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Submitted to: Submitted by:

Bidhan Mishra 2018PGP069
Professor Dr Niva Bhandari William Johns 2018PGP099
Letter of Transmittal

Gain Theory Consulting

Contact No- 9456783456
2nd Feb 2006

Ms. Corinne Mentzelopoulos
Chateau Margaux
Bordeaux, France

Subject: Report regarding future course of action for Chateau Margaux

Dear Ms. Mentzelopoulos,

We have perused the case meticulously and evaluated it fairly. After analyzing
the incumbent scenario and growth prospects of Chateau Margaux, we are
pleased to present before you the report containing possible strategies for future
course of action for Chateau Margaux. We look forward to working with you
again. In case of any query feel free to contact the undersigned.

Yours Sincerely
William Mishra

Enclosure: Final Report

Table of contents
Content Page No.

Letter of Transmittal 1

Table of Contents 2

Executive Summary 3

Situation Analysis 3

Problem Statement 5

Decision Criteria 5

Generating Options 5

Evaluating the Options 5

Recommendations 7

Action Plan 7

Contingency Plan 7

Exhibits 8

Executive Summary:
As per the case, Wine enterprise Chateau Margaux has to take a strategic decision
pertaining to the future course of action for the company. Chateau Margaux is
concerned about manifold transformations that are happening in the wine industry
such as entry of New world wines, increasing demand for less expensive wine,
changing consumption patterns, to name a few. Given the changing trends in wine
industry, can Chateau Margaux still have competitive advantage in future.
Various options are taken into consideration including launching third wine to
enhance the customer base, sticking to the orthodox way of production alongside
ensuring quality and price stability and building its own distribution system.
These alternatives were assessed on the basis of their ramifications on Chateau
Margaux’s brand image and sales. Also the owner of the estate, Mentzelopoulos
is facing a dilemma whether her company is operating at full operational
efficiency or not and if not, then what should be done to generate its maximum
potential. After analyzing each option it has been recommended that
Situation Analysis:
Chateau Margaux is part of the French elite of wines known as first growths. This
categorization was done by a classification system from 1855. Its quality had
fluctuated and at the time when Mentzelopoulos family acquired control of the
estate, its fortune were not strong. Together with manager Pontallier, Corinne
Mentzelopoulos rejuvenated the degrading status of estate to a level worthy of its
history and reputation.
At Chateau Margaux, 80 hectares were dedicated to vines for the production of
red wines. Whereas 12 hectors of the estate were devoted to white wines. The
remaining 170 hectares were estate, forests and meadows for the cattle that
produced organic fertilizers for the vineyards. For the production of first wine,
immaculate selection of grapes were done. Selected grapes that were discarded
from the first wine were used in the production of second wine. About 10% of
the grape production, while qualified as Margaux wine was sold in bulk to other
wine merchants, which were further included in their generic wine under the
condition that the source would not be disclosed.
Chateau Margaux’s greatness was an amalgamation of a grand terroir, the right
grape variety, climate, and high quality human work. Lack of any of one of these
factors would make the wine good, but not great. Chateau Margaux’s traditional
approach for production process was the prime reason behind its topnotch quality.
In order to focus solely on enhancing the quality of wines, chateaux owners
handed over their distribution to specialist merchants in the city of Bordeaux.
Overall there were 400 merchants in Bordeaux region. They tasted the wine very
early and once the official declarations were made by the company, they would
approach big buyers of the world and ensure a wide distribution of small amounts
of their product all over the world.
Most wines globally were sold after bottling. Nonetheless, top 50 or so Chateaux
including all the first growths, sold only 5% to 15% of their wines after bottling.
Majority of their sales happened in the barrel, in an en primeur or futures, market
which was referred to as the en primeur system. Hence grapes produced in 2005
was processed to make the 2005 vintage, which further would be sold en primeur
in spring 2006 and delivered to retailers in 2007. The en primeur sales happened
in several offerings, called tranches. The Chateau offered a first tranche of its
wine in strict allocation to selected merchants at a set price. This played the role
of product testing in the entire value chain. After analyzing the customer
perceived value from product testing the final price was set, that the public would
be willing to pay for the given value proposition. Subsequently they offered a
second tranche at an adjusted higher price and later a third tranche if the market
was judged receptive. Every year brokers and merchants were selected on the
basis of their rapport with Chateaux and their past performance in promoting and
positioning the brand. In order to seal a deal in good years they had to buy
products in bad years too. Also strong relationship between the owners and the
merchants helped the speculations and prices. Merchants allocated en primeur
wine to their buyers who were generally wholesalers, very large retailers and
importers. These in turn provided the wines to retailers. Afterwards prices
fluctuated even more, depending on the type of distribution channel. In business
terminology a new vintage was like a new IPO, a new product with a different
taste, volume, potential interests in the market. Prices usually climbed about 60%
between the first tranche offered en primeur and the bottles sold in the market
two years later, but there were exceptions too. An outstanding vintage might rise
200% while the post-launch price of the less successful 2001 vintage had actually
Historically, U.K., Belgium, Netherlands and Germany markets are the ones
responsible for driving the premium wines market. But within the past decades,
demand from United States market comprised almost half of the total demand.
Also new markets in Japan, China and Russia had become more important.
Demand for top wines was growing strongly since 2000 while the production
remained stable as the places to produce them were very rare. Increase in demand
from Asian, Russian and American markets were increasing on specific vintages
which could have tempted chateaux to increase their prices. But in order to have
a balanced distribution over all the markets they were a bit careful with respect

to their pricing strategy. Their pricing strategy was based solely on the quality of
the wines produced.
Chateau Margaux did not have its own distribution system. It also had little
knowledge about its customer base, since merchants did not give them all the
details and sometimes may not be having the full information about the customers
themselves. Customer perceived value of Chateau Margaux’s value proposition
was very high. In Asian markets like China, Taiwan or Singapore, their brand
was seen as a status symbol by some buyers. Luxury customers also were an
integral part of Chateau Margaux’s market but they tend to be more volatile as
they could switch easily from one luxury product to another.
There was no concept of marketing for old world wineries. Only the high-volume
New world wineries had systematic marketing programs to mass market their
wines. In old world countries, marketing efforts were often left to retailers. New
world wineries formulated their value chain in such a way, that a substantial
portion of revenue were left for marketing programs. Whereas Old world wineries
solely focused on their traditional production processes which would provide
them with the best quality wines. Also distribution channel worked as a marketing
tool for Chateau Margaux. Chateau Margaux owners did not spend much on
marketing programs as they believed their superior quality was enough to build
brand equity for them.

Problem Statement:
The problem statement is what Mr. Dunnett should do for the future of Arrow Printing and
Decision criteria:
1. Profitability of Arrow printing and publishing.
2. Customer base which is measured in terms of sales or revenue.
Generating options:
1. Sell the business
1.1 To his son Mr. Peter Dunnett.
1.2 To an external buyer.
2. Expand the business.

Evaluation the options:

Sell the business to Mr. Peter Dunnett:
If Sam Dunnett sells his business to Peter, being a full-time paramedic, he would manage to
have an output of 75% of maximum operational efficiency of 2003.
The current revenue is 155359.6 CAD which would decrease to 116,519 CAD in 2004.
Since he would be running the business alone, he would save money on wages and benefits
which equals to 35,382 and would be equivalent to 25.05% of revenue in 2004.
The current income is 33,524 which is 21.5% of the revenue.
Peters net profit margin would increase to 46.55% which is the sum of the profit margin of
2003 and money saved on wages. With the total revenue in 2004 projected to be 116519 CAD,
and a profit margin of 46.55% the net income would be 54,239 CAD, given the demand remains
Peter would have to pay Sam an amount which is equal to the difference between total liabilities
(12,237 CAD) and total assets inclusive of Goodwill (72,681 CAD).
Hence the amount payable to Sam is 60,444 CAD. This amount could be Paid by Peter in
12.08 months given no interest is charged.
We can see the net income of arrow remains 54,239 CAD if peter were to run the business
Given the time constraints faced by peter the income of the business is likely to remain more
or less the same at 54,239 in the upcoming years.
Sell the business to an External buyer:
The total revenue projected in the year 2004 would be 170895.56 CAD.
The total cost of production and expense of 2003 is estimated to be at 44.3% of the total
For a revenue of 170895.56 in 2004 the expense would be 75706.73 CAD (44.3% of 75706.73
CAD). With a decrease in production cost of 10% the expense would be 68136 CAD.
The bad debt would increase at an average of 1.75 times from 460 CAD to 805 CAD.
The advertising cost would also increase at an average of 2.5 times from 431 CAD to 1077.5
The total expense would be 70018 CAD, which is 40.9 % of the total revenue of 2004.
The profit margin would increase by 3.4% given a decrease in expense to 41.08% attributing
to decrease in production cost, bad debt and advertising expenses.
The erstwhile profit margin of 21.5% would increase to 24.9% and the net income on revenue
of 170895.6 CAD would be 42,553 CAD. Given an estimate of 10% year on year increase, the
net profit would increase to 46469.92 and 51116.91 in the upcoming years.
Expand the business:
If Sam expands the business in the field of four colour speciality work, given the profit
margin is typically 25% percent, he would be interested in printing materials such as books,
pamphlets and magazines. He would also want to attract the customers from the northern
Ontario market that required four colour works on a larger scale, by giving them a value
proposition that would substantially reduce the shipping cost and time.
He would require a veteran sales person to leverage his contacts. He would be required to
form an almost equal partnership with him holding a controlling stake of 51% in the company
and giving the partner a 49% stake.
For the expansion of the business the upgrade and purchase of equipment would cost 500,000
CAD. This cost could be covered under Ontario’s Community Futures Program in which
75% of the 500,000 CAD would be in the form of non-repayable contribution. He would
have to pay 125,000 CAD at a rate of prime plus one percent, which is 4%.
The new business would generate revenue of 200,000 CAD with a profit margin of 25%. His
net income for the first year would be 50,000 CAD with a year on year increase of 25% as
shown in Table 1.

Table 1
Year 2004 2005 2006 2007 2008
Revenue 200000 250000 312500 390625 488281.3
Profit 50000 62500 78125 97656.25 122070.3

Net profit
margin 25 25 25 25 25

The combined revenue from his existing business and the new business has been shown in
We would recommend Mr. Dunnett to go ahead with the expansion of the business in the area
of four colour works in collaboration with a veteran sales person keeping in view the long-
term profitability of business as shown in Exhibit 2.

Action Plan:
 Go ahead with the expansion of the business while applying for funding through
Government of Ontario’s Community Futures program.
 Find a suitable sales person in the business of four colour printing to leverage his
 Purchase the necessary equipment’s and make building upgrades in tune with the
production requirements.

Contingency Plan:
Mr. Dunnett should have insurance to cover damages in case of a business catastrophe.
Exhibit 1

Exhibit-1:Projections on expansion of the





250000 250208
170896 175865

122583 122070
102917 97656
50000 48904 53795
40417 44458

2004 2005 2006 2007 2008

Revenue from the existing
170896 187985 206784 227462 250208
Profit from the existing business 36743 40417 44458 48904 53795
Revenue from the new business 200000 250000 312500 390625 488281
Profit from the new business 50000 62500 78125 97656 122070
NET income from the combined
86743 102917 122583 146561 175865
Exhibit 2

Exhibit 2 Income based on the options


2004 2005 2006 2007 2008
expanding the business 83402.31 99242.55 118541.8 142114.7 170974.6
selling the business to peter 54,239 54,239 54,239 54,239 54,239
selling the business to an external
42,553 46808.3 51489.13 56638.043 62301.8473

expanding the business selling the business to peter selling the business to an external buyer