Expansion strategy differences between DBR (Lafite) and Château Margaux

A little bit late as a topic, but I found it interesting that Château Margaux was brought up more than a few times during our case discussion of "Domaines Barons de Rothschild (Lafite): Plus ça Change..."

Although their strategies differ, it is not surprising that Lafite Rothschild and Château Margaux are mentioned concurrently since both are prestigious Premier Cru, the highest rank of Bordeaux wines (only five wines have received this classification). Although Lafite Rothschild has conducted a multipronged global strategy, as seen in the case, Château Margaux has kept much closer to its core competencies. In this blog post, I will to share some insights about Château Margaux from a conversation with their Deputy General Manager, Aurélien Valance.

Château Margaux's current owners, the Mentzelopoulos family, took over the estate a few years after the 1973 Bordeaux economic crisis. Since then, they've restored the estate to its past glory and, in the XXIst century, added two new product lines under the Margaux name. While DBR pursued an expansion by acquiring other Bordeaux estates, partnering with premier wineries around the globe, and even conducting unique projects like the Chinese winery, Châteaux Margaux kept much closer to its core.

When Aurélien visited the Stanford Wine Society, he brought the only four wines Château Margaux produces: the Château Margaux Grand Vin (first growth), Pavillon Rouge, Pavillon Blanc and Margaux du Château Margaux. That's a very concentrated portfolio for a wine producer valued at over a billion dollars!

Aurélien explained that the Pavillon and Margaux product lines were only truly defined at the turn of the century. Although Château Margaux has been producing a 2nd wine since 1908, it only took on the name of Pavillon Rouge when they launched a 3rd wine, called the Margaux. They tested out the concept of the 3rd wine by only allowing distribution to restaurants, and its success led them to open the retailers distribution channel as well.

Instead of expanding horizontally through the acquisition of wineries in Bordeaux or elsewhere, Château Margaux believed that strengthening its brand and optimizing the use of its own grapes would be much more beneficial. This seems like a more conservative and prudent approach. It is clearly less capital intensive, the expected success rate is much higher given the branding, and it follows the philosophy that growth should not put the winery at risk.

When asked about the question of China and Asia, Aurélien brought up Château Margaux's belief that it should it needs to balance its demand pool, and actively worked with négociants to prevent from an overconcentration in Asia -- the Cognac bubble in China reminds them that concentration has its risks. This balancing has proved very difficult in terms of pricing as they've kept prices lower to protect their traditionally French and European consumers, but demand pressures from China lead to leakages by their négociants or secondary markets where the wine is sold at much higher prices and they do not capture the benefits.

Although global warming has been beneficial to their growth in most recent years, they are also very aware of the near future challenges, and being geographically concentrated definitely increases those risks. It is unclear how much longer they will maintain their current strategy -- Aurélien mentioned that they were working to find ways to protect their vineyards -- but it is definitely a story to follow.