Pricey Wines and Market Dynamics

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What is a wine worth and what is its pricing formula? Is it a measure of quality or market dynamics? Michael Fridjhon raises some interesting questions on wine prices and the Cape Wine Industry in South Africa

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Photo courtesy: www.wosa.co.za

In the past year or so the Cape wine industry has seen the release of a number of wines whose pricing sets them significantly apart from most of the other high-end products currently available in the trade. In a country where very acceptable commercial wine is priced at $3 per bottle, premium whites at $6 to $10 and highly reputed deluxe wines at $20 to $30, pitching a wine without a history or track record at $80 to $120 is as much a marketing statement as it is an assertion of quality.

The recent release of several such wines has woken the Cape wine industry from its traditional mid-winter slumber. Mike Ratcliffe – doubtless reflecting on what has been invested in building the Vilafonte brand (of which he is a shareholder) – tweeted that “greatness takes time. High price is not greatness. Greatness needs to be meaningful globally.”

Ross Sleet, head of sales at Cape Legends went further. “Greatness is earned and bestowed, not sought, bought or desired.” Ratcliffe added that the recent “tiny volume trend of ‘highly priced statement wines’ is not that positive for South Africa’s wine image”. Asked to clarify what constituted a “tiny” volume he said that a production smaller than 6,000 bottles was meaningless.

There’s more to this discussion than a couple of wine geeks arguing about who is – or isn’t – entitled to charge large amounts for low volume bottlings. Firstly, the concept of what constitutes a high price has been something of a moveable feast, locally and internationally. In the early 1980s Tim Hamilton Russell priced what in time became South Africa’s first trophy Chardonnay at roughly twice the price of a Château Mouton Rothschild of a comparable vintage. He sold every bottle, that is, with the trade begging and grovelling for more.

Today, Mouton costs 15 to 20 times more than the Hamilton Russell, yet the South African Walker Bay brand remains one of the deluxe icons of the local wine market. This poses the question of whether South Africa’s tolerance for premium wine prices is both significantly lower than it used to be and also lower than what is accepted in the international trade. Is there an invisible ceiling which constrains the pricing ambitions of local producers? Secondly, and perhaps more importantly, is it important to South Africans to know how a price is arrived at – in other words, how it is “justified”?

There is a story – which is not an urban myth – of two multi-millionaire wine estate owners taking a bet where the loser had to buy a case of the other’s wine “at cost price.” When the time came to settle, the victor produced an invoice for $3,000 – and substantiated the claim by showing that, taking all the expenses associated with running his property and his cellar into account, the true cost of the wine was over $250 per bottle.

Highlighting this chasm between the domestic and international trend is the rampant upward price movement of international trophy wines in the past few decades. The Mouton Rothschild sold for a profit to the proprietor in 1985 at roughly one three-hundredth of its cost to an importer in South Africa today, whereas the premium domestic wine market has tracked price increases of about one-tenth of that.

It’s clear that the business of producing a top Bordeaux red is more lucrative now than it was 30 years ago. It’s equally clear that the opposite appears true for South Africa’s top end producers – and the sudden flurry to release ultra-premium wines into the largely uncharted territory of R1000+ may be an attempt to correct this.

There are no obvious explanations for why Cape wines have not been able to match the price inflation of international deluxe wines. Kanonkop’s Johann Krige believes that the industry suffers from a “continent” and not merely a “country” discount. In his view South Africa is perceived by the outside world as being “somewhere in Africa” and that Africa is a continent with unscrupulous, corrupt politicians and dictators. Under the circumstances, buyers abroad do not believe that anything of real quality can come from Africa.

There’s no doubt that Africa – and with it South Africa – is not generally regarded as a source of high-end crafted products. Krige also says – and this is factually indisputable – that most of these new ultra-premium releases are boardroom constructs: with no sense of place, origin or site, and therefore no consistency over time.

In a market where there is a plenitude of fine wines at reasonable prices, the only incentive for paying over the top for something that is largely untried and untested is the snob value: buy now while there are still stocks about, and while what is on offer attributes social status to the purchaser. For this to happen the wine industry needs to attract more fashionistas – people for whom the brand value vastly exceeds the organoleptic benefit.

While in South Africa there are buyers of luxury car and premium spirit brands which are positioned in this manner, they are few in number and they have come to regard the codes of the wine world as too transient and arcane to warrant the investment. In the absence of an environment in which these stratospheric prices are the norm, there is nothing to support the price pretensions of the producers.

If you’re in the business of making these wines, you’re going to want to charge what the market will bear. There’s no point in trying to justify the amount (even if it is actually less than the real cost price) because, as far as the punter is concerned, unless he feels that the wine is worth it, he’s never going to buy it. Deluxe wine – like all high-end purchases – occupies its place on the pricing spectrum as a result of an implicit contract and a social conspiracy.

What makes a Jackson Pollock more valuable than a paint-splashed canvas is the agreement among a class of potential buyers that it is art, not rubbish. What sets the price is the point at which a willing buyer and a willing seller reach agreement. When it comes to trophy wines, the same rules apply.”

This article appeared first in Sommelier India Wine Magazine, Issue 5, 2015

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