The true value of Grange

pouring money from bottle of wine

I like wine, a lot! I think it’s truly amazing! The memories of my first Penfolds Grange Hermitage, where I was and with whom, still linger.

Looking for a decent tipple? A little research shows many things to consider before committing to that nicely labeled bottle at Dan Murphy’s. On their website current releases of Penfolds Koonunga Hill are $13.99. At the other end of the scale Penfolds Grange is listed at $749.00 a bottle.

Why such a variation in price?

Both wines mentioned above, produced by Treasury Wine Estates (TWE) under the Penfolds brand are made, predominantly from Shiraz grapes. According to Penfolds, fruit for both is sourced from multi-regions. Grange is matured for 18-20 months in new oak Hogsheads while Koonunga Hill is matured for 12 months in 3-4 year old hogsheads. So each wine is made a little differently, but $735 a bottle differently? New oak must be expensive. While it’s impossible to know what TWE pay for their individual oak barrels, they have invested AUD$7.6M in new oak in the first half of the 2016 financial year. (Treasury Wine Estates, 2016)

Varying markets require varying strategies

Although, TWE products are discounted at a retail level, this business to business (B2B) company relies on a variety of strategies for their margins.
TWE declare they participate in three market segments. Luxury (A$20+), Masstige (A$10- A$20) and Commercial (A$5-A$10) (Treasury Wine Estates, 2016)

Inventory Analysis

With a portfolio of wine covering wide ranging price points I suggest TWE use many of the “Rules of Thumb” pricing strategies outline by Dawn Iacobucci (Iacobucci, 2015, p. 150).

The commercial range would use the Cost + and Market Penetration approaches.
The Penfolds brand doesn’t have an offer in the Commercial segment.

Koonunga Hill, in the Masstige segment is, as the name implies leveraging the Penfolds brand promoting perceived value.

In the luxury range they will rely on the prestige aspect. In their research on Students’ Perception Of Status-Conveying Goods, Fan and Burton share Thorstein Veblen’s assertion that “society consumes not only for the utilitarian value of a good but for the status the ownership conveys ” (Fan & Burton, 2002, p. 36)

If TWE used a simple Cost + method for their entire portfolio they would not realise the best returns for the masstige and luxury ranges.

Yield management

Yeild Mgt

Supply and demand also play a part.
Every October, Grange and the entire Bin Series is released with great fanfare. Those who want it and can afford it, queue to buy Grange. Koonunga Hill on the other hand, is available all year round with no celebration of the change of vintage.

 

Airlines and hotels are great examples of Yield management programs.
TWE use similar albeit not so urgent strategies. An example of this is the 2011 Grange, when quality was down and production halved due to a wet season, prices remained steady (Evans, 2015). If quality was better, demand would have spiked and higher prices could have been justified, resulting in returns consistent with previous vintages. When volume is unaffected and quality is high, like the amazing 2010, higher pricing creates greater returns.

Price and value are not the same

Grange

The fermented juice of grapes can vary infinitely. Once you get past the producers, red or white and the various varieties of each the question of quantity, quality, and reputation comes into play with pricing considerations and approaches.
In the case of Grange TWE must also factor heritage, quality and rarity of one of Australia’s most “collectable wines” (Hooke, 2014). These theories are supported by various accolades, least of which is the 1971 vintage being voted the Best wine of the 70’s in the world. (Hawthorne, 2015).

The value, no matter price may be justified in most cases. I doubt Barry O’Farrell will ever justify the personal cost of one of Australia’s iconic wines.

Kevin Robe

Student ID: 212386109

Bibliography

Evans, S., 2015. Sydney Morning Herald. [Online]
Available at: http://www.smh.com.au/business/smaller-offering-of-penfolds-grange-as-retailers-predict-solid-demand-20151012-gk7iw6.html
[Accessed 25 April 2016].

Fan, J. & Burton, J., 2002. Students’ Perception Of Status-Conveying Goods. Financial Counseling and Planning, 13(1), pp. 35-46.

Hawthorne, M., 2015. Executive Style. [Online]
Available at: http://www.executivestyle.com.au/penfolds-grange-tops-global-challenge-to-find-greatest-wine-of-the-1970s-gjhjhc
[Accessed 27 April 2016].

Hooke, H., 2014. Good Food. [Online]
Available at: http://www.goodfood.com.au/good-food/top-10-drink/australias-top-10-most-expensive-wines-20140501-37ism.html
[Accessed 27 April 2016].

Iacobucci, D., 2015. Marketing Management. 1st ed. Stamford: Centage Learning.

Treasury Wine Estates, 2016. Interim 2016 Results. [Online]
Available at: https://www.tweglobal.com/~/media/Files/Global/ASX-Announcements/2016/2016-Interim-Results-Investor-and-Analyst-Presentation-18-February-2016.pdf
[Accessed 2016 April 2016].

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