Michael Fridjhon: Making sense of SA wine prices

By , 19 January 2022

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The current-release Series C 2019 from Vilafonté sells for R1800 a bottle.

At least once a year there’s a rant about stratospheric wine prices. It is usually book-ended by stories about how Cape wines are too cheap for the industry to remain sustainable. Those who argue that prices are too low point out that in the past 30 years the number of grape growers has halved. They also remind us that, on average, around  15 hectares of vineyard are abandoned or grubbed up every week of the year – a situation that has prevailed for more than a decade. I’m not sure how much more evidence we need to acknowledge that the primary side of the wine business is unprofitable, fragile, threatened.

Those who tilt at the ever-increasing high-end prices rightly note that there’s no real connection between the on-shelf price of the wine and the production cost, an observation which is as true as it is irrelevant. There are some very successful producers banking massive multiples of their running costs. There are also the ego properties where so much has been spent on the “Disney effect” that wine sales will never recoup the capital and operating costs. Tokara’s G.T. Ferreira famously called this investment miscalculation “Return on Ego.”

Commercially, the appropriate price for the vendor is one which sees the full stockholding sold for the highest possible amount. So if you have 1000 bottles to sell and you can sell them for R1000 per bottle in the 12 months between one vintage and the next you have optimised your revenue. If you have 2000 bottles to sell and you can only sell 1000 at R1000 you need to decide whether it’s better in the long run to ditch the remaining stock or risk flooding the market: if you offer all 2000 bottles will you actually bank less or more than R500 per bottle? Will your brand suffer if you are forced to discount a percentage of your crop?

These are fair questions: we all know that price is not only a means of recovering costs and maintaining profitability: it can also be used as a proxy for perceived value, and therefore as a marketing tool. Equally it is a measure of shortage – or perceived shortage. Tiny Burgundy domaines sell the same appellations as the large negociants – but often for significantly more. This is partly because there is less to go around. The lack of supply conveys the idea that these small producer wines are actually better. Of course some are, but many aren’t. Negociants who are also important landowners – Bouchard Pere, Jadot or Latour for example – are likely to produce better wines than many mom-and-pop enterprises which operate with sloppy viticulture and minimal technical expertise.

The lessons learned from Burgundy’s “small is beautiful” philosophy were not lost on Bordeaux. Until the 1980s very few of the major Medoc estates declassified anything except the really worst fruit or the most obviously faulty wine. So there were only a handful of “second labels” – everything went into the grand vin. Pressure to get higher Parker ratings forced producers to separate the best from the more ordinary. This in turn drove the development of the second label market and delivered an unexpected and very useful dividend.

By removing anything from the grand vin which might compromise a higher Parker rating producers found themselves able to ratchet up their prices because volumes were now substantially reduced. The discovery that selling prices increased dramatically when a large chunk of grand vin was taken out of the market enabled them to refine their strategy.

Firstly they could price the grand vin at the highest possible level relative to the estate’s classification. This obviously had marketing benefits. Doing so also yielded higher more revenue per litre, but on a smaller volume. Then they could develop their second label as a brand in its own right, to make up the income lost through the reduction in grand vin volumes. This way they were making more money and not exactly struggling to sell their crop. Of course in time this necessitated the creation of third labels to mop up surplus second label wine. Inevitably this meant declassifying otherwise perfectly good wine. In other words, correctly calculated they could make more money even if the last 10% of their production was dumped for 1 Euro per bottle.

As we go into South Africa’s new pricing season it’s clear that some producers have understood the lessons the Bordelaises learned from Burgundy’s low volumes, as well as the value of subsidiary brands. Unlike the old South African model where you created a reserve bottling (think CWG) to wring a little more money from the market (essentially putting another level on the top of the pyramid) this is an exercise in cranking up the price of the brand itself, by creating sales strategies for an “unavoidable” surplus.

Vilafonté introduced Seriously Old Dirt in about 2018. In the four years since then the prices of Series C and Series M have risen by considerably more than inflation (the current-release 2019 vintage of Seriously Old Dirt is R265 a bottle while Vilafonté Series M 2018 is R880 and Series C 2019 is R1800). Their successes have enabled the winery to fund greater holdings of unsold “grand vin” inventory. These older vintages get released later for substantially elevated prices because they are no longer current stock. In the meantime Seriously Old Dirt has become a brand in its own right: as it grows it no longer depends on surplus Vilafonté fruit (assuming it ever did: the back label on the 2019 shows “Wine of Origin Western Cape.”)

Those who mutter that the prices of Cape wines are now “too high” – using Vilafonté (for example) as their benchmark – would have to argue why Mike Ratcliffe shouldn’t be rewarded for applying this strategy and structure. He would say that he is optimising quality, maximising value and contributing to elevating the image of Cape wine. No one is being forced to pay more than they are willing to spend. It’s a free market where many complain that wine prices are too low while others moan that they are too high.

To the extent that my opinion matters at all in this context, I have only two observations: wine should not be produced at the price of human misery, so every one along the value chain needs to earn a proper wage. Secondly, since the average quality of Cape wine has improved dramatically in the past two decades, it’s easy to buy very good wine for very little – say around R100 to R150 per bottle. If consumers want to spend more, it’s the most discretionary of choices. To try to stop them is irrational and ludicrous – the modern day equivalent of King Canute trying to turn back the tide.

  • Michael Fridjhon has over thirty-five years’ experience in the liquor industry. He is the founder of Winewizard.co.za and holds various positions including Visiting Professor of Wine Business at the University of Cape Town; founder and director of WineX – the largest consumer wine show in the Southern Hemisphere and chairman of The Old Mutual Trophy Wine Show.

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  • Harry Melck CWM27 January 2022

    I undertook an exercise when SA went through the drought years to see if it would be worthwhile investing in wine. The premise being that the prices would go up (reduced yields and better quality wines).

    Besides the lack of a secondary market at the time for investment wines, I found that those historically big labels were not keen to stick their heads above the pulpits and increase the prices of their wines above the average increases. This was largely because of the oversupply of brands and that local consumers could just switch to another well known historical brand on the same price point.

    The majority of the well known brands have only had inflationary increases year on year. New brands can, however, enter the market at higher – more appropriate prices, because they don’t have the legacy and history of incremental increases year on year.

    Tastings held to assess the best quality fine wines in SA have shown that some of the older more recognised brands don’t even make it onto the line up because they price doesn’t meet the minimum price requirements.

  • Greg Sherwood MW25 January 2022

    My general observation in the SA market place it that it is exactly the people who used to drink the big labels at historically cheap prices who whinge the most when those big labels become industry leaders in quality (and marketing) and then up their prices considerably. What these whingers fail to see is that in the meantime, there are a plethora of other very decent, very affordable red wines available to buy and drink at the R100 to R200 per bottle price if they are so aggrieved with the ‘crazy price rises’… It’s their unwillingness to spend the cash or change brands that is the route of their despair… not the success of some truly admirable premium brands in the market, one of which is undoubtedly Vilafonte. If the shoe no longer fits, buy a new pair of shoes that fit your budget. Simple. South African wines on the whole are still incredibly cheap for the quality in the bottle… compared to the international norm. But it won’t / can’t last forever.

    • Billabong25 January 2022

      I couldn’t agree more Greg. There is so much excellent wine between R150 -R300 that SA consumers are spoilt for choice. There is also a lot of much fun to be had, hunting around for the next wine superstar. My only advice would be, when you find it, buy three cases and store them well, to insulate yourself from the inevitable price rise.

  • Nicolò20 January 2022

    Excellent observations Michael, thank you for the article. Insightful as always.

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