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The Strategy of Pricing Wine

Panel of experts review process behind pricing at SSU

by Andrew Adams
jon fredrikson gomberg bulk costs
Jon Fredrikson tells an audience at Sonoma State University that wine prices are increasing on the whole.
Rohnert Park, Calif.—Intense competition and retailer discounts kept wine prices in check during the recession, but that appears to be changing.

Jon Fredrikson, principal with Gomberg, Fredrikson & Associates, said that in the past two years there have been more price changes—especially at the lower and higher price categories—and prices on the whole have been increasing. “It’s clear people are dealing with rising costs,” he said.

Fredrikson was one of three experts discussing wine pricing at a forum hosted by Sonoma State University’s Wine Business Institute on Thursday night. About 70 people attended the event, part of an ongoing series of seminars and forums hosted by the school. Fredrikson was joined by Dr. Steven Cuellar, an SSU economics professor who studies the wine industry, and Chris Spear of TradePulse, a sales technology and information supplier to the wine industry. Another panel of experts discussed some of the major consumer trends in the wine industry Friday afternoon.

A flood of imported bulk
At the low end of the price spectrum, the industry’s major producers have had to import bulk wine to offset the lack of Californian wine. Fredrikson said that in the past 12 months, 40 million cases of bulk wine have been shipped through San Francisco alone. Most of the wine is coming from Argentina, Chile and Australia. “We ran out of wine in California, (and) to support their brands this is what they had to do,” he said.

Total imports from Argentina and Chile are four times higher than in 2011. The two countries accounted for about 14.5 million 9-liter cases in 2012 through August. Australian imports rose from about 2.5 million to about 5.5 million case equivalents.

While large American producers were able to turn to bulk imports to make up the balance of their value wines, overall global supply is expected to continue to decline; Fredrikson noted there’s 3% less total global vineyard acreage.

Ultimately though, the U.S. wine market is the world’s largest and most competitive. Fredrickson said that TTB approved 120,000 new labels in 2011 and whenever he attends international wine conferences people ask how to get wines into the hands of American buyers. “Because it is so competitive it’s a dream market for American consumers,” he said. Gomberg, Fredrikson & Associates publishes a monthly WINEDATA pricing report for more than 16,000 American and imported wines.

Price elasticity
SSU’s Cuellar has developed models that predict price equilibrium points based on factors such as retail data and market information. The models can also calculate a product’s price elasticity or the point at which a consumer will switch to a different product. Cuellar stressed that the figure is not a set number but a flexible factor that changes from market to market and other factors. “It makes perfect sense that consumers in San Francisco have different tastes than, say, in Sacramento,” Cuellar said.

With that in mind, Cuellar noted the need for “price discrimination,” or finding the different price points between different markets.

When asked about how Flash sites could be affecting wine prices, Cuellar said he has not seen much impact yet. He said one would expect to see greater elasticity in prices as retail channels compete with the online deals, but so far that has not been the case. “We haven’t seen elasticity increasing over time,” he said.

Streamlining pricing information
Spear, the vice president of business solutions for TradePulse, said the alcoholic beverage industry is a bit different in that it’s not selling a “free market” product. He noted there probably are countless online consumers who are eager to buy wine but live in states that do not allow direct shipping.

TradePulse provides clients with a suite of software to help manage and link pricing to sales, promotions and depletions. He said the models discussed by Cuellar should be used as an element of a winery’s pricing strategy.

Many wineries struggle with too many price points, which others try to simplify with one FOB price that fails to account for market differences or the costs of getting the product to market. Then price information can become confused between suppliers and wholesalers.

Spear went on to say that the “holy grail” of price control would be to eventually automate bill backs between wholesalers and wineries for a smooth settlement process. “This is a serious pain point for them as well,” he said.

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