High Prices Can Hurt Everyone

(Originally published July/August 2008)

The suck-ass condition of the U.S. dollar against most foreign currencies means prices for imported wines are higher than they might be if the dollar were stronger. Luckily, later this year the American populace will elect a new President who will then prove equally incapable of managing the economy. Whew. Until then high falutin’ drunks will just have to pay more for their wine. Accepting this premise, an interesting question is to then ask whom in the wine biz is getting hurt by the weak dollar.

As anyone who works in, or pays attention to, the wine industry knows, it’s arguably more competitive than ever. Even allowing for a certain amount of wholesaler consolidation, if not because of it, the most competitive arena is between individual wines for shelf or wine list space and overall market share. Some wines have a sustainable track record of popularity such that they will sell through almost regardless of price increase. Maybe at a slower pace or spread among more customers buying fewer bottles, but they will sell through. Or the production quantity is small enough that once initially gained, maintaining the sliver of market share required is not that large of an ongoing concern. However, there’s no lack of wine saturating the market and fighting for its life just about every day. How are these wines surviving?

Wholesalers, retailers, restaurants all have witnessed increases in underlying costs beyond the expense of the fermented grape juice product itself. Rent, electricity, salaries, insurance and similar items go up, up, up. As in any business, one normal course of action is to simply pass along increasing expenses down the chain. Producer to importer to distributor to retailer to end customer (or auction house!). If the wine industry was monopolistic each link in the chain would just have to take the price increases with a smile. Wait, it is monopolistic! Or almost so in many places. Which gets us closer to the heart of the question posed. Who in the chain is feeling the most pain because of the weak dollar and poor American economy?

First, let’s be certain to note that this screed is mainly about imported wines. As per usual, Hanes is focusing on what is called in the business the “super-premium” (retailing roughly for $8 to $14 USD) and above categories of wines (a small segment of the overall market). If you are reading this, you are one of a very few interested in these wines. Anyway, if you’re thinking that the weak dollar abroad was an opportunity for domestic producers to steal market share away from the foreigners, you’re more or less alone. Smaller domestic producers (arbitrarily, let’s say under 2,500 cases made per year) have fixed and/or rising expenses themselves and play in even more rarefied air than “super-premium” and their customers are less interested in price than points. The larger domestic producers (a) have a fairly stable market share and would rather maintain or increase profit margin than hold or lower prices as import prices rise or (b) are closer to being international conglomerates with sufficient profit streams coming from foreign held properties such that the overall corporate bottom line does not mandate the domestic entities in the portfolio fighting too hard for increased market share.

Add in the fact that domestic wines are branded and labeled in ways more familiar to the majority of the American public and thus have a natural advantage. There’s still plenty of “tweener” producers which Hanes would think might make a more concerted effort to grab market share via price drops while the foreign competition has been hobbled – if for no other reason than to become a prettier acquisition target – but few seem to be making these moves. If the prices of bulk grapes are too high to reduce end prices to the consumer, the domestic producers must have other good reasons to not spend their money to chase wider market share. Maybe it’s because the price of a Lexus keeps going up.

Let’s go back to the beginning of the sales chain. As has always been the case, regardless of the state of the American dollar and economy, the price of imported wines vary greatly among countries or origin. Duh. Same goes for the regions within countries, sub-regions, vineyards, etcetera. Those regions and producers deemed as the best fetch the highest prices at the starting gate. Unless greed, ego or a new oak barrel habit obtains, the weak dollar shouldn’t cause producers to raise prices much. The local costs of production are in a steady state. There should be rather a slow rise in prices over time to account for general inflation, replanting, vineyard acquisition, kids going to college, stuff like that. Contrary to the belief of many, it’s not the producers who are making the majority of the profit in the industry, particularly so for imported wines. They are just selling at whatever level international exchange rate the relevant currencies are at.

Importers and distributors (not always the same party) make many decisions in economic climates such as that of today. If you just spent the last 3-5 years sweating to carve out a sustainable market share for a French Côtes-du-Rhône or Argentinean Malbec or Australian Riesling you may decide to take a hit on your own profit margin to keep the retail price steady and not drive off fickle, price conscious end buyers. This tends to happen a lot with smaller importers and distributors who traffic in niche producers and more esoteric wines. If a line of wine has a great deal of brand awareness built with the buying public, a one to three dollar increase based off of a start point between $8 to $12 will probably be absorbed by the buyer, whose interest in a “known quantity” trumps saving a buck.

Large scale production brands can cap price increases in great part by squeezing the grape growers and wineries. “Central Coast” or “Southeastern Australia” bottlings get their grapes from anywhere they want within these loosely defined areas. And if X wants A for the grapes while new guy Y only wants B for the grapes, adios to X. Loyalty isn’t just a river in Egypt. Or something like that.

Smaller importers and distributors may not always have this luxury. Larger guys can be somewhat cavalier in maintaining producer relationships, the distributor knows that they have the clout to either move the product or if the producer gets pissed or feels slighted they can be replaced. Littler outfits have to continuously be appeasing two groups, the producers and the end buyers. This is a tricky maneuver to say the least. The need to hold prices steady during an economic downturn will usually mean that the importer or distributor fares the worst out of the entire production to consumption chain. You need to keep the small, artisanal producers solvent while at the same time if you raise the wholesale prices too much the stores or restaurants won’t buy and market share erodes. It can take a long time, years, to place a product in the market but only one release cycle to be forgotten. Them’s the facts.

Which leads to the point which hits home the closest with you, the buying public. If you prefer to purchase wines from smaller, more esoteric producers, should you cheer for competitive battles to retain shelf space? Does the battle for underpricing the competition help you more or less, especially in the longer term?

Hanes is of two minds here. It happens when you suffer from multiple personality disorder. As usual, he tries to remain dispassionately objective and assess facts and not emotional attachments. Natch. First, smaller importers and distributors who offer diversity of product not found with their larger brethren will be hurt financially if they try to hold the line on prices. If they bought the 2006 vintage at Price X and the 2007 vintage is now X+1 or X+2 they can either pass that along or swallow it. If they do too much of the latter they do indeed risk financial insolvency themselves. Bills must be paid, even by boutique wine importers. Conversely, raising prices doesn’t endear oneself to retail store wine buyers nor restaurant beverage directors. (Plus, it is worth passing consideration that even if the distributors hold the line it does not guarantee the avaricious retailer won’t mark up their shelf prices as if the retailer paid more to the wholesaler than they in fact did.)

So, if the wines you love are still as cheap as ever someone is paying a steep price for your $10.99 bottle of Muscadet. How long can this go on before the importer goes belly up? Depends on the importer. But there is substantial risk. So, the rationally self-interested wine buyer may decide that paying a slightly higher price is worth it because in the longer term it keeps the pipeline unbroken and open. Better to pay $14.99 for the Muscadet than have no Muscadet at all.

As in almost any industry, there’s little doubt that an economic downturn hurts the little guy more than the big guy (cf. Bear Stearns or Fannie Mae). It’s no different in wine. That said, there’s something Hanes has seen in many years of wine-fueled drunken frenzies. And it’s that there’s never a lack of new players trying to get into the game. It’s a sad and unfortunate fact, for a whole host of reasons. A dollar and a dream, baby, a dollar and a dream. As a result, while it may be the case that the importer you know and trust may go under, the producers in their portfolio will likely be represented in your market soon enough by some eager new guy. It’s bad if you are personal friends with the first guy but it still remains the case that, even as Hanes types, there are people on the sidelines with a fervent desire and a financial backer waiting to snatch away any loose high quality product from the extant players. If the wine is good and has a following, it won’t be unrepresented for long. This is a very cyclical business.

In the age of the internet and e-commerce and all that jazz, we’re more or less in a post-romantic epoch. Loyalty remains a laudable concept and one that even the scoundrel Hanes adheres to — once in awhile. But when the world is running down, you make the best of what’s still around and Hanes ain’t paying no $40 for a Nero d’Avola, no matter how good. Hey, how many of you would buy a bottle via the internet to save $5 rather than buy it down at the local wine store? We’re all “winehunters” galore. There are legitimate fears that smaller distributors get hurt more than large distributors when the economy sucks. But if the wine buying public’s paychecks are shrinking too, then it’s just time to sit back and watch ole wonderful capitalism at work. Closeouts and liquidation sales stink for the selling party but for the buyers it’s a rare moment of relief. Close your eyes, minimize the emotional component of wine buying, and it’s just like gas is $2.00 a gallon again…