A cynic, according to Oscar Wilde, knows the price of everything and the value of nothing. For some reason, this characterization is often associated with “dismal science” economists like me. Today’s Wine Economist column hopes to make an exception to Wilde’s rule by focusing on wine’s value problem and how understanding it can help explain recent market trends.

Price versus Value

Inflation is on everyone’s mind these days (both as an election issue and in more general terms), so it is not surprising that there is concern about the high cost of wine. But when I look at other consumer categories (as I did on The Wine Economist several weeks ago), I find that price isn’t as important to consumers today as value.

Consumers seem to recognize that sometimes when you pay less you get less. They are willing to pay more when they believe they get better value. A focus on value and not just price is not new, of course. Although it is easy to imagine that the Two Buck Chuck boom of a few years ago was driven by low price, it was true that there were even cheaper options. Many of the wine drinkers who embraced TBC cited value as the appeal. TBC is a two dollar wine, they’d say, that tastes like a five dollar wine.

Push versus Pull

Many wine consumers have shifted up a shelf or two on the wine wall in recent years in a process called Premiumization. Why have they done this? Did they wake up one morning and think that they just weren’t spending enough on wine? Probably not. Maybe they were pulled up by the higher quality of more expensive wines. I am sure that is the case for many.

But it is also possible that they were pushed up by falling quality and poorer value of the wines they had been drinking before. Did the value proposition of those mainstream wines deteriorate?

The Big Squeeze

Both wine producers and winegrape growers have been squeezed in recent years as costs have risen faster than price. One way that winegrowers have reacted is by increasing vineyard yields. This can be often be done without affecting grape quality, but only up to a point, as I understand it. When growers are squeezed so hard, quality can suffer and this can affect the perceived value of the resulting wine.

I know some growers who believe the value problem comes from a different source. They see wineries, caught in a cost squeeze themselves, substituting cheaper imported bulk wine (there is a lot of it on the market these days) for higher-cost domestic wine. California growers might argue that this dilutes quality.

Whatever the reason, the demand for wines below $10 (and now above $10, too) has been falling for many years. There are certainly many reasons for this phenomenon, but I think the value hypothesis is part of the problem. Value-seeking consumers have reacted to changing circumstances by shifting their wine-buying behavior, pushed by lower value here, pulled by high perceived value there, and squeezed by general economic conditions.

Some Implications

If budget-constrained consumers find themselves forced to move to higher price points in order to find the value that you used to get at lower cost, then it is not surprising that they have reduced the volume of wine they purchase.

If consumers believe that white wines give them the value they seek at lower cost than red wines, this might explain some of the red-to-white wine shift that we are seeing.

If correct, my speculations about value explain some but surely not all of the changes we have seen in the wine industry and raise an interesting question. Are the wine industry’s reactions to the current crisis addressing the cause of the problem or only the symptoms?