Chateau Pontet-Canet: The Numbers Behind the Decision

In preparing for Thursday's case on Chateau Pontet-Canet, I tested the financial implications behind each of the assertions made. As I mentioned, if you take the assumption that price can be increased by 7% for each point increase on the 100-point rating scale, moving to a biodynamic vineyard (or investing in other score-chasing practices) seems to make financial sense. But playing with the assumptions (and starting to sum up the other costs that that decision might imply) starts to make the scales tip the other way. Below, I summarize the math behind the case and my thoughts (to tie a bow on our class discussions).

Here is a snapshot of the base model. Green cells represent facts from the case, blue cells are inputs (assumption selections for decisions made), and orange cells represent items that are changed based on an assumption selection. Below shows the steady state with the results from Exhibit 9 in the case:

Ultimately, the answer comes down to how robustly one believes the role of the critic comes into play. If a raise in score can really contribute a 7% per point increase in price, then chasing score increases is certainly a sensible choice - see below:

Example: if you believe biodynamics will raise the score as implied in the case, it is a homerun, with about 130% the net profit implied (note: organics follows a similar path, though some of the changes are based on assumptions given lack of data in the case):

However, as discussed, we must consider the risks / tradeoffs implied. For instance:

Score chasing by aiming for a "Parker-centric" taste profile may result in:

• Lack of recognition as a wine from Bordeaux (since not made in the classic syle)
• Dependence on foreign (primarily American consumers)
• Increases in score not materializing (waste of time?)
• Increases in score materialzing but not yielding higher pricing power

Moving towards organics or biodynamics may result in:

• Even greater decreases in yield than expected, tipping the scale such that overall costs are too high (i.e., fixed costs become overpowering)
• Increases in score not materializing (higher costs but not increased profits)
• Increases in score materializing but not leading to increased pricing power (as above)

Adopting either of these and attempting to remain in the classification may mean:

• Score increases have no real impact on price (because the system's historical pricing outweighs critics' opinions)
• Elimination from the classification, which could result in price decline or less esteem amongst newer consumers

Showing this impact numerically, if you believe the price sensitivity to score is only 2% (still optimistic), biodynamics looks like a scary pursuit, with even lower profitability than in case 1:

Further, simple math hides the complicated economics of some of these tradeoffs, though assumptions could make further testing possible. Biodynamics or organics will take years to pull off; this model is simply the 1-year test. Can the vineyard stand multiple years of decreased profitability for no clear payout? Bucking the status quo could lead to the above consequences, some of which may make supply chain control and selling challenging. Leaving the en primeur system, as discussed in class, would be a logistical and financial nightmare for CPC.

Ultimately, I believe staying with the status quo is (unfortunately) the only sensible option here. It's a shame that the wine business is so resistent to change! The two key alternatives within this choice that I see are:

1. Producing a greater amount of the second wine (unclassed) if quantity is increased
2. Using cheaper packaging (for only the second wine or both) to save on cost

One iteration in my tests showed that this could increase profitability by 55% - by increasing volume of harvest to 50,000 cases and decreasing percent of the first classed wine to 50%:

While not the whole picture, the math really gives a great sense of the answer!

(If interested, you can download and play with the full model here).