Sunday, April 26, 2015

Should You Ever Discount Your Wine?

 
I'm betting nobody knows who Thorstein Veblen is. Like this picture, you have to be a little cockeyed to know him; be a Jeopardy Champion, enjoy thumbing through pictures of people who look like axe murderers, or maybe you are an economist with little to do with your free time except refresh your memory about a Veblen good?
 
One on-going debate in the wine business where Veblen's theories play a role is price discounts. Should you discount, and if so when and by how much? To get at an answer we'll review some economic basics. (... I know how exciting that sounds but stick with it. I won't kill you with math.)


The Rolling Stones Know Veblen

Normal goods are those goods that when income increases, demand increases. Inferior goods are those goods which when income increases, demand decreases. Inferior is not a statement of the good's quality, only the relative direction of negative change when income increases.

Wine as an industry product has both normal and inferior properties. During recessions, we see "trading down" of more expensive wines into wines of lesser price. When income increases as we are seeing today, the opposite happens and we see "trading up."

With a luxury good, as income increases, demand for that good increases proportionally more. A Veblen good is a special kind of luxury good like some perfume where a decrease in price can lead to a decline in demand ..... which seems to go against conventional economic wisdom. Nonetheless, some luxury goods perform just that way .... and without getting into a discussion of the marginal income elasticity for the wealthy class, when it comes to discounting luxury, superior and Veblen goods, consider this example:

nullYou see a bottle of wine in Safeway. Its a brand you've enjoyed often before at $25. This same bottle is now on the shelf on discount for $4.99 and there is a whole end-cap full of the brand. What do you do? With a price now 1/5th that of the old price, do you buy 5 times more wine? Nope. You question your memory and go buy something for $25. That's an example of a good reacting in the reverse to a discount. Its the "you get what you pay for" adage entering your purchase behavior.

I'm pretty sure when The Rolling Stones sang "You can't always get what you want," the song was written about scarcity and Veblen goods, because - if you could always get what you wanted - like air for instance, then you wouldn't pay anything for it even if having it is a life or death issue. And since drinking good wine is a life and death issue, that gets us back to the question of this post: Should you ever discount your wine?
 
 
 Discounts versus Brand Strength


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LIVE VIDEOCAST MAY 12TH, 9:30 AM
I've heard countless people in the wine business say you should never discount wine because you will pay hell getting your price back up later, and yet I've found little to support that thesis in actual practice for wines in distribution.

Wines are discounted at the distributor level all the time and price goes up and down in a range. I would argue those wines are mostly "normal goods" though. But if you really have a luxury good, discounting will have detrimental impact on your brand.

The way I see things, taking a discount depends on the strength of your brand along the curve. As your normal good approaches a luxury good, discounting becomes less effective.

The stronger the demand for your brand, the fewer perceived substitutes, the deeper your allocation list, the smaller the perception of easy availability - the more likely your answer should be "No, don't discount." Even if you are stuck on a large vintage, hold your price if you can and manage the scarcity of the label. Hold back the rest of the vintage for later special vertical releases, use it for hospitality events, but find some means to move on to the next vintage and make a plan for the excess inventory.

Its not always doable though. The vintage holdover could be huge, or the financial risk too great, but if you can take the path of holding your price and the added inventory you are supporting your own price. Yes you can discount the wine, but when a luxury brand is discounted it says something about demand which isn't positive and it drops itself into a competitive price range with other wines which could match it up against lesser substitutes, thus making your wine appear to fit a different strata of luxury altogether. In that case, you will pay hell getting your price back up.


Strongest Brands Discount the Least
 
I was thinking about discounting as I was reviewing the results of the recent Tasting Room Survey, when I saw this chart to the left regarding average discounts for Club Members throughout the various regions. As you can see, it's pretty normal for all regions to offer a discount for club members, but the region with the strongest brand - and not coincidently the highest average bottle price is Napa. They offer the lowest discount to their club members on average according to this finding.
 
I haven't checked, but I suspect Napa also has the most allocated memberships, with long waiting lists to even be offered the wine. That waiting list is an measure of scarcity. For an allocated wine, that is a luxury product and discounting shouldn't be considered. People with wealth don't care about the price of a true Veblen good. They have the money and they want it! Shouldn't everyone want to get to that point where they never discount and their waiting list averages years?
 
 
The Bugatti Veyron Grand Sport versus Mass Wine Producers

After a long time in the business I'd say the answer to the last question is no, and its emphatically no.

There are many wine consumers desiring different product attributes and there are business models that work well for all of the various consumers.

A Veblen level wine producer should never discount. Extreme quality, very limited substitutes, quiet but consistent PR, and scarcity are the hallmarks of those brands. The wine is like a Bugatti.

Some other models still have high prices and modest volumes with better availability, and do fine even with an occasional discount. They attract the aspiring affluent as well as some of the wealthy. Those wineries should consider discounts, but more important they should first consider other means of attracting clients, spending the most time thinking about protecting quality, restricted availability, and experience as part of the value proposition.

Finally, some wineries are based on high volume and lowest price ranges. Discounts and promotions are a normal discussion influenced by competitive substitutes usually. In those cases, advertising is a key component so targeted consumers identify some emotion with the brand, and the owners drive Bugattis.

Each of those above businesses find a place along the demand curve for wine and they can be very profitable at the right volumes, but not all should employ discounting.

The General Shape of Wine Demand

To the right is what a demand curve looks like for the wine business in broad strokes, though there are very few wineries I consider a Veblen good winery so its not like there are that many above the P0 dotted line as the numbers of wineries below the line.

Below the P0 line is a "normal good." Going out to the bottom right as the curve flattens is where mass producers live, out toward letter "D."

Mass volume producers of wine can see extreme changes in quantity sold based on small price adjustments higher or lower, as there are many competitors for near and pure commodities fighting on price. A ten cent bottle price increase might place you above a pure substitute.

For most of the wineries on the West Coast, you are higher on the curve and operate as a normal good trending toward a luxury good. You have defined and differentiated your label in a more exclusive way, leading to fewer pure substitutes. So for the normal good, a change in price (P1 to P2) yields some change in quantity (Q1 to Q2).

As you approach luxury status - closer to where the dotted line P0 and the solid black demand curve intersect, the shape of the curve is nearly vertical. In the case of a vertical demand curve, increasing price doesn't change the quantity of goods demanded. (And theoretically, lowering price doesn't change quantity either.)

Above the dotted P0 line is the good first described by our axe murder look alike Thorstein Veblen, and as discussed, an increase in price in that case increases quantity sold and a decrease in price reduces quantity sold.


Higher Discounts Do Equal Fewer Sales
 
What about some real life support? Here to the left is another chart where you can see the actual impact of price discounts on wine, again from the 2015 Tasting Room Survey just completed by Silicon Valley Bank and Wine Business Monthly.

In this you can see that in general, the larger the discount applied, the less spent by the wine club member annually. For instance, you can see in this chart that a 25% discount shows the lowest average wine club spend per member. That supports the general premise that discounting luxury goods, really doesn't get you as much as many might think.

 
The message is pretty clear: For most high-end wineries, you want to build your brand to a point where perceived quality and scarcity allows you to raise your price without impacting the quantity sold. Managing scarcity is an important component in that model. Creating an emotional bond with experience is an important component. Discounting is something to be considered, but sparingly applied.

SIDENOTE: The live videocast of the SVB?WBM Tasting Room Survey will be on May 12th. [LINK]
 ---------------------------
     What do you think about the topic?
 
  • Are discounts important in brand building? What are the options you have other than discounting when you have a long vintage or haven't sold your current vintage on schedule? How do you manage to effectively use discounts and promotions as part of a broader sales strategy?
Please join the site in the upper right hand of the page and offer your own thoughts for the benefit of the wine community. And if you think the discussion is worthwhile, please promote this on your favorite social media platform.
 

41 comments:

  1. After 26 years in tasting room sales I must admit I admire any winery that can sell every bottle of wine at full retail.

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    1. Thanks for the detailed analysis... although intuitively it seems like the causal relationship between discounting and sales is reversed. That is, wineries discount because they have weak sales... weak sales is unlikely an outcome of discounting.

      Would also be really great to see this stratified by per-bottle pricing. Again, intuitively it seems that consumers buying $100 wines (almost certainly scarce and likely scored well by the critics) are much less likely to be swayed by discounts than someone buying $30 wines (not as scarce and not as high quality).

      Also I wonder if your point: "Creating an emotional bond with experience is an important component" might even trump the discount issue. You can typically just go to a winery's website and buy the wine or join the club... but people don't unless they've been to the tasting room. The only difference between online and tasting room is the experience and perhaps a more tangible vision of what a relationship brings the buyer. Harder to quantify, but perhaps critical.

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    2. Anon 8:47 - I agree with you. Most tasting rooms do sell with discounts and that's supported in the chart that has Wine Club discounts by region. Allocated wineries do exist and many of them are our clients. They do sell all their wine at full price, have a waiting list and a secondary market exists that offers the wine at a premium to the release price.

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    3. Michael, thanks for the thoughts and for signing in!

      We do have the cut by bottle price and that will go out to the respondents who participated in the survey.

      On the question of discounts and sales, don't mix up weak sales with demand. A winery can have great sales but a large year and that's when discounting is brought into the discussion. Further, there are reasons other than a weak brand for discounting. Take clubs for instance. A winery may have great demand but to keep their club members alive and buying, they may have decided to offer a discount and guaranteed availability for being in the club.

      Discounting for weak or "inferior goods" may not work out well. When a brand is truly inferior, you may not see any build up in quantity sold when the wine is discounted. Take for example the low priced wines today.

      Looking at Nielsen's 3/28 information, the $6 - $9 price points have seen discounting of 2.3% compared to last year, and the result of that is volume declined 2.0%. That is a truly weak segment and discounting isn't the answer there. Other measures are needed to right size inventory and increase demand.

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  2. There's a winery on Conn Creek Road in Rutherford that doesn't fit anywhere on this Wine Demand Curve. The curve stops too early.

    This winery increase volumes, demand and prices annually and they don't discount at all. They don't neatly fit into the luxury or normal good categories.

    They are in a category of their own selling wines that are commodities disguised as a luxury goods.

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    1. Anon 10:16 .... do I detect a note of bitterness in your tone?

      In any case, wine quality is a given today. That is just a permission to play. Someone who is putting out commodity grade wine and selling it for luxury prices can either make gold from iron, or they will see their sales drop as luxury consumers decide the goods aren't up to snuff.

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  3. Rob - Another great post. I agree 100% (yes I am an economics junkie also). This is why second labels exist. For the brands that have real emotional connections with their customers, a second label can do just as much damage as discounting the primary label. If you know of any great wineries stuck alond their supply curve, send them my way...I would love to buy their juice!

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    1. Thanks for the comments Juan. You probably are aware that Ciatti and Turrentine Brokerage as well as some other smaller brokers are out there and handle the orderly exchange of wine between producers.

      Next week, well discuss what everone is dying to talk about, the Giffen Good. Stay tuned .... ;-)

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    2. Yes Giffen violates the law of demand! I actually can't wait. In all seriousness though, do you have a list of these brokers? I am aware of a handfull of brokers, but I would love to find more. Also, do you know of other companies like MHW Ltd? My understanding is they do all the back end work for beverage firms.

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    3. Juan - The two most reputable are the ones I mentioned. Not to say others are of poor reputation, just smaller and less in view.

      On the other question, I'm not sure what you mean by back end work? Compliance, taxation, shipping, inventory management??? Taking a blind answer, you might check into WineDirect.

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  4. as a michigan winery, i find it interesting that next to napa [and the other] we're the lowest discounting region to our wine club members. while i'd like others to think that this is a reflection of our regions' strong wine brands, i suspect it's a matter of our normal pricing model. we in the midwest generally try to price our wines to give good value, so have very little room for discounting. and personally, i abhor discounting, unless i am the purchaser.

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    1. Larry, Thanks for logging in and the comment. I'd love to give more thought to up and coming regions like Michigan with respect to where they fit on the luxury good curve, versus changes in income. It would be a facinating study to me. I like the fact that your are telling me you aren't selling on price either way.

      Thanks again for offering your thoughts!

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  5. Rob

    Is that pic of you sitting at the Westin in Waikiki?

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    1. It is exactly there .... one of my favorite places on earth. If you want to check out from whatever you are doing now and waste 15 minutes, here is the link to the webcam that is mounted atop the bar with the green roof, about 40 feet from where that picture was taken: http://www.seehawaiilive.com/oahu/waikiki-resorts

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  6. Great topic! Bordeaux seems to have the perfect "out" for deep discounting by playing up vintage variation. Compare 2010 to 2012 for example. This allows them to make large changes without looking like they are discounting at all - even when that is exactly what they are doing. Brilliant!

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    1. Louis, thank you for loggin in and the comments.

      I was trying to think through Bordeaux when I was writing, and how they can seemingly move price all over, but on the whole its been rising above the rate of inflation for decades.

      I don't have a rationale for it. I know the Chinese picked their supply up during the recession but now they are struggling a little more with the conspicuous consumption premption. You would think at some point they will end up with way too many vintages out there and someone will have to take the hit but somehow. Maybe its because the wine is historically aged for a long time so the consumer is sitting on that bulge in inventory. I don't know exactly what to think but its a great question for which maybe someone else has a relevent theory??

      Thanks for asking ..... anyone have a theory on Bordeaux?

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    2. This comment has been removed by the author.

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    3. DELETED FOR TYPO EDITING. NOW REPOSTED . . .

      Rob,

      Many Bordeaux producers are owned by European insurance companies (or the occasional billionaire) which take the "long view" in running a business.

      Link: http://www.nytimes.com/2013/04/13/business/global/chateau-latour-breaks-with-a-bordeaux-tradition.html?_r=0

      The sales revenue and profits of chateaux aren't even a rounding error to these insurance companies (or billionaires).

      If writer William Langewiesche in his cover story for The Atlantic magazine (December 2000) is correct that "even the best wines cost only about $10 a bottle to produce," then even after adjusting for the last 14 years of modest inflation, the contemporary production cost of a fine wine is still only in the low teens.

      With Bordeaux destined to sell for upper two digit or low three digit prices at retail, the carrying cost of inventory for unsold consecutive vintages is still affordable for these well-financed operations.

      Not every business is run on a classic P & L basis.

      Does Amazon earn a profit?

      Answer: http://www.wsj.com/articles/amazon-swings-to-loss-despite-jump-in-sales-1429819649

      Does Twitter earn a profit?

      Answer: http://www.wsj.com/articles/twitter-reports-slowing-user-growth-1423170918

      Does YouTube earn a profit?

      Answer: http://www.wsj.com/articles/viewers-dont-add-up-to-profit-for-youtube-1424897967

      Their business model is predicated on growing first, and generating profits later.

      Aspiring oligopolies that erect barriers to entry to thwart their competitors. (The most widely touted barrier: "network effects.")

      As one Silicon Valley oligarch declared:

      http://www.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536

      Bob

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    4. Bob - good thoughts. Thanks for sharing. I think you are saying that Insurance Companies and Billionaires are running the wineries as a labor of love, which I can understand if they aren't public companies.

      I can tell you for certain the cost of wine is far in excess of $10 though since I see financial statements. A cork can cost 50 cents and a good cork costs $1..... add in the cost of the label, the price of grapes factoring in harvest and farming costs and the price of the dirt, vinification .... it's pretty easy to get past $10 fast.

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    5. Those European insurance companies and European (and now Chinese) billionaires don't live off the proceeds from their chateaux.

      They have highly remunerative "day jobs" that allowed them to spend tens or hundreds of millions of dollars to acquire those chateaux.

      Repurposing (and augmenting) my reply to your June 8, 2014 blog entry titled "How Much Do Wineries Really Make?

      Excerpt from The Sacramento Bee "Business” Section
      (February 14, 2008, Page D1ff):

      “Full Bouquet on Wine Costs;
      From grapes to glass, prices vary by region and quantity"

      Alternate link:

      http://www.record-eagle.com/news/business_the_biz/article_1d40b347-9132-54ea-bb2d-fc3fbdfa3db9.html?mode=print

      By Jim Downing
      Staff Reporter

      “Breaking Down a Bottle”

      The value of wine grapes depends on where they’re grown. While grapes are the primary ingredient in wine, they make up only a splash of a bottle’s retail price.

      Here’s a breakdown of the estimated costs in a typical $20 bottle of wine:

      Grapes = $ 1.95 Petite Sirah (Mendocino)
      Winemaking ops = $ 3.25 medium-volume
      Oaking = $ 0.75 American oak barrel
      Bottle glass = $ 0.90 Midrange glass
      Label = $ 0.25 Midsize order
      Closure (cork) = $ 0.30 Midquality cork
      Capsule = $ 0.10 Aluminum
      Bottling = $ 0.45
      Subtotal . . . $ 7.95

      Winery mark-up = +75%
      Winery mark-up = +$ 5.96
      Subtotal . . . $13.91

      Wholesaler mark-up = +20%
      Wholesaler mark-up = +$ 2.78
      Subtotal . . . $16.70

      Retailer mark-up = +20% supermarket
      Retailer mark-up = +$3.30
      Total . . . $19.99

      Here’s a breakdown of the estimated costs in an $80 bottle of wine

      Grapes = $ 5.75 Cab Sauvignon (Napa)
      Winemaking ops = $ 6.25 small lots
      Oaking = $ 2.00 French oak barrel
      Bottle glass = $ 2.00 Heavy European glass
      Label = $ 0.65 Small order, fancy label
      Closure (cork) = $ 1.00 Highest-quality cork
      Capsule = $ 0.18 Tin
      Bottling = $ 0.50
      Subtotal . . . $18.33

      Winery mark-up = +150% Small, renowned winery
      Winery mark-up = +$27.50
      Subtotal . . . $45.83

      Wholesaler mark-up = +35% Low volume = high m-up
      Wholesaler mark-up = +$16.04
      Subtotal . . . $61.86

      Retailer mark-up = +30% Wine shop
      Retailer mark-up = +$18.13
      Total . . . $$79.99

      Sources: Sacramento Bee; Robert Yeltman, UC Davis; National Agricultural Statistics Service

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  7. Hey Rob

    Yeah, I was at the Westin Waikiki earlier this month, we had drinks at that very bar! I agree, great hotel. We stayed at the Westin in Ka'anapoli too. I sell wine and have the dilemma of discount or not to discount. Good information, Thanks

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  8. Hi Rob - as usual, great food for thought...several comments:

    1) Club Discounts - this is typically much more a marketing tool to overcome barriers to entry (ie. "why should I join the club?"). The enticement of a discount is the fodder, and the logic is impeccable (direct means lower costs, so the winery extends this to you, the consumer). Extended discounts and "member-only" specials turn out to be great avenues for inventory management in a contained audience that already has a "value point" (on your graph) emotionally set for the brand - and it typically doesn't move much unless the quality of vino changes (or rating create such perceptions).

    2) MSRP: interesting lessons learned when KJ pulled their VR Chard from Costco 5+ years ago. It was all about pricing...and Jess wasn't ready to let Costco control his pricing strategies. Huge hit to KJ that year and next, but they maintained pricing elsewhere, and have recouped shelf at Costco with other brands. Sounded like a great game of poker - still not sure who really won, however. Had to give Jess credit for sticking to his principles...and to Costco for sticking with theirs...

    Best in these discussions to weed the Veblen brands - they are too few and far between, and have a marginal share of the market. Nice efforts to keep the focus on the mass market, where the money is...

    Z

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    1. From The Wall Street Journal on another "big box retailer" playing hardball . . .

      "Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices"

      Link: http://www.wsj.com/articles/wal-mart-ratchets-up-pressure-on-suppliers-to-cut-prices-1427845404


      Excerpts:

      "Wal-Mart Stores Inc. is increasing the pressure on suppliers to cut the cost of their products, in an effort to regain the mantle of low-price leader and turn around its sluggish U.S. sales.

      "While lowering prices by shaving down marketing budgets may help Wal-Mart draw more customers, it gives suppliers less control over how their products are displayed or promoted, and less ability to make them stand out against store brands or other rivals. That is an issue when Wal-Mart and other chains are trumpeting their private-label house brands.

      "Recently, in what was widely seen as a move to pressure Procter & Gamble Co. to lower prices of its popular Tide detergent, Wal-Mart struck a deal with consumer products company Henkel AG to introduce a new premium-priced detergent brand, Persil, exclusively in its stores. Wal-Mart is selling Persil at the same price as Tide, and displaying it on shelves next to Tide."

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  9. Anon 12:30 - Really insightful comments. Thanks for taking the time to write.

    I totally agree with point #1. If wineries are discounting to invent purchases of slow moving wine, outside of a supply shock there is something wrong with execution or strategy.

    I remember seeing the KJ example you cite too. I had a similar event take place with a client in the late 1990's. The winery in question (since closed) raised price $5 a case and nothing happened to volume. Three months later, they raised price another $5 a case and nothing happened to volume. That seemed to be a trend so they increased price again $5 a case and sales almost stopped cold.

    With the last price increase they had passed the bottle prices of KJ wines and didn't have the same consumer perception in terms of quality versus KJ. They then had to backtrack and discount wines. Needless to say their wholesalers were not very happy with them. But that was the first time I had seen how small changes in the price of wines produced in heavy quantity could have such a severe impact on quantity sold.

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    1. Interesting...your example speaks volumes:

      1) Pricing - the fact that they had left $$ on the table earlier says they didn't have a good picture of price elasticity (since you're quotin' econ101). Too few wineries use basic techniques to test pricing. CPG companies do this routinely.

      2) Support your Driving Premise - this is a great example of failing to recover, as per your article to start. Hence the obvious growth in flash and 3rd party brokerage to deal with overages. And the company didn't have the hubris/sensibility to retract the price increases (or lacked the Sales team to make it stick) and tried to fix on the backend (and ended up being flushed...). They should have just eaten crow and repriced back down (and symbolically fired a marketing hack for such a mistake).

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  10. Bob Henry (wine marketer)April 27, 2015 at 4:44 PM

    Rob,

    "I'm betting nobody knows who Thorstein Veblen is."

    Geez, I feel like Rodney Dangerfield.

    I've been sprinkling like Pixie dust allusions to Veblen goods (and Giffen goods) as they relate to wine pricing all over wine blogs for more than a year now -- and I still don't get no respect!

    Nice to see a fellow Santa Clara B-school grad has taken up the cause of enlightenment.

    Thank you Professor McMillan.

    Bob

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    1. I knew there had to be one nerd in the world besides me Bob. Thanks for the public confession. Its good for the soul.

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    2. My first wine mentor Robert Lawrence Balzer [*] -- trained by Cambodian Buddhist monks -- used to exclaim to us students in his semi-annual wine appreciation course:

      "Confession is good for the soul."

      [* Obit: http://articles.latimes.com/print/2011/dec/09/local/la-me-adv-robert-balzer-20111209 ]

      Delete
  11. One way to move excess inventory is to invade "adjacent markets" unseen by most consumers.

    Markets devoid of check-out register scanner data that can analyzed by your competitors.

    Examples: restaurant wine lists; hotel/casino wine lists; cruise line wine lists, airline wine lists. By the glass or by the bottle.

    A good introduction to "adjacent markets" can be found in this highly recommended business book: "Double-Digit Growth: How Great Companies Achieve It - No Matter What."

    Link: http://www.summary.com/book-reviews/_/Double-Digit-Growth/

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  12. Rob,
    Nice work, but I think you're model is designed to work in bubble that doesn't take into account external factors such as competition. Or perhaps it only applies at the supplier end of the distribution chain.
    I owned an upscale wine shop for 20 years and resisted discounting as much as possible. However, New Jersey retailers are in a race to see who can make the least amount of money and keeping the blinders on to that kind of competition can sink a business quickly.
    When the economy tanked in 2008 my already cutthroat competition slashed their prices even more. It became a new paradigm as wines that were once scarce and highly allocated (Verblen good) plummeted in price and remained nothing more than loss-leaders for many stores to this day.
    Wholesalers who once told me I had to buy XXX Wineries so-so Chardonnay to get the rare Cabernet were now telling me I must buy the rare Cabernet to get the Chardonnay. Wines that I was once allocated a case or two were now offered to me at 50 case discounts. I would have loved to pocket some extra margin on these items but the competition wouldn't allow it. I still had to sell the items near cost or be branded a gouger for making 6% to 10%!
    Maybe those days are behind us for the wineries but discounting at the retail level is (unfortunately) imperative for many retailers regardless of - or perhaps because of - a products allure as a luxury item.
    Don

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    1. Don,

      You don't have to compete on price alone.

      You need to create "augmented" goods and services.

      By "adding value" through a curated experience in a wine store -- imparting your knowledge and expertise, hosting comparison winetastings, hosting winemaker dinners, hosting in-home or at-the-office winetasting parties -- you differentiate yourself from the competition.

      Check out Harvard Business School Professor Theodore Levitt's timeless article on this subject:

      "Marketing Success Through Differentiation—of Anything"

      Link: https://hbr.org/1980/01/marketing-success-through-differentiation-of-anything/ar/1

      Bob

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  13. Dan - thanks for the very salient comments and for logging in!

    You are right in that this is intended for wine producers with a focus on the US.

    Wine retailers have their own set of challenges and they are difficult ones which arise from the confluence of owning inventory during recessions and or predicting what consumers want and stocking that, and then from disruptive internet retailers of wine who may carry little inventory.

    Another factor - and maybe its the largest, is the ability to get pricing information right in your store with a phone. When the consumer is given perfect pricing information, they will use it and shop where price is cheapest. That forces retailers to lower price to compete, and in the end the most efficient retailer wins the game because they can discount the most.

    There is one solution to that and thats to use technology to improve predictive capability of wine purchasing and inventory management, and then work under a service model. All businesses who focus on cost cutting forget why they are in business eventually (the customer) and will leave wide swaths of opportunity. That said, those transitions are painful.

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  14. While technically not Veblen or Giffen goods, Apple's success extracting ever higher sales revenue and profits from the buying public is noteworthy.

    Ripped from the headlines . . .

    Excerpt from The Wall Street Journal "Main News" Section
    (April 28, 2015, Page A1ff):

    "Pricier Gadgets Help Apple Elbow Out Rivals"

    Link: http://www.wsj.com/articles/apple-earnings-iphone-powers-results-1430166629

    By Daisuke Wakabauashi
    Staff Reporter

    Apple Inc. is pulling off a feat rarely seen in any industry, much less the cutthroat world of consumer electronics: gaining market share while also commanding higher prices.

    . . .

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    1. Brand strength: Increasing price and increasing volumes sold. The valhala of marketing.

      Delete
  15. Rob: Emotional experience-bond value,
    Our brains evaluate each transaction identically, what is the products physical offer and it's emotional offer. The emotional offer far outweighs the physical offer in importance, 93% to 7% Harvard Business School 2014 ( a new paper to be published in June indicates 95% to 5%, the cognitive brain simply rationalizes the emotional decision).Thus emotions rule consumer's decisions making process because we are hard wired so, 10 to 1.
    Michael Brill wonder does emotional bond experience outweigh the discount factor? That depends on the strength of the bond versus the size of the discount and consumer profile female or male. If it is a strong bond inner self-identity needs can be fulfilled, especially for women and lead to brand loyalty. What experience bond lacks is the ability to satisfy social self-identity needs which are paramount for male behavior. Also emotional bond-experience is not easy to scale. The wine industry has relied on discounting to satisfy the emotional brain, but at what cost?
    This is why truly great brands satisfy inner & social self-identity needs, like Apple.
    Apple along with many other great brands understand how to communicate with the brain. You must first create an emotional transaction with the consumer prior to a fiscal transaction. And a long list of product facts will never achieve an emotional connection. Steve never sold a computer he sold VALUES. He clearly understood your product is not your brand.

    Bordeaux cost analysis:
    Could you make a great Bordeaux in 2000 for $10, yes. 4 factors to consider, they have little to zero debt to service, on an acre to acre vines planted comparison 1800 to 2200 versus Ca. 560 to 620, (Chateau Lafite has 7500 per hectare) today there are some Ca. properties doing high density plantings, label cost .15 no fancy Bordeaux labels except for Mouton, cost of French Oak lower in Bordeaux, and employee insurance cost our lower.

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    1. Edward -
      Thanks for the added thoughts and HBR facts. Always appreciate learning something.

      On the cost analysis, I can tell everyone with extreme precision that great wines cost far more than $10 to make. Its not even close no matter how its viewed.

      I will be updating the "How much do wineries really make" blog post probably this weekend and everone can take a look at the industry financials agglomerated for a benchmark.

      Delete
    2. If circa 2000 even "great" wines cost no more than $10 to produce, then doubly so for less-than-"great" wines. (That includes "very good" to "excellent" wines.)

      By "produce" I am referring to the input costs.

      Quoting the circa 2008 Sacramento Bee article for an $80 bottle of wine at retail, it costs $18.33 to produce:

      Grapes = $ 5.75 Cab Sauvignon (Napa)
      Winemaking ops = $ 6.25 small lots
      Oaking = $ 2.00 French oak barrel
      Bottle glass = $ 2.00 Heavy European glass
      Label = $ 0.65 Small order, fancy label
      Closure (cork) = $ 1.00 Highest-quality cork
      Capsule = $ 0.18 Tin
      Bottling = $ 0.50
      Subtotal . . . $18.33

      Winery mark-up = +150% Small, renowned winery
      Winery mark-up = +$27.50
      Subtotal . . . $45.83

      Wholesaler mark-up = +35% Low volume = high m-up
      Wholesaler mark-up = +$16.04
      Subtotal . . . $61.86

      Retailer mark-up = +30% Wine shop
      Retailer mark-up = +$18.13
      Total . . . $79.99

      If we cite by way of example a $40 or $50 dollar bottle of wine at retail, we can project the production cost is in the low teens.

      Here's an anecdote from the Wall Street Journal wine column on the relationship between wine grape variety input costs and a wine's projected retail selling price.

      “The Beckstoffer pricing formula calls for the price of a ton of To Kalon Cabernet grapes to equal 100 times the current retail price of a bottle. (This is true of all his heritage vineyards.) For example, if a bottle of Paul Hobbs Beckstoffer To Kalon Cabernet Sauvignon costs $250 (as it did at my local store) then Mr. Hobbs paid $25,000 for a ton of the fruit plus a base amount per acre that may vary. By contrast, the average price per ton of (average) Napa Cabernet is just north of $4,000.”

      Link: http://www.wsj.com/articles/SB10001424052748704893604576200842057088206

      Delete
  16. I went looking for any article or press release citing Harvard Business School circa 2014 regarding "The emotional offer far outweighs the physical offer in importance . . ."

    I found none on the Web.

    A tangentially related article I found (circa 2006):

    "What Customers Want from Your Products"

    Link: http://hbswk.hbs.edu/item/5170.html

    As for Steve Jobs, this quote:

    http://image.slidesharecdn.com/stevejobsvsbillgates-130528160028-phpapp02/95/steve-jobs-vs-bill-gates-8-638.jpg?cb=1370343218

    ReplyDelete
  17. Bob:

    Google, Professor Zaltman HBS Emotion, you will see numerous articles on the professors research. He also has compile some great research on persuasion tactics in sales presentation, they mis the market 95% of the time. The professor was not the first to understand, this actually goes all the way back to when Greece had true-money in their banking system. Plato believed decisions were formed in the cognitive brain while Aristotle believed they were formed in the emotional brain.
    Economics was the historical dominate discipline for research on decision theory, the role of emotion in decision making rarely appeared in the 20th century papers. Even though influential economic treaties were written, ( Google Loewenstein for a great review of these papers). Ok, fast forward early 1980 Professor Simon who shared Plato's believe's he stated " hence in order to have a complete theory of human rationality, we must understand the role emotions plays in it" He launched the revolution into consumer's decision making process research. Today neuro-imaging proves emotions dominates consumer decision making process.
    Here is a SHORT list of research studies that underscore Professor Zaltman findings, Scherer & Ekman 1984 ( numerous papers by Ekman), Frijda 1988, Damasio 1994 "Theory of Consciousness" a classic, Gilbert 2006, Keltner Lerner 2010, and Phelp's 2014 his paper for Annual Review of Neuroscience.
    Steve Jobs quote did not come from the Bill Gates discussion, he stated the importance of brand values many times in interviews and the reduce role of the physical product differentiation. What he was saying was the "order of presentation", how is your brand message tailored? He believed the physical product was important but the brands dimension of differentiation could not be based on product facts.
    Bob if you want any research on consumer's decision making process I be happy to provide it to you, jigsawmcs@gmail.com
    Best regards
    Ed

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    Replies
    1. Ed writes:

      "Economics was the historical dominate discipline for research on decision theory, the role of emotion in decision making rarely appeared in the 20th century papers."

      It is not a coincidence that the two greatest marketing professors of the 20th century were trained as economists.

      I refer to Harvard Business School's Theodore Levitt.

      And Northwestern University's Philip Kotler.

      The "rational economic man" theory has been supplanted by behavioral economics.

      For the benefit of the readers of Rob's blog:

      http://en.wikipedia.org/wiki/Behavioral_economics

      https://hbr.org/2015/05/from-economic-man-to-behavioral-economics

      Bob

      Delete

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