Vine Notes: Problems with wine price increases

With the U.S. wine market expecting to post its 21st consecutive year of growth in case good sales, a relatively healthy U.S. economy and an even brighter picture in the Bay Area, North Coast wineries are enjoying robust demand for their products, particularly through tasting rooms and club sales.

Nowhere is this more evident than at the high end of the market where some Napa Valley cabernet sauvignon wine producers have taken $10- to $15-a-bottle increases on $100-plus reserve wines that seem to result in no discernible reduction in sales volume.

While this is a very small segment of the market by volume, many wineries have increased prices at the winery level and not seen a drop off in demand. Against this backdrop, quite a few producers are exploring price increases at the wholesale level to help offset higher grape and operating costs.

The healthy market conditions and low resistance to price increases in tasting room as given some winery sales managers the confidence that wine buyers can also tolerate higher prices on store shelves. Despite the strong indicators demonstrated by consumers visiting to wine country, raising prices for wine going through wholesale distribution may prove more challenging.

Headwinds for higher prices

There are several powerful forces working against taking prices up that are independent of consumers’ appetite for wine sold direct. In Rabobank’s latest Wine Quarterly report, our researchers point out several key trends shaping the wholesale channel that are potential headwinds for pricing decisions. One of the major factors highlighted is the growth in chain store accounts that sell wine (up 4 percent in recent years) compared to independent stores (up 2 percent). Chain stores are now generating most of the growth in the off-premise wine market and success in these accounts can have an important impact on profitability.

However, this channel tends to have a more limited selection of ultrapremium wines and is served by fewer and larger distributors. These distributors often lock a given winery’s SKUs into a specific price range, in response to chain store shelving demands. Moving out of those price points means that the winery is now competing with a new set of wineries, in both their distributor’s book amd the numerous other wineries represented by competing distributors. If that segment is already crowded with other brands, the distributor will obviously be resistant to go along the price increase. A given brand’s strength within its competitive set will influence its price elasticity, which is detailed further in our Wine Quarterly.

Bevy of bulk wine

An added consideration for pricing decisions, particularly for North Coast producers, is the substantial volume of wine that will be added to the market with the 2012, 2013 and now 2014 vintages. Though smaller than the two previous years, 2014 appears to be another good harvest. Depending on the varietal, early numbers support above average tonnage on the North Coast, albeit 10 percent–15 percent less than the record 2013. Given the high volume, one might expect bulk prices to decline but we have only seen modest price changes, thus far.

As the Rabobank report indicates, the premium segment of the market (defined as $9 to $15) is capturing volume from lower priced wines. This segment is increasingly targeted by negociants, as well as major wine companies introducing brands specifically for this price tier. Large chain accounts are also jumping into the market with an ever increasing number of private label brands, very often slotted in the $12-$15 range. This price segment is below typical pricing for North Coast producers. However, the growing volume for wines priced in this range continues to drive the chain focus toward this tier.

Dancing with the dollar

Another factor affecting the competitive landscape is the strengthening U.S. dollar. The improving U.S. economy relative to the rest of the world is helping the dollar gain against other currencies and making imports more competitive. Chain stores are happy to continue to give shelf space to imports when they fit their pricing target in addition to the fact that imports are increasingly accepted by millennial wine consumers.

Understanding where a brand fits into its competitive set is critical in making pricing decisions. Despite the obstacles to raising wholesale prices, in certain instances it is being done successfully by some wineries. Often these brands are priced below their peers based on perceived value due to accolades in the wine press or social media campaigns, allowing for upward price adjustments. However, the ability to raise prices will have less to do with rising costs in the industry and more with opportunities to leverage brand strength and position within the distributor’s book of wine labels.

Charles Day is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, NA.