Fake Lafite in China

It is well known that the sale of counterfeit wine is a rampant problem in China. A Forbes article estimates that 50% of wines retailing for $35 or more in China are bogus. Empty bottles from brands like Lafite “fetch up to $1,000 a piece on the black market, which are ultimately re-corked and re-sold to unknowing buyers.” These bottles are often filled with Chilean wine, which incurs almost 0% import tax (vs. up to 50% for most wines), or wine from local Chinese vineyards. One of the only ways of avoiding counterfeit wines is to purchase “ex-cellar,” i.e., sourced directly from the cellars of producers like Chateau Lafite Rothschild. Otherwise, auction houses selling these wines cannot guarantee the provenance of the bottles.

I find the coverage about counterfeit wines interesting, particularly in the context of Lafite’s strategy to produce wine in China. On an obvious level, the retailing of fake wine is brand damaging. A person who spends up to tens of thousands of dollars on a wine that turns out to be fake may be unlikely to do so again. Even worse, a person who spends this sum on fake wine and does not realize the counterfeit may have a lasting negative impression of the brand’s quality.

While the sale of counterfeit wine is clearly a huge problem for wine collectors, I wonder whether the risks to the brand are slightly overblown. Firstly, major producers would generally never capture the upside of these massive price tags – since most wine is sold en primeur, they do not capture the value from wine sales on the secondary market. While one could argue that counterfeit wine is brand damaging in the same way as a fake Louis Vuitton might be, I don’t believe these are analogous. The purchaser of a Louis Vuitton, for the most part, can find out whether they are buying a real or a fake. The purchaser of a 1959 Chateau Margaux cannot (unless purchased ex cellar). The second article describes a collector who opened three of such bottles at a dinner party before he found one that he thought was genuine. He remarks, “What can you do? Enjoying old wines means taking risks.” This ability to take such expensive risks - whether the wine is no longer good or was never real in the first place – is an extreme luxury that enhances the status of the collector. I wonder whether the prevalence of fake wines actually increases the allure of the real thing.

I question whether the play to provide more accessible, Chinese grown wine has more brand damaging implications for Lafite. Unlike Lafite’s other markets (e.g., Chile, Argentina), wine from their Chinese vineyards is being produced for Chinese consumption. Particularly for a set of consumers that tend to spend money while traveling and place a premium on “old world” provenance, I suspect that prevalence and accessibility will dilute the exclusivity that makes Lafite a luxury brand. Perhaps Lafite should spend less effort worrying about counterfeit wine and more revisiting their strategy to prevent brand dilution.

Source: https://www.forbes.com/sites/pamelaambler/2017/07/27/china-is-facing-an-epidemic-of-counterfeit-and-contraband-wine/#2dbb4e995843

https://www.forbes.com/sites/jeanniecholee/2016/06/04/how-to-avoid-fake-wines-at-auction/#c7f91cb5113a

Growth of Chinese Wine Industry

When I heard about Chinese wine a few years ago, the first question is “are they making wine?”. Knowing about Chinese drinking culture and their love for traditional spirits, China doesn’t seem to be right place for wine. However, discussion on China wine market in the class, and a bit of research on the market astonished me. China is the 2^nd largest country owning vineyard behind Spain, and 8^th largest wine making country.  Just like other manufacturing industries, Chinese wine industries are growing fast based on huge consumption based and capital investment.

Even though, there are diverse views on the future of Chinese wine industry, there are some facts important to notice; new vineyard development by government supports, continuous inflow of foreign wine experts, and strategic alliance between global wineries and local makers.

This movement of Chinese wine industry is exactly similar to other successful Chinese manufacturing industries such as electronics, industrial equipment, and automotive. This is a proven success formula of Chinese business, and that’s why I am more interested in the future of Chinese wine industry.

Within short history of wine making, some of local winery such as ‘Grace Vineyard’ is writing a success story. A vineyard located in Shanxi is getting recognized by global wine professionals and institutions. By focusing on quality with France wine experts, sophisticating wine bottles and label, and broadening marketing channel by support of government, Grace Vineyard is growing into international beyond local market.

Even considering some negative effects on wine market – anti-corruption rule, drinking culture and behaviors – local demand is growing more than 12% CAGR.

Chinese growth strategy, growing success story, and strong demand. That’s why I expect growth of Chinese wine industry in near future.

More than Gabriel: How Gabriel-Glas can connect with today's wine drinkers

In our first class, I asked Tempe about how she can connect with consumers who aren't familiar with Rene Gabriel. The power of that name only exists for older, higher class, more refined wine consumers -- a very small portion of Gabriel-Glas's target market, and an even smaller portion of the broader population. I wanted to offer my own assessment and recommendations to help Tempe. To start, who is the customer? Excluding the refined, older, wealthy consumer for whom the Gabriel brand holds meaning, there are two major paths to becoming a Gabriel-Glas (GG) consumer: 1. Be in the upper quartile of income (for domestic US population) 2. Be engaged and put Gabriel-Glas on your wedding registry There's a fundamental truth that I need to establish upfront: truly middle-class families (median US household income = $55k) cannot afford to spend $29 per stem or $174 for a set of six. That's fine, we just need to own who the market is. For the first sub-market, the persona I build for this customer is a 28-38 year old urban dweller who enjoys indulging in a good meal and a solid wine. She or he frequents restaurants with friends or a partner, but also hosts the occasional dinner party or wine and cheese night. Her or his days are spent building a career, and evenings often start with a glass of wine to wind down. There are two potential paths to reaching this consumer: upper-mid market home stores (e.g., Crate & Barrel, West Elm), and restaurants. I think the second path is the most exciting, and would recommend GG explore retailing through urban higher end restaurants and wine bars (entrees ~$20-30). GG could offer the stems at a wholesaler price point to these restaurants, which would use them for dinner service and benefit from the refined image that the wine glasses represent. The wine list would include a note to "inquire for purchase of our Gabriel-Glas stems." Because the experience of using a Gabriel-Glas is so delightful, I think many patrons would be interested in purchasing stems at the restaurant and simply adding it to their bill at the end of the night. I've seen this model pursued successfully by restaurants like Porsena in New York (www.porsena.com). Porsena lists cookbooks and high end ingredients as well as lotions at the bottom of their menu. They pull it off seamlessly because the entire restaurant is so refined and classy that selling items seems like a special favor they are offering to patrons. I also think there's space to partner with digital wine retailers who focus on educating customers. GG should consider a partnership with places like The Perfect Sip or Winc. For the second market (engaged people who may not be able to afford wine glasses on their own), Gabriel-Glas would be a strong fit for any registry. Because GG does not offer volume discounts, the $29 per stem price point is perfect for wedding guests who might not be able to afford a more expensive gift. The trick is standing out from other wine glasses on the registry. On the push marketing side, GG could try to cut a deal for preferential sorting when a customer is selecting stems. On the pull marketing side, GG should reach out to wedding websites (e.g., The Knot) and Instagram handles to be featured on their sites. If there's only one outreach that GG does, I recommend Instagram influencers (e.g., think lifestyle handles and more targeted audiences, like Bachelor contestants -- only the classy ones though! -- or home decorators) and wedding handles; because this is such a visual product, the stems will stand out for their beauty and elegance. Additionally, I think video marketing would be strong for GG. GG should explore creating visually full but verbally subtle (probably word free)30-second videos for placement on Facebook or Youtube, and measure conversions off of those videos. And in general, I think Gabriel-Glas should redo their website to be more visually strong, and update the content to focus on messages that resonate with today's wine drinker. The website looks stale, and the commentary almost exclusively from sommeliers and wine critics misses the point of people drinking wine because it brings them together. When I look at the website, I think these glasses are for an older, stuffier wine drinker -- not for me. The visuals and messages should resonate more with young people, and should take advantage of the visual appeal of the glass. Instead of posing the stems with the black box, the landing page should be a video of a relatively youthful hand swirling wine in the glass, or an image of a table set with bread and olive oil with the wine glasses glimmering around the table. GG needs to take advantage of their website as a way to connect with customers. I hope this helps!

Wine vs. Beer: The drink of the elite vs. the drink of the masses?

Devin made a comment in our second week about beer seeming more accessible than wine, and had the important insight that this was about more than price point. I strongly agree. From a brand perspective, beer does feel more accessible. I want to unpack that a bit in the context of the wine industry's future. I'm struggling with the question, "would it be more advantageous for wine to be seen as elite or accessible?" The case for elite: the best products come with feelings attached. In the case of wine, elitism allows wine to mark special occasions -- an anniversary celebration, a promotion, a successful end to a hard project, a reunion amongst dear friends. Elitism allows 21-year-olds to feel grown up as they make their first wine purchase -- it allows us to try on what it means to be "refined" or "professional" or "mature." There's deeper meaning to wine because of its status in our minds, and that meaning transfers to us so that we can gain status in our own minds by consuming it. The quest for these feelings -- specialness, celebration, status -- drives many wine sales. The case for accessible: however, these ideas are social constructs, and like all social constructs, they are interpreted differently by different micro-societies. As someone with a lot of social and cultural capital, it's easy for me to embrace the feelings and status that wine gives to me. For people who don't share my privilege, wine may seem exclusionary and not for them to try. Many in this population could afford to buy lower end bottles, but choose not to because they think of wine as a rich person's drink, or as a mark of pretention. This thoughts could be explicit, or just implicit and passed parent to child across recent generations. So there's tension here: would increasing the accessibility of wine's brand image detract from the desirable feelings its consumption imparts? My perspective: I don't think so, not in a way that can't be recovered from. I think lower end wine will be seen as lower class, and that middle class consumption could move to higher price points to compensate. I think higher priced wine will remain entrenched as "luxury." Furthermore, I think it's important for this evolution to happen. There's a glut of supply, and while demand has been rising, at some point this will level out if we don't overcome the "class wall" and establish wine as something that can be enjoyed by all. I would be very interested to hear others' opinions too!

Beyond the glass: The power of the brand [Or, Why I'm Taking This Class]

I remember seeing the course listing for the quarter-long version of this class last year and thinking, "No way, I would have to rank this way too highly, it's one of those 'fad' classes where we just drink wine." Then, two threads of my world intersected in powerful ways: I needed to find an internship, and I visited Paris for the first time. All of last year, I spun in circles around the idea of marketing, knowing that I was customer-focused at my core. I started making lists of where I would want to work, and ended up with a list that included Bonobos, Away, Harry's, Warby Parker, LOLA, AllBirds, Glossier, MM LaFleur, and more. I couldn't articulate the core theme of my interests until I found articles explaining vertically integrated, direct-to-consumer, digitally native brands (see Andy Dunn's explanation here: https://medium.com/@dunn/digitally-native-vertical-brands-b26a26f2cf83). Suddenly I understood what so many others had already realized: a brand is more than just a label on a blouse or something you cultivate for yourself at work. Brands, when direct to consumer and vertically integrated, and perhaps especially when digitally native, are a powerful way to bring human empathy and commerce together. Brands turn a product into a personality, a company into a trusted friend. Brands are what elevate a product beyond its specs into something that people love. Okay, let's not forget Paris. In the heat of the internship search, I skipped class for a week in May (my girlfriend's parents were paying for our lodging, it was too good a chance to pass up!) to spend a week in Paris. My girlfriend, her brother, and his fiance spent a day in Eperney in Champagne, where I visited Moet -- one of if not the dominant champagne brand -- and Castellane, a much lesser known, more limited distribution vineyard. The whole group preferred Castellane's champagne to the famous Moet pours, yet any consumer would buy Moet over Castellane based on brand alone. I got to thinking about the power of how you position a product like champagne or wine in the consumer's head. Even comparing the two tours and welcome facilities -- Moet's shiny white marble tasting room and tour guides with crisp skirt suits and red lipstick made Castellane look like a barnyard establishment. I peppered our Castellane guide with questions about production, marketing, distribution, regulation and more (we were the only ones on the tour, unlike at Moet where we walked around with 20 other people). I realized the intricacies of champagne production, and the many different steps in the process where advantage could be won through right strategy. I became fascinated with this industry and the many levers that can be pulled within it. These two threads combined to help me realize the excitement of branding within the wine industry. I signed up for this class because I want to follow that interest while studying the challenges and opportunities that arise from the complexities of this industry.

Democratizing wine

Although wine consumption has increased at unprecedented rates in recent history, I wonder if growth rates will begin to plateau in the coming years unless all players in the wine industry find ways to innovate and appeal to a younger demographic. While I first began to think about this question when we learned about Cameron Hughes' marketing strategies, but it really struck me when Alder Yarrow visited class. I thought Alder was a fantastic speaker and connected with the class well; however, I was surprised when I looked at his blog and felt that I had been transported back 10 years to 2007. As one of the most highly regarded wine bloggers, I found it rather bizarre that the interface and format of the blog is so inaccessible. It felt as if there were a disconnect, as Alder talked about how he sought to make the content of his blog accessible to the average consumer (e.g., in terms of how he describes flavors). There is no doubt that the content is of the highest quality, but I can't imagine myself or anyone I know ever choosing to consume information presented in that form. 

I think this speaks to a systemic issue facing the wine industry: that all players, from wineries to distributors to wine experts, are using obsolete tactics to reach their audience. Wine is inherently difficult to purchase for the average consumer, given the abundance of choice. It is up to the wineries, distributors, and wine experts alike to make wine more accessible to the average consumer through easily consumable information and customer education. Customers today are more demanding than ever in wanting transparency and information about the products they are purchasing. It will become increasingly important for people like Alder to present that information in a relevant and seamless manner.

While the old school tactics have not meaningfully impeded their success to date, I think it will pose a significant challenge to growth as the younger generation today reaches the age where they are the primary target. 

Realm Cellars

This summer, I had the chance to meet Scott Becker, owner and Managing Partner of Realm Cellars (and an HBS grad). Founded in 2002 by fellow owner Juan Mercado, Realm has lived through dramatic ups and downs and built an outstanding consumer brand from scratch. Since 2002, Realm has scaled from 300 cases to several thousand cases across 11 small-batch wines: four proprietary red blends and 6 single-vineyard designant wines.

Realm started out by purchasing fruit from exceptional Napa vineyards and producing wines out of a rented winery space. While at the time, they could use only one of the vineyard names on their wines (To Kalon, part of which is owned by Robert Mondavi), the quality of the grapes and ability to lock-in outstanding relationships early became key to their success.

“Realm. As in the realm of possibility. We hadn’t sold a bottle of wine. We didn’t have a single person on the mailing list. We had all this inventory of great juice but no clear idea of what we were going to do with it. But I knew we’d figure it out. And I had the name.”

Realm continues to produce wines using grapes from those same plots of land and will selectively add new growers and new wines to their portfolio. While Realm relied on its vineyards’ reputation in the early days, its only addition to-date since 2005, Houyi Vineyard located on Pritchard Hill, indicates that Realm now leverages its own brand to elevate those of its vineyards. The Chang family purchased Houyi Vineyard and founded Nine Suns, a new winery, in 2010. Realm began sourcing fruit from the vineyard in 2013; it both displays Houyi on the bottle and makes a plug for Nine Suns on its website.

Scott had graduated from HBS to work in Napa Valley and worked for Bill Harlan on his new project, Promontory. After many years of being mentored by Napa Valley greats, Scott was looking for his own project. Scott and Juan began their partnership at Realm in 2012 at a time when “financial things were piling up” and the winery, despite having a strong brand and great wine, needed a restructuring. I asked Scott about the process of raising capital for a high-end winery in Napa Valley to support this restructuring. I thought it'd have been easy; having read about vineyards all month, a number of high net worth individuals seem purchase and steward them as investments or hobbies (or both). Contrary to my suspicion, raising capital to recapitalize Realm was incredibly difficult.  At the time Scott first met with Juan Mercado in mid-2011, Realm owned no vineyards and no capital; Juan had cashed in his 401k from his job in healthcare and bootstrapped the entire thing. High net worth individuals, even if they like wine, will evaluate an investment in the wine industry like any other.

As the next step in its evolution, Realm purchased Hartwell Estate in Stag's Leap District on December 30, 2015. Realm’s winemaker had worked on the property for more than 10 years, and Realm had outgrown its existing winery space. Although it’s described in Realm’s story as a “fixer-upper,” the property, despite the replanting and rebuilding required, provides Realm a home and a sense of place. Most importantly, it gave Realm its own fruit from which to create exceptional wines. Scott mentioned that the only thing more difficult than raising capital for Realm in the first place was going back to investors asking them for additional money to purchase Hartwell and make the huge capital investments required to rehab it.

Today, Realm competes with the "cult wines" of Napa Valley, and the team has ambitious plans for growth. I encourage you to check out the killer brand they've built and the storied history they've compiled here: https://www.realmcellars.com/pages/up-to-now.html#whole-story.