The Setting Sun on Luxury Wine

The wine sector “trading down” phenomenon has been much discussed.  While true and accurate, what hasn’t been discussed is the intangible and psychological aspect that may also be involved in a consumer flight to less expensive wine. Consumers might simply be tired of gilding somebody else’s lily.

In the dot-com era I worked for an Internet consultancy—the kind of place that charged a couple hundred of bucks an hour for consulting and projects under $150K were deemed too small to bother with.  We had dozens and dozens of Aeron chairs, a symbol of excess for that era.  And our offices … they were nice!  There was the requisite pool table, a de-commissioned race car hanging from the ceiling, and all of the accoutrements that said, “We’re important.”  The offices were too nice, in fact.

As a sales guy, inevitably, the first thing that would come up in a negotiation for a contract with a potential client would be the office space.  They would say, “Wow.  This is more expensive than I expected.  I guess you guys have to pay for that race car, huh?”  Annoyed sarcasm from clients aside, those were the good conversations, many were much worst.

The place really started to come undone when the CEO only started showing up 1/2 the time, driving his $80K car, while he managed a house remodel. Rumors ran rampant about the salary he was paying himself whilst the rest of us were underpaid to the market because, “it’s a start-up.”

The point is, internal to an organization, money is a fragile conversation.  Externally, people wanted the output of the project, but they didn’t want to pay for the trappings, real or perceived. 

Now, certainly, by way of analogy, I am not giving the bogeyman totem to luxury wine producers (those priced $25 and above), but I do want to point out, as a consumer, that there may be some rational avoidance of luxury wines that has nothing to do with saving ten dollars on a bottle.

We may just be tired of Aeron chairs that are expensive for the sake of being expensive and helping somebody else earn their next million. 

As the Wall Street Journal noted in a recent article on the luxury wine market (excerpted):

The slump continues as Americans continue to drink more wine overall.  Recession-weary consumers, however, are buying more mid-and low-priced wines, causing a sharp falloff in sales of wines priced at $25 a bottle and higher.

Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%, estimates Jon Fredrikson, an industry consultant with Gomberg, Fredrikson & Associates in Woodside, Calif.

So, we’re drinking more wine, but we’re buying less expensive wine.  Certainly the economic travails of our own pocket books are a prime suspect, but more importantly, is it safe to suggest that we don’t know what goes into wine pricing and, perhaps, many people, me included, don’t want to pay for somebody’s office space, or the wine equivalent – the luxurious trappings of the tasting room and/or the wine lifestyle?

As author and wine writer Thomas Pellechia noted to me, “Luxury wine pricing has always been and will always be based on what you can get away with charging.”  And therein lies the rub.

In a savvy consumer society when times are flush many of us will buy the more expensive bottle, even if it’s materially not worth the extra money.  I’ve never met anybody that could blind taste a wine and identify a price discrepancy in between a $25 and a $50 bottle, let alone the difference between a $40 and a $90 bottle.

Anything over $25 bucks is pricing for pricing sake.  To keep up with the neighbors, to get into a certain category at a restaurant, to justify yields and allocation, what have you …

Pellechia continues, “At $3000 a ton for grapes the raw material for a bottle of that wine will cost the winery $4. This is based on tonnage price alone, not on variety. If a variety costs as much as $9000 a ton, that’s $12 a bottle for the grapes (each ton gives about 150 gallons each; each 12 bottle case is about 2.38 gallons). Factor in the cost of bottles, labels, capsules, closure, and overhead, etc., it couldn’t possibly come out to $50 a bottle beyond the cost of grapes–could it?”

So, that’s the problem the wine industry is facing.  A thinner pocketbook, yes, but also the perception that what a consumer is paying for isn’t rationalized with a good reason for that cost.

I’ve done much research into wine pricing – academic textbooks and Internet research.  Nowhere, aside from a winery start-up spreadsheet, and a pithy graphic from wine negociant Cameron Hughes, is there any good information on how pricing is set for a luxury wine.

Circumstantially I know that wine pricing is more pig-in-a-poke than science, and by the facts this seems to be the case, as well.

According to a 1994 pricing strategy article in Wines & Vines magazine:

Ultimately, the pricing strategy used for marketing wines should be a function of the demand for wine.  Consumers are not directly concerned with the cost structure inherent in producing a commodity they are interested in purchasing.

Maybe 15 years ago “they” weren’t.  In 2009, I think “they” are.

Pellechia continued:

Of course, many wineries have to pay for that fabulous facility and their investor returns, and they have to also account for their volume – lower volume productions means having to charge higher prices in order to make a profit.

Luxury pricing is never, ever based on cost to produce …

In the aforementioned Wall Street Journal article it notes that many luxury producers are cutting prices, going on to say:

But such price cuts are taking a heavy toll on wineries’ cash flows, and could make it difficult for them to raise prices in the future.  “If you’re a $90 wine and all of a sudden you’re on the Internet at $50, how do you ever become a $90 wine again?” says Elliot Stern, Chief Operating Office of The Sorting Table, a Napa Valley-based wine distributor.

This certainly begs a couple of questions from a consumer perspective. If Fred Franzia is to be believed, that no wine is worth more than $10 a bottle, and demand for the high-end no longer outstrips supply, how DO you ever become a $90 wine again? 

The ultimate rhetorical question is: Do you have to be a $90 wine?