A recent article in the Economist titled “Fruity little numbers” and a post in the Dollars and Sense blog titled “The price of wine – not about the wine” inspired me to go back to Economics 101 and apply the law of supply and demand to explain fine wine pricing.
Supply
For any given vintage of a wine, the maximum supply is determined by total production in that year. Limited production relative to demand (e.g., Screaming Eagle, Harlan Estate, Le Pin, Petrus, DRC) leads to high initial prices. As production is fixed and supply can only decrease with consumption or with collectors storing wine for later consumption, the supply curve will only ever shift upward and to the left. Therefore, for any given quantity demanded, the price should increase with less available supply (unless demand falls faster – perhaps by negative changes in elements contributing to demand such as a reduced score from a major wine critic).
Demand
Demand is driven primarily by factors shaping consumers’ perception of quality:
- Scores and reviews from professionals and the wine community. Parker 100 wines, Wine Spectator's Top 100 wine list, public community tasting notes, etc.
- Appellation of origin. Terroir matters.
- Reputation of the producer, of proven “celebrity” winemakers, and of the wine’s ability to age. Newer garagiste producers need to develop track records.
- Marketing efforts by producers including label design, bottle selection, promotions, events, advertising, and extent of domestic and international brand development.
Other factors include:
- The growing global population of wine drinkers, not only in the U.S. but in new markets like Russia, China, and other parts of Asia.
- Investment appreciation potential, which is not necessarily a primary factor but may be a secondary consideration to many when deciding to buy fine wine.
For older wine, the provenance and bottle condition directly affect demand including:
- Past storage conditions and history
- Original wooden case or packaging intact
- Bottle fill levels
- Label, cork, and capsule condition
- Color
What about the costs of production?
Fine wine is generally not priced on a cost-plus basis once one a certain price threshold is exceeded (e.g., $50?). The producer’s objective is to price to perceived value, not costs. So get over the fact that Screaming Eagle now sells for $500 from the winery while their costs are a fraction of that. When demand is high relative to supply, production costs are irrelevant.
The impact of high prices on wine buyers
- If you are “priced out” of a wine you like, move on to discover alternatives in your price range. They exist.
- Get recommendations and advice from your retailer or others.
- Trust your palate to assess quality instead of relying on perceptions of quality that others are trying to shape for you.
Chart source: Wikipedia
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