Tag Archives: wine prices

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?

“Reasonably priced at $40:” Wine premiumization is out of control

wine premiumizationWine 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.

Forgotten facts

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.

More on premiumization:
• The premiumization backlash
• Premiumization, crappy wine, and we drink
• Premiumization: Prices in the real world

walmart liquor store

Wine sales in Texas after the Walmart lawsuit

Walmart lawsuit

Oh no! These shelves will be empty! Poor, poor pitiful us.

We’ll still be able to buy quality wine in Texas after the Walmart lawsuit, no matter what the panic mongers are telling us

Yes, it’s doom and gloom here in Texas after last month’s ruling that ended the unconstitutional monopoly that the state’s liquor store owners have enjoyed for more than 40 years. How will we ever be able to buy something besides Barefoot ever again?

“So while these new rulings, if enacted in Texas, might free up the market and lower prices they could ultimately harm the overall quality of the Texas wine market by lessening the overall total wine selection.”

Which, of course, we will. The naysayers, prominently quoted in the Wine-searcher.com piece quoted above, make it sound like allowing Walmart to open liquor stores is the beginning of the end: “Some of the most-legislated markets – such as New York and Texas – also have the most vibrant wine markets because these laws have forced owners to specialise and have steered fine-wine buyers to wine-focused independents and chains.”

Excuse me while I reach for my hyperbole eraser.

Nothing will change in Texas if and when Walmart, Kroger, and any other national chain opens standalone liquor stores. Yes, I’ll be able to buy a fifth of bourbon when I go to the grocery store, but that’s about it. I’m not even sure prices will go down; has anyone noticed the foolishness behind supermarket wine pricing?

Some independent retailers, shorn of the monopoly that has protected them since the state’s retail lobby “convinced” the Legislature to pass unconstitutional legislation in the early 1970s, might go out of business. But it’s difficult to feel sorry for any business that stays afloat because a law was designed to stop it from failing.

Know three things about Texas wine sales after the Walmart lawsuit:

• Supermarkets sell spirits in Florida and California; I haven’t heard anyone complain they can’t buy a quality bottle of wine in either state. Right, Kermit Lynch?

• Some small Texas retailers don’t need the monopoly – they have thrived selling quality wine and offering quality service, knowing those are more effective weapons than an unconstitutional law. Pogo’s in Dallas, the not-related Wine Merchants in Austin and Houston, and Put a Cork in It in Fort Worth don’t need the Legislature to protect them.

• The independent pet store was supposed to go out of business in the early 2000s, thanks to national chain retailers like Walmart and PetsMart and more pet products in grocery stores. Sound familiar? But there may be more independent pet stores in the U.S. today than there were then.

So no, I’m not worried about Walmart or Kroger or Target or whatever opening a liquor store and destroying my chance to buy quality wine. And anyone who reads the blog knows that if there was a reason to worry, I’d be the first one to write about it.

The other thing to know? If and when three-tier reform hits your state, you’ll read and hear the same dire warnings. And there won’t be any reason to believe them, either.

Expensive wine prices in the real world

expensive wine prices

“There is no way any bottle of wine is worth 10 times more than one of my performances.”

I can see Glenda Jackson and Justin Timberlake for $150, but the best I can do in wine at that price is far from legendary

For $150, I can watch Glenda Jackson do Edward Albee on Broadway. For $150, I can see Justin Timberlake perform in Dallas. But for $150, the best I can do in wine is hardly legendary – labels that even the cheerleading Winestream Media considers good, but not great. Legendary costs four or five or even 10 times Glenda Jackson, and that’s difficult to believe.

How did we get to this point? Most of us will never taste the world’s greatest wines, which have been priced out of our reach for decades. The 2005 Chateau La Tour costs $1,000. And maybe that makes sense, in some warped supply and demand way. But it doesn’t make sense that wine that isn’t close to being the world’s greatest costs more than watching a legendary actor or musician. And this, as I have noted many times, does not bode well for wine’s future.

Or, as the wine economist Mike Veseth has warned us: If we keep this up, wine will be like opera, something that interests only the rich and the privileged.

In fact, supply and demand does work for plays and music. It’s one reason why it costs $20 to see a community theater do “Hamlet” and it doesn’t cost more than a cover charge and some beer to watch a local band. There is lots of supply, and not nearly as much demand, compared to stars like Jackson and Timberlake.

So why the divergence between the best wine and the best live shows? The answer, I’m afraid, is that the people who produce the latter want to keep their products affordable. The least expensive tickets for Jackson and Timberlake are about $50, and you can’t get anything close to legendary in wine for $50. If fact, you can buy crappy wine for $50 without any trouble at all. The people behind theater and music understand, in a way wine doesn’t, that the future of their business depends on making it accessible to people who can’t afford the top ticket. In wine, it’s the other way around; if you can’t afford the top ticket, why should we bother with you?

That’s why the pre-teen and teenaged girls who will attend the Timberlake show will be buying his music for the rest of their lives. It doesn’t matter what I think of him, what their parents think of him, or what music critics think of him. It’s why one friend’s daughter, told she couldn’t go to the Timberlake show, has stopped speaking to her mother.

And it’s also why, when you talk to young people about wine, they don’t show anywhere near the same kind of loyalty and enthusiasm. Accessibility is all; otherwise, we’re going to turn into opera.

Update: Wine prices in 2018

wine sales 2018Wine prices 2018: Look for increases later this year and early next, thanks to a weak dollar and the return of inflation

Look for wine prices 2018 to head upward, and not just because of premiumization. Inflation, something that hasn’t been part of the U.S. economy for decades, has apparently returned. In addition, a much weaker U.S. dollar will force up the price of imported wine – one of the few values left for those of us who looking for quality at $10.

I’ve been watching pricing pressures since the end of last year, but I didn’t anticipate this — and the dollar’s weakness in particular. About 18 months ago, it was at parity with the euro, but has fallen more than 25 percent since then. A stronger euro means the cost of wine from France, Spain, and Italy will increase – probably sometime in the next 12 to 18 months, according to several distributors I talked to. The same holds true for Australia, where the Aussie dollar has gained 25 percent since bottoming out at about 50 cents to the U.S. dollar at the end of the recession. The New Zealand dollar is about the only wine-related currency that hasn’t increased in value. It has been stable for about a year.

There’s little we can do about exchange rates; a weak dollar is a political decision to boost U.S. exports to Europe and elsewhere. Inflation is another story, and it’s something that we haven’t really seen in the U.S. since the 1980s. Remember 20 percent interest rates? If not, your parents do – ask them what those rates did to mortgage payments.

The point here is that inflation means producers will raise prices because the cost of their goods increases – bottles, grapes, wages, and the like. We’re already seeing grape prices rise despite yet another bumper California harvest as well as flat demand.

The good news for consumers is that the Federal Reserve, which oversees the fight against inflation, seems ready to try to rein in prices. In addition, inflation will likely hit more expensive wine harder than $10 wine. For one thing, it costs more to make $20 wine – pricier grapes and bottles, for example – and many expensive wine producers are smaller and less able to absorb cost increases. That’s much different from the companies that make cheap wine, which can accept higher grape and production costs without raising prices because they’re so big. Massive, in fact. They’ll put up with smaller margins rather than lose sales and shelf space.

The other thing in our favor? Tremendous – and probably unprecedented competition – among retailers. Never have so many stores sold wine, whether supermarkets, independents, chains, warehouse and club stores, and big boxes. Price matching and discounting are key parts of post-modern retailing, and giving them up to raise prices may be difficult.

Winebits 525: Blind pricing, legal weed, wine theft

blindpricingThis week’s wine news: Blind pricing, or why retailers carry expensive wine you can’t buy elsewhere, plus legal weed goes after booze and a rare wine theft

• Blind pricing: This blog post by distributor Olivia Schoenwise is aimed at small retailers and how they can compete against their biggest competitors. But it also explains why it’s so difficult to find so much wine, even without the restraints imposed by the three-tier system. The idea, writes Schoenwise, is for small retailers to find wine to stock so they have “a competitive advantage against big retailers; and many are turning to blind price wines” – wine that we can’t price shop on phones or on Winesearcher.com. That’s because these wines are a form of private label. And since they’re only carried by one retailer in one area, the retailer can charge more for it, unburdened by competition. Writes Schoenwise: “[B]lind price brands are where the big profit margins are made.”

• Wine is evil: That’s the theme of a campaign from legal weed, targeting alcohol, says the New York Post. “’ ‘Marijuana,’ blares a billboard in Arizona. ‘Less Toxic! Less Addictive! Less Scary Than Alcohol!’ ” The Wine Curmudgeon has been warning the wine business about this for a couple of years, but with little success. Maybe, now that legal weed is hurting alcohol sales in some legal weed states, says the story, wine will notice. Otherwise, reports the Post, “Hello Marijuana, Goodbye Hangover.”

• Good help is so hard to find: An employee stole $1 million of wine from New York investment tycoon David Solomon, including some of the rarest bottles in the world. The employee was supposed to collect wine shipments at Solomon’s Manhattan apartment and then take them to the banker’s wine cellar in East Hampton. But the wines apparently never got to the Hamptons; instead, the employee sold them to an Internet retailer in North Carolina.

Wine prices 2018

Wine prices 2018: Price creep, price confusion, and crappy wine that costs more money

Wine prices 2018 will be even more confusing than wine prices were in 2017, and that was confusing enough. This year, expect producers and retailers to use even more sleight of hand to get us to pay more money for the same quality wine — or even wines of less quality. My look at wine trends in 2018 is here.

There are four reasons for this:

1. The end of standard pricing. Traditionally, a wine cost about the same at every retailer in the country, whether it was $10, $20, or $50. No more. Today, as long-time reader Rex Warburton and I discussed, “the price spread is incredible. This is not a big problem for regular wine drinkers, but a nightmare for beginners or occasional buyers.” Which is the point. Expect to see a wine at $11 cost as much as $18 elsewhere (which was the case with the Ferrari Carano fume blanc I reviewed in the fall).

The reasons revolve around consolidation in retailing and distribution, and which are too complicated to explain here. It’s enough to know that the biggest retailers get incredibly better pricing than a neighborhood independent or even a small chain, so they can afford to sell wine for much less money. The catch for consumers is that the big retailer’s pricing is a one-off, and there is no guarantee it will sell the wine again, let alone at the same price.

2. Price creep. Or, when a $10 wine costs $12 for no particular reason. It’s not necessarily a price increase, since the wine can still be found for $10 elsewhere (and most retailers remain reluctant to raise prices). It’s just a retailer testing the market.

3. Price positioning. Look for wine to be made so it will cost a certain amount, probably between $15 and $20, and not because the wine is worth that much. This is not new for expensive wine, but it has started happening in the past couple of years with cheap wine.

The textbook example, which should be studied at every business school in the world, is E&J Gallo’s La Marca Prosecco. It’s probably $10 or $11 worth of wine, but its average retail price is $14 – and consumers are happy to pay it, turning La Marca into the top-selling Prosecco in the world.

I saw the same thing recently with a cabernet sauvignon from California’s Lodi region, listed at $17. This is twice what it was worth (and about six or seven times what the grapes cost), but the producer figured the consumer would bite. Because wine has to cost more than $15 to be good, doesn’t it?

4. Price confusion. This is more of what grocery stores and the World Market chain have been doing for years – three, four, or even five prices for the same bottle of wine. This is called fake front end pricing; the producer suggests a retail price that is artificially high so that the retailer has lots of room to “cut” it. My Kroger, for example, listed the Layer Cake rose for $21, and then put it on “sale” for $10, when $10 should have been the price all along. This practice will expand to other retailers, and it will be almost impossible to believe any wine price listed in a supermarket or World Market.

Finally, as a corollary to all this pricing foolishness, availability – already awful – is going to get worse, and it will be more difficult to find interesting wines at a fair price. First, the biggest retailers prefer to buy from Big Wine, since it’s more cost effective, and most quality cheap wine comes from smaller companies that don’t sell to grocery stores. And grocery stores sell more than half of the wine in the U.S.

Second, the biggest retailers can demand exclusives for national brands (though that’s technically illegal), further reducing availability. Finally, private label wine – those wines only sold at one retailer – will become even more common, and they will take up shelf space that might have gone to more interesting wine.

In the end, all of this will amount to price increases without there being any actual price increases. Aren’t we lucky?

Illustration courtesy of Fix.com, using a Creative Commons license