Has the wine inflation beast been slain?
“You think Champagne prices have risen a lot already? Just wait til the holidays when the prices will go up again.”
That’s what a leading NYC sommelier told me a few months ago. When I heard it I went out and bought two bottles of champagne as a feeble hedge against the impending price rise. (But I drank them already though!)
Prices of many wines have indeed gone up. Last spring, I managed to find in my office the 2007 and 2008 catalogs of the same importer’s tasting. Prices were higher across the board, ranging 15 percent and went up as high as 40 percent. I should have alerted Ben Bernanke since that is several times the overall rate of inflation!
But recent developments have me wondering if the sommelier’s prophecy might still be true. The dollar surged six percent against the euro last month. If it strengthens a fraction more, the greenback will be positive for the year, quite a change from the steady drumbeat of declines since the heady days of 2002.
That currency reversal means that wine importers–like airlines who now have tacked on all sorts of fees in the name of higher oil–now have less of a justification for higher prices. (Oil, which affects both imports and domestic wine, has also been turned around, now aiming for $100 a barrel down from $147.) Champagne may well be sui generis since the global thirst for bubbly seems to know no bounds. But what about reasonably priced imports? The vintages that will be landing on the market have been mixed: in Bordeaux, the 2007 vintage was weak but in Germany it was superb.
Will wine prices actually go down? Probably not. But markets tend to operate on a continuum of greed and fear. Maybe some importers are just that little bit afraid that the sorry state of the economy might cause consumers to trade down for cheaper bottles so they may hold the line on price increases (or hedge their risk if they think the current dollar rally is but a head fake). So maybe we’ll see no more price increases this year, at least for imported wines under $30. This drinker can but hope.
On September 3rd, 2008 at 7:30 am ,Michael wrote:
I have given much though to this recently and I think that you are correct. In fact, I would say that wine prices are likely to go down. If oil demand stays down and the Euro keeps losing on the dollar prices should surely slide. Producers will be reluctant to dial back their own extreme prices at first, but just wait until sales slump. Other factors to consider are that Asia probably won’t – at least yet – have the effect on demand at all levels that it may be having on blue-chips, and particularly on first growth bordeaux. But most of all I think that certain parts of the wine industry have grown on a bubble, one that could pop.
Surely the economic predictions out of Europe point to the Euro sliding to a more reasonable place against the old greenback, as European markets suffer their own – albeit less severe – housing and credit crunches. Really I think that there is no way the Euro could hold its current rate against the dollar. Let’s see now who bets the same way. I surely hope to see even a five dollar drop in wines at the 25 – 30 dollar level, which would translate into bringing a lot more quality wines into the realm of reasonable, as in not requiring an occasion. Either way, I’m excited to see how it plays out.
On September 3rd, 2008 at 12:25 pm ,Lee wrote:
As soon as I see the prices I pay for barrels, bottles, corks, labels and shipping go down, so will my wine prices!
I don’t disagree with the data in your post, but the drawn-out nature of the production schedule will not result in lower costs of production at the winery. Keep in mind, I did not mention the increased costs we’ve incurred to grow the grapes.
Larger wineries with large inventories may be more price-reactive, but don’t count on us small guys discounting any time soon.
On September 3rd, 2008 at 3:00 pm ,Vintuba wrote:
The thing to keep in mind here is that there is a big lag time between when the dollar gains or the euro losses value and the time that prices adjust. Importers place their orders and commit to prices not on a just in time basis but have to do so 6-12 months in advance of when the wine hits the retail shelves, so I think that saying the importer is to blame for higher prices or not passing on the saving to the consumer is not entirely true. I bet that if you talk to an importer you would find that they are as frustrated by the situation as the end consumer is, because higher prices mean a slow down in demand of import wines compared to domestic brands, and ultimately lead to lower profits.
The producers overseas are also not entirely to blame because they are at the mercy of transportation costs and currency fluctuations. Do we blame the dairy farmer because a gallon of milk now costs $5? We need to realize that some of these producers suffer greatly because their product is no longer competitive on the US market.
Producers in the USA have seen the cost for barrels, winemaking equipment and packaging supplies all rise because of transportation related cost and the fall in the value of the US dollar. One would not see a drop in prices associated with a rise in the value of the dollar or the drop in transportation for a at least a couple of vintages.
In the end the consumer must bare the biggest blame because it is the price that a consumer is willing to pay that sets the standard. As long as we are willing to overpay for certain wines, those wines will continue to be priced at that level and inch higher until the we (the consumer) no longer purchases these wines at which time the producer, importer, retailer will be forced to lower prices.
On September 3rd, 2008 at 4:37 pm ,hamishwm wrote:
I’d agree about the lag times for costings and currency fluctuations. These last 18 months have been a nightmare to plan wine lists and try to offer customers a consistent price. In the UK we have had the fuel surcharges on everything, the dry goods increases from the wineries and then on top of that big rises in taxation from the government. The background global economic uncertainty has not helped stability!
My company is exposed for the £ v € and the £ v the Aus $. When currencies are moving by 10-15% against the market margins become squeezed….if they exist at all. However I do not blame the consumer as Vintuba does. I really do not understand the logic in this blame. These issues have not been unique to the wine trade, we have just got to work through this situation.
On September 3rd, 2008 at 6:48 pm ,vintuba wrote:
Hamishwm,
What I meant by my “In the end the consumer must bare the biggest blame” is that pricing in any market is 9 times out of 10 dictated by what the consumer is willing to pay, hence if a consumer is willing to pay $20 for a bottle of Rosé from a certain producer, that is what the wine will be priced at, that is how free market economics works. Since wine is a discretionary product if we (the consumer) feel a wine is priced to high we will refuse to purchase it and ultimately the retailer will be forced to price it at lower level to move the inventory. This effect will then trickle down to the producer who will be forced to evaluate their pricing structure and margin levels.
Remember we vote with our pocketbooks!
On September 3rd, 2008 at 10:07 pm ,Nicolas wrote:
On our side we have seen our cost of doing business going through the roof over the past two years. We have no choice but to consider a price increase. This is not greed because we do not make money nor have positive cash flow, it is a question of survival. Not all wineries have the luxury to move price up and down and still make enough money to keep the private jet!
On September 4th, 2008 at 1:33 am ,hamishwm wrote:
Nicolas. I was disappointed to hear that you guys at Pacific Rim only have one Private Jet. Hope it runs on bioethanol rather than that expensive gas!
Vintuba. OK thanks for the explanation on blaming the consumer. I thought you were on slippery ground there. I agree that we are open to free market economics. However the skill of a winery or agent or distributor or retailer is justifying why wine X is better than wine Y (and $10 more expensive). Yes wine is a discretionary product but it is not just a simple commodity. The Rothschilds, the Antinoris, the Mondavis and DRC are not just selling wine, they are selling aspirational quality wines that they want the consumer to acknowledge (by location, by point of difference, by heritage, by quality and also by high price). These guys are continually marketing themselves and their wines to elevate in the consumers mind the idea that these wines are different and so much better than their next door neighbors. To get back to the original thread any price increases can be delivered as long as they are explained and sensibly passed on. Exchange rates and higher dry goods costs and fuel hikes are not exclusive to any one winery. They are unfortunately universal at the moment. Yes realistic margins have to be maintained…without greed… but only to ensure that the winery,agent, retailer will be in business next year.
On September 4th, 2008 at 7:31 am ,Michael wrote:
The ironic thing here is that I don’t think this post was, for the most part, designed to indict winemakers, but rather to point out a general economic trend that has resulted in higher prices across the board. And I am not even really sure that wine prices have risen as much as the prices of many other items. My grocery bills have gone through the roof and all the while I have cut out many luxuries. But the problem with “dollar voting” on wine is, snobbish or not, I have found that the more I drink wine, the harder it is for me to drop below a certain qualitative level. I buy in bulk, I look for deals, but frankly I’d rather drink a cocktail than poorer quality wine. So the dollar voting model risks losing wine drinkers altogether, particularly new ones and those that are beginning to enjoy wine but are not yet committed. When I speak of hope for change, I mean this more in terms of across-the-board change, even if that does take time, so that gasoline gets a bit cheaper, which makes all other products cheaper, which makes shipping wine cheaper, harvesting and working the land (in some places) cheaper, energy bills at wineries cheaper, and yes, even barrels, corks, and bottles cheaper.
No, I don’t expect to see wine at 1999 prices next week, but it would be nice to see a bit of a reduction in the price by 2010 or 2011, and it gives me another reason to be optimistic about the economy.
As for ire at winemakers, I think that most people aren’t mad at small producers, nor even large producers of inexpensive wine, but there is some real resentment in the wine world with the producers of many luxury wines who have astronomically jacked prices. I have had discussions with some of these men and women, who cite everything from vineyard improvement to asian demand as a justification. But the problem is that a 1000 dollar bottle of first growth is an insult to everyone who even might buy bordeaux. Even a few years ago, when I first got into wine, a most of the world’s “luxury” wines were actually available to most wine lovers as an occasional splurge, but no more. The problem isn’t that I can’t buy first growth bordeaux, nor cult napa cabs, the problem is that it makes the whole industry seem disgustingly elitist to those who are first paying attention to wine.
So yes, I hope to see prices fall, and no, I don’t mean that as an insult.