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Tipping Point

Home Prices Seem to Have Stabilized…Why Not Napa Cabernet prices?!

About 5 years ago, Geek noted on these pages a concerning trend: the unrelenting, upward march of the prices for Napa Cabernet. At the time, we wondered if they were going to ‘kill the golden goose’ which Napa was (is). As of this writing, it appears that our fears were unfounded: at this point they have gone far beyond their prices then. In some cases, prices have doubled since then…and the wines are still selling, but we again wonder: how long can this go on? As Capitalists, we suppose that A) the producers are allowed to charge whatever they choose and B) the more these wines cost, the more we all make (ie, distributors & retailers), so why the angst? But at some point, there must be a price ceiling.

Of course, the wineries—like the rest of the world–have been subjected of late to all sorts of uncontrollable increases in some costs: bottles, corks, labels, capsules, energy, health care…you name it. Most of this is attributable to the ubiquitous ‘supply chain issues’ and it is all exacerbated by increased fuel costs—which affect everything. But the primary cost of a bottle of wine is what is in the bottle: the wine.

Checking in with several vintners, we determined there is a small range for what the cost of the liquid is in a bottle of mid-range wine: for a wine that has a $100 FOB (the price to the distributor), the cost of the of the juice is $45 to $55. One very concise winemaker told us that in addition to the cost of $53 for the wine in a $100 case, there are transport costs, fermentation costs, barrel costs, et cetera to turn the juice into wine. He noted additionally that carboard has almost tripled, glass has more than doubled, and corks are 2.5 times what they all were in 2020.

Interestingly however, the cost of fruit has not gone up dramatically over these past five years. Napa Cabernet fruit averaged about $8500 per ton this year (2022); in 2016, we recall it was just below $8,000. This leads us to wonder why the price of some of the most desirable wines have gone up so dramatically over this period. Admittedly it’s the most desirable wines that are going up the most—the power of scarcity we guess. For some reason, Geek distinctly remembers the price history of a particular culty Napa wine: ten years ago, this wine was $125 a bottle wholesale; four or five years ago, it got bumped up to $300 a bottle; this fall’s release clocked in at $525 a bottle wholesale. That’s a bit above the ‘adjusted for inflation’ number…and any increases in the cost of glass or cardboard! Of course, we are allocated just modest amounts, though you would think at that price there would be plenty! Admittedly, this is just one example, and it is a pretty renowned wine, but…

As mentioned before, we are Capitalists, so if they can get it, more power to them. But we cannot help but wonder if they are painting themselves into a corner. Indeed, we know of more than one uber-premium producer that has either created a ‘2nd label’ (selling the same wine cheaper under another name) or have ‘bulked off’ a bunch of their crush to another winery (to create a ‘shortage’ in order to maintain their price). Again, their prerogative to market as they see fit. Most concerning however is the theory of ‘price envy’. Some high-quality producers will taste their wines against one or more of the cult wines and declare that their wine is ‘just as good at a much lower price’. So they do what any logical business person would do: they raise their price. Price increases due to cost increases are easy to understand and justify; price increases due to someone’s ego are less easy to understand, and can best be justified if the buyer has an ego as well. And a fat checkbook.

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