The Point Of Equilibrium

A piece for Tim Atkin MW on the economics of wine pricing

Someone recently told me that my saying “a bottle of wine is worth whatever the consumer is willing to pay for it” was a lazy, throwaway comment.

But it’s the reality! I protest.

In fact:

Supply is the total quantity of wine available in the market; demand is the total quantity that consumers are willing and able to purchase at various prices; price is the point at which supply and demand intersect, in a precarious and ever-changing equilibrium; utility is the satisfaction a consumer derives from drinking the wine; willingness to pay is the maximum amount a consumer is prepared to spend for that satisfaction.

And a bottle of wine’s worth — its value — is the story we tell about that equilibrium.

But at this moment in time, we’re well into the third consecutive year of falling wine prices or, the longest sustained down market since the 1970s. If price reflects the point where supply meets demand, then where is that equilibrium now?

It’s a frightening thing, to invest time, land, labour, and capital into a product, only to be told it’s worth less than the sum of its parts. It’s scary because value is not intrinsic; it’s determined by what someone else is willing to pay for it.

Some might rightly argue that the real value of a bottle must be based on fundamentals, on production costs. What are those costs? Land, labour, electricity, tax, and so on. Equipment, fuel, fertiliser, packaging, water, bottles, corks, labels, marketing, insurance, logistics, certification, compliance, warehousing, sales and distribution, ...

On top of these costs, a premium is added for margin and prestige. And we tend to think that this premium (for wine) is always large — and often is.

But if I’m to believe what a Champagne grower once told me — that if you buy a bottle of Champagne in a UK supermarket for under £15 (at the time of writing, Sainsbury's has two and Waitore one), it likely means the grower behind it has lost money — then it’s clear there are some market dynamics pushing prices below that fundamental floor.

That’s not sustainable, on either end.

Over time, selling wine below cost of production isn’t viable. If the alleged benefits of supermarket partnerships don’t eventually outweigh the losses, those businesses won’t survive.

On the other hand — and perhaps this is where we are now? — excessively high prestige premiums added on top of that fundamental floor can damage the market in a different way. They tend to erode consumer trust, and buyers become sceptical and then they stop buying altogether.

But in such market conditions, when prices decline for this long, what is wine’s fair value?

Marie Antoinette’s “qu'ils mangent de la brioche” is often cited to mock an out-of-touch luxury thinking. In this analogy, wine is the brioche. Brioche is to bread what wine is to water. That’s to say: wine isn’t essential to life. Tim Atkin readers might disagree — but generally speaking, it’s not medicine. For a diabetic, there’s no price too high to pay for insulin. Thankfully, in Europe, we rarely test this economic theory known as inelastic demand. But in other parts of the world, where healthcare isn’t public, people know exactly what it means.

In my original comment: a bottle of wine is worth what someone is willing to pay for it and that’s because it’s not priced on need, but on desire.

And desire changes.

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