I had an honor to have the edited version of my commentary to Harvard Business Review case study Preserve the Luxury or Harvest the Brand? printed in its January / February 2011. The commentary was part of the gojceta.com initiative and it is embeded in my web 2.0 “personal strategy”, which is partly described in one of my posts.
I posted the comment to the hbr.org community in October 2010 after having read the intriguing case study. The complete text is available in the Jan/Feb 2011 issue of the Harvard Business Review, or on the HBR.org. In short, the case was about an imaginary French winery Chateau de Vallois. Vallois is a typical family business with simple business model combining vineyards cultivation with wine making. They are traditional in producing high quality wines and selling it through the traditional channel which exists for centuries in Boreaux. The negociants are wine merchants that diminish the risk of wine placement, but take the majority of the sales margins in return.
The youngest member of the family, after her MBA study and engagement with a leading consulting firm, wanted to make some change and start branding and selling wine on a much larger scale, targeting lower market segments. The young women’s idea engaged the family into discussion. Others were concerned about Vallois’s ability to market, their capacity to go for large scale, the relationship with negociants and similar.
This was my original commentary to HBR.ORG Vallois case study
Personally, I would’t go from exclusivity to wide market. We learned lessons from different industries such as car producers or fashion brands where this was often a bad idea.
I would rather use an even more exclusive wine*, sold directly from the chateau as brand exstension. Brand extension is fair even if adding several percent to profits of a business. Let’s say, in this case a new wine would make only 5% of the total quantity. Its margins would be double than the usual shipments due to direct sales and would add a 30% due to exclusivity. In this case the 5% of the revenue could contribute with additional 13% to the margin, assuming their selling price as base price and that the new production wouldn’t generate excessive additional cost (vine making is their core business anyway).
The new brand extension with exclusive price, channel and quantities would be a lever to increase demand for other wines purchased by negociants. The 5% of the total quantity wouldn’t create problems with the lack of grapes and would not harm the negociant’s market, but rather increase the whole brand value through scarcity of the newly introduced wine. The new wine would allow the owners to gain marketing expertise and establish the new business model with a low risk approach.
*In the original text it stands “vine” instead of “wine”
What was my point?
The approach I suggested was keeping the family business set up, while giving them the opportunity to start building their sales and marketing capability. The approach with even a more prestigious vine brand, sold directly from the vinery, would have been focused on profits rather than revenues.
How did I reach the above calculation?
Negiociants used to resell Chateau de Vallois’s wines with around 100% margin. If the Chateau would have had produced additional 5% of a more exclusive wine with higher margin of 7 value points from 5 quantity units, compared to the 135 value points they gain from 100 quantity units through negocitants (supposed cost ratio is 80 value points per quantity of 100 for both vines), it would contribute with 13% of additional profit margin (7 of 55).
|New prestigious wine||Actual wine|
|Production cost (value points)||4||80|
|Price sold out (value points)||12||135|
|End consumer price (value points)||12||200|
|Ch. de Vallois margin (value points)||7||55|
What did I mean by lessons from different industries where brands have eroded due to switching from serving exclusive segments to wide markets?
Different exclusive car producers have given up their exclusivity to address a wider market. Not many of them have succeeded. Instead, many have struggled for years to regain the original brand proposition. Some of the examples were Porsche’s front engine GT models discontinued in 1995, or Jaguar’s trip into middle class car production.