The pricing decision

What is a wine worth? Any wine? That is probably the single most challenging decision that any winery faces, where to price their wine to keep the winery as a whole financially viable, while also ensuring that wine consumers will find value in the bottle. The decision for wineries is far more daunting that it is for customers. After all for customers it is pretty straight forward. I pay “$X” for a bottle I drink it and our palates and preferences ultimately tell us it is worth it or not.

For retailers and restaurants it is simpler too. Especially here in Idaho where all entities whether it be a big box store a small retail wine shop or a restaurant we all pay the same price at the wholesale level as dictated by the state’s liquor law. For retailers the standard markup over wholesale is 30 percent, for restaurants and other businesses selling wine to be consumed on the premises the markup varies from 100 percent to 200 percent over wholesale to cover all that goes into running a restaurant or bar. By the glass pricing is handled slightly differently with the wholesale cost of the bottle being covered by the per glass price. At this retail level all is fairly tightly constrained by competitive pressure and the aforementioned state pricing rules.

For wineries and winemakers though they have a long list of factors to consider from supply and demand, to the decisions of competitors. From the segment of the market they would like to compete in to their own financial circumstances of their business. If you price your wine to high you bring more competition into your “market” and risk disappointing the buyers of your “bottle.” If you price your wine too low you sell out too quickly and leave profit on the table, and also set an unrealistic expectation in your customer’s minds for the future.

Raw materials costs drive much of the equation. While glass bottles, corks, labels and the like are fairly standard with some exceptions for more elaborate wine packaging, wine grape prices are more volatile. In a year with a small crop there can be fierce competition for the best grapes and most sought after varietals. In a year with a large crop there is ample supply but competition still exists as the perception of those years is higher so wineries want to make more wine anticipating being able to sell more wine. All of these factors make long term grape contracts and solid relationships with grape growers more important than almost anything.

Currently we see two risks and two mistakes being made by domestic wineries. In the super premium category of the market we frequently notice producers of $100 plus bottles making the assumption, incorrect in our opinion, that a wine can command the same price regardless of how much the winery makes. While quality is the major component that drives wines priced at this ultra high level, scarcity is a close second. We have seen many wineries earn well deserved accolades for their wine and demand quickly follows but many then make the mistaken assumption that by making 2 or 3 or 4 times as much wine they will be able to earn the same price. It just doesn’t work that way. If a wine becomes so readily available you can’t expect the same super high price, consumers lose interest when they start to see a previously hard to get wine everywhere.

The second common mistake we see is wineries basing their pricing off what they need to earn to keep the winery viable with no eye to the competition. This is especially true right now with wines from the Northwest. Between California and the “old world” wineries of Europe we are seeing many wonderful wines coming in at prices far better than those from our neighbors to the west. The wines from Washington and Oregon are delicious world class wines to be sure but the prices are reaching levels that are simply not sustainable given the competition from other places that are also very good at their craft.

The pricing decision is likely the most difficult one that a winery owner makes; it takes tremendous effort and acumen to get it right. Ultimately consumers are the best arbiters of those choices as they vote with their palates. We would continue to urge caution on our nearly local winemakers as they strive to find that pricing sweet spot as we find many assuming their product is worth more than consumers are likely to pay.

If there is a topic you would like to read about or if you have questions on wine, you can email George@thedinnerpartyshop.com, or make suggestions by contacting the Healthy Community section at the Coeur d’Alene Press.

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George Balling is co-owner (with his wife Mary Lancaster) of the dinner party, a wine and table top décor shop located by Costco in Coeur d’Alene. George worked as a judge in many wine competitions, and his articles are published around the country. You can learn more about the dinner party at www.thedinnerpartyshop.com. Be sure and check out our weekly blog at www.thedinnerpartyshop.com/home/blog-2. You can get all of these articles as well as other great wine tips by friending us on Facebook at www.facebook.com/#!/dinnerpartyshop.