Price and Value


The topic of wine pricing keeps popping up as a media topic, with some writers waxing on how wine is priced arbitrarily and without any connection to quality. Recently, during a wine podcast, one of the hosts read a question submitted by a consumer that, in essence, asked why wineries didn’t sell wine to their best customers (club members, frequent buyers, etc.) at the same price as they sold it to wine wholesale distributors.

Yes, Wineries DO Value Their Best Customers

Let’s tackle that latter topic first. In a previous post, “Getting Wine Pricing Right,” we note that the sales channel in the U.S. legally mandates a “three tier” system, in which each sales partner is adding cost and margin to a wine. It is vital to factor in those added costs and margins when pricing a wine. Otherwise the winery will likely lose money.

This is true for almost any product. The cereal you buy in a grocery store includes the costs and margins of the producer, the distributor, and the grocery store. Now Kelloggs doesn’t sell retail directly to consumers – there are no Kelloggs stores nor can you purchase a box of Special K on their website. But they do calculate a SRP well in advance of distributing a product. To sell Special K at their distributor price to consumers would likely anger their distribution partners, as Kelloggs would be using their producer’s advantage to undercut their partners’ pricing. No producer is willing to sacrifice a majority of sales for a minority of its customers.

Almost universally wineries give their best customers best pricing as frequently as possible. Club pricing, volume discounts, promotions, specials, etc., are to entice and reward customers for their support. Yes, the winery does have more flexibility in their margins when selling retail direct to a consumer – hence the best pricing. But that pricing cannot be such that it undermines their distribution; selling a hundred cases at low retail margins is not worth potentially losing sales of thousands of cases through their distribution partners if those partners decide they cannot or don’t want to compete directly with the winery. A store certainly doesn’t want to hear that it was the winery selling a wine they stock at 50% off, making their customers mad at them. Wineries work with distribution partners to lower prices from time-to-time so as to increase sales and move inventory, as well as insure some level of margin for partners. Distributors and outlets take their own initiatives too, and put wines on sale for the same reason.

What is Value?

Still, wine writers continuously throw shade at wineries over pricing, implying that wineries are gouging consumers out of greed and ego, without regard to any other factors. Why is there this expectation that the winery should sell its wines for lower prices? Exactly what price do writers want? Truly, what is wrong with asking for what the market will bear? Why should a winery or distributor leave money on the table?

Even though some brands have a great deal of leverage over their pricing, hear this: wine is the most competitive consumer package good in the U.S. with over 100,000 brands competing for 71.5 million wine drinkers. Market forces are at work, especially supply and demand on pricing.

If a winery is pricing its wines sensibly, then the cost to make the wine (cost of sales or COS) is a significant factor in that calculation. There is a vast difference in the COS of a Napa Valley Cabernet Sauvignon versus a California Cabernet Sauvignon. Prime plantable land in Napa Valley can cost up to $250,000 per acre versus $20,000 – $40,000 per acre in San Joaquin Valley. Salaries are higher in the north coast wine-growing regions. COS can be several orders higher for specific AVAs throughout the U.S. and world. Yet wine writers still insist that a Napa Valley Cabernet Sauvignon is overpriced and compare it to wines from other lower cost regions, states, and countries as proof, never factoring in that famous regions accrued higher costs because of demand for their wines – demand driven by quality, reputation, and yes, marketing.

Supply and demand drive pricing. So yes, a wine with a reputation for extraordinary quality or valuable brand equity should factor those into the pricing calculation. A recently published study showing price influenced peoples’ perception of quality really elicits only a big, fat, “duh.” Price is a marketing tool to create brand equity and value. That’s how it is supposed to work. Supply, demand, brand equity, and marketing prowess add more to the pricing for some wines than the COS – and should, if the wine merits it. Does anyone really think that the materials used in a Rolex cost significantly more than a Citizen? Craftsmanship, supply, and brand equity all factor into the price discrepancy between the two.

Value is a trust proposition that wineries build over time by balancing price, quality, and satisfaction (brand equity). It is not a metric of how expensive a wine is. Wineries do not succeed if they don’t build value – no matter how expensive their wines are. A consumer enjoying a wonderful $60 Russian River Chardonnay is as valid a value as another happily pouring a glass of $9 White Zinfandel. Each consumer calculates the value to themselves in the purchasing transaction. Break that trusted value and you lose sales.

Pricing is Elastic and More So Today

A prominent wine writer, Dan Berger, takes the latest shot at the supposed nefarious motives behind wine pricing. His premise is that wine retail prices are always going up. Hmmm, so seemingly do prices on cars, cereal, toilet paper, and movies. But flogging the tired, old argument that in France they adjust their prices according to vintage so why don’t California wineries, Berger neglects the fact that really, only the collectable wines do so while the popular French wines rarely do. Prices for French ultra-premium and luxury wines based on vintage pricing have steadily increased over time too.

Furthermore, why should wineries in California – or New Zealand or Argentina – just follow an old, mostly archaic tradition of vintage pricing when wine quality is remarkably consistent and high this day and age? Truly bad vintages are rare, even more so outside of Europe. Yes, there are vintage variations, but viticultural and winemaking technology mitigates much of the negatives that might occur in “off” vintages. Today we don’t have English and Irish wine merchants with an oligarchic lock on French Claret and Burgundy like they had over a century ago ruling the global wine trade and allowing them to dictate pricing on vintages.

Berger continues with an ouroboros of an argument, detailing many anonymous war stories about common winery practices that also come into play post calculation of the SRP, and ends up contradicting his premise. Inventory levels, sales movement, distributor and buyer relations, market importance, etc., are mentioned as causes for wineries to adjust pricing on inventory … usually down. This has been typical in the wine industry since inception, as it is for all industries. Today, though, global competition, the internet, and market consolidation are forcing market pricing to be even more flexible. The average high quality of wine is somewhat taken for granted. Many mass-market wines today are of a quality that 80 years ago would have been impressive for the (relative) price.

For some reason the business of wine is a cause for affront for many writers (and some connoisseurs). The business of wine should be, we maintain, at the forefront of any winery’s thought process in their pricing and sales efforts if they want to be successful and profitable.