Quality over Choice: The In-N-Out Story

During our discussion on consumer choice last Friday, the point was made that producers or goods will have higher perceived quality if they make a broader range of that good. For example, a chocolatier that makes 25 different types of chocolate will have a higher perceived quality than a chocolatier that only makes 5 different types. To me, this made sense and I was able to think of a number of examples that fit this mold.

But what about In-N-Out? Among those knowledgeable about such things, In-N-Out burgers are the best of any fast-food chain in the world (sorry Five Guys, Shake Shack, and Whataburger). However, In-N-Out has a smaller menu than an artisanal farm-to-table restaurant. The In-N-Out menu, excluding the special menu for elite In-N-Out connoisseur, offers three types of burgers that vary only by number of burger patties and cheese slices, fries, shakes, soda, milk, and coffee. That's not much choice!

Somehow, despite its limited selection, In-N-Out maintains the highest perceived quality in the industry, as reported by 90% of Californians. How have they been able to achieve this? Is there value in specialization? Does this laser-focus on quality only work in an industry filled with low quality producers? All I know is, I'd like a #1, please. Yes, with onions.

Understanding wine tastes and developing palate

In the last class on Friday, Alder’s truthful and authentic advices on how to taste and enjoy the wine confirmed directions on my future wine journey.

Among thousands of wines, I always had tried to find something with decent tastes and with reasonable price to me. Obviously, it’s all subjective. However, in the meantime, I also looked for some objective criteria to judge the wine taste and quality. I bought books and read magazines to identify what the real taste of wine is. Well, that was a mistake. Understanding all descriptions of the wine by different professionals confused me, and most of the ingredients that they explain were even new to me. Despite of frustration, I tried to learn them, and articulate different flavors and aromas as if I really knew them. However, when you don’t really understand it, it’s hard to keep pretending to do so, since you cannot go into deeper and deeper. This experience dragged me down from wine for a while.  

But, Alder’s clear views on words (jargons?) used to describe the tastes of wine gave me at certain level of confidence to try again to learn about it. Even though there are various ranges and descriptions of taste of flavor and aroma, those seems to be categorized in some way.    

What’s next? Experience more wines with Vinogrpahy Aroma Card, and develop your own wine palate. 

What happened to Greece's wine industry????

The earliest evidence that Greece produced wine dates back 6,500 years.  With all of that heritage, why is it not a cherished and reputable wine region today?

When researching this topic, I surprisingly discovered that there's a Greek wine region map, that the Greek wine industry has a Wikipedia page, and that Food & Wine wrote a review nearly 10 years ago about seven Greek varietals.  I've been fortunate to travel quite a bit, and am a wine fan, so why have I never heard of Roditis?

Puzzled by this gap, I researched how to find imported Greek wine by calling Arlequin Wine Market in San Francisco.  They didn't carry Greek wine.  I called BevMo on Geary Street in San Francisco, and ran into the same issue.  Equipped with only two regional data points, I found a few importers online that can ship to me, but there is still a gap for the consumer who wants a special bottle of Greek wine tonight.

In a time where Greece's economy has collapsed harder than a Kardashian in a spelling bee, I am curious: WHY hasn't Greece made a larger effort to export the product one of it's oldest traditions, wine?  Was there a decline for demand of Greek products (demand), or did Greek winemakers close up shop in recent economic riff (supply)?

I can't find an answer or a conclusion, which makes me feel like I've written a terrible blog, but perhaps a reader will have a firm answer.

Tax Breaks for Wineries and Craft Breweries in Republican Tax Plan

We have spent some time in class discussing the fraught regulatory environment for alcohol producers—and particularly, wineries—in the United States. After yesterday's Congressional theatrics, the federal government has slipped in some less-noticed tax breaks for craft brewers and winemakers.

The new tax plan provides two major concessions to the wine industry: i) it broadens the number of wineries eligible to receive tax credits, and ii) it raises the ABV threshold for excise taxes.

Under the current tax regime, wineries producing fewer than 250,000 gallons (c. 105,000 cases) of wine are eligible to receive a tax credit of up to $0.90 per gallon. The new plan raises this threshold to 750,000 gallons (c. 315,000 cases), with no phase-outs for eligibility (i.e., even producers with well in excess of 750,000 gallons will receive the credits for the first 750,000 gallons produced).

Another provision in the status quo tax regime levies excise taxes on wines with an ABV of greater than 14 percent. Industry advocates have argued that this threshold is too low for the current wine palette and production processes. They state that improved viticultural processes have "reduced crop size and opened up canopies", which has "increase[d] structure and flavor development, but... also sugar accumulation, which translated into over 14 percent alcohol". Currently, wines over the threshold are taxed at $0.50 per gallon more than those below. The new tax plan increases this threshold to 16 percent.

Additionally, the tax plan includes reduced excise taxes for craft breweries, which are discussed in this Politico article.

While the above amounts may seem minor, they add up. For a producer selling 600,000 gallons of 15 percent ABV wine, excise taxes would total $947,000, with no eligibility for tax credits. Under the new tax plan, excise taxes due would amount to only $642,000, with offsetting tax credits of $371,450, resulting in a net tax of $270,550. Tax savings of $642,000 in what we know is a low-margin business could be meaningful for a business selling ~252,000 cases of wine.

Perhaps we are seeing the beginning of congress going easier on the alcohol industry.

Georgian Wines Gaining Popularity

Through a classmate who moved here from Georgia (the country), I was introduced and have been really impressed Georgian wine (but also the food).  I'm also learning that it's becoming more of a travel destination, partly for that very reason ... the quality of the wine.  I was introduced to both the food and the wine at a great restaurant in NYC.

If anyone has been and has any recommendations, I'll go next year and would love to check out some wineries while I'm there.  Also, if anyone happened to write on Georgia for their final paper, any insights are greatly appreciated.

https://www.wsj.com/articles/is-the-country-of-georgia-the-next-great-wine-destination-1460045910
https://www.nationalgeographic.com/travel/best-trips/best-fall-trips-2016/best-fall-trips-kakheti-province-georgia-wine/
http://odahouse.com/
http://odahouse.com/menu/drinks/

Scientific, Technological or other innovations - what would really change things in the wine industry?

If we consider many factors that can make grape growing and/or wine making a challenging prospect, I'm interested in knowing what might be the single biggest issue that -- if solved -- would change either grape-growing or wine making forever. 

While I think about all the things we learn are critical to developing a good wine, the quality of the grapes, the processes chosen in making the wine; I'm now wondering if there's something even bigger out there -- not necessarily on our minds, maybe not on the average grape grower or wine maker's mind -- that might (for example) make it possible to grow good wine grapes in a region we never, ever considered; make it possible to grow 5x the number of grapes in a given acreage while maintaining grape and wine quality; make it possible to save/regenerate a crop of grapes that would have previously been viewed as irreparably lost/frozen/of poor quality, etc.

We are surrounded at Stanford with so many people working on tough questions in biology, physics, chemistry, etc.  (and, of course, people around the world are doing the same)... it makes me wonder what huge challenge may end up getting solved that could change the landscape of the wine industry that we aren't yet considering. 

Brand cultivation in the wild

Man, those Duckhorn slides. I could envision some banking or private equity associate stretching the images of wine bottles to indicate revenue explosion over the past five years; and when Carol was describing her relationship with TSG as a partner, I could imagine sitting in on the conversation between management and the investors at TSG. As an investor in consumer and retail businesses, and also as a consumer, I was excited to learn more about Duckhorn’s history of private equity ownership and the impact it has had on the company.

Carol used the term “relentless focus on luxury” to describe how Duckhorn is trying to grow, and I especially appreciated her thoughtfulness, attention to detail, and creativity in do so. Two key lessons on preservation and cultivation of the Duckhorn brand, one small scale and one large, stuck out to me:

1. Carol described policing menus, making sure that sommeliers used the term “Decoy by Duckhorn” rather than “Duckhorn Decoy.” This seems like a minute detail, but in her description, I saw her ruthless pursuit of brand preservation. I agree, a customer who seems Duckhorn Decoy might not realize that it’s the less expensive line unless it is separated as she described. The lesson for me here is to find the instances where even such subtle wording choices might have a differential impact on how customers perceive your brand.

2. She also shared with us the thoughtfulness with which Duckhorn decided to acquire Calera, a “blue-chip brand” that was already highly respected by others in the industry. Recognizing that everyone’s eyes would be watching them, her team made sure that the next big step after acquisition by TSG was still brand-enhancing and not destroying. A different acquisition of a less respected name might have eroded the industry’s faith in Duckhorn’s success as a brand after taking money by a financial player looking for a profit. This example is a good reminder be thoughtful about how any structural decision, small or large, might enhance or erode brand in the eyes of customers or competitors.

Brand cultivation is not always obvious, and Carol's lessons helped bring to light some examples that we might not otherwise at first glance. As an investor, I want to be wary about how these business decisions, however small or large, could impact my customers perceptions of my brand. And as a consumer, I want to use what I learned from Carol to make better decisions, and also to recognize when my decisions are the product of marketing decisions rather than a result of my own preferences.