What’s it worth?

While some in the wine trade search for rational formulae, Roger Morris reports that simple logic is often simply wrong. Price is in the mind of the buyer, not the seller.

Dr Z. John Zhang,  professor of marketing, Wharton School at the University of Pennsylvania
Dr Z. John Zhang, professor of marketing, Wharton School at the University of Pennsylvania

Since the 1970s, writers have given fine wines point scores to determine which are ‘best’. Now some members of the media and the wine trade are trying to advance their influence a step further. They are devising seemingly objective schemes to determine whether a wine’s rating justifies its price and crying foul when producers disagree and charge something else. This year, for example, the British wine trade and press were in an uproar when quotas they set for how much Bordeaux châteaux should reduce their prices to wine traders to négociants – distributors – for the 2017 vintage were largely ignored, even though the price reductions were significant. 

It’s the latest, and perhaps most autocratic, measure in trying to determine what factors should constitute a wine’s fair price – whether it be supermarket plonk or collectible grand cru – and to wave a finger at naughty price offenders rather than wait for the market to make its judgement. 

To illustrate with a true story: a well-respected American wine writer steps up to a booth bar during a not-too-distant Vinexpo to taste a Whalebone Cabernet Shiraz blend from Brian Croser’s Tapanappa group in South Australia. The writer and a colleague spend some time sipping and discussing the merits of the wine’s depth of flavours, complexity and ageability.

 

    “I really like this,” the writer says. “What’s the price on this?”
    “It will retail in the US at about $74.00,” he is told is told by a voice from behind the bar.
    “What! $74.00?” 
    “Yeah, but it’s a great wine regardless of price,” the colleague says.
    “Not for me,” the writer replies. “I don’t like it very much at $74.00.”

 

Not that wine writers ever actually buy wine, but the story is somewhat instructive about pricing and how people in the trade and the media often respond to it. Taking matters a step further, the same writer, after the market crash in 2008, speculated that once newly price-conscious consumers discovered enjoyable bottles for less than $20.00, the days of routinely buying wines priced many times that amount were at an end.

Of course, the writer failed to account for such basic human emotions as lust, envy and greed, which routinely factor into both the price and purchase of a bottle. “Luxury goods cater to a consumer’s desires, rather than her needs,” says Dr Z. John Zhang, professor of marketing at the University of Pennsylvania’s Wharton School. “Therefore, exclusivity is always a key to pricing luxury goods,” wines included.

Competition on price

Anyone trying to make a living selling anything understands success depends either on high volumes sold on thin margins or scarcer volumes sold at high margins. 

In supermarkets, where wines are sold as cheaply as $3.00 a bottle, it’s all about high volumes. A producer here begins price building by adding up the cost of goods, cost of production (including overheads) and a percentage of profit. Exceptions include offering loss leaders to gain market position for other products, selling multi-product bundles (where legal), or for producers with deep pockets, buying into the market and raising prices once competition has folded. 

The biggest segment of wine sales, in terms of number of players and number of brands, begins above $10.00 a bottle and ranges well beyond $50.00. Here, producers depend on a variety of factors to establish and justify prices, including quality differentiation, great stories to tell, customer loyalty, and dedicated and competent importers and domestic distributors.

In this broad market, finding the right price point is key. Brian Larky of Dalla Terra, a direct importer of Italian wines, says: “The first thing for pricing any wine is what the competitive set looks like in the market. Additionally, for my producers, a key [factor] often is did they inherit the vineyard or are they having to pay for land or to buy grapes?” 

Martin Sinkoff, VP and director of marketing for American importer Frederick Wildman, says the American three-tier system needs to be explained to the producer: a percentage profit for the importer, the distributor or wholesaler and the retailer has to be figured into the price of a bottle. “Sometimes they have to give a little to meet an acceptable price,” Sinkoff says, “and sometimes we have to give a little.”
Where does this broad category end and luxury wines begin? As Zhang says, exclusivity is a good starting point. Ordering a bottle of California Cabernet in a restaurant for less than $100.00 to go with a rare steak still falls into the category of needs, but springing for a 2007 Shafer Hillside Select for $2,140.00 falls into the category of desires. 

“If you are a bargain hunter,” Zhang says, “you are not really a luxury customer. This sounds snobby, but luxury goods are a snobby business in some ways.” Value is still a consideration – to a point. “A good value does enter into the calculation by the luxury goods consumers as it does by the normal goods consumer. However, for the luxury goods, value is in the eyes of a beholder ... and it varies across aspiring customers,” he says. “Hence, you could have [the concept of] affordable luxury that has taken off in the recent decade.”

Perceived value at the luxury and almost-luxury levels is determined by well-established measures such as ratings, historical rankings of brands such as grand crus or first growths and by the resale or auction market. Producers may also send quality signals to consumers to justify price, such as fancy trade dress, seriously heavy bottles and claims to being located “just down the road from” Latour or having the same terroir as Cheval Blanc.

Of course, price is also used as a signal: to be good, a wine must be expensive. Conversely, during the recent recession, many well-rated wineries were forced to sell their wines cheaply to maintain cash flow – but only through middlemen who pledged not to reveal the wine’s origins. “Price promotions can kill a luxury brand quickly,” Zhang says. 

Competition on perception

Robert T. Hodgson’s study of wine-judging panels in California over a three-year period illustrates the difficulty in trying to objectively define quality. Among Hodgson’s findings: “Each panel of four expert judges received a flight of 30 wines imbedded with triplicate samples poured from the same bottle. Between 65 and 70 judges were tested each year. About 10% of the judges were able to replicate their score within a single medal group. Another 10%, on occasion, scored the same wine bronze to gold. Judges tend to be more consistent in what they don’t like than what they do.”

Determining quality and establishing prices in Bordeaux is uniquely complicated, with its annual en primeur spring ritual, where media and trade taste very young barrel samples from the previous harvest and give feedback by word or score to individual producers. What follows next is called the “campaign”, where each château randomly announces its price to the négociants, usually by mid-June. Based on various considerations, they may raise, lower or hold steady on their price from the previous vintage.

Château Smith Haut Lafitte in Pessac-Léognan is well-known for its quality and reasonable pricing, and is owned by Florence and Daniel Cathiard, who at one time ran a supermarket chain. “In the supermarkets, the motto could be, ‘Pile it high, sell it cheap’. Now, it is just the reverse,” says Florence Cathiard, who adds that key factors in determining price include the quality and volume of the vintage, along with press ratings, tasting comparisons, the market prices of available wines and exchange rates.

Outside input is important, Cathiard says. “We are watching Liv-ex, Wine Lister reports, Wine-Searcher, most recent prices of our wines and those of our peers on La Place de Bordeaux or on the English market, auctions prices,” she says. “All year long we are listening to our wine merchants, brokers, final customers, market vibes through importers, wholesalers and on trade. We are watching other French winegrowers as well as international vineyards.” She pauses. “Nevertheless, at the end we are the only ones who take the final decision.”

As Cathiard mentions, the hub of fine wine trading and pricing information is London-based Liv-ex, founded in 2000 by two stockbrokers. Today, more than 400 merchants from 36 countries are members. Live-ex recently decided to expand its purview by attempting to link wine prices to wine quality based on collective scores given by select wine writers. It calls the process “fair value”. “Our role is to make the market more transparent,” says Liv-ex’s Sarah Phillips. “It’s up to the châteaux whether they decide to price it this way or not.”

Vintage 2017 proved an interesting test. As is typical, the English media and trade started beating a drum for lower prices before the barrel tastings began. This year, their argument was there was too much unsold wine from previous vintages still on the market and that, regardless of quality, prices would have to be drastically reduced to set the market right. In other words, price shouldn’t just reflect quality, it should also be reflective of market economics. They mandated a “rational” pricing response, château by château. 

As it turned out, almost every château did significantly reduce prices. For example, Margaux dropped its price by 17%, Figeac by 20% and Pavie by 6%. The critics remained unconvinced. One headline implored: “En Primeur 2017: Have We Learned Nothing?” The naysayers didn’t seem to care that they were themselves signalling wine retailers and wine drinkers not to buy, a self-fulfilling prophecy of doom.

And as far as Liv-ex’s fair value? “In short, too few [châteaux] are following it,” Phillips reported late in the campaign, “assuming they actually want to sell to the end consumers, and not just to the negociants.” Even if the critics are right, and the collective wisdom of the châteaux is wrong, the châteaux and negociants are still the ones who must bear the consequences of their decisions – good or bad.

Perhaps Zhang puts pricing back into its correct, less-controversial context, whether for wines destined for supermarkets, gourmet weekend dinners or collectors’ vaults. “The key to pricing is always, ‘Know thy customer’ – what they are looking for, what they buy, why they buy,” he says. “Targeted pricing to a segment or tailored pricing to a segment is always the way to go.”.

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