Why are some wines more expensive than others?

The other week Brian Croser released Petaluma’s ‘Tiers’ Chardonnay. It is from a single vineyard, the vineyard which, according to Croser, contributes most to the depth and richness of Petaluma’s excellent chardonnay. It is a wonderful, sumptuous drink with a clarity and brightness of fruit that I simply adore and a length of flavour only found in wines of true greatness. At $115 a bottle I also believe it to be Australia’s most expensive white wine.

It goes without saying that most readers of this magazine would not pay $115 for a bottle of Australian chardonnay, but Croser isn’t worried. Of the 300 cases made of this wine, only 150 are allocated for Australia. Like Croser, I expect these to sell out in nanoseconds.

In other words, there are enough of us who reckon that it’s entirely a fair cop for Croser to ask $115 for a bottle of chardonnay. He’s posed the proposition and certain amongst us will have accepted it, entirely on face value, no questions asked. Provided the second vintage of the wine sells out as strongly as I expect this one to do, the price has been set and accepted in the marketplace. $115 will have become the standard price for Petaluma Tiers Chardonnay.

Yet in the same week a leading Sydney retailer was discounting what might now become known as the ‘standard’ Petaluma Chardonnay for 15 less than its ‘listed’ retail price of $39 per bottle. Croser has a lot more of this wine to sell than the Tiers and it’s already possible that the public may come to believe that some of the lustre traditionally associated with this wine has been transferred to its superior and more expensive sibling. It’s not a view I share, but that’s not the issue. Once you discount the price of a wine, that becomes the price people expect to pay for it, like it or not.

So, with one Petaluma chardonnay priced at $33 and another at $115, what is the market supposed to think? Is the Tiers wine nearly four times the quality of the ‘standard’? Has Croser compromised the quality of his standard wine to create the Tiers? Not at all, he says, and with this I entirely agree. So where is the logic? How can Croser sell out of his budget-bursting record-breaking reserve wine, whose price breaks ground even Penfolds did not dare to enter with the Yattarna, while his flagship wine is simultaneously sold at reduced prices? Again, where is the logic?

The point is as simple as it is inescapable. There is nothing logical about the price of wine other than that it is the purest imaginable expression of a free market. Dismiss entirely any thoughts you may harbour about a clear relationship between price and quality. There is such a relationship, but it meanders its way through a minefield so littered with contradictions that that to walk through it unaided is a journey of great peril. For that reason alone, a dollar spent on wine education is perhaps the wisest investment a wine drinker could ever make.

So then, why are some wines more expensive than others?

How big companies price their wines

Pretty low, according to Mildara Blass’ chief executive Ray King, who believes consumers benefit from the low returns traditionally made by wine producers. ‘Some companies take the approach that they’ll make the best possible wines for the lowest possible price while others, recognising that the industry is extremely capital intensive, price their wines relatively high to achieve a proper return on their investment’, he says. ‘And it’s fortunate for the consumer that the pendulum is very much to the former.’

The bulk of Australian wine is made and marketed by our four largest wine companies, Southcorp Wines, Orlando Wyndham, BRL Hardy and Mildara Blass. To a large extent, each provides the market with a large range of choices, such as variety, region, image and presentation, each offered in a step-by-step sequence of pricing barriers. Imagine a relatively flat pyramid whose vertical axis is price and whose horizontal axis is volume, and you get the picture. A more accurate depiction would involve a stepped pyramid, with each discrete pricing segment representing a separate step upwards on the pyramid’s exterior. Smaller and medium-sized wine companies can price more flexibly, but they still tend to operate the same way.

It’s well known that before it was purchased by Fosters Brewing Ltd, Mildara Blass was producing a better return on investment than its competitors. While the ROI as a percentage of funds employed for the industry as a whole five to six years ago was around 5, Mildara Blass was returning 13-14. At that time Ray King saw that the only way to made an adequate return was to focus on the top 25 of the market. ‘The higher you get, the smaller the market becomes’, he says. ‘We needed to sell our wines for something more than $10 a bottle. On average we now sell for around $12, against a national average of $7-8. Furthermore, we need to give the consumer a $12 bottle of wine as good as another priced at $15 for it to work.’

Over the last five years the wine industry has clearly focused more of its attention towards the top end of the market than ever before, with the result that its overall return on investment has dramatically improved to around 10-11. Now that more wine makers have discovered for themselves that the best profits are made by adding value, they are constantly seeking to stretch the pyramid ever higher. The question is, how high can it go? It’s Ray King’s belief that some time in the future, later rather than sooner, the industry will return to over-supply, which will put a strong downward pressure on prices. That’s why he’s happy not to have too many wines in the Mildara Blass folio priced over $40 and why he’s content just to be well represented through the bulk of the top 25.

‘I’m not surprised by the extent to which consumers have absorbed the price increases in wine, but it can’t go on forever’, he says. ‘Recently I looked at what I wrote in our company’s 1991 Annual Report and was quite shocked to read some of the depressing things I said there. But at that time retailers who were normally extremely sensitive to high prices had simply become paranoid. Wines then priced at $14 and above, about $20 in today’s terms, virtually disappeared from the shelves and a number of companies just disappeared in their entirity.

‘The same will occur the next time. While we’re presently in a period of prosperity and buoyant consumer demand, expensive wines are going to be smashed when the downturn hits’, he predicts.

The costs they have to bear

Strangely enough, says winemaking consultant Gary Baldwin, the actual winemaking costs are themselves the smallest significant part of the cost of most bottles of wine. The greatest expense incurred by most wine companies, he suggests, is in sales and marketing. Then, in order of importance, is the cost or value of grapes, packaging and bottling, and finally winemaking itself.

Since they buy so much fruit from contracted growers, the larger companies are critically aware of how the cost of grapes affects their profitability. According to Nick Blair, Orlando Wyndham’s Marketing Manager for Wine, during a three-year period in the early 1990s grape prices increased on a compound basis by over 100, and the cost of fruit represents about a third of the cost of a bottle of wine. Sooner or later the wine makers, being manufacturers as well as primary producers, simply have to pass this cost increase to their buyers.

Furthermore, the incredible extent of this country’s new plantings has imposed unprecedented pressure on our available winemaking resources which are now, in a word, inadequate for the task now at hand. So, built into the price of a bottle of wine must be sufficient profit for the larger and medium-sized companies to continue to invest more in capital expansion. To some extent, what you invest in your wine purchases today is underwriting your drinking future.

The other major cost facing all makers but especially the larger ones, is the cost of holding stock until release. Large stocks of cellared wines tie up an extraordinary amount of capital and involve the opportunity cost of locking those monies away. Reds are usually kept before release for two years, top sparkling wines for three. It costs Domaine Chandon more to fund its stock holdings than it did to build its splendid winery and plant its vineyards. And then, if it’s stored in the winery – in barrel or in bottle – come June 30th, wine is perceived as a company asset and taxed accordingly. Little wonder that so few Australian wineries release their reds with hardly any maturity at all. Who can afford to?

And then, once the wine is put to market, it is taxed at wholesale level to the tune of 41. So, for a wine which retails for around $35 and has a wholesale price per case of $200, a staggering $82 is skimmed off to government. Meanwhile, if this wine is a mature red, it will have attracted tax several times already during its making and maturation. Beginning to see why returns on wine investment have been so low? And I’m not even going to mention how many years it takes for a vineyard to break even!

Are prices really affected by costs?

To a point, but not really. Rick Kinzbrunner agrees there are plenty of people who make wine at more or less at the same cost as he does whose wines aren’t as expensive as Giaconda. Grange couldn’t cost much more to make and to grow than Bin 707, according to Gary Baldwin, yet Penfolds has only recently increased Bin 707’s price to around $70 per bottle. Sure, it costs more to manage low-yielding vineyards and to compensate for the loss of a larger crop, factors which should both be reflected in the price of wine. But most wine companies that produce the so-called ‘ultra-premium’ wine from mature, low-yielding vineyards paid for those vineyards long ago.

The decline of the Australian dollar against the American and European currencies has driven up the cost of oak by perhaps around 20. While this will unquestionably account for a small price increase to be passed on to consumers, it should not affect the relative prices of our premium wines.

It’s a fair thing for makers of specific wines like pinot noir to charge a premium to cover the additional hands-on attention they demand in the winery. But since it’s the same for every maker, these costs effectively cancel each other out and if singled out, should not make one top pinot more expensive than another.

Yet some still remain many times more expensive than their competitors, simply because some makers either pin excessive faith in their own publicity while others, like Bass Phillip’s Phillip Jones, will go to any extreme to maintain their quality. Jones has found himself hallucinating while sorting individual pinot noir grapes on a brightly-lit stainless steel table late at night.

At Fromm’s in Marlborough, New Zealand, four vineyard workers are basically on permanent assignment to make sure bunches are positioned and leaves are thinned correctly. Each year at Philip Island, Victoria, the Lance family put a net over their entire vineyard, all five acres of it! It’s only natural that these extremes may make a wine more expensive.

So, why do they charge the prices they do?

At the end of the day, given that in their categories, small, medium-sized and large wine companies are faced with broadly similar cost structures, wineries basically charge whatever they think they can get. There are no rules: remember that this is a pure market. And what wineries can get depends on a range of variables, like the profile and visibility of the property, its maker or owner. Is there a more identifiable brand in Australia than Wolf Blass?

There’s nothing like fashion to distort prices beyond their true worth. A tacky plethora of unwooded chardonnay springs to mind, as well as the bulk of wine presently made on the Mornington Peninsula. How much is a maker selling overseas? Or more pertinently, how much is a maker leaving for the Australian market to fight over?

Is the wine a Langton’s favourite? It’s no coincidence that most of the high-performing wines at auction are amongst those whose retail prices have also increased to the largest degree. History, reputation, track record, provenance and reputation come with a price, but why shouldn’t they? And let’s not forget the influence of the media and its ability to make or break reputations. There’s nothing like a decent review to nudge a wine’s price just that little bit further along.

Miss out on too many of these and if you’re high-priced debut label, you could be in for a rough time. Some wineries have found out the hard way that you can’t fool enough of the people all of the time. On the other hand, some companies do more than sell you just a bottle. ‘You even get product support and backup service from Penfolds with Grange’, says Gary Baldwin. ‘With its recorking clinics Penfolds is demonstrating it will stand by its bottles of Grange for the next twenty years. That has to be worth something.’

Pricing a premier wine

If anything, the recent price rises of Henschke’s Hill of Grace have been even more spectacular than those of Grange. Hill of Grace is a small and clearly defined dryland vineyard which cannot be expanded and whose vines are aged and low yielding. Higher crops would undoubtedly compromise the wine’s integrity and would never be countenanced by either winemaker Stephen or viticulturist Prue Henschke. And now the price of Henschke’s other premium shiraz, Mount Edelstone, is beginning to follow in its shadow.

‘Mount Edelstone always had a high profile’, says Stephen Henschke. ‘Back in the 1970s it was always priced very close to Hill of Grace. My father used to tell everyone that Mount Edelstone was the better wine, but everyone wanted Hill of Grace because of its name. Then, after he died (in 1979), we released the Cyril Henschke Cabernet Sauvignon, which was for a while priced higher than Hill of Grace.

Once Steve Henschke took control of the cellars, he and Prue commenced a ten-year plan to improve Hill of Grace, working both in the vineyard and the winery. Their success is tangible, especially in the wine’s consistency and in its use of newer and better oak. But back then, Steve recalls, shiraz was hardly treated as a premium variety and most people were fixed in the view that quality red could only be made from cabernet sauvignon.

‘As shiraz improved its profile, the two wines followed along’, he says. ‘Today it’s something of a Catch 22 situation since with the high prices they fetch at auctions and the increasing pressure from overseas, prices are shooting up all around us. There’s just not enough of them for people to buy.’

Steve Henschke doesn’t decide his prices in isolation. Instead, he discusses the market with his Australian and international agents, with people he believes to be more in touch with the market than he is. He considers the prices of his competitors very carefully and believes that like a perfume, premium wine is today a luxury item. ‘You can’t avoid the fact that today price has become an indicator of quality’, he says. ‘If it’s too low, it can reflect poorly on the standard of the product.’

But how far should he stretch the numbers? ‘You shouldn’t sell at the highest possible price’, Henschke responds. ‘Your old and faithful customers should still be able to get the wine at a price which represents value for money. But like the rest of life, it’s really hit and miss.’

‘Over the last twenty years we’ve made a serious attempt to get prices to their right level. We’ve learned in the school of hard knocks. As a young kid I remember seeing brands destroyed simply because their prices were too cheap. Today it’s different. For the first time in my life Australian wine has a price to match its status. Historically our prices were always too low.’

When size doesn’t matter

Aside from Grange, whose production varies within the range of 5,000 to 8,000 cases, nearly all of our most expensive wines are made in small volumes. Bass Phillip, the tiny Victorian specialist in pinot noir, is no exception. Its custodian and winemaker, Phillip Jones, has just released his 1997 vintage wines, which happen to include the country’s most expensive pinot, the Bass Phillip Reserve 1997, which sells for $115 per bottle ex cellar. This year he has doubled this wine’s production, to nearly 50 cases!

Does he consider costs when pricing his wine? ‘Looking at the production process and trying to run a business that sustains itself – and being a former management consultant – I can happily say that I wouldn’t have the first idea of what it costs me to make a bottle of wine and I don’t want to know’, he says. ‘It’s part of the approach that we adopt that if we have to go to special or extraordinary lengths to get special results, we’ll do it. At the moment the outcome is that I go broke twice a year, but I hope that in five years time I won’t.’

So how does Jones set his prices? Like the makers of top-drawer perfumes and jewellery he makes no bones about the fact that he’s creating tiny volumes of a high-class product whose real market is really very small. ‘To me the most important thing is to provide value for money to the customers who understand the wine’, he says. ‘It’s still a major issue with pinot that the market doesn’t understand the complexities and subtleties of the better wines, wines that need around five or more years of cellaring. People who haven’t become familiar with French Burgundies don’t understand that there are about ten valid styles of pinot noir, so if I’m looking at pricing, how many of them are going to understand the wine? I hope that doesn’t sound arrogant, but that’s the way it is.

‘When I’m looking at my higher-priced wines (the new vintage of Bass Phillip Premium sells ex cellar for $75), I ask myself if I can get as much out of the bottle as I can from a Premier Cru Burgundy. Empirically this is rather vague, but when my wines are good, which isn’t all the time, I’m not shy about them being 10-20 less than a reasonable Premier Cru, but nothing I make approaches anywhere near Grand Cru level.’


If some wines are justifiably expensive, why are others so cheap?

Wine is often sold at prices well below what their producers may have initially anticipated. There’s a variety of reasons behind the phenomenon of discounting, some of which are driven by makers who find stock hard to shift, others by retailers attempting to encourage customers into their stores. Whatever the reason, it’s my experience that once a wine is discounted to a price supposedly beneath its true worth, the discounted price swiftly becomes its true price.

Ray King is adamant that discounting doesn’t work for the producer. ‘In my 28 years in the wine industry I have never ever seen a price reduction or a repositioning of a product that actually worked. Discounting generally occurs at a time when the economic cycle is at its lowest and the market is extremely depressed. The best example is in 1991, when the market for bottled wine in Australia fell by 4 and 12 in the final quarter. I had never seen as extensive a raft of discounting ever before, from casks to $25 bottles, yet the market still went downhill.’

But even today, when margins are paramount and price and image are inextricably entwined, some makers sell wines below their true worth, just because they want to. There’s no better example of this than Bowen Estate, whose wines have consistently been priced at around 60-70 and less of what their competitors have charged. As a result, they’ve always sold out quickly, even before the current red wine boom kicked in.

‘I view wine as something which should complement food at the dining table without being an overly expensive part of the meal’, says Doug Bowen. ‘I think there’s far too much attention given to making wine the absolute focal point of a meal on its pricing structure alone.

‘We have a huge following for our wine from people who always see it as value for money. They buy it every year because they know they will get value, and that’s an important part of our selling philosophy. I don’t want to upset those people because I consider wine as a beverage.’

But reality is beginning to bite, even at Bowen Estate. The Bowens constantly find themselves under pressure from other sources to increase their prices. Some of their distributors are concerned that Bowen Estate’s wine is too cheap. ‘There’s a mentality out there that price equates to quality, but I feel sorry for people who can’t see through that barrier’, says Bowen. ‘I am constantly seeing these high profile wines being written up on the basis of price, not quality, but I think we compete very well with them.’

At the Langton’s Shiraz Auction conducted during Wine Australia a barrel of 1998 Bowen Estate Shiraz was sold for a retail equivalent of around $34 per bottle, well above the $21 retail price of the currently available 1996 vintage. Bowen has now conceded he’s got little choice but to revisit his approach to pricing.

Why wineries should be able to charge what they can get

It’s because of the success of Australia’s top wines, overseas and at home, that the wine industry is doing so well. The more great wines we make, the more of everything else we will surely sell. The high prices now being achieved by more Australian wines gives every winery more than enough incentive to make the best wine it can. Without these incentives the industry can only stagnate. There are more great Australian shirazes today than ever before, and these wines only exist today because there’s a genuine reason for winemakers to invest in better viticulture, lower crops and better oak. And the reason is simple: price.

Australian wine has a history of re-investing in itself. If you can’t make money out of Australian wine right now, you never will. Yet I don’t see too many winemakers driving exotic cars and buying bigger houses. Instead, the returns are being pumped back into their businesses, into better vineyards, better resources and equipment.

Of course there’s a temptation for some makers to charge well above a wine’s true worth and some makers are certainly doing just that. Such an approach can only be short-lived, for today wines come under more scrutiny than ever before. Remember the release of Penfolds’ Yattarna. We’re still suspicious of the more expensive wines, and rightly so. Fail to perform and they’ll go.

Irrespective of the price of our most prestigious and sought-after brands, there’s little doubt that with the rate at which white varieties, especially chardonnay, and then red varieties, especially shiraz, have been planted in recent years, there will be plenty of honest, quality wine made from premium varieties for Australians to drink. But at this time, we just don’t know what those brands are going to be called.

If you’re like me you never quite know what to make of the word ‘Reserve’, especially when it appears on a bottle similar to, but more expensive than those you regularly drink. It’s a word that hardly ever comes cheap and a term that, like democracy and decency, means different things to different people. I guess it all depends on who puts it on the label.

Is it the winemaker who, with a few barrels of something so spectacular and complete at hand, decides to keep the lot separate from the bulk of a blend for a once-in-a-while special release? Is it the marketer who, under pressure from the accountants to raise profile, prices and profits in about that order, simply decides to put much the same wine with an extra dollop of oak into a fancy bottle with a five colour-label, a computer-generated ‘historical’ name and a price about 50 wholesale above the standard wine? Or is it the accountant himself who, in the face of tough competition at or below the ‘standard’ price, allocates the bulk of the standard wine for further maturation, slashes the price of what’s left, only to re-introduce it as much the same product with yet another fancy label and price? Only this time around it will sport a ‘Reserve’ tag and be sufficiently over-oaked to fool most of the public, the trade and the press.

No winemaker I have ever spoken to about his or her Reserve wine ever believes its removal from a larger mass ever affects the quality of what it leaves behind. On a large scale, I am happy to accept Brian Croser’s view that the removal of Petaluma’s Tiers Chardonnay has not compromised the remaining wine. I rate Petaluma’s 1996 Chardonnay, the first to have dealt with this potential disadvantage, as one of the company’s best ever.

At the other extreme, when Phillip Jones takes his one or two barrels of Bass Phillip Reserve Pinot Noir from the quantity that would otherwise have constituted his Premium Pinot Noir, he has done so without affecting either wine’s integrity or quality. The Reserve is traditionally more concentrated, robust and long living, and the personalities of both wines have traditionally been consistent.

Other makers, such as one of Victoria’s leading chardonnay producers, is adamant that you cannot remove a parcel of your best fruit from a relatively small make without diminishing the remaining wine. He is certainly not alone in that view.

Until its final vintage in 1994 one of the most sought-after of Australia’s ‘reserve’ wines was the Reserve Cabernet Sauvignon Merlot of Cullens in the Margaret River. Unlike some vineyards, which only release a ‘reserve’ wine from exceptional seasons, the Cullens wine was released every year, yet consistently managed to perform at a very high level. Vanya Cullen, one of the best and most instinctive winemakers in Australia, is now making just a single cabernet wine, removing the term ‘reserve’ from the label in the process. The Cullens’ argument is that their entire vineyard is now sufficiently mature not to need to distinguish between parcels of younger and older vines and that since 1995 all the cabernet sauvignon and merlot from the estate vineyard has been handled with the same techniques as the old ‘reserve’ anyway.

Moss Wood’s Keith Mugford was concerned that his flagship Cabernet Sauvignon wine was becoming to be viewed as a second label behind the occasional appearances of his sought-after Reserve wine, so he dumped the Reserve. Well, not exactly. As he explains: ‘The first Reserve wine was really an experiment, until we realised that ultimately we should make all the wine that way, with two years in oak. The trouble was, we couldn’t afford to, so we kept the wine for special years, the last being 1994.

‘From 1996 onwards we have made all our own cabernet into the reserve style of wine, and that vintage will not be released until July 1, 1999. It’s taken nearly 20 years for us to be able to afford to do this, for we didn’t just want to push up the price without the winemaking rationale behind it. Otherwise it might have looked like a price grab’. If only everyone else was as honest as Moss Wood and Cullens.

There are many compelling arguments to suggest that all wine companies, large and small, can benefit from a tiered labelling structure. This concept not only gives their winemakers the flexibility to deal with exceptionally good and ordinary seasons by promoting good wines and ‘declassifying’ poorer batches, but when used honestly it gives the buyer a very fair idea of what is up to scratch and what isn’t. One of the Mornington Peninsula’s best wineries, Stonier’s, was not afraid not to release its Reserve Pinot Noir from the rather dampish 1996 vintage. A very high profile Yarra producer might win friends by showing the same discipline with its Reserve Cabernet Sauvignon in cooler seasons.

At the end of the day it’s most important to realise that there is no law or industry standard covering the term ‘reserve’. Although some makers use it with reverence, the best advice I can give you is to treat it with scepticism. Please login to post comment