The downside of premiumisation

The price-to-quality disconnect

“I’m old enough to remember when the term ‘fine wine’ was not anachronistic, and pricing used to go up and down depending on perceived quality,” says Fred Peterson, who has worked in the California wine industry since the 1970s and whose family has operated Peterson Winery in Sonoma’s Dry Creek Valley for three decades. “Many California producers would lower prices for vintages where production was large or there were issues with the vintage, conversely raise the price when quality was considered exceptional or there was a small crop. Now, and especially with high-end Napa wines, it would be the kiss of death to officially sell for a lower price.”

Because, of course, higher prices mean better wine, even if they don’t. This is at the heart of the premiumisation model: consumers will trade up to more expensive wine because they want to ‘drink better’ and they assume that higher prices mean higher quality.

In theory, this makes perfect sense. Who wouldn’t pay $15 for wine if they knew it would be appreciably better than $10 wine? 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 more expensive wine that isn’t appreciably better. 

As one perceptive wine drinker emailed me: “I don’t see that the wine industry in general is offering to truly premiumise its products,” he wrote. “They’re not offering better quality, new packaging, increased convenience or exclusivity. Premiumisation looks like across-the-board price hikes, where the wine has been given a fancy name to make it sound better than it really is.” In other words, $15 wine is the new $8 wine.

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.”

Meanwhile, a friend who has been selling quality wine at Dallas’s best retailer for more than 30 years said he no longer understands how wine is priced. 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 US, they’re priced for special occasions.

Or this review for a $24 California wine on a leading industry website: “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?

And how about the California winemaker who has to sell her $20 bottle of Sauvignon Blanc more or less at cost to compete with producers who aren’t as fussy about the grapes they use? That’s because she uses 100% appellation fruit, while some of her competitors use 75% appellation fruit. Then they fill the wine out with bulk grapes that could cost as little as half the price of appellation fruit. It’s entirely legal, and it works wonders for margins, but it’s also why many $20 wines don’t taste like $20 wines any more.

How did this happen?

Did someone just decide one day to put all the $8 wine into $15 bottles? Talk to people who make, distribute, import and sell wine, and you’ll begin to understand that the situation is far more complex – a combination of post-modern business practices, the wine business’s unique supply chain, declining demand for wine, and once-in-a-generation demographics.

Know that the recession was not kind to the US wine business. Sales in dollar terms were down in 2008 compared to 2007, and were mostly flat by the amount of wine sold – the first time either of those had happened since 1993. Hence, the industry had lots of wine sitting on store shelves and needed innovative ways to move it. Know, too, that the Baby Boomers remain the most important wine-drinking demographic in the US, especially for wine costing more than $15. On the whole, they’re wealthier than they were 30 years ago (perhaps the last US generation to accomplish that). And they grew up thinking more expensive wine was better than cheaper wine because it was more expensive.

Wine in the US remains a special occasion beverage, even after the almost four-decade US wine boom. So why should producers make wine priced to drink every day? Who wants to buy $10 wine for a special occasion? I think this is much of the problem with declining interest in wine among younger age groups. They want to order takeaway and watch Netflix, and they see wine as something their parents drink at fancy dinners. So they opt for craft beer, where a six-pack costs half as much as one of their parents’ bottles of wine and settle in for the evening without corkscrew, wine-speak and special glasses. 

So some producers, mostly bigger but not always, started new labels at higher prices. They understood consumers might baulk at higher prices for current wines, but wouldn’t have the perspective to object to higher prices for something they had never heard of.  Is an $18 California appellation Pinot Noir (pick your favourite) all that different in quality from something like the venerable $10 Mark West California appellation Pinot Noir? Probably not, but since it costs more, the Boomers with money figure it must be better and will pay more.

In addition, Big Wine has also been able to buy brands which were specific to the appellation and variety and turn them into California appellations with varietal line extensions. That way, the new owners can keep the $15 or $18 price on the original labels, but boost margins since they’re using cheaper grapes. (Though, to be fair, as one Big Wine marketer told me, sometimes just the reverse happens: they have to use pricey grapes in cheap wine because the pricey grapes are sitting there and need to be used.)

Then there’s the Costco effect. Retailers big and small see Costco’s volume and profit in wine and want it, too. This is particularly true for the national supermarket and discount chains. Walmart has launched a couple of private-label brands in the past couple of years in emulation of Costco’s Kirkland, whose wines are mostly priced in the teens, while Target announced a wine department makeover in 2017 spurred on by Costco’s success. 
Plus, supermarkets like Kroger have embraced brands like Josh Cellars, once difficult to find in any retailer and now on end caps (displays at the end of an aisle) around the country – complete with one of those fake three-price grocery store labels so the consumer doesn’t quite know how much it actually costs. I have been told over and over by any number of experts and consultants that grocers want to make wine a regular part of their customer’s shopping cart. They see it as a hedge against Amazon and as a way to drive growth that doesn’t rely on core food sales.

And let’s not overlook producer consolidation, which has evolved to where the top three producers control 55% of US wine production and the top 50 control 90%. That makes oligopoly-style pricing possible, aided and abetted by the way alcohol sales are regulated in the US. In some states, for example, minimum pricing makes it illegal to discount wine.

Consumers react

The industry’s response to all of these complaints? First, if consumers really objected, they’d stop buying wine. Second, the economics of wine production, and especially in California, make it almost impossible to produce wine for less than $15 – factoring in land and labour prices and all the rest. 

This overlooks two things. First, consumers have stopped buying wine. Sales by volume have been flat for years. It’s what Rob McMillan of Silicon Valley Bank calls the new normal – that wine consumption won’t return to the pre-recession glory days. 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.”

Second, it’s true that the economics of wine production stink for almost everyone who isn’t Big Wine. I sympathise with those producers, but overpriced wine is overpriced wine. As my perceptive consumer noted: “Spending a lot of money on land in California doesn’t mean one’s wine is worth more. Either the business model works or you paid too much for your assets – or it’s a hobby.”

Given all of this, shouldn’t it be time for the industry to put an end to premiumisation? 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, spirits and all those hard ciders and seltzers? But this is an industry where three-quarters of its product is still sold in a glass bottle with a cork or a cork-like closure, despite every advance in packaging technology and marketing in the past 100 years. So expecting an end to premiumisation because it’s a dead end once the last Baby Boomer dies is probably hoping for too much.
 

Jeff Siegel is an American wine writer whose work has appeared in national and regional newspapers and magazines. He is the author of the Wine Curmudgeon website, which focuses on affordable wine.