Pricing Wine

When I interviewed Brian Finn (Chairman of Southcorp) one of things he said was “..you don’t buy a bottle of wine because of what it cost to produce, it's a value based product and you buy it because of your perception of its quality and that can be everything from the packaging through to the taste and so on.”

This leads to this week’s topic, the way we price the better quality wines in Australia compared to the way they are priced overseas. Let’s compare the Bordeaux (and some American) pricing rational and that employed in Australia.  

In Australia we have a relatively stable pricing structure (with some exceptions) where the price of the top end wines like, say Grange or 707, may creep up (or rocket up) over time. In the midrange at the $35 and up brackets, these prices are normally stable, and, on the primary market they rarely drop. As a result, you would pay the same dollar amount for a bottle of say a 2000 Dead Arm (weak vintage), as you would for a bottle of the stellar 1998. As you know, this ‘sameness’ of price is pretty much through the entire Australian pricing structure.

However that’s not necessarily the same in other parts of the world. In Bordeaux for example, the price of the top wines are set (in theory) based on the quality of the vintage. So if you have a great year you pay a heap more for the wine; purchase from a poor year and there are some less expensive options.

So which is better? If you take Brian Finn’s comments on wine being a value based product where you purchase wine based on your perceptions of the value of the wine to their logical conclusion, then in theory we should base wine pricing differently from year to year. Under that system, the 98 Bin 707 may be about $175 and the 99 only $75 instead of the $125 last release price. This is exactly what happens with first growths now.

There are advantages and disadvantages to both systems for both the consumer and makers. Under the current Australian system knowledgeable buyers have the advantage of being able to get the top vintages for less provided they buy quickly. On the negative side, buyers have to pay the same amount for the same wine from a lesser year. The current system, in theory, should allow wineries to have better budgeting data as the final sale price is consistent, provided the wine sells.

Under the Bordeaux system, the buyers get a pricing break in lesser years but in top years the wine price may go sky high, so some consumers may benefit but some may be disadvantaged. The wineries will also have to wrestle with a whole new set of pricing problems and if they get it wrong they will be in big trouble. At least now, they have consistency.

As to what happens to a wine’s reputation with the buying public when they see if from $75 to $175 as I used in my example above, who knows, I certainly don’t. There is one thing I do know, the current Australian system favours those that know their wines.

the current Australian system favours those that know their wines.

Finally, lets not lose site of the fact that this pricing issue only affects a very small percentage of wine sold as I don’t think they are about to price casks and sub $10 wine based on vintage conditions and that’s the vast majority of wine sold.

Till next week.

Cheers

Ric