Wine Talk

Snooth User: Que01

@ Gregory Dal-Piaz: What Dictates Price?

Posted by Que01, Feb 8, 2010.

I am new to Snooth but not so new to wine - drinking, not so much "tasting". Can you share some of the elements that determine wine pricing? Curious. Anyone with thoughts, ideas, facts, please share. Thank you!


Reply by Charles Emilio, Feb 8, 2010.

Welcome to Snooth..

Wine like anything else is determined by Demand and Supply.

However there are other factors in setting the price of a wine:

- the land where the grapes are grown. Is it mortgaged or family owned?
- the % of new oak used in the wine (New french barriques are close to $2000 for a new 225L barrell)

One factor which influences 'demand' with a lot of people it is the score or number of points that the wine has been awarded by wine critics & publications such as 'Wine Spectator' and 'Robert Parker'

I hope this helps a bit

Reply by chadrich, Feb 8, 2010.

I think I'd put the price influencing factors into 3 buckets:

1)The base is the investment of raw material (grapes, barrels, bottles), the labor (harvest, make the wine, bottle it), and all the various overhead (real estate, insurance, utilities). Those can be influenced to some degree and may or may not have an impact on the style and quality of the wine (ie cheaper barrels does, working in a tin barn doesn't).

2)Discretionary items such as how much marketing one chooses to invest in, what method they choose to use for distribution, if they have a public presence (ie tasting room) and how decadent it is, if/how much they're going to travel to promote the product, etc. Some of the wines that I love are made in small family owned wineries that I've mainly learned about by word-of-mouth, and their prices are still very reasonable as they're doing little to none of these items. Of course some of the very high production shops do all of these things but are able to keep prices low because they're selling such a huge amount of wine that the cost of these things doesn't have a big impact when spread across all the bottles they sell.

3)As Charles so rightly mentions, supply and demand; much of which is driven by scores. A 95 point score (or inclusion on the Top 100 list) in one of the influential magazines can catapult a modestly priced wine into the stratosphere. And the reality is, it's the exact same wine that it was the day before the article was printed but now there are people lined-up with cash in hand to buy an item that is in limited supply.

Wow, just had a flashback to my college Economics course, that was scary....

Reply by zufrieden, Feb 8, 2010.

The impact of cachet on price cannot be underestimated. To take the example of automobiles, many of my neighbors like to drive highly unreliable and expensive German makes. In this case, consumer reviews (like point scales) have little bearing on the purchase. Instead, the trademark attracts most of the attention.

This can often be the case with wine. Reputation - whether based on up-to-date knowledge or no - has an enormous impact on demand (and hence price) for wines. Often, years go by before the market adjusts to falling quality.

So while all the economic inputs are obviously important drivers of production cost, wine is par excellence a status item. That is why people often scoot around like lemmings seeking out Mr. Parker's highest scores or references to revered growths. To counteract this minefield, some book learning is recommended - along with a few casual wine tastings where you can begin to learn the difference between quality and hype. For such a difference does exist.


Reply by GregT, Feb 8, 2010.

Well, here's something I wrote a long time ago to explain "cheap" wine and maybe it's a good place to begin.

Start with the cost of goods. If your family has owned its land for many generations and has no mortgage on the property and knows how to grow grapes, your costs are lower than the person who just bought in at $200,000 an acre. This is partly why some wines from Europe are still such values in the US, in spite of the Euro/dollar exchange rates.

There's more. If your yields are 15 tons per acre, you get more wine from your land than the guy whose yield is 2 or 3 tons per acre. And if the 2 or 3 ton per acre grapes are harvested when they are really really ripe and have actually started to dehydrate a bit, then he is getting even less wine from his vineyard, so charges even more per ton of grapes.

How big is your vineyard? How many bottles can you actually make? Are your fixed costs amortized across 100 bottles or 100,000 bottles? And did you make it yourself or did you hire a consultant for $100,000 a year or more?

So we have some pricing factors now. Suppose you have a vineyard and you don't sell all of your grapes. Maybe there is a hill at one end and the grapes at that end didn't get ripe enough. You might sell off those grapes, or the juice from them.

I might be in the market for some grapes/juice and if I can get a good price, I'll take yours. I'll take the juice from lots of people and blend it all together. Maybe I will ferment it to leave just a touch of residual sugar and maybe I'll store it in large tanks and I'll put some oak chips or oak planks in it to provide some of the vanilla and toasty notes that people like. So by using bargain grapes (NOT to mean bad quality grapes) and some oak chips, I can produce a wine that people will like.

Just as an aside, barrels are overwhelmingly made from oak and they are often toasted - you tell them if you want them toasted and how much. If you don't want any, you just use the barrel made of raw wood. Or they start a fire in the barrel and let it burn. It can go to light toast to actually charring the inside of the barrel until it's like charcoal. That char is what gives some wines a characteristic toasted marshmallow and coconut flavor, and sometimes a smoky one.

Finally, when the wine is finished, it might seem "flabby", so you might add some acid. In warm climates, it is very common to acidify wine - California acidifies, so does Australia. In cooler climates where the grapes don't ripen as easily, they often add a bit of sugar, not to make the wine sweet, but because the grapes may not have enough natural sugar for the yeasts to ferment. This is called Chaptalization, named for a French man named Chaptal and of course that is legal in Burgundy and Bordeaux. You think you're tasting something special about the land, and you are, except that some of that taste of the land may be Cuba.

Now we can talk about "cheap" wine. Everyone has his or her own definition. For me, it means that the price is low for the quality. So a $40 wine can be cheap if the quality is extraordinary.

But we can start at the low end of prices. A wine like Two Buck Chuck, for example, is made of grapes that were purchased from a number of people and which were grown in any number of areas. The point of those wines is to produce a consistent product from year to year. Thus, if it is not as ripe a year, we might add some sugar, if it is very ripe, we will acidify, we will maintain the tannins, the alcohol, pretty much everything we can from year to year. YellowTail for instance, was designed by the importer - essentially a recipe was provided and the wine made specifically for the US market. It would be comparable to MacDonald's fries and burgers - the quality is known and constant.

This is not to disparage it at all. Many marketers are similar. Gallo for example, has a huge presence and they also have a number of different labels or brands, which is a very smart move for obtaining shelf space. Where you find "cheap" wine here is easy - you go to the store with the best price. The wine is easy to find, there is a lot of it, and it's sold like any other product, on price.

That wine will enjoy serious economies of scale and can be sold like a standardized commodity, which in fact it is. Of course, that is precisely what turns some people off. It doesn't mean they're right or wrong. But just as some people never go into fast food restaurants and some do, so it is with wine.

Thus, moving up a notch or two, you might find a wine where the producer buys from growers or owns his own land. But this winemaker will not be buying on the open market, rather he will have worked with the grape growers through the summer and will have long term contracts with them. He will vinify the juice and make the best wine he can each year, but he will accept that each year is different and consequently his wine will vary from year to year. This is the traditional model in parts of Spain for example, or France, and now in some places in the US, Argentina, Australia, etc. At this level, it is possible to find pretty good wine that is not overly expensive. On a personal note, this is where I start to look for "cheap" wine. Where you find "cheap" wine here is by looking for wineries who have long-standing relations with their grape producers, as they do in Spain and parts of France and Italy, or where they have developed these relationships for the same purposes, as for example, some producers have in Argentina, California or Washington.

Moving up, the producer can own its own land and manage it's own vineyards. In Europe, there are often restrictions on the yields allowed from the vineyards - they believe that lower yields result in better juice. But even where regulations do not exist, winemakers often voluntarily reduce yields. Partly for the same reason and partly to keep their prices up. Yield management is interesting and I am far from certain that yields per acre are a good proxy for quality.

The idea is to make the vine struggle. You almost want it to think it is going to die, for then it spends all of its energy producing fruit. If you don't provide sufficient water for example, but you don't go so far as to dehydrate the vine, you can concentrate the juice. That's why when they have a rainy year and especially a rainy harvest in a winemaking area, the vintage is usually considered a bad vintage.

Planting density is another way of making the vine struggle. High density planting can make each vine fight for limited nutrients. And poor soil is another way - some vineyards are basically rocks and you wonder how anything can grow there.

If the vine struggles so much that it gives you only very small grapes and only a few bunches per vine, and the area has warm days and cool or even cold nights through harvest, you might just have really good wine grapes. You might be able to start demanding a pretty good price for your wine, particularly if you have a famous critic give it a good score, or if you have built up a reputation over many years. This is perhaps the situation in places like Chateauneuf du Pape (CdP). Where you find "cheap" wine here is by looking at places that are close to CdP, but do not have the CdP name.

Now let's say you ferment your grapes and put the wine into barrels. Say the barrels hold 225 liters of wine and cost around $800. Let's also say that you paid a lot of money to buy your vineyard because that is not the business you grew up in. Let's also say you hired a very expensive consultant to tell you how to make your wine. And let's say that you want the same respect that your neighbors have, which is why you wanted to get into the business anyway. This is what is happening in Napa today.

Now, do you pay 35 cents for a cork or $2? Do you pay $1 for an empty bottle or $5 for something fancy? Do you hire an expensive artist/designer for your label or let your daughter design it? Do you buy your grapes from an expensive vineyard in Napa or from somewhere in Santa Barbara, or the equivalent elsewhere?

Where you find "cheap" wine in Napa is by avoiding the newest producers. They simply cannot open a new winery and produce "cheap" wine, and nobody is interested in doing so either. So look to producers who have been there for 20 years or longer. Where you find "cheap" wine in the rest of CA is very often by avoiding Napa and seeking out good producers in less prestigious areas.

But there are other reasons for high prices. In Burgundy, they have very different types of soil in very close proximity to each other. Burgundy is not unique in this of course, but if you look at the flat plains of Kansas and Nebraska, it is apparent that they have similar soil for many miles. Everyone has seen different layers of soil. When you have a hilly or mountainous region, the earth gets folded and sometimes the layers get flipped so that they are like standing a sandwich on its edge. So you might have had an ancient sea that was covered by lava that was covered by sand and then when they get flipped ninety degrees, you have three different soil types next to each other.

My explanation is simplistic, but the point is that wine lovers want to pretend that they can taste, and claim that they can taste, the difference in wine from the different soils. As a result, in Burgundy a grower might have only a few rows of vines and his neighbor a few rows, and they will produce very little wine that is in great demand so their prices will be very high. Where you find "cheap" wine here is by avoiding the vineyards that have been given the top rankings, but the year was good and the wine is made with careful attention. Note that this is precisely the opposite of the winemaking we started with, where a grower buys grapes from all over and blends them to get consistency and sell cheaply. In Burgundy, one is as far away as one can be from that philosophy and people are willing to pay tremendous sums of money for the uniqueness of the soil, the vintage, and the winemaker.

Bordeaux on the other hand is unique in the wine world. They price very much based on what their neighbors are charging and on what the prices were last year and on what they think the market will bear. In the world of wine, their prices might have the least relation to their costs, at least for the classified growths. Where you find "cheap" wine is either by being a billionaire so you can pay for a case of Haut Brion without blinking, or by buying from the chateaus that might not have the biggest names but that are neighboring, or that have recently been overhauled and are trying to establish a reputation.

There are many many other things that one could discuss and this is not even a surface scratch. But think of bread. We can go to the supermarket and buy bread in a plastic bag. We can also go to the little lady in the town in the hills who grows her own wheat, mills it, and makes bread out of that using wild yeasts in the air.

And finally, how much you pay for a bottle need not reflect any of the direct costs. In Bordeaux for example, estimates are that it's maybe $14 or so to produce a bottle of wine that sells for hundreds. Remember that at some point wine becomes a Veblen good. You don't buy it because it's worth the money in an objective sense. If you were to do that, you'd taste blind and then buy the wine you liked most. But people pay serious money for wines that will impress their friends and neighbors. And nothing impresses like a brand name that costs several hundred or thousands of dollars a bottle.

Reply by Que01, Feb 9, 2010.

Thank you, everyone, for your responses so far. While I understand that these only scratch the surface, they all have been extremely informative and will certainly assist me as I begin to search for ones of interest as well as start to share my impressions/reviews!

Reply by VegasOenophile, Feb 9, 2010.

Reputation is a big part of it definitely. Opus One for example, is well known and carries the names of two royal families of winemaking. Is every bottling a stellar $200 a bottle drinking experience? No. Do they always get 95+ ratings? No. It is sometimes great, yes. I thnk a lot of pricing comes from how it's grown and produced. As with all mentioned above, the location of the vineyard and the fruit those vines generally produce, the season, the way it's crafted, the yield and release size and much more all play into it. An estate wine will always cost more than wines made from fruit from a number of vineyards and limited release and specialty wines from a winery will always cost more as they have small distribution, if any at all outside the winery.

That's the nice thing about personal taste. Most people I know have really enjoyed both some very pricey wines and then some very low-tier priced wines as well!

Reply by GregT, Feb 9, 2010.

Right. Once you get away from direct costs, you start factoring in reputation. Looking back over my cut and paste, it's not really directly on point but it hits some of the main issues.

In any event, direct costs may be five or ten dollars, or fifty dollars. But the wine may be $100 or more on the shelf. As you move up in price, the disconnect between direct costs and retail price increases. When WS names something Wine of the Year, the price goes up 20 - 100% or more in a single day. That's got nothing to do with the cost of production of course. And the next vintage of that wine is going to hit the market at a higher price point than previously, again not because the inputs have gone up, but because the reputation is enhanced.

Reply by Charles Emilio, Feb 9, 2010.

Further to what Greg mentioned, another important factor in cost is the number of hands the wines passed through in the distribution chain.
Nowadays it's possible for some wine stores to import direct from the vineyard. Whether or not they pass the savings on to the customer or increase their profit margin, I dont know.

I would imagine that a french wine sold in a US store somewhere in the middle of the country could have gone through 4-6 people by the time it is purchased by the consumer.
Can nayone confirm this?

Reply by Gregory Dal Piaz, Feb 9, 2010.

Greg T covered it all but I'll just add may 2 cents.

Vanity and mortgages consume a lot of cash. People price wines at the same level as their neighbors just because they share the same basic soil. Other people price wines like their neighbors because the share the same, frequently expensive and over enthusiast winemaker.

A lot of these people are not selling much wine these days simply because those are not viable models, except in the best of times. During those best of times some people spend huge sums to buy the best vineyards. They don't really pay for those properties, the consumer does, and when the price of a wine shoots up under new ownership you know it's because they have a huge nut to cover.

Once you get away from the producer though we are stuck with an antiquated three tier system in these United States that requires that several people get paid for moving wine around. It's sort of like the stock market, move wine from a to b and then back to a, three people get paid and you just get a more expensive product.

Not all expensive wine is over priced though. the laws of supply and demand cannot be suspended, mush to the shock of many wine producers. If more people want to buy your wine then your wine will get more expensive. I just don't think that affects a tremendous number of wines and it frequently doesn't affect the wines I really want to drink.

I look to some of the grand families of California for values. If Charles Krug, Pedroncelli, Kunde, Sausal and the like can get great juice in a bottle for $20 the question becomes , why can't more producers, and why pay more?

I have to run to a tasting soon but would love to jump back in here soon.

Reply by dmcker, Feb 10, 2010.

Would love to hear more from you on this subject, too, GregDP....

Reply by zufrieden, Feb 10, 2010.

Then can someone explain the now common occurrence of more modestly priced wines winning medals against their highly reputable and highly expensive opposites? I'm talking here of blind tastings by experienced connoisseurs.

Quality is rationally priced in the long run only; in the short-run, prices will lag behind true valuation of the product. Remember that wine is no ordinary commodity with many substitutes (that's why we have a love affair with it).

Reply by GregT, Feb 10, 2010.

zu - I thought I explained it. As the price goes up, there's less correlation between quality and price. Once the direct costs stop being a factor, price is influenced by many non-direct inputs, particularly fashion. One of the problems I have with many producers in places like Spain and Hungary is convincing them that the quality of what's in the bottle doesn't mean it equates to a price commensurate with those of some highly-regarded French wines.

I do blind tastings regularly and the most expensive wine is the best sometimes, but not regularly.

The prices of Bordeaux between 2000 and 2009 have not changed only because of Euro/dollar rates.

Reply by Gregory Dal Piaz, Feb 11, 2010.

The price of Bordeaux has been manipulated by producers and many in the media joining together and relaying a singular message. Best vintage ever (again), buy them now because they will always be more expensive (false), and these are the best wines Bordeaux has ever made (debateable).

I am at a place now in my career as a wine student where I believe only what I taste and what several close friends tell me. The body of wine criticism out there is all tainted by prejudices and levels of snobbery, but that's another story, which I began to discuss in today's email which can be found here:

But back to the pricing. I think that for the vast majority of people, myself generally included, wines that cost about $35-$50 offer the best drinking experience. They are frequnetly wines that have a bit of premium built in due to demand but are produced in quantities sufficient to almost meet that demand.

That is an interesting position to be in because if the production is of this size then the demand, one assumes, is genuinely driven by the quality of the wine, as opposed to it's rarity or appreciation potential.

I am continuously surprised by the winners of blind, and sometimes not blind tastings. Rarely, if ever, does the most expensive wine win the contest for best wine today and over the short-term, notable exceptions being aged bottles of cellar-worthy wine.

I love Barolo, and most of my favorites, that were $40-$65 a bottle 6 years ago, are now in the $65-$120 range. That's a function of four things though. The wines have found many new admirers based on the passionate coverage afforded them by the most recent reviewer of Italian wines for Robert Parker's Wine Advocate( debatable name there). The euro exchange rate has had a significant effect. Piedmont has been blessed by an unprecedented string of fine vintages ,and a revolution in winemaking, that had greatly increased the chances of any random bottle of wine being good or better. And the final factor, the wines, these great Barolos, are made in small quantities.

It's touch to generalize but most of the great Barolo bottlings are made in quantities on the scale of a 1000 cases or so, many far less. Compare that with the production of classed growth Bordeaux coming in at 10, 15, even 20 thousand cases.

I bring this up to help illustrate that there are many reasons why wines have become so expensive. Some linked to the quality of the wine, many not. The high price of a bottle of wine is no guarantee that YOU will enjoy that bottle. I've found that most of my favorite Zins are the ones that are selling for about $20 a bottle. This week's blind tasting in fact had an $18 bottle beating all comers, up to $75!

So spend wisely, taste often, and share with your friends. By building up an independent body of knowledge we can all help consumers to make educated decisions that are driven by fact rather than fantasy.

Reply by Kenner, Feb 11, 2010.

The two Gregs have hit all the high points.
Taste as much as you can, with friends, and make up your own mind, discover your own values. Enlist a local , well stocked retailer to help buy a mixed case. They should ask what you enjoy to start a dialogue, and as trust and understanding grows, you can expand your palate.
As you find things you like, stock up on them and you will have a cellar of your own, with old friends that you know. Hold back on a bottle or two, and see how or if they evolve in a few years.
To Greg DP: I had a Rashi Barolo at a tasting last week that was very good. Give it a try, $32 I was told. Not sure of the vintage, but it was the current release.

Reply by zufrieden, Feb 11, 2010.

Well, my challenge for a more probing explanation was (naturally) no indictment of the valiant efforts of knowledgeable persons to tackle the problem in a few hundred words. But I appreciate your clarifications and expansion on the main theme; I found the additional posts clear and direct.

Keeping producers in places like Spain or Hungary focussed on sound, quality production is the key. While they may not be able (in the short-run) to bid up the price of their products to the lofty heights of some French first growths, they may put pressure on prices generally, enhance competition and keep the wine establishment more honest. Then - and only then - will they be in a position to draw a larger share of the wine market to themselves.

I also think that a shared passion for a particular region (Piedmont, for example) allows persons of like mind to develop an appreciation for certain nuances of quality within certain wine subgroups. Determining what's good, better and best within a category of great personal interest seems to hold the more internal validity. It may well be possible to frame a relationship between consensus opinion on quality to price in these more self-contained settings. Sounds like a good thesis for an academic paper.

While it is true that this forum began asking a fairly straight-forward question about the drivers of price in wine markets, the more interesting question is about quality. I cannot believe that anyone interested in wine can be focussed on anything else in the long run - especially given that most of us do not have unlimited access to funds. The trick, therefore, is to get a handle on quality FOR price...

Reply by zufrieden, Feb 12, 2010.

It might be interesting for some of us to participate in a little experiment on price and quality. Once I get my head around it (and can spare some extra time) I may open a forum on the subject. It won't be for a bit though.

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