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Copyright © Ric Einstein 2009
The Curious Case of The Icon Wine
I (and I guess many others) have been watching the progress of the greatest vintage ever of the greatest wine ever, as it has appeared and then disappeared just as fast, off the shelves of the bottle shops of Australia. Mind you I am not certain about the accuracy of the last part of that statement as I have not seen it on a shelf in a bottle shop anywhere in Australia. I have only seen it listed by the case on a number of “web based” auction sites, going for rather awe inspiring amounts. But I have seen lots of bottles of the 1997 vintage on shelves in bottle shops, where the bottle shop owners seem to be torn between offering it as a “special”, usually reserved for those product lines which are difficult to move, and offering it as a great opportunity to get a bottle of something unusual.
I am referring naturally to that great Australian Icon, Southcorp’s Penfolds Grange, vintage 1998.
Now, there is an extremely cynical side to me, which when coupled to my normal suspicious nature encourages me to ask a few questions in my mind. Or better still, to indulge in some speculation of the mental kind rather than of the “invest now and sell later” variety.
In the months leading up to the release date, it quickly became clear that G’98 was being hyped up by a very strong marketing campaign, designed to raise the profile and hence “consumers” awareness of the impending release of the phenomenal wine. This, coupled with hints of an expectation of rampant demand, and further hints of limited supply as a result of large volumes earmarked for export added to the hype. In retrospect, all the hype was no co incidence. It was a cleverly designed marketing ploy.
And what happened was just that. All available stock was apparently sold out within hours (if not minutes) of release. Fantastic result for the Icon; a huge brand awareness and a runaway result.
But hold on. There are a number of odd aspects to this saga. And these inevitably lead to some speculation and also to some conclusions.
So to the first one: Why did so many retailers complain about the very small allocations they had been given? In many cases, retails were given just one or two bottles, in other words far less than in previous years. Ah, I hear the answer: It’s because of the large export volumes which left so little available for local distribution. So, I conclude, foreign, overseas buyers were clambering for this then? Well apparently not, as anyone who follows the web based auctions will know: just a few weeks ago, there was a 300 bottle lot sitting in London available for sale with a strong hint that it could be brought back to Australia without great difficulty. I doubt that this would have been the case if foreign demand was so astronomical.
The next one: given that retailers were given limited allocations, often only one or two bottles, there would probably be very few people who managed to buy a whole case upon release. And for those who were “lucky” enough, I would have expected them to hold onto their treasure. So I would have thought that there would be a limited number of “case lots” available on the auction sites soon after release. But this wasn’t the case at all. On the limited number of website auctions that I watch, there were plenty of case lots available. (And were sold, at fairly good, for the seller.)
Now for some thoughts. The great corporate conglomerate winemaker, Southcorp has been through some difficulties recently. We all know that. Profit downgrades. Changes at the top. More profit downgrades. Falling share price. Still more profit downgrades. So, as I now understand it, they are likely to make just about no profit this year. These are tough times at Southcorp, and there are reputations on the line, and points to prove.
More speculation: I believe that something like 7000 (plus) cases of the great Grange were made. i.e.84,000 bottles. Could have been more, and if there were more, then my theory becomes even more viable.
And without any real background we will do some guessing now. Lets us assume that the release price per bottle (it’s a bit easier to do the sums that way) to retailers was $300. (Yes, I can hear everyone say it wasn’t, but just bear with me, we are speculating here). And at $300 per bottle, the Southcorp margin (still guessing) was $75 per bottle.
Now sitting in the corporate finance department at Southcorp is a bright accounting type (still speculating here), who spotted the opportunity. Why not release a miniscule amount onto the local market, hype it dramatically, to drive up demand? By releasing only a small amount, the supply is severely restricted. And economics 101 says the price will go up. Well didn’t it do just that? Look at the auction results if you don’t believe me.
Now for the smart bit. Over a period of months we slowly release our icon onto the secondary market Tens of cases (i.e. between 10 and 90) at a time. This achieves a number of things for us: It allows us to capture the secondary market value of our product. It also allows us to grab the bit that the retailers would have made between release price and retail price.
So lets us make some more assumptions now: Based on the traditional approach, 84,000 bottles with a $75 margin would have made us $6.3 million. Good. Big G is important in our line up of things but not the biggest money spinner.
But if we adopt the “capture the secondary market” approach, then things look a bit different. Let’s assume we release 24,000 bottles locally and another 24,000 abroad through the usual channels. No we have 24,000 bottles to move. And we move these on the secondary market, and we achieve a conservative $500 per bottle. (Not unrealistic). Now our financial position is as follows: We still make the $75 on all bottles, plus an additional $200 per bottle (after commission) on the 36,000 bottles. Net effect is to improve our result by $7.2 million.
Now and additional $7.2 million, when you are making more than $100M is not that significant, but when you are only just turning a profit, that $7.2 million can be the difference between surviving and collapsing.
In conclusion, I agree that this is a lot of speculation, but, I wonder if there isn’t a grain of truth in it somewhere. More important though, are the questions the whole saga raises about Southcorp itself, because even if this is all wildly inaccurate, isn’t the message from Southcorp one which says: “We don’t care about our Australian market and customers. We are big boys now and we want to play in the international field: If you want to be part of it, you now need to pay to play.
And more significantly, the Southcorp message in any case is “We are a business, here to make a profit for our shareholders, and to pay the salaries of our staff. … .. Oh yes, we do this by making and selling wine.” My problem is the order in which these three are adopted.
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Copyright © Ric Einstein 2003