A story called Can Napa Wine Prices Stay Up? from Wines & Vines caught my eye today. While there were arguments offered that perhaps prices can stay up, realistically, the answer is "no" in aggregate unless producers adopt creative sales and marketing approaches. Here's why (plus a few suggestions on what wineries can do).
The fundamental law of supply and demand
There is no escaping the fundamental law of supply and demand. When demand is high and growing (relative to a producer's supply and competitive substitutes), prices go up. One of the best leading indicators of future prices is secondary market sales activity, i.e., when consumers sell a current or prior vintage of a wine after purchasing it elsewhere. If secondary market prices are consistently higher than new release prices (as they have been for many Napa wines in recent years), mailing list prices can safely be raised. Certain high end wineries capitalized on this trend by raising prices 100% or more within only a few years. On the other hand, if secondary market prices are falling, which they have been (25+% for fine wine in other categories), this creates downward pricing pressure on future releases. Check out WinePrices.com for some well known, high priced Napa wines sold at auction and you can already see examples of price declines in the secondary market since September 2008.
How to maintain price levels
There are only two ways to do so:
- Maintain sufficient demand at the historic price point. This is perhaps possible if the winery had "excess" demand before, i.e. waiting lists can replace disappearing prior customers, or the winery will need to attract new customers, perhaps via new selling channels/methods (e.g., brokering wine through retailers), introducing new marketing methods, selling into new geographic markets, etc.
- Reduce supply to match demand at the historic price point. If the winery can afford to live without the cash flow from unsold supply, the unsold wine can be added to the winery's library to sell when better economic times return. Supply can also be shifted to overseas markets to reduce domestic availability (but that is really a demand building exercise).
As production from existing vineyards is hard to "turn off", and most wineries need the cash from current production to pay bills, the natural emphasis of wineries to respond to the current economic conditions will be efforts to stoke demand to avoid lowering prices.
Holding on to current price levels through market segmentation approaches
If a winery wishes to avoid a public price cut (long enough for an economic rebound to restore demand) and needs the money from selling annual production even if part of it needs to be sold at a discount to the public price, then they should segment the market to maximize revenues.
To address the market of consumers not willing to pay the "full price" for what is excess supply to the winery, the winery needs to avoid creating public price conflicts to avoid cannibalizing its "full price" customers. One way of doing this is to offer wine through retailers capable of managing "private sales" of wines, perhaps only to their better customers and where it's not assumed the wine was sourced from the winery. Selling wine through an anonymous auction channel is a similar approach but adds more "below market" pricing data into the public secondary market data sources.
For example, Vinfolio has a priority customer program and markets wines to these high-spending customers via email without prices being publicly displayed on our site or fed into wine search engines. Given that Vinfolio sources most of its wine in the secondary market (approximately 75% by value), even for a new release of many historically "allocated" Napa producers, the assumption by our customers is that the wine fitting this description is not from the winery. The price, however, will nevertheless need to reflect secondary market price realities if the wine is to sell. As the wine would only be offered after the new release was available, then such an offering is not competing with winery mailing list sales (where people still have a further incentive to buy to maintain a mailing list position).
Another method which comes to mind when a producer is to accept a lower price than desired on a portion of his supply is to consider any discount an "investment" in a relationship with longer term value. E.g., perhaps a first-time direct customer gets a one-time welcome benefit of an extra 6 bottles at a better price per bottle for buying a full allocation at normal prices. Or free shipping is thrown in which avoids the need to change the bottle price. The producer might also make a longer term supply commitment to a retailer for supporting the brand in tough times that might permit the retailer to guarantee customers who buy now the right to the same wine next year (an extension of the mailing list concept to third parties). You get the idea.
Innovation is the answer
The good news about bad times is it forces us to become more creative and to innovate. That, in turn, is what leads the economy out of recession. If you've got other ideas, please add a comment.
P.S. Also see a prior post from November 2006 titled "An explanation of fine wine prices."
