The Good and the Downright Ugly Side of Wine Pricing

This week’s article examines a couple of different facets of wine pricing spanning both Australia and the US.

Yesterday I walked into my local Woolworths owned Mac’s Liquor store and was gob smacked when I saw the Penfolds 1999 St Henri on the shelves for $64.45 per bottle (less 10% for a six pack.)  P.T Barnum must have been right, there is one born every minute. Obviously it’s the convenience shopper and those that know nothing about wine values that must be purchasing these premium wines at Macs.

A quick look at the internet shows the following prices for the same wine.

Kemeny $39.99 (dozen price)                 

Wine Pool/60 Darling Street $43 (dozen price)

Nicks $49.99 (single or dozen)

Winestar $49.99 (single or dozen price)                

Kirra Beach $52.50 (dozen price)

Vintage Cellars $58.49 (dozen price)

Notice something here? The two most expensive locations are from two of the largest retailer chains in Oz that between them own over 40% of the wine market. Woolworths and Coles/Myer between them have Dan Murphy, First Estate, Safeway, Mac’s, BWS, Vintage Cellars, Bailey and Bailey, Liquor Land, and a heap of others.

This pricing scenario is not a unique example, in Australia. In fact I would say it’s fairly typical of top end wine pricing between the major two retailers and the balance of the independents. As long as the big two keep charging prices at this level there will always be room for the good independents that charge reasonable prices and don’t rely on P.T Barnum’s clientele.

When I interviewed Brian Finn, Chairman of South Corp, earlier this year he said “If you have a look at the UK, it has temporarily, and I do think its temporary, turned into a special offer market. Unless things are on promotion 70% of the time they won't sell but I think that will change. What is difficult and what we haven't reacted to well is that in most cases in the UK wine is a secondary purchase.  People actually go into the grocery store and buy food and on the way out they buy wine. Very rarely do they go in and buy wine as the primary purchase.”

I am not sure how “temporary” that situation is for the educated wine buyer but the point Brian makes in reference to wine being a secondary purchase in grocery stores is an excellent one. In fact, it explains the stratospheric prices in Mac’s, Safeway’s and other grocery associated liquor stores. However it still does not explain how stores like Vintage Cellars who are not associated with grocery outlets manage get away with their premium wine pricing structure.

Brian Finn also said, “My view is we should be able to deliver excellent products to customers at lower prices more of the time. If I can get more of my product in front of more people more of the time I can win from that situation.”

Based on that premise, where should Southcorp and the other majors be trying to sell their top end wine?

In grocery store associated liquor stores the staff generally know less about wine than they do about baked beans (at least they may eat beans) so service (i.e. wine knowledge) is shall we say “limited.”

It’s becoming increasingly obvious that it’s in the best interests of smaller producers to support the independents and the smart ones are doing exactly that! The large chains have no loyalty to their suppliers and only care about the bottom line; they also won’t promote and support a wine unless there is a financial reason to do so. The independents will support and promote wineries that make good wine because their clients who are smart buyers are looking for new wines and good value. Let the unknowing/un-caring masses contribute to the shareholders of the big chains.

On a related subject let’s examine some wine pricing philosophies in the US. Thorn-Clarke has recently taken the US market by storm and created a frenzy with their Shotfire Ridge wines. There are two reasons why they are doing so well. Firstly a wrap from Parker helped but the big kicker was the perceived value of the wine. As a general rule of thumb a wine costs the same absolute dollar number in Oz and the US despite a big difference in the value of the two currencies. Also factor in that we Oztralians are paying over 40% of the cost of a bottle of wine in tax and you can see how much potential there is for wine profit in the US.

Let’s examine some well known pretty typical examples (prices do vary but that happens in both countries.)

Elderton Shiraz              A$22                 US$22   (equates to $36 Australian)  

Fox Creek JSM              A$22                 US$20

Leasingham Bin 61        A$19                 US$20 

Penfolds Bin 128            A$22                 US$20

Penfolds Bin 389            A$40                 US$20

Lehmann Shiraz             A$18                 US$20

Lehmann Clancy            A$15                 US$25

Shotfire Ridge             A$25                 US$15

So generally speaking the US consumer is prepared to pay far more for wine than the Australian (or indeed the UK) consumer. When taxes and exchange rates are taken into account the US market looks extremely profitable and that’s why so many wine companies are trying to gain a toe hold and why expansion into that market was seen as key to Southcorp’s growth when they merged with Rosemount.

The pricing shows that in Australia Shotfire is about 25% more expensive than six of the other seven listed wines yet it is 25% less in the US. Why? The answer is simple. Rather than chasing a quick buck, Thorn-Clarke has a long term view of the market and is not greedy. They are still making as much in absolute dollar terms as they would have if all the wine was sold in Australia but they are gaining a strong foothold in the US and are capturing the consumers’ imagination. 

At the other extreme, Peter Lehmann’s distributor is raking in the shekels with the Clancy which is the cheapest on the above list in Oz but the most expensive in the US.

When I was compiling the information for this article I was very surprised by the price of Penfolds Bin 389 in the US, it’s essentially the same as Bin 128. In Oz Bin 389 is almost twice the price of Bin 128.

Brian Finn also said “Would you buy a bottle of wine because of what it cost to produce and therefore what it costs to buy? If it's a value based product 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. The US market has figured that out.”

Yes they have figured it out. The US market has figured out that consumers are happy to have some of the most expensive wine in comparison to the rest of the world. Likewise companies like Thorn-Clarke have figured out that not everyone is happy with high priced wine and are using that to their advantage.

One can only wonder if wine consumption in the US is one of the lowest in any of the firs

One can only wonder if wine consumption in the US is one of the lowest in any of the first world countries because wine is seen as a luxury item and costly. Over time, if the price of good wine (not plonk) came down in the US one can also wonder how much the market would grow under those conditions. Food (or drink) for thought!