Thursday, November 1, 2007

Wine, Branded Wine and the Market for Lemons

I have learned that many people who visit this page are searching for an answer to the question "why are brands so important in the wine market today?" (When I Googled that question this morning, this blog was #3 on the results list). So maybe I should address the question directly.

It is true that wine brands are a significant factor in the market. The largest wine companies in the world -- Constellation Brands, Foster's, Gallo -- manage large brand portfolios. Just as a mutual fund tries to cover the bases with a diversified mix of investments, the wine giants try to cover the market with a collection of brands of different types of wine from different continents at different price points. Just click on one of the company links I've inserted to see the brand lineups for yourself. They are really quite spectacular in terms of the number and diversity of wines that these companies produce and distribute.

The emphasis on brands isn't limited to the largest companies. Just look at the brand portfolio of the French firm Broisset, for example, or Ste Michelle Wine Estates. Precept Brands is a good example of how a relatively small regional wine company can successfully assemble a global wine portfolio -- their wines come from Washington, California, Australia, New Zealand, France, Italy, Spain and Germany. Don Sebastiani and Sons is another good example of the global wine portfolio model.

So why are branded wines suddenly so important? Well, the first thing to recognize is that wine branding (and even portfolios of branded wines) is not a new phenomenon. Although people tend to associate the branding trend with New World wine, especially U.S. and Australia, in fact the Europeans inventing the system and in some respects are still masters of it.

Branding is really all about product differentiation -- establishing a product identity that stands out in the marketplace. The European appelation system was invented to accomplish this goal. The local and regional classifications that make marketing European wines in the New World a nightmare were invented to be powerful brands (and some of them still are). The difference, of course, is that those brands were created by regional grower cooperative wineries in an attempt to differentiate their wines from those of other regional producers, whereas these brands (Yellow Tale and the like) are created by wine businesses that specialize in selling wine, not making it -- in marketing not viticulture.

Globalization has been part of the shift in brand strategy. As the global market expands and brings in new consumers, the company-based branding system is simply more successful than the old geography-based grower-driven branding system because it is easier to understand and promote. It gives wine to consumers who are accustomed to purchasing branded products in a format that they can easily understand.

It seems to me that the French, who famously reject the idea branded products in their anti-globalization rhetoric, are in fact the most successful practitioners of the branding art. If you think of Champagne and Beaujolais as brands, which they are, and not just regions or styles of wine, this becomes instantly clear. Beajoulais Nouveau, the ultimate Coca Cola wine, was purposefully developed as a global brand. And of course, such French firms as LVMH are the most successful purveyors of branded luxury products, including wine, in the world.

Brands are nothing new and they are more than just a marketing tool. Brands can serve a very useful economic purpose. The Nobel Prize winning economist George Ackerloff wrote about the problem of making a purchase under uncertainty in a famous paper on "the market for lemons." Buying a used car, for example, is difficult because it is hard to tell if a particular vehicle is a "lemon." Some cars, even by reliable manufacturers, are simply plagued by problems and it is not in the seller's interest to disclose this fact. So when you buy a used car, you have to accept the risk that you might be buying a lemon. This uncertainly drives down the price of all used cars, according to Ackerloff, even the good ones. There are a variety of solutions to this problem, many of which are techniques for the seller of a non-lemon to communicate this fact to buyers, thus differentiating good cars from bad and gaining a higher price.

Do you see where this is going? Although I have never tasted wine made from lemons, I have drunk a lot of lemon wine in my time. The fact is that some wines or some vintages are lemons and cannot be sure if you have a lemon until you open the bottle. Solution? Well, the whole wine rating industry exists because of the lemon wine problem, doesn't it? Robert Parker and Wine Spectator play the same role for wine that Consumer Reports does for cars and washington machines.

Brands are another solution to the lemon problem. If brands represent a reliable indicator of quality or consistency (these are not always the same thing), then they communicate valuable information to buyers, who are seeking that knowledge. Result (if successful), more confidence among wine drinkers and a higher overall demand for wine. With the market demand for wine growing and becoming more complex in the New World, the value of brands has increased correspondingly. That said, I do not think that some of the hundreds of new brands I have seen really mean anything or communicate any useful information to buyers. There is a brand boom going on, in my opinion, which I suspect will be followed by a brand bust. Keep your eyes open for bins of discounted wine from discontinued brand lines.

One final reason for rising importance of wine brands is distribution. I have noticed that every industry tends to organize itself around solutions to its biggest bottleneck -- the factor that represents the biggest impediment to efficiency. Distribution is the biggest problem in the United States and some wine makers solve this problem by becoming distribution machines (that's part of the Gallo story) and some distributors have become turned into winemakers, either directly or through strategic alliances (that's part of the Yellow Tail story).

Here, very briefly, is the distribution story. Retailers prefer to deal with a small number of distributors in each product category, so size matters in distribution. On the wine aisle, these distributors need to provide product at several different price points (because retail wine buyers purchase by price more than any other factor) in a large number of different categories (think of all the different varietals and regions to cover) -- and do it in a way that will reduce consumer uncertainty not increase it, reducing the lemon fear and increasing sales. Brands address the lemon issue, and portfolios of brands are necessary to provide provide wines in different categories at each critical price point and to create the breadth and scale that retailers seek. The distributors what can do this the best become the leading wine companies.

1 comment:

Tony said...
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