THE WINE PRICING CHALLENGE

498prc

The East Coast wine merchant walked into the California discount warehouse armed with nothing but a throw-away camera. He strode to the wine section located at the back of the store and started snapping pictures of the display bins, paying particular attention to the signs and their prices. Soon a store manager ran out and hustled the visitor to the exit, saying, “Get out. And if I ever see you in here with that thing again, I’m gonna have you arrested.”

The East Coast wine merchant replied, “As they said in The Music Man, ‘Ya gotta know the territory, and these [pictures] will help me a lot.'”

The scene, which occurred about a decade ago, wasn’t unusual. Wine marketing in the lastdecade has become a battleground strewn with the bodies of many a heroic fighter who simply didn’t have the tools or know the rules.

And one of the most important tools for wine marketing is putting a price on a bottle of wine. Pricing wine for the retail shelf today is something akin to guerrilla warfare: first you find out what the enemy is doing, usually by infiltration; then you make a strategic strike, often a flank attack; then you wait for retaliation, and then you mount an all-out frontal offensive.

If this sounds a bit melodramatic, consider how simple life was almost 20 years ago, before the end of price posting as it existed in the U.S. All beverage alcohol had to have their wholesale prices posted well in advance of any changes; retail price margins were mandated. Only under rare conditions were prices allowed to drop to what today we call discount levels. The term “bomber” came into use to describe a renegade retailer who was able to offer special prices on certain wines, but in general, everyone offered roughly the same prices.

The sales of wine from one tier to another also looked quite different. Under the old system, hundreds of wholesalers flourished, many of them selling the same brands in the same markets and all for the same price. The only thing that differentiated them was service and the comfort factor: some retail outlets liked being able to buy a number of favored brands from one book. “The margin on wine was always about 33%,” said Darrel Corti, a 25-year wine merchant and grocer in Sacramento, CA. “Even if you offered a 10% case discount, you were still making 23% on wine. Now, you tell me a business that works on 23% margins.” He pointed out that in the grocery business, the margin on most food items is well below 10%, and in most cases, below 5%.

Wine has always been a solid profit center, and the end of price posting in 1979 opened the door to discount operations that could work on 10% to 15% and still make money. But they had to sell greater volumes to do so. A classic example, which started in 1978, was Price Club, now called Price Costco Wholesale. The chain of discount warehouses specialized in large-size packagings of commodity items for the home and office and posts very low prices on everything. Today Costco stocks between 70 and 100 wine items in most of their stores. Included are deep discounts on some of the better-known wine brands from California.

What this does, clearly, is to keep those same items to a minimum on the shelves of nearby retail wine shops. The farther away from a wholesale warehouse, the less impact it has on the availability of — or the pricing of — commodity wines. “Look, I can’t compete with those guys on those items,” said one San Francisco wine shop retailer. “They ask [the wholesaler] for the 1,000-case price, and if that’s not low enough, they ask for the 5,000-case price. No matter how carefully I buy, I can’t compete with that.” The retailer, who asked to remain anonymous, said he carried most of the same brands that Costco stores do, “but only enough to supply a few people who want a bottle or two. I specialize — that’s how I compete.”

The advent of the beverage alcohol specialty superstores (such as Binny’s Beverage Depots and Sam’s in Chicago), as well as the ability of many major retailers to ship wine, changed the face of retailing in the last decade. Consequently, today there is little meaning to the phrase “suggested retail price.” The standard margin of a 50% markup, or 33% profit, is “absolutely archaic,” says San Francisco wine marketing executive Ed Everett, “but it’s the old standard and a lot of people still remember it. And it’s the only one we’ve got. The higher the price [of a particular wine], the more likely it is that the buyer is shopping around the country to get it, to save money,” Everett continued. “That’s the reason it’s so hard to make any money on big Burgundies and Bordeaux these days — everyone is out shopping for the best price.”

Smaller retailers, such as Corti Bros. in Sacramento, CA, find it more difficult to compete selling certain widely available wines, in part because they can’t afford to work on 10% to 12% margins.” Corti said he competes by finding specialty items and announcing them in a well-written newsletter that goes via direct mail to thousands of loyal Corti Bros. shoppers.

Russell DeVore, wine buyer for Frugal MacDoogal’s Beverage Warehouse in Nashville, TN, admits that pricing wine is, in part, a function of what takes place on retail shelves throughout his own city. And, he admits that pricing wine is very different from a decade ago, when he had fewer brands to deal with and more predictable pricing. “Today, it’s a balance,” he said. “You try to determine the best price for each particular item, and you can’t make an item too high or too low. The wholesalers don’t want you to bastardize their products by offering it so low, and the flip side of that is that you have some competitors who don’t care how low it is, and they discount certain items quite deeply. “We assess each individual item carefully, and we discuss the ramifications of what the price point is that we will sell it for. We want to be competitive, but the odd thing is, if we sell something too low, people say, ‘What’s wrong with this product?’ And we can’t sell it too high, for obvious reasons.”

To price accurately, said DeVore, “We have to constantly check our competitors, to make sure we’re offering the best prices.”

Everyone agrees that smaller profit margins make for far more selective buying by retailers. Moreover, the competition from stores, such as discount warehouses, which often can sell their wine before they have to pay for it, forces smaller shops to shy away from large volumes of the same wines.

The game is changing, and pricing is no longer a simple formulated thing. Now it’s a guessing game, replete with pitfalls and requiring careful planning and strategy.


Dan Berger’s wine column is carried by the Los Angeles Times Syndicate, and he also publishes a weekly newsletter on wine, “Vintage Experiences” (e-mail: RLLS92A@PRODIGY.COM)

Leave a Reply

Your email address will not be published. Required fields are marked *