Wine premiumization may be ending, but you wouldn’t know it by reading the Winestream Media
By most measures, the end of premiumization is underway. Wine drinkers have been opting for less expensive wine over the past six months, and, depending on which expert is talking, the trend will continue and perhaps even accelerate. In other words, lower wine prices and better quality cheap wine.
But it would be difficult to know this from reading the Winestream Media.
I don’t write this to be snarky (well, maybe, just a little), but to point out how difficult it is to tell what’s going on in wine from its most important media outlets. Wine-searcher.com somehow managed to run these two stories almost at the same time – “Premium wine falls victim to the coronavirus” and “Wine sales defy doom and gloom.” And this doesn’t include the site’s regular roundup of all things high priced – “Bordeaux’s most expensive wine,” “Napa’s most expensive wine,” and (my favorite), “Brunello 2015: Another perfect vintage.”
At the Wine Enthusiast, meanwhile, one writer was salivating over $40 California gamay, which is about as premiumized as wine gets that isn’t cabernet sauvignon. And the Wine Spectator has reassured us that it will continue to cover the 2019 Bordeaux futures market, despite what the magazine’s Bordeaux reviewer called the pandemic’s “rude interruption.”
Why is the Winestream Media treating this almost unprecedented moment in world history – and with all of the changes it looks like it will bring to wine – as just another minor sales blip?
• Because that’s what it does, and to expect more of it is expecting more than it is capable of. Yes, it may well be fiddling while Rome burns, but it doesn’t understand that Rome can burn. Rome is eternal, just like wine scores and $300 Napa cabernet.
• Because it doesn’t want to see what’s going on, as Richard Hemming, MW, explained to us last week. If wine writers write things the wine business doesn’t want written, there’s a good chance the wine writers will find themselves persona non grata. As Hemming said, there’s no reason consumers should necessarily trust wine writers.
• Because there aren’t really any good numbers to describe what’s going on, even if a wine writer wanted to write about it. We’ve noted this on the blog many times, and another example came up last week. David Morrison at the Wine Gourd has made a specialty of parsing wine industry statistics, whether sales or scores, and noted last week about one sales study: “The conclusions seem to vary from quite accurate to wildly exaggerated.”
So what’s a consumer to do? Buy wine you like, be willing to try something else, and wait to see what prices will do. We’ll almost certainly see prices drop before the Winestream Media discovers most of us aren’t all that interested in $40 California gamay.
Way too many grapes and continuing flat demand may lead to lower wine prices 2019
At the end of the summer, I was talking to an official for one of the big grape grower trade groups. I asked what he thought wine prices would do through the end of the year, as well as into 2020.
“Wine prices are coming down,” he said. How can that be, I asked. Because, of course, premiumization — its reason for being that wine prices are never going down again.
He laughed. “That may be,” he said. “But when you have too many grapes, which we do, and flat demand, which we do, wine prices come down. There’s nothing premiumization can do about it.”
The trade group official was not alone in his take on wine prices 2019. Whenever I interview a retailer or producer, I always ask about business. And their responses over the past nine months have not been nearly as optimistic as the last couple of years – and certainly not as optimistic as the official wine business position: “Ever more wine sold at ever high prices!”
The consensus: Business may not be bad yet, but it’s certainly slowing. And, no, this isn’t a highly scientific survey process, and yes, it’s overwhelmingly anecdotal. But, like the Wine Curmudgeon Wine Sample Index, it rarely steers me wrong. Because other signs point to the same thing:
• Reports one trade website: California “supply levels remain higher than ideal and therefore the market remains favourable to buyers, with wineries quoting the lowest bulk wine prices in 5 years.” In other words, lots of grapes in the supply chain, and not too many buyers, so lower grape prices.
• And that’s because the 2018 harvest was record-breaking, and the 2019 harvest may be equally as gigantic.
• And we all know about flat demand. In 2018, about one-fifth of regular U.S. wine drinkers were older than 65, compared to 16 percent in 2015. But the youngest regular wine consumers, ages 21-24, are decreasing, dropping 13 percent from 2015.
• Canceled grape contracts. Large producers are refusing to buy grapes they agreed to buy, ostensibly because of smoke damage from the 2018 wine country wildfires. But there’s a suspicion that the wildfires had nothing to do with the cancellations; rather, it’s because the producers already have too many grapes and don’t need any more.
• Wholesale alcohol inventories, measured in dollars, are at an all-time high, according to the U.S. Census Bureau. This could be nothing more than a side effect of premiumization – the same amount of wine in warehouses, but since it costs more, its value is setting records. Or it could mean there is a lot of wine stacking up because no one wants to buy it.
• Last week’s tariff news should only make things worse, since it will raise prices for many European wines, while most cheaper French and Spanish wines could disappear from U.S. shelves. Which will further cut demand and increase the overall supply.
If, in fact, wine prices are coming down, will it happen in time for the holidays? Probably not, though I’m willing to bet we could find terrific deals as producers, distributors, and wholesalers try to get rid of select wines they have too much of.
The real selloff may come at the beginning of next year, and especially if the holiday season is as slow as it looks like it will be. And then, finally, we could be able to see the beginning of the end of premiumization.
Wine price data may show that retailers are absorbing some of the higher prices that come with premiumization
The theory behind premiumization is that wine has become more expensive – not necessarily because wine prices have increased, but because we’re buying more expensive wine. Yes, it’s a fine distinction, but it’s one that the experts insist on.
And there may be some evidence to back that up.
What I’ve found, with expert guidance from Tarek Abdallah, PhD, an assistant professor of operations management at Northwestern University’s Kellogg School of Management in Evanston, Ill., is that retailers haven’t been raising prices as much as wholesalers have. In fact, says Abdallah, the numbers show that retailers have been getting squeezed since the end of the recession.
Since 2009, wholesalers have raised the prices they charge retailers by an average of 2.25 percent a year. But retailers have only increased the prices they charge consumers by three-quarters of that amount, about 1.84 percent annually. In other words, retailers are absorbing some of the price increases.
Abdallah points to two sets of data compiled by the federal government to demonstrate this: First, the consumer price index for alcoholic beverages, a derivative of the better known overall consumer price index, the standard measure of U.S. inflation. Second, the wholesaler producer price index for alcoholic beverages, which measures what the second tier charges for its products.
What’s the catch?
The caveat here: Neither index breaks out wine; rather, each tracks combined sales of beer, spirits, and wine. So we can’t be certain that wine prices by themselves are acting this way. But, says Abdallah, the data is broad enough and consistent enough so that we can be reasonably certain.
Which brings us back to the idea that wine price increases aren’t the most important part of premiumization. How can they be if retailers are working to minimize those increases?
This plays into the sense that producers, rather than raising prices for existing products, are bringing new, more expensive products to market. They want us to buy their new $15 wine instead of the old $10 wine, marketing the new wine as better than the old wine because it costs more – even if it isn’t necessarily better.
And retailers seem to be hedging their bets and not charging the full $15 for the new wine — and maybe for just that reason.
More about premiumization:
• Premiumization be damned: $139.36 for 14 ½ bottles of cheap wine
• Wine prices, razor blades, and premiumization
• “Reasonably priced at $40:” Wine premiumization is out of control
Most importantly: Consumers dislike wine premiumization, no matter what the wine business wants us to believe
Last week’s wine premiumization analysis kicked up more than a little dust in the cyber-ether – it was the most visited post on the blog in almost 2 ½ years. The comments and emails covered the spectrum, from people blaming me for wine’s problems (and that there wouldn’t be any if not for people like me) to those who offered their take on premiumization (pro and con) to those who thought I was spot on.
In all of this, I learned five things after writing the wine premiumization post:
1. Consumers dislike premiumization, no matter how much the industry insists otherwise. I wasn’t sure about this until I saw the reaction to the post, since all the data suggests we’re paying more for wine. So if we’re paying more, then we’re happy, right? But since fewer of us are buying wine, and those of us who still buy wine are buying less, how happy can we be?
2. Talking about wine prices is even more taboo today than it was when I started writing about wine in the late 1990s. There was a sense then that pricing was not to be questioned. Because, wine. I’ve never understood this, and my emphasis on cost vs. value has always annoyed people in the wine business. It annoys them even more today – and some are way past annoyance.
3. The economics of the post-modern wine business stink for almost everyone who isn’t Big Wine. I sympathize with those producers, and have agonized over their plight many times. But overpriced wine is overpriced wine, regardless of the reason why. Is any bottle of wine really worth $80 or $100? Or, as hard as it is to believe, thousands of dollars?
4. I taste thousands of wines a year, at all prices and from all over the world. My friends also taste thousands of wines a year, and we talk about what we taste. So how am I not qualified to say that wine quality is not what it was before the recession? One friend, a well-known wine judge and critic, will start his pinot noir rant without one nudge from me. Yes, technically the wines are OK — not oxidized, not tainted with VA and so forth — but are they interesting to drink? Are they fun to drink? Unfortunately, not nearly as many of them as in the past.
5. Wine writing, even in the second decade of the 21st century, is still expected to be positive and to sell wine. I had hoped the Internet would change that. I was wrong.
Photo courtesy of IWA wine blog using a Creative Commons license
Wine premiumization: Prices keep going up, quality keeps going down, and fewer people are drinking wine. Am I the only one who thinks that’s not a coincidence?
This is how deeply premiumization has upended the wine business: A reader emailed me to say I shouldn’t use the prices I paid for wine in my reviews. Instead, I should use the prices on an industry website, which are typically more than what I pay.
What twisted wine universe do we now live in? Is premiumization so deeply ingrained in the system that cheap wine should not exist, even if it actually does?
Premiumization is the idea that consumers are trading up, that we’re willing to pay more money for a better quality bottle. In theory, this makes perfect sense. Of course I will pay $15 for wine if I know it’s going to be appreciably better than a $10 bottle.
But theory, to paraphrase the economist John Maynard Keynes, is for dead people. The wine business, in its dedication to short-term profit at the expense of long-term growth, is selling us more expensive wine that isn’t appreciably better. It just costs more money, and we’re supposed to accept that as the natural order of things.
I got a sample of an Italian white wine this summer, which came in a flowery bottle with an even more flowery name. My tasting note? “Very nicely done $10 blend (chardonnay, pinot bianco) with a little lemon, minerality, and crispness. For some reason, the suggested retail price is $20, making it one of the most overpriced wines I have ever tasted.”
It’s not just me
A friend of mine, who has been selling quality wine at Dallas’ best retailer for more than 30 years, told me he no longer understands how wine is priced. He cited two examples: Spanish albarino, once $10 and $12 and delicious, is now $18 and $20 and not very albarino-like, while French picpoul, “which should cost $8, costs $16.” These are wines that people in Spain and France drink daily; in the U.S., they’re priced for special occasions.
Or, as a review of a $24 wine on Wine Industry Insight put it recently: “Thin, acidic, and lacking fruit.” How far has wine fallen when $24, which used to be enough to buy something fabulous, now only pays for thin and acidic?
I write all of this in the shadow of the end of the wine boom: Flat sales, more young people who see wine as something for their parents and grandparents, and experts who say drinking will kill us as surely as cigarettes. It’s what Rob McMillan of Silicon Valley Bank calls the new normal – that wine consumption won’t return to what the industry wants. Instead, he writes, “don’t be surprised if young consumers drink less alcohol tomorrow, and those who do drink continue to embrace craft spirits and beer instead of wine.”
Given all of this, shouldn’t it be time for the industry to put an end to the premiumization that gives us $8 worth of wine for $15? If wine is in a fight for its future, shouldn’t it focus on selling well-made and affordable products in response to the competition from craft beer and spirits?
That makes perfect sense
But I long ago stopped expecting that sort of wisdom from wine. In this, I thought I saw the end to wine premiumization several times over the past couple of years, and I’m not the only one who did. But just when you think it has run its course and this foolishness can’t go on forever, it does a Freddy Kreuger. How else to explain when the man who runs Jackson Family Wines wants the federal government to eliminate his competition with a tariff wall?
All of which leads me to wonder how far we are from something that wine economist Mike Veseth has predicted for several years: That wine will become like opera, which was once mass entertainment but is now reserved for a wealthy elite.
That’s a new normal that won’t make anyone happy.
More about wine premiumization:
• “Reasonably priced at $40:” Wine premiumization is out of control
• The premiumization backlash
• Has premiumization damaged wine’s popularity?
Wine premiumization may be working for producers, but the loser remains the wine drinker
The following arrived in a news release the other day: These “wines are reasonably priced between $15-$40 — ensuring excellent price-quality ratio.”
Where do I begin to parse the failure of the post-modern wine business, as demonstrated in that sentence? Am I the only one who sees that most wine drinkers don’t consider wine costing more than $15 as either reasonably priced or having an excellent price-quality ratio?
The wine business has fallen all over itself in the past 18 months throwing as much crappy $20 wine on the market as possible, because one very smart man noticed some of us were willing to pay more for wine. He called the trend premiumization, and his point made sense: If you have more money, you’re willing to spend more money.
Which is what happened in the U.S. when the recession ended. Sales of higher priced wines increased significantly, and the average price of a bottle of wine in the U.S. rose to almost $10, the highest in history.
Welcome to the promised land
The wine business, particularly in California, saw premiumization as the promised land – a way to raise prices without necessarily increasing quality. Hence higher profits, which had been squeezed during the recession, as well as the need to sell less wine to make the same amount of money. If I make $10 wine, I need to sell 10 bottles to make $100; if I make $25 wine, I only need to sell four. And if I sell five, I’m better off than selling 10 bottles of $10 wine. Who wouldn’t want that?
The result, according to a study from Internet retailer Wine.com, has been flat U.S. wine consumption. “This means for every headline about a brand growing 10-20%, another one is shrinking by a similar amount,” says the report. “With little to no organic industry growth, it’s all about battling competitors for market share.”
In other words, the pie isn’t any bigger, but there are more producers charging more for us to eat it. So we’re the losers, as the quote at the beginning of the post shows.
Here’s what the wine business overlooked in its haste to embrace premiumization:
• 95 percent of the entire U.S. population – not just wine drinkers – will never buy a $20 bottle of wine. That’s from the Wine Market Council, which studies these things for the wine business. So premiumization excludes 9 ½ out of 10 U.S. adults – hardly a way to make wine more popular.
• Let’s say I buy two $40 bottles of wine a week, which the Wine Market Council says “a high frequency wine drinker” might do. That’s $320 a month – or about as much as it costs to lease an Audi A3 Cabriolet. I love wine, but I know what I would do with that money.
• The rise in sales of more expensive wine, given that overall wine sales are flat, means people are buying less cheap wine. The assumption has been that consumers are trading up from their $4 and $5 bottles to $20 bottles, which only a winery could believe. What’s more likely is that older wine drinkers, who bought much of the very cheap wine, aren’t drinking as much. They’re either dead or have cut back as they got older. The same thing has happened in beer and Big Beer is in a panic. This would raise the average price of wine without actually increasing the number of people who drink it.
So we’re stuck with reasonably priced $40 bottles of wine. Whatever that means. Hopefully, we won’t be stuck much longer — since I don’t need any more reasons to worry about the future of the wine business.