Pricing Product Dicey Proposition for Most Wineries

On the third Sunday every November in a small town in France, wine is auctioned off. It is the annual Hospices de Beaune auction of wine, which benefits the Hospices, a charitable institution.

Prices for the wines may be a bit higher than normal because proceeds benefit the institution and because the Hospice wines are rated highly. But prices generally are based on the quantity of wine made during the vintage and the quality of that wine. Thus the prices tend to set a standard for all wines of the vintage from that region.

This is a most sensible method of pricing wine, and it means that prices for a 1984 wine from a particular vineyard will be lower than the same vineyard’s 1985 wine because of the higher quality of the ’85 vintage.

For many California wine producers, however, the pricing of a bottle of wine has often been the knottiest of problems, and one that many of them haven’t handled well at all.

Comparing the Quality

New wineries occasionally price their wines by the seat of the pants. The owner and wine maker sit down at a table with glasses of their own wine and glasses of their competitors’. They don’t know which wine is in which glass.

If the new winery’s product is close in quality to a wine selling for $15 a bottle, the winery owner can say, “Well, if he can get $15 a bottle for his wine, I can get 15 bucks for mine.” Often the amount of wine the new winery has of a particular wine, and will have in future vintages, is not taken into consideration.

Other wineries price their wines by a method even less meaningful. They try to make back their investment in the winery at the same rate a Wall Street firm would--a clearly impossible formula. Winery owners know (or should know) that it takes years to reach profitability.

But even established wineries fall into a pricing trap. They keep prices for each wine the same as last year’s bottle. Or they raise the price. Almost never does a winery drop the price of a wine, not even when they have twice the amount to sell or even if the wine isn’t as good as the previous year. Or both.

(Since there is no public auction of wines similar to the Hospices de Beaune auction, there’s no marketplace input to the price that would be fair for a wine.)

No One Dropped Price

For example, today most Cabernets from the Napa Valley routinely sell for $12, with the better ones selling for between $15 and $20. Yet when the 1983 Cabernets were released a couple of years ago, no one dropped the price, even though the vintage wasn’t considered one of the better ones of recent years. In fact, a number of wineries raised their prices.

In the last year, there has been a wave of price increases by premium wineries, especially for the 1985 and 1986 Chardonnays, and for the 1985 Cabernet Sauvignons. By increasing the prices, based in part on favorable reports of the quality of the vintage, wineries are gambling that there will be no consumer backlash.

But some industry analysts are saying that that backlash is imminent. If the price of the French franc declines, making wine from France less expensive here, consumers may well rediscover the wines of Bordeaux and many high-priced California wines will go begging--especially since it’s not usual for a California winery to lower the price for a wine.

It is thus essential that wineries consider all the implications of wine pricing, because the dynamics that affect wine prices can be as subtle and remote as the price for a barrel of crude oil.

Stu Smith, co-owner with his brother, Charlie, of Smith-Madrone Winery on Spring Mountain in the Napa Valley, earned a degree in business, so he is a one winery owner who understands the dynamics of wine pricing. And yet recently as we chatted over lunch and sipped his 1984 Cabernet Sauvignon, he said he was unsure how to price the wine.

“This is the best Cabernet we’ve ever made,” said Stu, who sports a huge, mouth-engulfing beard that is brightened by sparkling eyes. “But Charlie and I can’t figure out what to charge for it. I think it’s worth 20 bucks, but . . . .”

There Might Be Resistance

His voice trailed off as he envisioned what nightmares he could create for himself if he suddenly raised the price for his wine to that height. There might be great consumer and retailer resistance.

The Smiths have always priced their wine based on quality. Smith-Madrone’s best previous Cabernet was its 1979. It sold for $14. After that, for the nice 1980, 1981, 1982 and 1983 Cabernets, the price was $12.50.

Then along comes the ‘84, and it’s a winner. The rich, herbal scent is graceful and has ample stuffing to age for a long time. But the overall impression is one of completeness and depth without the high alcohol sometimes associated with “big” wines.

There is not much of this wine, just a few hundred cases. So, Stu reasoned, he could charge $20 and argue to the consumer that it is in great demand and short supply. And he would be right. But what, he thought, would happen to him if he dropped the price from $20 on his 1985 wine, or his 1986, or 1987, because one of them truly didn’t live up to the ‘84?

Stu left our meeting without making a decision, but a few weeks later I received a note from him in the mail. “The decision was to price the wine at $14 a bottle,” he wrote.

“Charlie and I both believe it’s intrinsic value is much higher, but as you know, in the short run, sizzle outsells steak. But being a believer in truth, justice and the American way, steak will triumph over sizzle.”

Decision Based on Different Factors

I called Stu. He said his decision was based on several factors. First was the consumer resistance the winery experienced when it dropped the price of Cabernet from $14 for the ’79 to $12.50 for the ’80 (because he had much more of the 1980 wine). It made sales more difficult, although the wine was probably worth $14.

Secondly, he said, he chose to move up to $14 and not drop the price again for a lesser-quality vintage. Instead, he would release no wine from a lesser-quality vintage. He discards such a wine.

“We dumped the ‘86, sold it off,” he said. He pointed out that his ’84 and ’85 wines are both excellent, but that he and Charlie didn’t like their ’86 Cabernet very much, so Smith-Madrone will not have a wine from that vintage.

“Oh, it was OK, not a bad wine. But it wasn’t a $14 wine,” said Stu. “I guess we could have sold it for $10 and it would have made some people happy, but it would have been hard explaining it to people, why we were moving the price up and down.”

The fact is, pricing works precisely that way in Europe, and American buyers understand it when it happens: A 1984 Bordeaux sells for $20 and the 1985 from the same producer sells for $35. But they don’t like it when the pricing for a U.S. brand makes those kinds of moves.

Wine of the Week: 1988 Charles F. Shaw Gamay Beaujolais Nouveau ($6)--The first wine of the vintage is the traditional Nouveau, and this one is annually California’s most successful. Loaded with cranberry, strawberry and spice elements, including a trace of clove, it is great to serve slightly chilled with leftover turkey or stew or even with salmon. A number of other California producers make a Nouveau like this, including Robert Pecota and J. Pedroncelli. The Shaw is the closest to the French model.