information such as their price point to generate wine recommendations
• Source: https://www.forbes.com/sites/cathyhuyghe/2014/06/04/new-innovations-in-wine-technology-four-leaders-one-curveball/#7332335c526d

• Machine learning & Irrigation - In Australia, vineyards are using machine learning and drones to better water their vines to improve the output of the harvest, as well as the quality of the grapes.
• Source: https://pursuit.unimelb.edu.au/articles/five-ways-technology-is-changing-the-wine-we-drink

WineInStyle: should Eberhart sell?

This case ends with a key decision point for Eberhart’s career. I would separate two aspects of the decision. First, I think that Eberhart needs to decide whether he wants to stay as in the business or not. If he decides to stay as Chairman, he faces a series of decisions of how to turn around the business. The case suggests that he has an idea of how to make this happen by cutting operational costs.

If he decides to leave, and sell his part, he needs to decide who to sell. In this scenario, I see the certification requirement as a no brainer. As Eberhart, due to moral reasons, I wouldn’t want to leave Khoo and the company in hands of investors that might do wrong to the company, even if he ends up receiving the money from them. I think that the downside of looking for a certification is very low compared to the huge upside of reassuring that the investors are who they say they are.

For me the toughest decision is the first one, which is if he wants to continue in the business or not. I would take a few considerations to make this decision. First, I would look at his personal situation. The case mentions that Eberhart wanted to spend more time in Palo Alto with his family. The second consideration is what is best for the business. If he does want to spend more time in Palo Alto, then maybe the position of Chairman is no longer suitable for him since it would require someone more in touch with the day to day business. Therefore, as Eberhart I might lean towards deciding to leave the business. Then I would do the certification; if the investors pass it, then I would sell to them, and if not, I would look for other investors.

Wine In Style

Ah yes, another dentist-turned-winemaker. Or in this case, dentist’s-spouse-turned-wine-importer, but close enough.

Eberhart’s story has the seeds of a classical tragedy - of extended adolescence, of real life delayed in pursuit of the ambitious and exotic. Eberhart left his Ph.D to chase family, then left his family to chase opportunity. Always in noble pursuit - but when is it time to quit the chase?

The answer is clear: today.

Eberhart has constantly been pushing this company uphill, rarely catching a break. Growth is there, but this is no rocketship. WineInStyle has no strong competitive advantage with him in charge - foreign ownership has continually proven to be a hindrance. He has a strong customer base, but not particularly defensible. And he’s running out of cash.

It’s time to declare victory, to bask in the spoils of his constant hunt. To let this very accomplished new CEO - an incredible boon of a hire - fly free.

But not in haste. The ultimate tragic conclusion would be to sell majority stake to a fraudulent investor group, and lose control of all he had worked for with little to show for it.

WineInStyle has got investor interest. Shop the deal around. Where there’s interest from one investor group, if legitimate, there should ostensibly be interest from others.

Put business growth on hold. Spend some time in the market. Use your last hurrah in Japan to close the right deal. Then return to Palo Alto with a win and a nice little pile of cash, and buy yourself some property. Or do some angel investing.