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Wine Pricing: Still Economics 101
By Michael Apstein
Mar 11, 2008
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I have ongoing discussions regarding wine pricing with Michael Franz, my friend and colleague here at WRO.  He believes that part of his responsibility as a critic is to consider whether the price of a bottle of wine bears a reasonable relation to its cost of production.  I, on the other hand, ascribing to the free market philosophy, believe that the market should be the sole determinant of price.

A recent advertisement from Zachy's Wine and Spirits, located in Scarsdale, NY and one of this country's premier wine retailers, left even this free-market believer aghast.  The 2005 Château Cheval Blanc was listed at $1,100 a bottle, the 2005 Château Ausone at $5,100 a bottle and, hold on, the 2005 Château Pétrus at $7,500 a bottle.  You read that correctly; these were prices for a single bottle, not a case.  To be fair, the 2005 Pétrus was released originally at approximately $1,500 a bottle--still not exactly pocket change, so the current Zachy's price presumably reflects middleman markups.

Believe It or Not, Wine is Not Essential

Although I believe wine is an essential--as do the legislatures here in Massachusetts because wine, like food, is not subject to a point of sales tax--in reality it is not.  No one is buying it with food stamps.  Although I'm not an economist, to my mind, it's the perfect product for pure market-based pricing.  If the price is too high, bottles will sit on the shelves or cases will languish in warehouses and the producer, importer, distributor and retailer--or some combination of all four--will lower the price to move the wine.  Retailers will have 'close-outs.'  Distributors have retail outlets that take items that otherwise don't move.  Importers will make 'deals'--offer incentives--to move their inventory.  Some producers may opt not to lower the price to preserve an image, but that is a business decision. 

On the other hand, if a producer sells a new vintage quickly, perhaps the price will seem too low (remember the 1982 Bordeaux), and will be increased as the wine wends its way through the market.  The producer surely will make adjustments the following year.

Supply and Demand

The problem for us consumers, of course, is that the production of upper-end wines is extremely limited and demand--especially today with a global economy--will always outstrip supply, sending prices upwards, squeezing me--and others--out of the market.  As much as I adore Guigal's single vineyard wines from Côte Rôtie, La Mouline, La Landonne and La Turque, I have stopped buying them as their prices have skyrocketed.  Although I miss having them and others in my cellar, I and other consumers don't have a 'right' to drink first growth Bordeaux, Grand Cru Burgundy, Shafer's Hillside Select Cabernet or similar Napa Valley wines.  But then again, I am not willing to pay to drive a 500-series Mercedes Benz either.

Current strong demand for the top wines in Asia, Russia and other new markets paradoxically still poses a risk for producers.  With prices for upper-end Bordeaux in the stratosphere, Americans accustomed to buying Bordeaux could look elsewhere and try the excellent Bordeaux-blends coming from other countries.   When the fad for fancy wines fades in the Far East in a few years, the Bordelais might find that American wine drinkers have forgotten about Bordeaux and happily continue to drink their New World Bordeaux blends.  Still, that kind of long term vision and pricing strategy remains a business decision for producers. 

It's Not Just the Quality of the Wine

People buy wine for a variety of reasons, not just for its inherent quality.  Some true connoisseurs will pay substantially more for what novices might perceive as only a slight increase in 'quality' because they appreciate subtle differences and are willing to pay for the marginally enhanced experience.  Some collectors might buy wine because they, well, are collectors.  Speculators buy in hopes of reselling at a profit.  Others are image buyers.  They buy a bottle, not for the wine, but rather the label, the rarity factor, or the impression it will make on their friends or associates.  Friends in finance who know little about wine tell me that they and their colleagues order expensive wines in the steak houses because they fear insulting clients by ordering inexpensive wines. 

On the flip side are the upstart California producers who charge outrageous prices because of the image they wish to project, not on a proven record of quality.  Again, that decision is based on their business model, not the inherent quality of the wine.

Consultants to restaurants, who prefer to remain anonymous, have told me that many customers won't order wines priced too inexpensively because of their impression--erroneous to be sure--that there is a direct correlation between price, quality and enjoyment.

That mentality extends to the retail market as well.  My argument to Michael Franz is that the motivation of many consumers for buying a specific wine is entirely unrelated to what's in the bottle.  Hence, its production cost is irrelevant.   It's back to Economics 101--supply and demand.  And the demand often has little to do with the immediate drinkability of the wine.

What's the Wine Lover To Do?

What's the strategy for those of us who buy wine based on what's in the bottle?  Look for wines that are superb, but lack the name recognition or cachet that many image buyers are seeking.  There are scores of Bordeaux-blends from Napa and Sonoma--Dry Creek's 'Endeavor,' Flora Springs' 'Trilogy' and Franciscan's 'Magnificat,' to name just three--that deliver incredible enjoyment at less than half the price of the big names. 

Tired of seeing triple digits when looking for 2005 red Burgundies?  If you must drink Burgundy, snap up remaining 2002s, purchased when the dollar was far stronger than it is today.  Or look to New Zealand or Oregon for their Pinot Noirs.  Are they Burgundy?  No, but they are very enjoyable at a fraction of the price.  Macon-Villages and St. Véran--nobody ever bought those wines because of their image--produced fabulous Chardonnay-based wines in 2005.  Or try Ponzi's stunning 2006 Chardonnay from Oregon's Willamette Valley for $35.

Must drink Bordeaux?  Look for the 2005 Cru Bourgeois ($20-30 a bottle) or even lesser known properties, such as 2005 Château Recougne ($15).  You can even find reinvigorated classified wines whose price has yet to catch up to their quality, such as the 2005 Château Corbin, a Grand Cru Classé from St. Emilion that is a terrific deal at $40 a bottle.  You get the picture, and I haven't even mentioned the values at all price ranges from Australia, South America, Spain or Italy.  Search our database of reviews using a combination of point score and price and see what you come up with.

Comments?  I expect to hear from Franz, but readers should weigh in at mapstein@WineReviewOnLine.com