Tag Archives: premiumization

Making more expensive wine doesn’t necessarily mean higher profits

expensive wine

Stefano Castriota: “The key is not whether higher quality implies higher prices, but rather whether it boosts profitability, and it does not.”

Italian study finds that cheap wine producers are more likely to do better than those investing in premiumization

No one was more surprised than the Wine Curmudgeon after my email chat with Stefano Castriota, whose working paper about price and quality (“Does Excellence Pay Off? Quality, Reputation and Vertical Integration in the Wine Market”) was recently published on the American Association of Wine Economists website.

“How can you say if price and quality match?” he wrote me. “You can only see whether they are correlated. And they are, in my research and in the previous literature. The key is not whether higher quality implies higher prices, but rather whether it boosts profitability, and it does not.”

In other words, premiumization – the biggest wine trend in the past decade – may be leading the U.S. wine business in the wrong direction. U.S.  producers have been spending hundreds and hundreds of millions of dollars to make more expensive wine in anticipation of higher profits, because U.S. wine drinkers are supposed to be abandoning cheap wine for something they perceive as better.

Castriota, who teaches at Italy’s University of Bolzana, did find that improved wine quality leads to higher prices. But he also discovered that higher quality is irrelevant when it comes to profitability.

“I was expecting these results,” Castriota wrote me. “The outcome of this research did not surprise me, but surprised many others. Most people – both in the academic and in the business sectors – look only at the advantages of excellence, but do not consider the costs/disadvantages. Many entrepreneurs end up over-investing in quality and reputation.”

Producers spend so much money to achieve higher quality – more expensive land, higher-priced grapes, better technology, increased marketing, top-notch winemakers – that they don’t necessarily make the same return on their investment as cheap wine producers, who don’t do any of those things.

The latter just sell more wine: “Being able to sell the wine is more important than producing good wine,” Castriota said in an email. “This is why in my analysis the firm size is the most important driver of profitability.”

The bigger, the better

That’s because the “issue is business scalability, the possibility to increase production once you achieve excellence,” Castriota wrote. “If you spend a lot of money and invest huge capitals to become famous, but cannot increase the supply, firm profitability can be low or even negative. In the restaurant sector is the same: hiring the most famous chef and interior designer and buying the best raw materials is expensive. You have surely higher revenues, but also higher costs and capital invested. In the end, with respect to the capital invested, are you more or less profitable than a whatever medium-level restaurant?”

The caveats now: First, the study measured wine quality using ratings from Italy’s Veronelli, a leading wine guide. We’ve noted here the tenuous link between critical ratings and wine quality. Second, the Italian wine industry is not exactly like ours, and U.S. and other New World producers may not be as constrained as those in Italy. Having said that, Castriota emailed that it would be reasonable to expect the same results “or something similar. We don’t know until we see some study with other data.”

Finally, the study doesn’t specifically address premiumization; that’s my interpretation. But that approach makes sense, given the rationale to premiumization – that producers will make more money selling more expensive wine. Which Castriota says isn’t necessarily true.

“If you succeed in selling bottles at $50 or $100, you make a lot of money, but for every very profitable firm there is another one which is losing money,” he emailed. “On average, looking at the data, I did not find any significant return of excellence, which is very expensive. [A]chieving quality and reputation is not a necessary condition to become profitable because the costs and the required capitals increase a lot.”

Is it any wonder I worry about the future of the wine business?

Winecast 31: Rob McMillan, Silicon Valley Bank

Rob McMillanSometime in the next several years, the pricing sweet spot for wine will be $15 to $25 a bottle, compared to $12 to $15 today.

Rob McMillan, the executive vice president and founder of Silicon Valley Bank in Napa, may know more about wine pricing — what will happen and why — than anyone else in the world. And he doesn’t see that cheap wine has much of a future.

Sometime in the next several years, the pricing sweet spot for wine will be $15 to $25 a bottle; today, it’s about $12 to $15 a bottle. In this, McMillan sees the increase as the next step in premiumization, the process he has identified as the gradual increase in the cost that wine drinkers are willing to pay for what they consider a quality bottle.

We talked about premiumization, as well as how difficult it is forecast wine prices given the lack of quality information — what McMillan calls the same sort of self-interest that the tobacco companies displayed when they were discussing the relationship between cigarettes and cancer.

Also, he said, don’t expect to see wine price increases in 2018. There are enough grapes in the world so that supply will be steady, while demand looks to be about what it has always been. In this, it will be easier to start a new brand at a higher price than to raise prices for and existing brand.

Finally, we had an intriguing discussion about Barefoot, the $7 wine that accounts for as much as five percent of U.S. wine sales, and how it fits into premiumization.

Click here to download or stream the podcast, which is about 21 minutes long and takes up 6 1/2 megabytes. The sound quality is good; we recorded it using Google Voice.

Four premiumized wines worth buying

premiumized wine

Wow, the Wine Curmudgeon is right. These wines are worth the extra money.

These four premiumized wines are worth the $17 to $22 that they cost

Premiumization and premiumized wine gets a nasty rap on the blog, and why not? Who wants to pay $15 for wine that’s worth half of that? But the Wine Curmudgeon is nothing if not open minded, which is one of the keys to quality criticism.

Hence, reviews of four wines worth buying that cost between $15 and $20 or so, the so-called sweet spot for premiumization:

Chateau d’Epire Savennieres 2014 ($22, purchased, 13%): I love Savennieres, chenin blanc from France’s Loire Valley, but quality Savennieres isn’t $10 anymore and even the pricey stuff is difficult to find or overpriced. But the d’Epire was everything I hoped it would be – fresh lemon fruit instead of the Sweet Tart style you find in so many less well made wines, plus the traditional steely minerality. Highly recommended, even for $22. It should age a little, too, showing less fruit and more minerality as it gets older.

Donati Family Vineyards Claret 2013 ($20, sample, 13.8%): This California red blend was an astounding value, full of quality red fruit (cherry and strawberry?) and an almost Italian-style freshness. Yes, grilled sausages and red sauce, but also a long dinner with good conversation. I was a little surprised by how much I enjoyed it, and not just for the value; it’s that so many other California wines at this price taste like fruit punch spiked with alcohol.

Domaine de la Chanteleuserie Cuvée Alouettes ($17, purchased, 12%): This red from France’s Loire (made with cabernet franc) is not for everyone, and especially if you prefer a New World, fruit forward style. But if you want to try an impeccably made wine, with berry fruit, a little graphite and spice, and wonderful length, give it a try. Highly recommended, and just the thing for steak frites.

St. Urbans-Hof Alte Reben Riesling 2015 ($18, sample, 10.5%): Quality German riesling, like Savennieres, has been mostly priced out of what most of us are willing to pay for wine. That’s what made the Alte Reben so enjoyable – it’s more or less worth what it costs. Look for a slightly honeyish sweetness with riesling’s telltale petrol aroma and bright lemon acidity. Very tasty, and just the thing as spring arrives.

The premiumization backlash

premiumization

“Why am I spending more money and getting less wine?”

Is the U.S. wine business finally noticing that premiumization may be good for producers, but not so good for consumers or the industry?

Consider these three items, all of which sound like something the Wine Curmudgeon would say during one of his premiumization rants:

• Wineries should try to democratize wine instead of focusing on premium brands from California’s higher-priced North Coast.

• The wine industry is dominated by elitists who dismiss sweet wines and insist that real wine drinkers should like drier, more correct wines. Isn’t it time the rest of us put a stop to that kind of arrogance?

• The upward spiral in wine prices, as well as the continued growth in producers, may be unsustainable and could inflict long-term damage on wine’s popularity.

In fact, I didn’t say any of those things. They were made by industry leaders, the kind of people who speak at trade shows, are ranked on most influential lists, and get paid lots of money for their wisdom. Stephanie Gallo, the vice president of marketing for E&J Gallo, the largest producer in the world, said the first. Tim Hanni, one of the first two Americans to become a Master of Wine, said the second. And the third was part of this year’s much-respected Silicon Valley Bank state of the wine industry report.

How can that be? Why are wine insiders saying things usually associated with cranks like me – the kind of people who don’t show up on lists, aren’t asked to speak, and who are noticed, if at all, as voices in the wilderness?

Because the U.S. wine business is somewhere it hasn’t been in 40 years – flat growth, higher prices, skyrocketing land values, and Neo-Prohibitionism. And the smart people, who aren’t quite sure what’s going to happen next, are worried.

This is much different than the all too common wine industry approach, described to me by one Napa wine marketer as “My wine is special, and you should buy it because it’s special.” Which, of course, is about as practical as jumping out of an airplane without a parachute. You’re OK until the bottom, and then you wish you had approached the problem differently.

And I’m convinced the key to this soul searching is premiumization. Again, it’s not that higher-priced wine is a bad thing and that all high-priced wine is a scam. Even I buy expensive wine, but that doesn’t mean I throw out all considerations of value and quality when I do.

But those considerations don’t seem to matter to too many producers. They’re happy to sell less wine as long as it costs more, regardless of whether it’s worth the extra price. As in: “Wine at $15 is trending now. What can we make to sell at $15 that will be popular but doesn’t cost us as much to make as the other company’s $15 wine? And make sure it has a cute label.”

The other concern, which Gallo noted in her speech to a major industry trade show: Higher prices are limiting the number of frequent wine drinkers, those of us who drink more than the national average of one bottle a month. We matter because we drive industry growth, and without us, wine wouldn’t be as profitable.

How do higher prices do that? It’s math – if I buy 6 or 7 bottles a month (one way to define a frequent wine drinker), I’m going to buy less wine if I buy more expensive wine. Which, in the long run for the wine business, is like jumping out of the plane without a parachute.

And no one who cares about wine, including the cranks in the wilderness, want that.

Premiumization, crappy wine, and what we drink

premiumizationPremiumization is not the reason for the decline in wine quality; blame the producers

This has been a most depressing year for quality cheap wine, the $10 labels that are my reason for being. So many all-time favorites have been bought or changed distributors or decided that being cheap and good wasn’t as profitable as being not cheap and not good.

When I went through my notes for this piece, I saw things like this over and over: “Decent enough, but overpriced”; “flabby and soft, what happened to the wine?”; and “disappointing, and not what it used to be.”

In other words, producers made conscious decisions to change the way the wine was made that had nothing to do with winemaking and everything to do with the marketplace. In one respect, this is understandable – everyone is in business to make money, something that even cranks like I understand. The difference, though, is that there’s making money and making money, and we’re getting to the point where making money is more important than the wine.

Wine quality has suffered greatly in the past couple of years at almost all prices – producers are using poorer quality grapes, cheaper production methods, and cutting corners that they wouldn’t have cut before. The economic term for it is commoditization, in which products become more alike over time and the only thing different about them is the price.

Which is bad enough. What’s worse is that no one really seems to care. When I ask about it, it’s always someone else’s doing, even if that producer is one of the biggest offenders. Or they just get mad at me, tell me I don’t understand their wine, or suggest I don’t know anything about wine. The latter, believe it or not, happens regularly.

Call this the downside of premiumization, a concept that has been misunderstood by almost everyone in the wine business except the guy who figured it out. Producers see premiumization as a chance to sell consumers the same wine they were drinking before for more money, while critics like me see it as the end of great cheap wine.

It’s neither. Premiumization is about two things: Some, not all, consumers buying more expensive wine and the decline in sales of the very cheap wine that costs less than $5 a bottle — and it’s not necessarily about wine prices increasing. In this, premiumization is part of a historical process that involves industry life cycles, and wine is no different than breakfast cereal or blue jeans in why it happens. At some point, industries stop growing, and when they stop growing, pricing models change. And that’s where we may be with wine. The wine drinking boom that started in the 1970s has apparently ended, more people aren’t drinking wine, and growth is flat. That, more than anything else, explains premiumization, which is a natural part of that process.

So why does everyone else see it so differently?

• It’s the wine business, and that’s the way it operates. There’s not a lot of perspective in wine, because wine is so different from other consumer products. Which, of course, isn’t true. The minute your product gets on a grocery store shelf, most differences are gone.

• Selling cheap wine isn’t as prestigious as selling expensive wine. Many distributors have a fine wine division, which handles everything that isn’t in the grocery store, and a grocery store division. Guess which part of the company most people want to work for?

• Because expensive wine is more profitable. Margins are higher, and it’s easier to get into a retailer when you’re selling something the retailer can make more money with that isn’t sold in a grocery store.

This doesn’t mean there isn’t quality cheap wine to buy. It’s just more difficult to find. Consumers still want to buy $10 wine – how else to explain that $6 Barefoot and $10 Bogle, which sell more than 20 million cases between them, would be one of the five or six biggest wineries in the U.S. if they were one company?

The irony? That there is still a need for what I do, perhaps even more of a need given all the junk masquerading as wine worth buying. That’s something I didn’t think was true when premiumization started at the end of the recession. Those who read these annual critiques of the wine business knew I have been contemplating ending the blog for the past couple of years, thanks to flat visitor numbers and the hype that said wine drinkers were giving up on cheap wine.

But you still need me. And that, more than the money I don’t make from the blog or the fame I don’t have, is what keeps me going. At heart, I’m still a newspaperman who wants to write for people who want to learn. And you do. So I will.

More about the blog’s history:
Birthday week 2015
Birthday week 2014
Birthday Week 2013

 

Wine prices 2017: Premiumization is here to stay

premiumizationBut premiumization isn’t necessarily killing great $10 wine, which makes the Wine Curmudgeon happy

Premiumization, where consumers buy more expensive wine, is here to stay, and may even be part of more significant changes in the wine business. But that doesn’t necessarily mean wine prices are going up.

Confused? So was I, until a chat this week with Rob McMillan of Silicon Valley Bank, who probably knows more about the subject than anyone in the world. His take: That premiumization is a natural development in the evolution of the wine business, and that it’s going on not just here, but everywhere people drink wine. It’s a fundamental shift in the way we buy wine, something that seems to happen every generation.

Today, some of us are buying more expensive wine, fewer of us are buying wine that costs less than $7 a bottle, and overall wine sales are flat. Given those three things, the average price of a bottle of wine has gone up, which is different than prices going up.

“I don’t see prices going up,” says McMillan. “It’s very hard to raise prices these days.”

Instead, Big Wine is introducing new products at higher prices to appeal to people who want buy more expensive wine. This is the key that unlocks premiumization, says McMillan – Big Wine’s ability to produce $15 and $20 wine to meet consumer demand in a way smaller wine producers couldn’t – and didn’t think about doing – a decade ago. There are dozens of wines on store shelves today that exist for one reason only – to sell to consumers who think they want to buy it. And why do they think they want to buy it? Because, says McMillan, Big Wine’s marketing ability and clout with retailers is almost unprecedented in wine history.

You can see this change in the September Nielsen sales numbers. Growth in wine costing more than $12 was up double digits from a year ago, while sales in wine costing less than $9 was flat. And the overall increase in the average bottle of wine was just 19 cents – hardly cause for a Wine Curmudgeon rant.

Which brings us to the good news. There is still quality cheap wine available, even if it is more difficult to find. That’s because premiumization is not necessarily about the $8, $10, and $12 wine that I write about, but about the on-going sales decline for the very cheap jug and box wines that dominated the market from the mid-1970s to the end of the recession, and the increase in sales for wine that costs more than $15 since then.

More wine retailer foolishness

wine retailer foolishnessYou’d think I’d find something worth drinking among a dozen bottles, but you’d be wrong

Some notes after buying a dozen bottles of wine at various retailers over the last week; sadly, most weren’t worth drinking, let alone writing about. Call it more wine retailer foolishness:

• Points are bad enough, but they’re despicable when they’re so obviously fake. A Dallas mom and pop had an $11 rose from France that I had never heard of – Rose of Scarlet, complete with a Gone with the Wind style front label. Is this dry, I asked? Yes, I was told. It got 92 points. But really dry (because why would anyone put that label on the wine if it was any good)? Yes, I was told. It got 92 points. Of course, the wine tasted like a bottle of French rose with a Gone with the Wind style front label – not really dry, without much rose freshness, and way too much fruit. If it got 92 points, the score came from the winemaker’s mother.

• Premiumization run amok. A couple of years ago, I bought a bottle of the 2013 Spy Valley riesling from New Zealand at a prominent Dallas retailer for $16. Over the weekend, it was $18 at the same retailer. The wine has not necessarily improved with age, but it cost $2 more? And why was the store selling an out-of-date riesling for the same price as the 2014, which was next to it on the shelf?

• Trader Joe’s wine continues to baffle me. Its prices on national brands are a couple of dollars more than other retailers in Dallas, and buying its private label stuff is a crapshoot. Most of it is cheap and tastes that way, and I’ve bought just one wine in 15 years that was worth what it cost. How so many of my colleagues can rave about its wines baffles me. And the Texas section consisted of one wine stuck in the lower left hand corner of the shelf, and it wasn’t even technically Texas wine – it was a dreaded for sale in Texas only.

More about wine retailer foolishess:
Wine pricing skulduggery
Beware wine vintage skulduggery!
The Kroger wine proposal