Reshaping the Wine Pyramid

Many will be familiar with the concept of the price/volume “pyramid”.  This is a simple diagrammatic way of displaying the typical situation in many product markets (wine most definitely included) where the largest volumes of sale are sold at low prices and decreasing volumes as prices increase.  In other words, like a pyramid the diagram is widest at its base and rises to a peak at the highest price levels.

Given the events of the last four years of recession, global market weakness and lingering oversupply, most people would expect that the pyramid for the wine industry has been squashed down across the board.  In most countries that is exactly what has happened, with the most glaring exceptions including the feeding frenzy around the top Bordeaux wines, and especially the 2009 en primeur campaign. 

However, in New Zealand, even though the overall impact of widespread product discounting has been consistent with the expected “squashing” of the pyramid, this has not happened across the board.  Indeed, the very top of the pyramid has risen higher, not fallen.

The peaks are the top wines but even lesser wines from the same producers have sometimes risen within their price bands.

For the first time there are signs of a real separation in New Zealand wine pricing between the industry’s “aristocracy” and the rest.

At the same time as discounting has been rampant, an increasing number of individual premium labels are selling at luxury prices (by NZ standards $80 dollars or more, though some would argue even lower prices still constitute luxury, as opposed to “ultra premium”, by New Zealand standards).

How has this happened?

Arguably this is to some extent made possible by the fact that top Australian red and white wines have traded at luxury price points for many years, selling for prices from NZ$80 up to several hundreds of dollars on release.  The fact that leading New Zealand wines have developed track records in wine shows and in competitions such as the Tri-Nations with Australia and South Africa, including competition wins in the prestige Pinot Noir and Syrah/Shiraz classes, can only have helped.  Pride in top NZ wines has moved beyond the “cultural cringe” of the past to increasing levels of chest-thumping fervour. 

The fact is that any statements that New Zealand wines might be in a comparable class to those of any other wine region of the world are hollow if no one is prepared to pay prices that at least reflect some kind of comparable relationship.

There has been a trickle of New Zealand wines asking luxury level prices for over a decade.  Examples such as Stonyridge Larose, Martinborough Vineyards Reserve Pinot Noir, Montana’s Tom, Esk Valley The Terraces and even Morton Estate’s Coniglio Chardonnay come to mind.

With the growth of new reputations, a number of newcomers have joined the early runners. These have in the main tended to come from four regions (south to north):

Central Otago – starting with Felton Road and increasingly now the top labels of several other producers both fuelling and feeding on the Region’s growing international reputation;

Martinborough – Dry River, Ata Rangi, Escarpment  and others are now producing pinnacle wines – proximity to Wellington and consequent high land prices have supported the economic equation in favour of higher prices;

Hawke’s Bay – The success of the Gimblett Gravels area especially, with international recognition, has supported the growth of luxury labels from Craggy Range, Trinity Hill and a band of relative newcomers with lofty quality ambitions;

Waiheke Island – Supported by the proximity of Auckland, top labels from the likes of Te Whau and Passage Rock shone even when Waiheke seemed to struggle to deliver on its relatively high price points. This has now changed as established labels perform and relative newcomers such Destiny Bay, Hay Paddock and Man O’War produce top labels that justify luxury price points.

There are luxury priced wines emerging from other regions.  In my view (and not judging the rights or wrongs of this) these are generally more scattered.  Marlborough, for example, has its share of wines at price points above the rest, but the ones that reach levels comparable to other regions (the likes of Seresin, Fromm, Herzog might be mentioned) are more the exceptions. These serve to remind us that Marlborough’s reputation is still built on a grape variety that only very rarely reaches luxury price points even in its homeland. Similarly in Waipara and North Canterbury, the exceptions such as the top labels of Pyramid Valley, Bell Hill and Pegasus Bay, rightly or wrongly, stand out from the rest.  These are all reminders, however, that this is an ongoing process – that others who strive for excellence will win the reputations that allow them to join these names.

To a certain extent there are parallels among the regions.  From the late 1990s (the freak 1998 vintage aside) into the early years of the last decade there was a pervasive sense, despite notable exceptions, of overall underperformance, lack of stylistic clarity and direction, made worse by some indifferent vintages.

Over the last 5-6 years there has been a broader sense of change and, despite the economic circumstances, energy in these regions.  At the same time as a series of good to excellent vintages, viticulturists and winemakers have been hitting their straps and starting to craft wines of focus and ambition.  Competition at the top level has become intense, and price has become a justifiable measure of achievement – just as it formed the basis for quality rankings, most famously the 1855 Bordeaux Classification, in Europe in the past.

The evidence from Bordeaux 2009 En Primeur, and from other wines with global markets, is that while recession has suppressed overall wine prices this has not happened at the top.  The collapse of pricing for some highly rated Californian Cabernet Sauvignons has perhaps underlined the global emphasis – these were sometimes wines without a track record that relied on a specific domestic rather than global market.  When the pyramid reflecting supply and demand for that marketplace was squeezed, only those with established reputations and alternative avenues to market could maintain their position.

As in New Zealand, and despite the well documented difficulties in that country’s industry, Australia’s top “icon” labels have mostly defended and in some cases increased prices.

What is now also becoming evident is that there is indeed a flow on effect from having “icons” within the portfolio – that wineries producing individual wine labels with pinnacle reputations, operating in the fine wine space, increasingly achieve higher price points for their lower tier wines than do competitors with comparable products.  Perhaps in part because consumers come to expect that the care and attention that goes into the top labels will be repeated through the portfolio.

Another factor may well warrant investigation, especially in New Zealand and Australia.  Social media has been widely adopted by the mostly smaller producers who produce the wines that justify luxury pricing.  Many may have done so to ensure they remain above the difficulties associated with crowded and discounted supermarket aisles, but in the process they have forged closer ties and greater visibility with their customers.  The economic payback for this visibility and for what it has contributed to their reputations is very clear, if not easily calculable.

The pyramid is continuing to change.  Already there is anecdotal evidence that the worst discounting is starting to dry up in some parts of the market – so the bottom of the pyramid may even be starting to push up for a change.  In New Zealand the effects of the GST increase are still working through the system.  However, those producers who have worked hard on building their reputations based on better than simply solid quality, and who have maintained or even enhanced their visibility in the marketplace, are still able to do well.

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