Wine vs Coffee: Thinking Like Alan Greenspan

Alan Greenspan was famous for many things, most of all because of his long tenure as chairman of the Board of Governors of the Federal Reserve System. Economists like me remember Greenspan for his deep knowledge and understanding of economic data down to the micro-level. He could see how the business world was interconnected better than most, spotting macro-trends by closely monitoring purchases of new brooms and patterns in men’s underwear sales. Amazing.

Here at The Wine Economist, we sometimes try to think like Alan Greenspan would if he were focusing on the wine industry. Here’s our most recent attempt.

The Coffee Cost Conundrum

Have you noticed what’s happened to coffee?  The price of coffee has risen dramatically, driven by a perfect storm of forces ranging from uncooperative Mother Nature to Trump tariffs. It’s a real problem for coffee addicts like me.

So how have buyers responded to higher prices? The Econ 101 answer is simple. Buy less coffee. Buy cheaper coffee. Buy coffee substitutes (tea? Diet Coke?). Buy less of coffee complements (like cream and sugar, for example, or maybe jelly donuts if you are into that sort of thing). The conventional wisdom about coffee demand is pretty straightforward.

So it is interesting (this would please Greenspan) that at least some of the effects are unexpected. According to the Financial Times, the head of Italian coffee roaster Lavazza reports that consumer demand has shifted from cheaper ground coffee products to more expensive whole bean coffee. That’s not how higher prices are supposed to work!

And the shift is not small. Lavazza’s U.K. market whole-bean coffee sales increased 20.3 percent by volume and 36.8 percent by value in the last year. Unit sales of expensive machines that grind and then brew whole-bean coffee rose by 33.5 percent.

Lavazza speculates that many consumers are simply buying less but better (premiumisation, we call it on planet wine). But there’s also this: It seems like part of the pattern is an attempt to recreate the on-premise experience at home(and for less)  with better beans and equipment. It’s a substitution effect, but substituting home-brewed off-premise coffee for the more expensive on-premise product while trying to maintain the experience.

So What Does This Have to Do with Wine?

I know what you’re thinking. That’s interesting, Professor, but what does it have to do with wine? Well, here’s the Greenspan connection

The Drinks Business reports that, “Restaurant wine pricing in the US has become “a particular pain point” for the category, with some venues now taking six-times markups on bottles, according to Gino Colangelo, founder and president of Colangelo & Partners, the New York-based wine PR agency.”

“Now restaurants are taking six times markup,” he said, pointing to a real-world example of a Prosecco with an ex-cellar cost of around €1.70 a bottle appearing on a New York wine list at $60. “Prosecco producers are flabbergasted… it’s like, how can my wine be $60 a bottle?”

Restaurant wine pricing strategies are a complex topic, as we’ve learned from reader comments on previous Wine Economist columns. Markups differ for bottles versus by-the-glass, they differ for different price points, and of course they differ by region and type of establishment. In fact, you might say that the thing that restaurant wine price strategies have in common is that they are different.

My favorite strategy is from a European restaurateur who says he marks up wine by the same margin that he marks up food. The only difference is that customers can easily use a smartphone to calculate the wine markup but they seldom think to do the math on the food.

So a six-fold markup is not universal, but I am not alone in seeing higher prices for bottles and glasses of wine. What’s the consumer reaction? The Econ 101 answer is clear. If wine prices are higher, consumers purchase less wine, cheaper wine, wine substitutes, and they cut back on wine complements like appetizers and bar munchies.

We see fewer bottles on tables but perhaps that’s both the cause of the higher markups and their effect. Lower volumes induce higher prices, which cause lower volumes, etc. etc. Not a good dynamic.

Now let’s go beyond Econ 101. Thinking about the coffee situation, maybe there is also a shift from on-premise to off-premise consumption. The Drinks Business report cites evidence for “pre-loading,” for example.

…  increasing numbers of Americans are now drinking at home before heading out – so-called “preloading” – specifically to avoid paying inflated markups on wine and cocktails once at the table.

Another possibility is what I call the Lavazza Effect. Higher restaurant wine prices increase the total cost of dining out for quality-conscious foodies. It makes sense that they might shift to home consumption, saving money on wine and spending it on a Food Network-inspired elegant meal at home. This might partly account for the fact that sales of $25+ wines have held up a bit better than the rest of the market.

The loss of wine sales at high-end restaurants may be Costco’s gain? Maybe there is a marketing opportunity here? Just trying to see the situation like Alan G.