subscribe: Posts | Comments      Facebook      Email Steve

California wine prices: Where are they going?



Interesting article by the Chronicle’s occasional wine writer, Jon Bonné, in yesterday’s paper, on a range of topics related to wine prices, but mainly more or less of a warning that they may be too high to be sustained.

Jon fairly points out that labor costs in California are very high (just look at the cost of housing), and vineyard prices also are increasingly beyond the means of all but the superrich, at least in prime coastal growing regions. These things all contribute to the cost of the bottle—but perhaps the prime culprit is a “we’re-worth-more argument” that prompts many winery owners, maybe too many, that they can charge just about any price they feel the market will bear, because…well, just because.

You can’t go into a fine wine shop and not agree. Prices really have shot through the roof—despite the Great Recession, which may temporarily have halted the inflation in some cases, but if it did, no more. At the ultrapremium end, prices just keep going up, and up, and up, which leads Jon to ask the (rhetorical) question, “Wouldn’t it be a shame if…progress was halted because the people…decided it just wasn’t worth the money?”

Good question. What will it take for consumers to say, The heck with it, I’m not paying $80 for a bottle of Pinot Noir when I can get something just as good for half that price, or less—whether it’s from California or some foreign country?

I myself can’t see far enough into the future to make a prediction. Ten years ago and more, I was wondering how so many Napa Valley wineries were able to get away with charging triple-digits for their Cabernets. I thought then that lots of them would be forced out of business. That didn’t happen. So I’m out of the prognostication game. In fact, nobody knows where prices are going, but in the history of wine in California and in Europe, they seldom, if ever, go down, so we can only assume that they’ll continue to increase, albeit possibly at a slower rate.

Some commodities and consumables do decrease in price or at least hold steady when market conditions aren’t so good. That’s why we’ve seen basically flat inflation in the U.S. ever since the Great Recession. Things just aren’t getting more expensive. But wine seems to able to disobey the classical laws of supply and demand. I’m not sure why that is. I think, in many cases, winery owners are independently wealthy, so they can ride out periods of decline, sometimes for many years. I think also that wine, alone of all alcoholic beverages, has the allure of luxury: it’s an aspirational drink. Like diamonds, or sports cars, or designer clothing, wine has managed to furbish itself with a glow, in a way beer and spirits haven’t. True, both beer and spirits are available in very expensive bottlings. But think about it: beer’s fundamental image, at least in America, is of a cheap buzz, in front of the tube on Football Sunday. The image of spirits is more complicated, but then, spirits are cheaper than wine, when you compare the two ounce-per-ounce in terms of alcoholic strength. A good bottle of Scotch might set you back $60, but you’ll get a lot of mileage out of it over time, and unlike wine, it won’t go bad in a few days.

Wine by contrast seems to lift any occasion into the realm of special and celebratory. People still ooh and aah over wine: even a meal in a place like Chili’s or Applebee’s is heightened when wine is set on the table. People perceive this about wine, consciously or not; either way, wine makes their meal feel more special. And because wine has this quality of glamour, consumers seem willing to pay extra for it.

How much extra? That is the question. I’m not as worried as Jon is about California wine pricing itself out of the market. There will always be moderately priced California wine—say, under $20—and as for the under-$10 segment, I don’t really think that much about it, except that I’m glad it’s there because it gets people to drink wine who might not otherwise.

But I do continue to wonder about these Cabernet Sauvignon, Pinot Noir and, now, Chardonnay prices that are skyward bound. I suppose the wineries who are taking price increases know what they’re doing. At least, I like to think so. But Jon, coining a phrase, referred to “the neuroses of [California’s] prestige” as a way to pointing out that some wineries are taking increases, not because they know what they’re doing, but because they think they do; they think they’re riding the same bubble as Bordeaux.

Maybe they are. Maybe they’re not. Maybe Bordeaux’s bubble is unsustainable. Like I said, I don’t play the prognostication game anymore. But, if you look at the history of Bordeaux prices over the centuries, they have just one direction: up.

  1. On Monday I attended a trade tasting of Terry Theise’s Champagnes in Los Angeles.

    Had the pleasure of speaking to Jon Bonné, who attended the event. (And later meet him at his book signing and wine tasting event at a local wine store.)

    Two economic terms underscore luxury wine pricing:

    Veblen Goods

    Giffen Goods

    (Look them up on Wikipedia.)

    And then there is simple ego: my vineyard neighbor commands a high price for his/her wine . . . and I think mine is just as good. So I will price it comparable to my neighbor’s.

    “Keeping up with the Jones.” Including suggested retail selling prices.

  2. $15/glass * 5 = $75 / 2 (restaurant markup) = $37.50 *retail* price. FOB is $19. You’re going to hate on a winery for selling a bottle of wine for $19?

  3. Michael, et. al.:

    Check out this 1988 article from the Los Angeles Times, detailing the sales revenue, cost-of-goods-sold, and gross profit margin on a bottle of Groth Napa Valley Cabernet:

    Winery founder Dennis Groth, a CPA, provides a useful tool for converting these cost expenditures into percentages of sales revenue, that can used to create an index for any other winery to measure itself.

    ~~ Bob

  4. I think it’s pretty clear that there are a ton of great QPRs in imports… hardly surprising as 95%-98% of the world’s wineries exist outside the US… and many of those wineries have far lower operating costs. That’s why imports were 20% of the US market 10 years ago and closing in on 40% today… and it’s conceivable that could hit 50% in 10 years.

    Unfortunately, domestic wine industry profitability sucks pretty bad:

    So domestic wineries don’t have a lot of wiggle room on pricing. Something’s got to give.

Leave a Reply


Recent Comments

Recent Posts