Professor Geoffrey Lewis Competing in No Man’s land.. Can Marketing turn a Sow’s Ear into a Silk Purse? An experimental study American Association of Wine Economists 10th Annual Conference June 21 - 25, 2016 Bordeaux, France Professor Geoffrey Lewis Professorial Fellow, Melbourne Business School The University of Melbourne g.lewis@mbs.edu Dr Alastair Reed Senior Lecturer in Viticulture and Winemaking, Melbourne Polytechnic AlastairReed@melbournepolytechnic.edu.au Ross Lyman Management Consultant at Ernst & Young Formerly an executive at Treasury Wine Estates ross.lyman@au.ey.com

Wine grade & costs (AUD) Cost per ton (approx.) RRP Range for 750ml bottle A $3500 - $15000 $50 - $800 B $2000 - $2500 $20 - $50 C $1200 - $1500 $15 - $30 D $500 - $600 $8 - $25 E $250 - $300 $5 - $10 F Unfit for production - Talk to differences – broadly speaking A grade drinkers (considered luxury drinkers and make up 2% of total wine consumers – are quality focused. E grade wine drinkers are cost conscious and make up 90% of wine consumers. B – D however is a confusing mix of quality and price – what is driving consumers’ choice in this segment? Other inputs – oak barrels, lower operating efficiency, greater inventory holding costs due to longer maturation. AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 The research question Can you turn a sow’s ear (D-grade wine) into a silk purse (B-grade wine) via marketing? AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Experimental design 6 x Australian wines, either D or B Grade fruit South/South Eastern Australian Shiraz 80 x MBA students from Adelaide and Melbourne, conducted over two sittings in February and June 2016 RRP from $8.99 to $27.99 (750ml bottle) 3 Groups, subjected to different conditions AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Wines tasted Wine Comments 1 ‘Commercial’ D Grade, RRP $8.99 2 ‘Commercial’ D Grade RRP $8.99 3 ‘Masstige’ D Grade RRP $21.99 4 ‘Masstige’ B Grade RRP $23.99 5 ‘Masstige’ B Grade RRP $27.99 6 Retailers House brand D Grade RRP $14.99 AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Experimental design Group A (n=27) Blind taste Indicate WTP & Rating Initial data collected from participants Shown brand, ads & packaging (no RRP) Then indicate 2nd WTP and Rating Group B (n=12) Blind taste Indicate WTP & Rating Initial data collected from participants Shown brand & RRP (no ads or packaging) Then indicate 2nd WTP and Rating Group C (n=14) Blind taste Indicate WTP & Rating Initial data collected from participants Shown brand, ads & packaging & RRP Then indicate 2nd WTP and Rating Group D – Rating, but no WTP – then Blind taste, Shown brand, ads & packaging & RRP, then indicate 1st WTP and Rating – original intent was to show any anchoring effect. A vs C allows us to test the impact of RRP under conditions of seeing packaging and adverts B vs C allows to test impact of packaging and adverts under conditions of seeing RRP AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Results - Before Conclusion 1: Q ≠ R – no correlation between wine quality and ratings or WTP AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Results - After AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Results AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Results AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Conclusion Objective characteristics (Packaging, Brand, Price, Advertising) drive Rating and WTP. All wines aligned with marketing positions – regardless of wine quality. Therefore you can turn a sow’s ear into a silk purse – shown by Wine 3. AAWE Conference - Bordeaux, June 2016

AAWE Conference - Bordeaux, June 2016 Further research Test impact of packaging vs advertising Test silk purse into sow’s ear – B grade fruit sold as commercial. A grade fruit – same phenomenon? AAWE Conference - Bordeaux, June 2016

Great wine may be made in the vineyard … but willingness to pay is a function of marketing! Discussion AAWE Conference - Bordeaux, June 2016