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April 30, 2007

Are Wine Prices Determined By Quality Or Marketing?

Posted in: Marketing

I’ve been doing some work recently that got me thinking about how much a wine’s price is determined by the actual quality of the wine in the bottle and how much by the demand created through marketing. Aside from a few very rare exceptions, wine needs to be marketed to be sold. This is normally done through retail stores, the winery tasting room, to wine clubs and increasingly through online wine merchants. All these add to the costs a winery has to pay in order to get their wines to the customer but they are not the main cost driver; the grapes are.

If you are Fred Franzia making his famous “Two-buck Chuck” you are paying about $100 a ton for your over-cropped Central Valley Cabernet Sauvignon. The yield per ton is probably something like 7 tons per acre which doesn’t produce the most concentrated fruit. That ton of fruit will make around 60 cases or 720 standard bottles so Fred’s got around 14 cents per bottle in fruit costs. Now you can start to see how he can make money selling it for $1.99 at Trader Joe’s. Contrast that with the premium producer in Napa Valley who spends $6,000 a ton on fruit and up. There the yield is between 3 and 4 tons per acre that will produce a more concentrated, complex wine. Assuming the same 60 cases are made, the Napa Valley producer has around $8.30 in fruit costs. Not too bad if the wine will be selling for $50 or $60 a bottle but still 60 times more costly than Mr.Franzia’s wine. But this post is not intended to be a forensic dissection of the wine cost structure, for that, visit my friend Vini.

So getting back to the wine in the bottle, the basic difference is in the quality of the fruit and cellar treatment (i.e. new oak barrels vs. chips, aging time, etc.). For producers making the finest wines they tend to spend a lot more on these items but in the final analysis the most extravagant producer might have something like $30 of cost in each bottle produced. Since distributors buy at an average of 40% off retail, this wine would sell for a minimum of $57 a bottle assuming a 10% winery profit. But what if this wine is priced at $150 or $500 a bottle? Well, the profit margin is certainly higher but there are probably higher marketing costs, as well.

As I learned last week, there seems to be a point where price and quality diverge. The reputation of a winery, bolstered by glossy treatment in the wine magazines and 95+ Parker scores also help to push the demand, and price, for these wines. But are they the best example of a certain wine region or variety? Well that, my friends, is in the eye, and palate, of the beholder. You might think Screaming Eagle is the zenith of Napa Cabernet while I prefer what Ladera is doing for a lot less. Preferences aside, there are many great quality wines from all over the world that compete for our hard earned wine dollar. What really separates them is not the quality of what’s in the bottle but the demand that is created for those bottles. That, in a nutshell, is the essence of marketing… at least in my book.

By Tim Elliott: www.winecast.net


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