Thursday, July 25, 2013

French Wine and Vertical Relations

One of the topics in my Industry Analysis course revolves around how firms relate to other firms in terms of the vertical (business-to-business) relations model.  We look at a monopoly selling to another monopoly and how an oligopoly selling to another oligopoly performs in terms of profits.  What we find is that firms that can eliminate the additional layers can increase their profits.  This is exactly what we are seeing in the French wine (Bordeaux) market right now.

The New York Times reports that Château Latour, a local Bordeaux wine firm is planning on eliminating local wine selling intermediaries and will start selling directly to wine distributors.  One of the reasons is that of brand quality management.  Specifically, Bordeaux wine sold today may not be the best until it has aged for a few more years (decades).  If customers purchasing a 2012 wine are impatient, they may open the wine up too soon, and be disappointed in the overall quality.  If the winery can force the customer to wait (by delaying the sale) then the customer will likely have a better quality product and the winery more revenue.

The current system in Bordeaux wines has the high-end wines of the region sold via local intermediaries, called négociants, rather than directly by the chateaus as opposed to wine producers such as Château Latour selling directly to distributors such as in Italy.

Château Latour's deep pockets gives them the ability to forgo profits today and focus on greater profits for the future; simultaneously reducing the sales and profits from the négociants, which is exaclty what is predicted from the vertical separation and vertical integration business model.

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