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WINE AND FOOD WEDNESDAY
07/20/2016
The Perils of Brinksmanship Pricing

By Charles Olken

It is now four decades and counting since Earl Singer and I started Connoisseurs’ Guide, and the problem of wine pricing and how to deal with it was as real then as it is now. One of our first stops in the wine world was with the folks who ran Chalone, then one of the true cult wineries whose Pinot Noirs and Chardonnays were about as good as one could get back in the day. We went to talk about getting access to Chalone wines for review, and it turned out that the winery had no problem with the concept. But, there was one fly in the ointment from its point of view. How would we handle the relatively high prices of their wines. “Don’t talk about price; talk about wine quality was the advice given”.

And for the most part, we adhere to that principle. Whether a wine is too expensive for us or for you is a personal issue. Occasionally, we comment on very high price when quality is missing, but the world understands that a three-digit Cabernet with a mediocre review is not worth chasing.

And then there is this. I grew up in a retail business; Steve Eliot grew up in a family business. I studied economics and business and spent a period of time in the early days of Connoisseurs’ Guide working as a professional economist. So, we understand the law of supply and demand, we recognize that pricing fairly but with an eye towards profitability is part of the equation for any business. And, make no mistake about it. A winery, regardless of its flirtations with quality and the search for artistic excellence, is still a business.

Still, when Joe Heitz raised the price of his Martha’s Vineyard Cabernet first to $15 and then to $25 when only French wines dared charge those prices, we did a slight double take at the willingness to charge every bit as much as the market would bear and more. Turns out that Joe was right. He may not have sold out that first elevated-priced vintage, but he made a lot of money and he was left with an extra bit of inventory that he could slowly dole out over the ensuing years. In short, he took pricing to the brink and got away with it. Such is the nature of business and pricing. If you get away with it, you have not overpriced your product. If you get rejected by the market, then you went too far.

Last Sunday, in the San Francisco Chronicle, the food editor, Michael Bauer, whose restaurant reviews are, for our money, the best around, commented on the trend toward rapidly rising fixed price menus in San Francisco. He could have also said Paris, London and anywhere else that high quality cuisine is accorded high value. Bauer marveled at the rapid rise of prices and, without reference to qualitative judgment at first, simply laid bare the trend. But, then, in his quiet way, he lashed out at a couple of new restaurants that had started life at the high-priced end of the scale without earning their spurs first. He noted that those places were half empty (and more) on what should be busy nights for them.

The wine business here in California would seem to ripe for similar price-quality shocks. Just the other day, we sat through a tasting of new Zinfandels and, upon opening the bottles, found several wine of decent but hardly outstanding quality with prices ranging well about $50 and up to $80. It was not our place back forty years ago to tell wineries how to price their wines. Only the market has the power to do that, but just as we rolled our eyes every once in a while about rapidly rising prices back then, so too have we been rolling our eyes at the proliferation of $200 Cabernets. That price level is not new, and few wineries pricing their top offerings at that level have gone out of business so obviously, the market is telling them that they are right.

And maybe the market will tell the makers of $80 Zinfandels with mediocre reviews that they are also right. Such are the perils of brinksmanship pricing. Not matter what we think of the price-quality ratio offered by any wine, it is the market that decides if that that ratio has gone over the brink. If one gets it right, you are an economic here. Get it wrong and it is you who will pay the price.


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Comments

pricing
by Michaela Rodeno
Posted on:7/21/2016 10:31:56 PM

Charlie: have you detected a trend whereby old-timers in the wine biz are generally shy about pricing brinkmanship, while newer entries are more on the bold side of that equation? 

The marketplace...
by Sherman
Posted on:7/24/2016 1:48:15 PM

...is a harsh mistress, as you've noted in your final sentence. Something is worth what others will pay for it, so the seller does their research and marks the line in the sand that will be their price. Only time and the consumer will tell whether they have correctly judged the value of their product.

Apple, Mercedes, etc., all price their products at the top of the market and generally have no trouble selling most of what they make (we'll overlook the iWatch and the SmartCar in the US). 

If a consumer doesn't think the value is commensurate with the price, either they won't pay it in the first place or they won't be a repeat customer. Having been in sales for decades, I feel that the best way to demonstrate the worth of what I am selling is the repeat customer.

The World According to The Market
by Charlie Olken
Posted on:7/24/2016 7:51:13 PM

In an earlier life, I studied economics and wound up the head of big economic and marketplace analysis unit just before I finally left "the dismal science", as it is called, for wine writing.

My mentor put the equation this way: "You cannot swim uphill against the market".

Sherman, you have obviously hit the nail on the head. It is the principal by which Connooisseurs' Guide was launched. We spent more money acquiring readers than the cost of their subscription, and we reasoned that we had a year to convince them to renew (become repeat customers). Fortunately, for us, they did renew and we have managed to stay in business for four decades now.

And, to Michaela: The biggest change in pricing strategy, Joe Heitz notwithstanding, is the willingness today to come closer to European pricing. CA wine is still priced below the top Europeans, esp when it comes to Bordeuax, Burgundy and Champagne, but the CA industry has earned its spurs and has priced itself out of my market at the very top end.

But, what I also see is that the breadth of wealth that has developed in this country since 1970 has created a wider market for expensive goods and that has allowed for wine prices to run up faster than average earnings. 

One difficulty is that most young people, including young somms, will not have the top tier tasting experiences that their predecessors had, and thus learning about the best is now harder.

No Subject
by Bob Henry
Posted on:7/30/2016 2:26:33 PM

"... few wineries pricing their top offerings at that level have gone out of business so obviously, the market is telling them that they are right."

Not so obvious.

Just give the "burn rate" sufficient time.

If a winery is a "bragging rights" vanity venture with someone's family name as the brand, then the founder-owner can tolerate running an operating loss (funded from his day job or investments or inheritance) indefinitely.

Charles Foster Kane:

"You're right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars next year. You know, Mr. Thatcher, at the rate of a million dollars a year, I'll have to close this [newspaper] place in... 60 years."

$80 Zin
by David Scheidt
Posted on:8/4/2016 2:12:37 PM

The price economics on an $80 retail Zinfandel are not out of the range of current prices, simply because Zinfandel prices on older vines, say 50 years plus have gone up. It's cool to have a true "old vine" Zin in your portfolio. But the yield for the grower is so low per acre, the price has to go up to the wine maker. The alternative is to rip out the old-vines that produce less than 2 tons per acre and go with a more vigorous young vine at 6 tons per acre.

The second reason a new winery comes out of the gate with a $80 Zin? They know they are going to flash sale a certain percentage of the cased goods. The flash reseller will bid out a $80 wine with no track record at $29.99 and the winery will probably sell to the flash site at $15-19 a bottle. If they offset that low price from the flash site with their own hand-sell retail price discount to $65 for wine club members, they may have a strategy. On average, this would be profitable, and they'll move cases, get cash flow, and live to harvest again, until their brand takes off where they no longer have to rely upon the flash retailer to move cases.

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