I believe that the games we all played when we were younger taught us valuable lessons, both about life in general and life in today’s wine industry in particular. Risk, for example, taught us to be strategic in analyzing any situation. Checkers and chess taught us to think beyond the next move or the one after that, to anticipate our competition’s reaction to each possible action.
Monopoly, of course, prepared us for the wine industry’s continuing consolidation with big getting bigger at every level — retail, distribution, winery, and vineyard.
Up and Down
Chutes and Ladders (or Snakes and Ladders for some of you) is the game to play if you want to get a sense of the premiumization game that is a distinct characteristic of the wine industry today. Chutes and Ladders is a race to get from the bottom of the playing field to the top. You can climb up one step at a time, but ladders sometimes zoom you to a higher level. That’s great, but there are also chutes that send you tumbling down again.
Wine businesses have been encouraged to play the Chutes and Ladders game because the growth in the market has ratcheted upscale with surprising speed since the global financial crisis. Sales of wine at lower price points have languished or declined. The growth zone has shifted to higher and higher price points (which entail lower and lower volumes). The sweet spot in the wine market is a moving target. Talk about Risk!
Sometimes it seems like if you are not climbing the ladder you must be falling down the chute. Growth-seeking wine brands must keep climbing market ladders as the sweet spot shifts, but (to mix metaphors) it is hard for a tiger to change its stripes. Once a brand has established an identity, it is dangerous to cut prices and difficult to raise prices. Climbing the premiumization ladder can be a roll of the dice.
Early Mover Disadvantage
I have seen this with some European wines that entered the US market back in the day when market conditions were different, It is hard for them now to change stripes. Take the popular-priced red wines of Valpolicella, for example. These were once some of the best-selling imported wines on U.S. shelves and still do very well, but the bargain prices that drew attention back then no longer make the same impression.
Montepulciano D’Abruzzo faces some of the same challenges. Buyers may think of good value, not high quality when they see this wine, which is a problem if spending growth is focused on higher price points. When we were doing research for our trip to Abruzzo last year, for example, most of the Montepulciano d’Abruzzo wines we found were in the “good value” category — a legacy of the region’s early successful entry into the U.S. market.
The low point came when we found a popular brand of Montepulciano d’Abruzzo in a Grocery Outlet store selling for just $5.99 per 1.5-liter bottle. Not the image you want to see, especially since the region has so much potential.
Climbing the Ladder
We found excellent wines during our trip to Abruzzo. We were especially impressed by the small wineries of Villamagna DOC, for example, and the Cantina Frentana cooperative showed that quality and quantity could go hand-in-hand.
We’ve recently been sampling the Villa Gemma line of wines from Masciarelli, and they are terrific. The Montepulciano d’Abruzzo Riserva 2017 is an example of a wine that can help redefine the category.
The classic-level Masciarelli wine sells for $12.99 at the upscale supermarket down the street and for just under $10 at a local big-box alcohol superstore. That’s a good price point, but with premiumization moving the ladder, market growth seems to be shifting up a level. Hence a focus on super-premium Villa Gemma and wines like it to take advantage of premiumization without sacrificing the existing profitable market.
North and South
Here in the U.S., we have the tale of Washington state’s Chateau Ste Michelle, which prospered just a few years ago when the sweet spot for wine sales growth was $8 to $10. The wines are very good, but they were pigeonholed by their price point and now the market has shifted higher.
New Zealand wines present the other side of the situation. New Zealand entered global markets at what were then surprisingly high prices. New Zealand’s average export price for still wines was for some years the highest in the world (remember that world wine flows include vast quantities of inexpensive bulk wines, which are not part of the New Zealand portfolio).
Having entered the US market at a higher price point, New Zealand wine (mainly Sauvignon Blanc) has benefited from each upward shift so far. But, seeing the writing on the wall, some Kiwi producers are getting ready for the next ladder climb. For example, we have recently sampled wines from Babich, which seem to be intended to scale the next ladder.
The Babich ladder begins with the classic Babich Marlborough Sauvignon Blanc and then climbs through Black Label, Family Estates, Select Blocks, and Winemaker’s Reserve tiers. Babich is a well-known champion of sustainable wine-growing and this is part of the brand ladder. The classic that we sampled was certified Sustainable and the Select Blocks wine was made with organic grapes.
The classic wine and the Select Blocks were very different from each other when we tried them — as they should be. The classic was a refined variation on the now-familiar Marlborough Sauvignon theme. The Select Blocks wine was even more elegant and perhaps defines a new category — which is great in terms of product differentiation. But it didn’t say “Marlborough” to us as much as we’d liked.
How High is Up?
How much longer will the premiumization game of Chutes and Ladders last? And who will the eventual winner be? The wine market is like a dynamic pyramid and the volume of wine is smaller at the top of each ladder compared with the one before.
Like the housing bubble of a few years ago, this process doesn’t seem sustainable. That means that Stein’s Law probably applies: if something can’t go on forever … it will end.
Note: Masciarelli has released a special wine, Pecorino Castello di Semivicoli 2022, with proceeds to raise funds to support a charity that assists the parent of autistic children. Bravo, Masciarelli family!
California used to be all Chutes…remember when Beringer, Almaden and Inglenook were top of the heap? I guess now we’ll see if Coppola can reverse Inglenook Inglenook. Or should I say ‘repremiumize’? Come to think of it, I can’t recall a successful California ‘ladder’…
Constellation clims ladders by buying brands at the top and selling the ones at the bottom.
It will be interesting to see. But we have to define premiumization first. It used to be people trading from lower to higher prices.
As I see it today, we have fewer wines sold under $15 and more being spent on more expensive wine. But those still willing to pay more fall into the +60 cohort. Below that, on average I don’t think we have much premiumization. If that’s true, as boomers ‘sunset’ on average premiumization should wane.
I think its also important to realize those who have wealth will always be willing to buy “the best” of anything. So it’s not going to mean all expensive wines decline in price. Established brands will still likely thrive in my estimation. The questions will be at the margins. Faux cult wines will probably stall. Price increases may be more difficult.
Of course the solution is still marketing to consumers younger than 50. As an industry, we need to increase occasions and align our products with those younger consumer valued. If we evolve, there is no reason premiumization wouldn’t continue in some form.
Thought provoking article. I was setting up for World of Pinot this weekend. Before they let in the general public, the rep next to me leaned over and quipped, “Here we go again. The 80% of wine brands trying to sell to the 1% of consumers.”
I do wonder if some of the stratospheric pricing associated with premium regions may elevate otherwise looked over regions. For instance, as Champagne prices have made it into low-Earth orbit, can Cava (especially Reserva/Gran Reserva) drum up more interest and alter it’s perception as a cheap and cheerful, simple sparkling?
Excellent analysis of a pyramid scheme (just kidding). In our business, it is up to the journalists and committed retail vintners to sort it all out. Two things to keep in mind: quality always sells and there is always decreasing room as one climbs a pyramid.
Morrell Wine is pretty much the gold standard among wine sellers. Thanks for your comment.