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Price of Wine: Is the more expensive the wine, the better it is?

When are you paying for quality vs. for marketing premium?  What really determines the price of a wine?  

A practical approach – when thinking if a wine is of great value, consider how much you are paying and what percent of that is really the cost of the wine.

Let's go through some examples to illustrate when we are paying for quality and when we may be paying for overhead expenses.

A fair value, paying predominantly for the cost of production: 

For many small domaine bottled Burgundy reds, the price of the wine is only a small mark-up to the cost of operations.  Most domaine producers (not applicable to negociant models) have limited hectares of vineyard, which means they can only produce limited quantity.  With low production volume, the cost per bottle would be high.  Secondly, land and labor cost are expensive.  Thirdly, quality production method requires yield control, vineyard investment, and other rigorous practices.   The trendy practice of maturating part of the production in new oak further increases the cost base.  Luckily there is increased market appreciation and heightened demand on Burgundies.   This explains why the cost of Burgundy has gone up these past years.

Paying for legal and marketing: 

Now let’s take a look at a different example – Champagne.  Champagne and Cremant de Bourgogne are made in the same country (France), using similar grapes, and following the same production method.  Why would an average Champagne retails at ~USD 38 and an average Cremant de Bourgogne retails at less than half of that?
 
For those of us old enough, we may remember decades ago, an American sparkling could be labeled as Champagne.  Confused customers would often opt for a less expensive American sparkling thinking they are buying Champagnes. CIVC, an organization of Champagne producers and trade, battled hard to protect the trademark Champagne, actively participating in litigations and branding initiatives all over the world. It was estimated that one-third the cost of every bottle of Champagne contributes to the efforts of CIVC.  So in relevant to other sparklings, a high percentage of what we paid for in a bottle was for legal and marketing fees.

Paying for brand prestige: 

Ever wonder how much you are paying for brand premium?   A bottle of Talbot 2005 (5th growth) retails at US$ 70 and a bottle of Lafite 2005 (1st growth) cost US$ 1,100?     

Even factoring in yield management, new oak and storage cost, it is doable to produce a grand-cru quality wine at Euro 25 (~USD 30) a bottle.  So this means anything on top of that goes towards marketing, overhead, brand premium, and profit margin.   

My take on price and quality – anything over US$ 40 a bottle, you are paying a higher percentage for brand premium, marketing, and producer margin.  

As wine lovers, we are willing to pay a premium for the wine we love.   As smart buyers, we may want to look for great value wine.   In our next article, we would cover ways to find great value bottles!

For the sake of comprehensiveness, let me provide an economic approach to value of a wine.  I put this at the end as it is a bit on the academic end…

For the intellectually curious, an economic approach:

An economist would say that the price is the equilibrium point of supply and demand.   Basically it means a match between how much the customers are willing to pay and how much the producers are willing to sell. 

On the supply side, the producers would want to price the wine so that the total cost of production is covered.  Total cost includes the cost of growing the grapes (the labor, irrigation, fertilizers, green harvest, etc); the cost of production (oak barrels, storage space, flying consultants, etc); the cost of bottling (label, cork, glass, packaging); the cost marketing and overhead (vineyard maintenance cost, machineries, staff, office space, etc).  

On the demand side, the customer will pay the value of how much the wine is worth.  They may define an everyday wine as falling in the US$10 to US$ 19 range; and a special occasion wine in the US$30 to US$50 category.  If an everyday wine is priced at $35, they will psychologically opt for an upgrade, switching to a branded wine instead.  In the long term, an equilibrium will be met and wines will be priced based on how much customers are willing to pay and how much producers are willing to sell.