Fluctuations in Wine Prices

(Originally published February 2002)

Following the American economy as a whole, the price of wines for sale at retail stores and restaurants has fluctuated remarkably during the past year, especially the past six months. So, Hanes will now discourse on this phenomenon and provide some insight into this process and how you, the consumer, play the most important role in this phenomenon.

The last few years have been fat times for the wine industry. Remember that Yahoo.com stock that made you feel rich two years ago? "Sure, let's hit that four-star restaurant!" "Hey, honey, want to fly to London for a long weekend?" Well, on the whole, you, the consumer, were willing to pay more and more for wine with each passing year. Shameless price increases with each successive vintage had negligible effect on whether or not wines moved off the shelves, be they from any grape or region of origin. As a result, more and more players got into the game, planting more acreage of wine vines and opening up new wineries, primarily in the ultra-premium end of the spectrum. Who cared about track records? With a (million) dollar(s) and a dream, you too could charge $80 for the first vintage of your micro-production Cabernet!

Then, whoops, that little something called "irrational exuberance" proved to more than just a catch phrase. In 2001, you lost money, Hanes lost money, your bookie lost money. The concept of limitless disposable income was disposed with. And with this downwards trend is going the over-leveraged dreams of many winemakers throughout the world. Just as more and more product was being produced and released, most of it over $25, the punch bowl was being taken away. (Yes, there is not a hackneyed cliché Hanes will not employ to make a point.) More product being produced combined with large yields in many prominent wine regions in multiple vintages created an excess of wines the likes of which has not been seen for some time.

Or did it? In 1999, this dude named Lewis Perdue wrote a book called "The Wrath of Grapes: The Coming Wine Industry Shakeout and How to Take Advantage of It" which predicted the "too much supply/not enough demand" scenario. He was pooh-poohed for a variety of reasons but not really for the reason Hanes found his argument faulty. Yes, over-production did come to pass. And it is still coming to pass (Hanes sees industry articles almost every day with headlines like "wine glut fear after record harvest"). But what few folks wanted to notice was how personal and emotional wine appreciation becomes for so many people. All Hanes needed as evidence of this folly was his five-digit Visa bill. Did he need all this wine? No! Could he afford all this wine? No! Did he lustfully acquire all this wine and the attendant debt? Yes! Wine is a luxury item that allows its possessor to show not only a measure of cultural refinement but additionally brings with it an attractive mixture of intellectual cachet and hedonistic abandon. A growing number of people of above-average income have learned to care about the arcana of wine, and once you impress a few friends or co-workers with your prowess in picking and serving wines, it becomes difficult to resist the wine siren's song for long. Every dinner party or night out becomes an opportunity to show off under the guise of simply providing the most jovial atmosphere and perfectly complemented culinary experience possible. "So that's what we're having to eat? Let's try this Condrieu. Or maybe this white Burgundy might have more stuffing..." Continuing to purchase and serve the best wines seems an immediately pleasurable and easy path to take, even as the second BMW is sold off in favor of an used Honda or you vacation this year in Puerto Rico rather than take the family skiing in Switzerland. The wine glut has proved to have a split personality to say the least.

Whether or not the wine glut is real or not has a lot to do with a variety of factors, among them where you live, how you shop for wine, and how you perceive a "buying opportunity." And it also has to do with the wealth effect and how rich you feel or how optimistic you are about your financial picture over the next 2-3 years. But let's also remember that there were plenty of millionaires around during the Great Depression who bought up lots of stuff for ten cents on the dollar and these sort of people exist today too.

The laws of supply and demand are fairly easy to grasp. If supply goes up while demand goes down, prices drop. If supply goes down as demand goes up, prices rise. Whether supply of wine is great or not has a lot to do with where you live because not all wines are sold in all markets. Some Austrian Rieslings don't make it to Omaha while other Australian Chardonnays get exposure in all markets. This happens due to limited supply and/or distributor marketing plans. The biggest markets (New York, San Francisco, Los Angeles, Chicago, etc.) have the most wine stores and restaurants and they inevitably get a piece of every pie. If you live in one of these places chances are there is plenty of product to be had. The question, then, is how has the recent wine glut been felt in these different markets?

Big cities get most of the "cult" wines, the lion's share going to fancy restaurants. As dining out has declined and restaurants found themselves with less cash to spend on wine, more of these cult or hard to find wines have been allocated to retail stores. However, while it is great for a retailer to get offered some of these wines for the first time, this ego rub can only produce a positive cash flow if the end customer (i.e., you) is there to buy it. Here in New York City, the split personality of the wine glut is seen most clearly. We don't have "bargain stores" such as Costco or retailers who specialize in selling close out product at very low prices. Retail stores still pay top wholesale prices regardless of the economy's state. The retailer then has to roll the dice and see if his customer base will buy up that extra case of Latour or Dominus he has just been offered. What does the retailer see? Regular customers who never flinched at spending $50 on a bottle buying more $20 bottles. But, at the same time, a stranger comes in and drops $5,000 in one purchase. How to stock the store rationally in such an environment? Uhh, you can't. So, many retailers have hoped for the best and bought more wine than financial prudence may suggest, hoping that Mr. $5K walks back in soon.

If this doesn't come to pass, they have a sale. These are rarely great sales since the retailer still overpaid to begin with and doesn't want to actually lose money. They offer 10%, 15%, maybe 20% off at best, bringing a $60 bottle of California Chardonnay down to $48. What a bargain! So, the product sits longer on the shelves, tying up capital. But, wait, Hanes! Didn't you say that there were all these ego maniac wine whores out there? If their favorite Burgundy or Spanish cult wine is now on the shelves and not hidden in the "back room" for the best customers, how can they resist?

Well, they resist through their buying habits. The new primary purchasing vehicle is the internet. So many wine retailers have sprung up that the competition this creates gets fierce, with internet price comparison a snap for the consumer. If your local store has that Californian Chardonnay for $60 and then puts it on sale for $48, wait, I found this website based in Santa Rosa that has it for $35, which still is cheaper even with the shipping. Or here's a micro-production Australian Shiraz for auction in Australia and they're practically giving it away! Fewer consumers seem to be currying favor with a small group of local retailers, instead searching the world's entire retailer base in order to knock off a dollar or two on each bottle purchased.

The wine availability trickle down effect just mentioned aids this trend because, say, a NYC restaurant passes on a case of Bryant Family Cabernet. It then gets offered to a NYC retailer who just bought a case of mega-expensive Harlan Cabernet and a case of Colgin Cabernet, meaning he has to pass too due to lack of funds. So, somehow, more hard to find wines trickle through the pipeline and end up being offered to that wine store in Omaha. And he has a website too! And maybe he overreached and has this $4,500 case of California Cabernet sucking up his capital so he can't pay his rent. So, on sale it goes, on the website for the world to see, and perhaps for a cheaper sale price than any NYC store would have offered had they bought the wine in the first place.

Oh, the wine whores are there, they just have jacked into the matrix and now buy their wine from the four corners of the globe, becoming best buddies with the UPS delivery guy instead of the wine store owner on the corner. Brand loyalty being a two-way street, more and more customers are seeking out both new buying channels and new wines to purchase, passing on old favorite wines as their prices spiral higher. Hanes knows few wine lovers who have stopped buying. They just have changed their habits. And there still seems to be enough new wine appreciators to fill the void left by the erstwhile customers who moved on because of price increases -- when one has heard raves about a certain wine for years without ever having access to it, and it suddenly becomes available to you, the temptation is too much to resist. Even if these new guys only buy a vintage or two before moving on because of the prohibitive price, there still seems to be plenty of other folks waiting to take their place and keep the product moving.

It appears the only rational thing to do is kill anyone who now shows an interest in learning about wine! Since some people tell Hanes this is against the law, he must conclude that demand is not going to abate anytime soon and as a result prices will at best stabilize where they are and not drop very much at all. Sure, supply is increasing each day. But so is the number of wine lovers, and so many of them will graduate to wine whore status too, unable to say no when offered some wine gem for their belly or collection.

How does one shop wisely in this environment? The internet remains your best bet, with hundreds of wine purveyors selling their wares. Locally, visit as many stores as you can to catch sales and try to stock up then. Otherwise, if the store can be trusted to have kept the wine in good condition, look for recent but not the latest vintages. For example, the 1999 California Cabernets are currently being released meaning the 1998s and whatever 1997s may be left need to be moved to free up space and capital. Retailers so far seem to be resisting heavy discounting, maybe because they overpaid in the first place, and even selling them at wholesale cost wouldn't seem like a deal to their customers. But cracks in the wall should pop up here and there and if you keep hunting around you will find them. The wholesalers also seem to be trying to clean up their storerooms by selling some of their recent but not latest vintages at discount to retailers. This savings should be in turn passed on to the consumer -- but don't count on it! Being over-leveraged means that the retailer still needs that higher margin to pay those bills. So, either you keep those margins high and gamble that the wine whores will still buy at the higher prices (Mr. 5K, where are you?!), or you lose and eventually go out of business.

Hanes's bet is that, on the whole, the wholesalers and retailers will win and the consumer will cave into lust and buy. It's human nature to spoil oneself and when you hear your buddy or co-worker talk about this FANTASTIC WINE YOU GOTTA TRY it's hard to take the broad perspective and say no. Eventually, the lesser quality, over-hyped expensive wines will be foisted off on someone and the supply pipeline cleaned up a bit. The deadly duo of relentless hype and natural acquisitiveness remains on the seller's side. The great thing about wine is that there is always a new vintage on the horizon and someone, somewhere in the world is turning out an irresistibly fabulous product.

Wine lovers of the world, we have met the enemy and it is us.