END-OF-CHAPTER CASE FUZION WINES CATCHES THE ATTENTION OF ONTARIO WINE DRINKERS Case prepared by David Rose, Conrad Business, Entre- for the products follows automatically from the application preneurship & Technology Centre, University of Waterloo of the fixed mark-ups and other elements of the pricing structure (for example, freight costs and currency exchange The Liquor Control Board of Ontario (LCBO) is one of rates if the purchase is in a foreign currency). As part of the the world's largest buyers and retailers of beverage alcohol. agreement to purchase, the supplier must provide the final With more than 630 retail stores throughout the province, quote or cost to the LCBO, usually per case. it offers nearly 19 000 products directly to consumers and LCBO buyers make every effort to get the best prod- to licensed establishments. The LCBO's sales are over $4 ucts in each price band, whether for sub-$8 wines or billion per year, with spirit sales making up about 43 per- super-premium spirits. They review more than 50 000 cent, wine 36 percent, and beer 21 percent of the total. As submissions annually and negotiate with suppliers to make an Ontario government enterprise, the LCBO pays divi- the best of these products available at good prices. The dends to the province that help pay for healthcare, educa- LCBO is an attractive customer for manufacturers, and tion, and other important services. Moreover, since 1990, there is fierce competition for listings. As a result, suppli- LCBO has won more than 200 awards in customer service, ers frequently submit products to the LCBO at prices innovative retailing, social responsibility, staff training, store lower than those charged to other jurisdictions. design, marketing, and corporate communications. One of the newer additions to the LCBO's lineup is In setting retail prices for the products it sells, the Fuzion, a line of affordable wines from Argentina's Familia LCBO strives to balance several key elements of its man- Zuccardi, one of that country's largest and most famous win- date, including promoting social responsibility in the sale ries. Making wine in the South American country of and consumption of beverage alcohol; providing excellent Argentina is not new they've been doing it for 400 years- customer service, including offering customers a broad but sometimes a tiny push in the right direction is all a region product selection and value at all price points; and gener- needs to put it on the map, and that push came in the form of ating maximum profit to fund government programs and Fuzion. When Fuzion's Shiraz-Malbec blend was first priorities. The LCBO also ensures that it meets the legis- launched in Ontario it caused near riots in the aisles of LCBO lated requirements under the Liquor Control Act con- stores, as the fruity, soft sensation-at the time $7.45 per bot- cerning minimum price and uniform price. (Minimum le-was snapped up at an alarming rate after receiving prices are the lowest prices that products can be sold for, favourable reviews and being compared to wines at twice and and uniform price requires that the price for a particular three times the cost. Such was the frenzy over the new wine product be the same throughout the province.) that LCBO instituted a waiting list and reported jammed To achieve this necessary balance among the key ele- phone lines as customers called to add their names to the list. ments of its mandate, and to meet public sector standards Customers spent so much time searching for Fuzion that of openness, fairness, and transparency when it buys prod- when they did find a supply they bought it by the case, ucts for resale, the LCBO uses a standard mark-up pricing prompting the LCBO to stack cases near checkout counters structure, Mark-ups vary by product category (among rather than trying to keep up with restocking of shelves. beer, wine, fortified wine, spirits, and liqueurs, for exam- Fuzion did for Argentina what Yellow Tail did for ple), and a charge is added to imports to cover supplemen Australia-sending exports soaring and other wineries tary costs associated with those products, but otherwise scrambling to catch the wave of excitement. At one time, the mark-up is consistent for all products. This standard Fuzion was not only the hottest selling wine in Ontario, it mark-up pricing structure, established by the LCBO in was also the fourth best selling product at the LCBO behind consultation with the Ministry of Finance many years ago, only Heineken, Smirnoff, and Corona. While sales have allows suppliers to be confident that the LCBO provides since cooled, the company has added to the portfolio with a fair and equitable treatment to its business partners. wide range of new wines, including a Blanc de Blancs Char- As a result of this fixed mark-up structure, when LCBO donnay that lists for $24.95, an Organic Malbec Cabernet at buyers and suppliers discuss possible purchases they focus on $12.95, Fuzion Alta Reserve Malbec at $9.95, and a couple the product's final retail price. The payment to the supplier of easy-drinking white wines in the under-$10 category. 386CHAPTER 10 . Pricing: Understanding and Capturing Customer Value 387 While the Fuzion hysteria has subsided, there is no perfect to address consumer demands for better, cheaper denying that consumers have come to love the bold fruity wines. And the LCBO was right: Fuzion found the magical flavours and soft tannins of Malbec, the main ingredient in boundary between the affordable and the highly enjoyable, the red wines of Argentina. The country's profile has been and the rest is history. elevated and the door opened to so many other interesting Meanwhile, value-seeking wine lovers in the United wines, many of them attractive for their low price, but also States are lamenting the end of the "Two-Buck Chuck" because the wines are so consumer friendly. Perfect grow- era. For more than a decade, shoppers at Trader Joe's stores ing conditions in the regions near the Andes and Colorado in California paid just $1.99 for a bottle of Charles Shaw River have allowed varieties such as Cabernet Sauvignon, Shiraz or Cabernet Sauvignon, making it Trader Joe's Malbec, Pinot Noir, Semillon, Merlot, and Chardonnay to best-selling wine. While the price has been higher in grow successfully. Today, over 230 000 hectares of vine- other parts of the United States for years, the increase to yards are planted in Argentina-almost half of those to red $2.49 in California created quite a stir. According to varieties and a quarter each to "pink" and white varieties. Bronco Wine, the company that produces the Charles The most popular grapes are Malbec, Chardonnay, Caber- Shaw brand, it was able to maintain such low prices for so net Sauvignon, and various indigenous varieties. long in part because it owns 45 000 acres of vineyard land, While Argentina is currently the world's fifth largest which helps the company ride out wild fluctuations in wine producer by volume after France, Italy, Spain, and grape prices like those the industry has seen in recent the United States-it is only in recent years that it has years. However, bad crops in 2010 and 2011 spelled the emerged as a major player in the wine world. The most end of "Two-Buck Chuck." important aspect of Argentina's wine boom is what people usually call the price-quality ratio. Argentina's grape- Sources: Information from LCBO website, www.lebo.com; Gord Stimmell, "Fuzion Frenzy Uncorked," Toronto Star, January 24, growing regions are warm and dry, which means there are 2009; "Plonk for the Privileged: Fuzion Malbec," Choosy-Beggars few problems with pests and moulds and so little need to Choosy-Beggars.com), June 10, 2009; Rick VanSickle, "Argentina buy pesticides, fungal treatments, and so on. Argentina's Wines," Traveling Golfer, February 1, 2011; "Canada Signs Up for other production costs (labour, grapes) are also generally the Cult of Fuzion," Ontario Wine Review, October 8, 2008; and low by international standards. Together, these low costs Cathy Bussewitz, "Price Hiked for "Two-Buck Chuck," The Press Democrat, January 23, 2013. mean that Argentine wineries can offer the same quality product for less money than other producers. However, Argentine wines aren't the only value-priced QUESTIONS FOR DISCUSSION wines available in Ontario. The LCBO lists more than 500 1. Which of the major pricing strategies does the wines for under $10, with products from all of the world's LCBO employ when introducing new products? major wine-producing regions. How was the launch of one wine-Fuzion's original Shiraz-Malbec-able to create 2. What other factors does the LCBO consider when such a sensation in this very crowded market? The situation setting prices for its products? was different in 2008, and the timing was perfect for Fuzi- 3. By pricing the first Shiraz-Malbec blend below the on's entry. At the time, the LCBO was being challenged for value perceived by most of the wine drinkers who moving away from wines selling below $10 and not search- tried it, Fuzion created a sensation in the Ontario ing out suppliers in the low-price category. In response to wine market. Are there any risks involved when this criticism, it began looking for added-value brands for selling a product for less than other products of its product lineup and picked Fuzion, thinking it would be similar quality