The High Costs of Low Prices

Part of the WSET’s Diploma studies is the composition of a research paper that focuses on some of the more pressing issues currently at play in the global wine industry. The following is my look at the challenges created when discounting becomes standard operating procedure. This paper received a passing grade of Distinction, and so I’m now only a couple of steps away from completing the Diploma. I can’t get there fast enough. 

Introduction

All wine drinkers love a good bargain. Few things are better than walking into a shop or supermarket and finding a great bottle for half-price, or seeing the store is running deep discounts on shelves of favorite labels. But when the customer gets more wine for the dollar, it stands to reason that somebody else along the line – grower, producer, distributor, retailer – is going to get less. And, even with slashed prices, is the consumer really getting their money’s worth? In the end, low prices might not be a bargain for anyone.

In 2000, California boasted 1450 bonded wineries, nearly half of the total 2904 wineries sprinkled across the United States. Twelve years later, the US’s most productive state’s roster had ballooned to 3754 wineries, compared to 8806 for the US overall (Wine Institute). No matter how you look at those figures, that’s an enormous growth in production capacity in a very short time. And, despite the ongoing drop in wine production across Europe’s major producers, there has been enough growth globally to keep overall production constant. Even though consumption in the United States has been steadily rising for years, European consumption continues to wane (BKWine). With more competition for market share increasing globally, every stakeholder in the wine world knows that there is a constant need to keep the widening river of wine flowing from the winery to the consumer. The next vintage is not going to wait.

There are many reasons that wines are discounted in order to spur sales. Some are logistical – the need for shelf space for newer product, wineries’ need to make room for the next vintage, distributors faced with mounting inventory. Others are financial, and for most segments of the wine industry, the most pressing of these is cash flow. Revenue is oil for the gears of commerce; nothing in any industry runs without a steady cash flow. If product sits too long at any point in the chain – winery, distributor, or retail outlet — everybody begins to suffer.

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Low prices are a good thing for consumers. But there comes a point where low becomes too much of a good thing, where consumers are getting less than what they paid so little for.

The one tried-and-true method, historically, to ensure market activity, has been the simplest one: make the wine cheaper so more people will be more interested in buying it. It is axiomatic that if consumers believe they are getting more, whether in terms of quality or quantity, for their money, they are more inclined to part with their hard-earned cash. There are various ways that shoppers are enticed to become customers. Stores run closeout specials, offering older vintages or hard-to-find labels. There are sales where discounts of 30-50 percent are offered; two-for-one bargains, or buy one, get one for five cents are also common. In recent years, online flash markets have mushroomed, giving wineries, especially small and medium wineries that have trouble gaining entrance to the portfolios of major distributors, a chance to unload inventory quickly and with fewer attendant costs. Another venue for attractive sales are large discount retailers like Costco, Walmart, and Aldi, where the stores set intentionally low profit margins, allowing for rapid turn-around of the limited labels they stock.

Of these methods, flash sites — online vendors who act as short-term, direct-to-consumer liquidators for wineries desperate for both cash and reduced inventory – and low-margin markets like Costco create the greatest danger for established brands. “Wineries have mixed feelings about flash sites… Selling wines through the sites can upset distributors and retailers, some of whom pay more for the wines than the flash prices. Another concern is that regular customers or wine club members might happen on flash sales at lower prices than they have already paid, though most flash offerings have short exposures” (Franson).

Discounts good? Discounts bad?

The recent global recession that kicked off in 2008, the effects of which continue to linger world-wide, underscored the cash-based and seasonal natures of the wine industry and offered a look at how the industry behaves when the wine river is slowed or dammed. Writing in The New York Times in July 2009, Eric Asimov explained the ripple effect. “Consumption and sales are actually up, industry analysts agree. But people have turned away from expensive wines, buying two $8 bottles instead of one $20 bottle. As a result, growers in high-status areas who don’t already have contracts for their grapes are having trouble selling them, and prices are way down” (Asimov).

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Much has changed on the American wine scene since Agoston Haraszthy, founder of Buena Vista Winery in Sonoma, set in motion what would become the California wine industry. Nearly 90 percent of American wine comes from California. Wineries continue to open at a breath-taking pace, which is a good thing as the thirst for wine, here and abroad, continues to grow.

He continued, “Russian River pinot noir grapes, for example, which sold in 2008 for $2,800 to $4,500 a ton, are now going for $1,800 to $2,800 a ton, said Bill Turrentine, president of Turrentine Brokerage, a leading California broker of wine grapes. Napa Valley cabernet sauvignon is selling for $2,000 to $3,000 a ton, he said, down from $3,500 to $5,500 in 2008.”

In 2012, because of similar market conditions, the chairman of the New Zealand Grape Growers, Stuart Smith, accused that nation’s two largest grocery store chains of driving prices down and crippling producers. Smith “suggested a ban on alcohol pricing in advertising to make supermarkets rethink their heavy wine promotions” (stuff.co.nz). Smith contended that 90 percent of New Zealand wines were sold on deep discount, compared to only a quarter of the stores’ other merchandise. “I’m sure some [wines] are selling, on occasion, below cost” (stuff.co.nz). In Australia last April, Decanter magazine reported that ongoing reduction programs at Treasury Wine Estates, Pernod Ricard, and Accolade wines had many growers wondering how they themselves would manage to remain in business. “ ‘All 505 Murray Valley wine grape growers are trading well below break-even,’ MVW’s chief executive, Mark McKenzie, told Decanter.com. ‘We are very concerned with the winery tactics on prices, which will force vineyards into insolvency’” (Decanter).

Lower wine retail prices might be hurting growers, but surely customers can only benefit from such deep discounts, right? Not necessarily. In a 2013 interview with the BBC program Watchdog, renowned British wine critic, Oz Clarke, explained that due to taxes, tariffs, and the cost of materials, consumers, when buying a £5 bottle, are purchasing only about 20d of wine, and not very good wine at that. “Is it me or do most of these bottles seem to be discounted most of the time?” Clarke asked. “And, if this is the case, are we getting an amazing deal when we pick up a bottle of half-price plonk, or are we having the wool pulled over our eyes by some smart marketing device” (BBC)? Clarke pointed out that, given those aforementioned costs, that it’s not until consumers reach for bottles in the £10-15 range that they start to buy wine with any fair value. “So you might want to think twice the next time you see all those enticing offers” And it’s not only the consumer who suffers. According to some, too much movement in pricing tarnishes the retail sector as well. In the same telecast, Allan Cheesman, former wine director for the United Kingdom chain Sainsbury, suggested that wine discounts are not nearly as transparent as the customer might think, saying that wines listed as discounted from £12 to £6 usually aren’t worth the original price to begin with. “Probably wasn’t worth six, actually,” he said. “I would say as a member of the trade, the industry, that it’s not doing us any good, our reputation, ethically. It’s something I’d like to see the back of” (BBC).

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Growers, producers, wholesalers, retailers — players in every sector of the global wine marketplace are finding that deep discounts cost them in more ways that just lower revenues.

In a recent article in his blog, The Wine Economist, Mike Veseth, quotes an article from British Master of Wine Tim Atkin, who insists that wine prices are too low, echoing Clarke’s point that customers are getting nothing when buying the cheapest bottles. “If wine is so cheap that it is no longer seen as having any special qualities, will it lose its distinctive identity and become just an alcoholic beverage, vulnerable to competition from beer, spirits and cider? Has this already happened? Perhaps it has in the UK, if Atkin is right about collapsing quality” (Veseth Economist).

The effects of price-cutting, it appears, are more negative, throughout the wine industry chain from grower to customer, than positive. Customers save money but end up with an inferior, wine-like beverage, not bottles of recognized quality. Retailers see more product turnover but within tighter profit margins. Distributors move increasingly larger amounts but need to squeeze higher priced labels from their portfolio in order to carry the wines that the discount shopper wants. Large producers lose market share for their higher priced wines, forcing them to produce even more of their value labels. Smaller producers who specialize in more expensive, boutique wines find gaining or holding any place in the market a titanic challenge. Growers find asking prices shrinking and contracts disappearing, and must often resort to dumping their fruit on the bulk market at any price they can get. From vine to vendor relationships are tensed and frayed.

Will the bubble burst?

One sector where these dynamics seem not to be in play, or certainly not with the same widespread negative effects, is in Champagne. The popularity of the wine from that region is due, largely, to the large brands – the grandes marques – that have been assiduously developed and marketed over the last century and more (Robinson RM). And the image that has been marketed has been one of luxury. In the eyes of some business insiders, Champagne might have the strongest and highest-priced territorial brand among all wine producing regions, due mostly to a long history of luxury promotion, astute management and luck (Lockshin, Charters 118) “There are 20 well-known grandes marques, robustly priced champagnes that are made in such quantity that they have to blend dozens and often hundreds of different ingredients to produce a consistent style When you serve your guests one of these, they now they are being treated to something with a certain price tag, reputation and familiarity” (Robinson Brand). If, as studies show, people buy more expensive wines for special occasions, then expensive wine is special (Veseth Wine Wars 36). Historically, Champagne’s price has marked it, without question, as a luxury good. So what happens to a brand whose quality is tied to high prices when those prices plummet?

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Despite appearances, market conditions in Champagne are not always sunshine and blue skies. Tensions between deeply discounted “value” brands and the premium labels of the Grand Marques have started to shake the historically solid cachet that attaches to all things Champagne.

That’s been the situation in the past several years in UK markets where, Nicolas Feuillatte commercial director Julie Campos believes, certain producers must be selling below cost, calling the discounts “inexplicable.” In an interview with The Drinks Business late in 2013, Campos pointed to rising trouble with the European Champagne market. “I say inexplicable because the pricing doesn’t add up to the cost bearing in mind what a replacement bottle of Champagne would cost these days… it’s obvious there are offers around that are below cost” (Schmitt). Furthermore, Campos pointed out, because grape prices have been rising faster than Champagne retail prices, the grapes alone now account for 42 percent of Champagne’s total production cost, up from the recent mark of 30 percent. As a consequence, she suggested that the current deep discounts were connected to an immediate need to convert stock into cash to pay for the cost of producing Champagne. “I think the promotions are linked to economic problems in Champagne, rather than an attempt to buy market share” (Schmitt). Campos later opined that Champagne producers had developed “an addiction to promotion” (Smith).

This compulsion for deep discounts affects both own-store labels like Pierre Darcy and De Vallois (Schmitt) and higher priced grandes marques bottlings (Glass of Bubbly). But this is in the UK. In the US, at least for the past several years, discount Champagne has been almost impossible to find (Yarrow). In fact, with the steady slide of the Euro, combined with a strengthening US economy and attendant consumer confidence, producers remain bullish on the American market. “We’re happy because this helps our profit margins,” said Frederic Rouzaud, managing director at Louis Roederer, who expects to increase spending in the US in the coming year. (Chow). Still, despite the rosy outlook across the Atlantic, Champagne producers need to exert some control over non-stop discounting and shore up their eroding public image. This was underscored in late 2013 by a 1 percent drop in value and a 2.7 percent drop in volume sales. These numbers seem benign until compared to the respective 13 percent and 10 percent rises in non-Champagne sparkling wines. (Green). “If big Champagne houses continue to go down the promotional route and try to match the price of sparkling wine, consumers will think they are similar products and we will struggle to get strong equity in Champagne,” said Oliver Dickson, senior brand manager for Piper-Heidseick. Explaining his firm’s goal of rebuilding market equity lost due to rampant discounting, he added, “It’s our intention from 2014 onwards that Piper-Heidsieck never drops below £20. It’s very difficult to drive equity messaging if it’s sold at half-price” (Green). Increasing prices and maintaining high prices will help Champagne remain a luxury brand. Ongoing discount promotions will serve only to damage the brand irreparably. It is time for the Champenois to choose what they want their future to look like (Lockshin, Charters 118).

Death by a thousand cuts

There are times in the market where reliance on low prices and constant discounting bring harm not simply to an individual product, but to an entire brand. One of the more documented examples of this lately is the most recent bust (in an perpetual cycle of boom-bust) of Australia wine and the dilution of what is known as Brand Australia. In 1996 the Australian government issued a study and set of ambitious goals called Strategy 2025, outlining their plans to surge into the international wine market and, in a few short years, become the preeminent player in the field. Despite reaching their initial goals early, the Australian wine industry finds itself in confusion, its future uncertain (Veseth WW 46).

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The Australian wine market has found that protecting its critters has not been without a cost. Exporting too many cute and furry animal brands around the world has blinded consumers to the great amount of fine wine that the country produces

Many in the industry, both in Australia and abroad, point the finger for their tattered market at mass-market wines, specifically Yellow Tail and other “critter” labels that have cast a shadow on Australian wine, obscuring much of that nation’s vinous output in the international marketplace. In the first decade or so of this century, Yellow Tail has remained the best-selling import in the US; even when Aussie exports plummeted in 2009 due to global recession woes, Yellow Tail stayed strong. As recently as 2011, the popular kangaroo label outsold all French producers combined (Veseth WW 139).

According to British wine critic Jancis Robinson, the market strength of Yellow Tail has “ ‘left most Americans with the impression that Australian wine is sweet, cheap, and adorned with a ’critter’’ ” (Fickling). Pernod Ricard SA’s Premium Wine Brands unit chimed in, saying that “A focus on volume sales and not value building” had hurt the reputation of Australian wine, in a October 2011 government inquiry submission (Fickling). John Casella, managing director of Casella Wines, the maker of Yellow Tail, fired back, insisting that Australian market troubles cannot be laid at the foot of his popular brand. “Yellow Tail is at a certain price point and people buy it because it’s there; the Toyota Corolla didn’t destroy the Lexus,” Casella argued. “Someone buying $12 wine doesn’t buy $6 wine” (Fickling). Casella contends that there is room in the marketplace for more upscale Australian wines, although it’s hard to imagine that the 8.5 million cases of wine he ships to America each year have left little room for other Australian wines, regardless of their price. (Veseth WW 140).

Yet, to be fair to Casella, other forces are at play in Australia that have caused exports to drop – nearly 10 percent in 2011. Even Yellow Tail sales in the US were down 7.8 percent in the first half of 2012. One, due to growth in other economic sectors, the Australian dollar is stronger than it has been in some time (Fickling). Also, the global thirst for Aussie plonk seems to be a bit fickle; international favor in the Popular Premium category (wines priced at $5-7) is shifting to Chile and Argentina (Love). With all these downturns, are there any bright spots in the future for Australian wine? Perhaps.

As of July 2013, sales for Australian wine priced in the $7.50 to $9.99 range grew by 14 million liters, and by 16 million liters in the $10 and above slot. Wine Australia’s chief executive Andrew Cheesman found hope in these figures, saying “The growth across higher price segments suggests Australia’s continued strategy to build a stronger perception of the quality of Australia wine is achieving cut-through” (Love). Cheesman believes that success in these areas is essential to the health and sustainability of his country’s presence in international markets (Love).

Another reason for optimism, albeit with some caution, is the rise in Australian exports to China. China, while a burgeoning market for international brands, is beginning to slow, with a steady decline projected for the next several years (Collins). At the beginning of 2010, Australia had gained a foothold there as number two importer behind France, with a 22 percent share of the market (Veseth WW 199). If Australia can hold steady in China, grow its premium wine exports, and slowly erase the image of their wines as nothing more than “cheerful, cheap, and sweet” (White) there is a chance that the goals set for Brand Australia back in 1996 might still be possible.

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Works Cited

Asimov, Eric. The New York Times. “Where Anxiety Is All That Is Flowing,” July 28, 2009. http://www.nytimes.com/2009/07/29/dining/29pour.html?_r=1&

Chow, Jason. The Wall Street Journal, “Champagne Makers See Opportunity in Weak Euro,” March 18, 2015. http://www.wsj.com/articles/champagne-makers-raise-a-glass-to-weak-euro-1426705276

Clark, Oz, BBC Watchdog, November 13, 2013 https://www.youtube.com/watch?v=1Yg5is6UDRI

Collins, Guy. BloombergBusiness.com, “U.S. Demand Seen Driving World Wine Market Growth, Deglise Say, January 25, 2015. http://www.bloomberg.com/news/articles/2015-01-26/u-s-demand-seen-driving-world-wine-market-growth-deglise-says

Decanter magazine, “Grape Price Cuts Will Send Us Bust: Murray Growers,” April 2014, p. 6.

Fickling, David. BloombergBusiness.com “Yellow Tail Maker Plans $10 Wine As Dollar Shaves Profits,” August 27, 2012. http://www.bloomberg.com/news/articles/2012-08-27/yellow-tail-maker-plans-10-wine-as-dollar-shaves-profits

Franson, Paul. Wines and Vines, “Leading Flash Sales Sites Identified,” Feb 1, 2011. http://www.winesandvines.com/template.cfm?section=news&content=83556

Glass of Bubbly. “Cut Price Champagne: Bargain Bonanza or Brand Damaging?” April 24, 2014. http://www.glassofbubbly.com/cut-price-champagne-bargain-bonanza-or-brand-damaging/

Green, Martin. OffLicenceNews.co, “Champagne Supplier Warns Against Discounts,” December 12, 2013 http://www.offlicencenews.co.uk/news/fullstory.php/aid/13825/Champagne_supplier_warns_against_discounts.html

Karlson, Per. BKWine magazine, “State of the World wine production and grape growing 2014: France back on top for wine,” November 11, 2014. http://www.bkwine.com/features/more/state-world-wine-production-grape-growing-2014-france-back/

Krause, Nick. Stuff.co.nz., “Discounts Hurt Winegrowers,” September 27, 2012. http://www.stuff.co.nz/business/farming/7734332/Discounts-hurt-winegrowers

Love, Tony. AdelaideNow.com. “Why The World Doesn’t Want Australia’s Wine Anymore,” July 15, 2013. http://www.adelaidenow.com.au/lifestyle/sa-lifestyle/why-the-world-doesnt-want-australias-wine-anymore/story-fnizi7vf-1226679796783

Lockshin, Larry; Charters, Steve, ed.. The Business of Champagne: A Delicate Balance.” Routledge. Oxford, United Kingdom. 2013.

Robinson, Jancis. “RM Champagne No Shortcut to Quality,” February 6, 2010. www.jancisrobinson.com/articles/rm-champagne-no-shortcut-to-quality?

Robinson, Jancis. “Champagne – A Wine or A Brand? June 1, 2013. www.jancisrobinson.com/articles/champagne-a-wine-or-a-brand

Schmitt, Patrick. The Drinks Business, “Champagne Deals Push Prices Below Cost,” November 28, 2013. http://www.thedrinksbusiness.com/2013/11/champagne-deals-push-prices-below-cost/

Smith, Hamish. Drinks International.co, “Champagne Discounting A Bilateral Challenge,” November 29, 2013. http://www.drinksint.com/news/fullstory.php/aid/4181/Champagne_discounting_a_bilateral_challenge.html

Veseth, Mike. The Wine Economist, “Are Wine Prices Too High? Or Too Low? (Wine’s Golden Age & Its Disconents), December 23, 2014. http://wineeconomist.com/?s=Wine%27s+golden+age&submit=Search

Veseth, Mike. Extreme Wine, Rowman & Littlefield. Lanham, Maryland. 2011.

Veseth, Mike. Wine Wars, Rowman & Littlefield. Lanham, Maryland. 2011.

White, David. Terroirist: A Daily Wine Blog, “A Conversation with Jancis Robinson,” October 31, 2012. http://www.terroirist.com/2013/10/a-conversation-with-jancis-robinson/

The Wine Institute, April 2015. http://www.wineinstitute.org/resources/statistics/article124

Yarrow, Alder. Vinography: A Wine Blog, “Where Is All The Deeply Discounted Champagne?” September 20, 2010. http://www.vinography.com/archives/2010/09/where_is_all_the_deeply_discou.html

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