What Makes Wine Expensive?
Have you ever wondered what makes wine expensive? Have you ever been at an upscale restaurant, enjoying a fine dinner as part of a special evening, and decided to order a bottle of wine?
The Sommelier arrives at your table and delivers the restaurant’s wine list for the evening. He asks if you have any questions, and then says that he will return in a few minutes after you have had a chance to make a decision.
You share the wine list with your table guests, and the decision making begins. Which wine will you and your party enjoy the most? Which wine is best? Surely, the more expensive the wine, the better the wine, right?
Everybody has their own preferences when it comes to wine, but there is a common belief that the more expensive a bottle of wine is, the better the wine is. Is there truth to this belief, and what in fact makes wine expensive?
How is wine’s value determined?
The price of a particular bottle of wine will reflect a few things. Obviously, as with any manufactured product, there are the costs of production, which is how much it actually costs the winemaker to produce a bottle of wine.
The costs of production include the raw materials of grapes, aging barrels, wine bottles, utilities, and labor. These are direct costs that factor directly into the cost of a bottle of wine.
Next, you have overhead costs, such as administrative, sales and marketing costs.
Some winemakers spend a large sum of money on marketing costs, just to get their brands of wine into the market and become recognizable. The next level of costs comes from the markups imposed on each bottle of wine from the distributors, wholesalers and retailers, each of whom all look to make a profit on each bottle.
Finally, there is always the “Mother Nature” factor, as drastic changes in weather patterns can lead to vast reductions in yields, which then disrupts the supply and demand factor. If a particular vintage has a materially lower yield than in previous years, there will be a reduced supply of that wine available in the market. Assuming that demand for that wine stays constant; the lower supply will lead directly to higher prices.
Now that we have a general understanding of the variety of costs associated with the production of a bottle of wine, we can go further and ask why are expensive wines expensive?
Why are expensive wines expensive?
The word expensive is a relative term, and as such, it means different things to different people. Let’s take a look at some of the general segments of the wine market to see how wine prices are typically classified. We will start at the lowest priced segment and work our way up.
The cheapest (or as I like to say, least expensive) segment of wines is referred to as the “Extreme Value Wines.” This tier, which is often considered to be the lowest quality tier, does include familiar brands including Gallo Family Vineyards and Sutter Home.
These wines often sell for under $5 a bottle. Wineries that sell wine at this price point have a large commercial production and an integrated distribution system that allow it to remain profitable, even at these low prices.
These wines are most often a blend of several types of grapes, from several regions, and even from several vintages. It is difficult to find any consistency from this segment of the wine population.
The next step up is the “Value Wines” segment. These wines typically sell for between $5 and $10 a bottle. What distinguishes this segment from the Extreme Value Segment is the noticeable higher level of quality and consistency. Wineries that produce in this segment make an effort to create a wine that is suitable for everyday drinking. Wines in this segment are usually produced from a single vintage, though still using different kinds of grapes.
It is the next step up, with the “Popular Premium Wines” that include many of the most popular and highest selling bottles of wine in the entire market. Bottles of wine from this segment typically sell for between $10 and $15, which is still considered affordable for many consumers.
This segment, while it includes a decent number of quality varietal wines from good large production wineries, it also includes some wines that should be placed in the Value Wines segment, but are marketed as being higher quality, leading to buyer confusion. This is the segment where the true Popular Premium Wines actually show typicity, meaning that a Cabernet Sauvignon, for example, actually tastes like a Cabernet Sauvignon.
One level above the Popular Premium Wines is the “Premium Wines” segment, which includes wines that sell for between $15 and $20 per bottle. These are consistently good, solid wines that have both typicity and the very beginnings of terroir, meaning that the wine’s flavors are indicative of the location of where the grapes were grown. This is where you can tell the difference between a California wine and a French wine. This segment is where you will find the wines that truly can be considered high quality. Wines in this segment are produced from more focused regions.
The “Super Premium Wines” segment includes wines that will cost between $20 and $30 a bottle. This category is considered to be the entry level for great handmade wines from medium or perhaps large production wineries. This segment includes the typicity and terroir as previously noted, but the element of craft also shows itself.
As we begin to move out of the segments that most people would consider being affordable, we come to the “Ultra-Premium Wines” category, which sell for between $30 and $50 per bottle. This segment includes wines from producers of all sizes that are characterized by being great quality, excellent tasting, and cellar-worthy. Many wines from the Napa Valley and Bordeaux regions fall into this segment.
“Luxury Wines,” priced between $50 and $100 are exactly what the name entails. Excellent wines from the top wine regions of the world are included here. This segment will feature wines from the best regions and near-top producers.
A step up from the Luxury Wines are the “Super Luxury Wines” which include wines from the top producers from the most prestigious wine regions in the world, though maybe not their best bottles, which are reserved for the “Icon Wines” segment, where bottles are routinely priced above $200 each. Icon Wines include the best of the best.
What makes wines expensive?
As we have now explored the various segments in the wine market, classified by price, we can ask, why are expensive wines expensive? Expensive wines, for the most part, are expensive for two reasons.
Expensive wines generally cost much more to produce. We discussed the production costs earlier in this article, and you can see where these costs could be much higher for certain wines. The raw materials can vary in cost dramatically. Remember the wines discussed in the Extreme Value Wines segment?
They are typically produced from very high-yielding grapes from an average or below average vineyard. These grapes are then fermented in large stainless steel tanks. When we look at the production of Premium wines, we will find wine produced with lower-yielding grapes from a marquee vineyard and that are fermented in oak barrels under the supervision of an expensive consultant.
The most sought after wines in the world are aged in oak barrels. Aging wine in an oak barrel adds to distinctive qualities to wine. It adds oak flavors to the wine and it exposes the wine to oxygen. The oak flavors are often compared to vanilla, nutmeg, coconut, milk chocolate, or even baking spice.
The oxygen causes the tannins to become noticeably less intense and makes the wine taste much smoother. As oxygen permeates through the barrels, some of the wine will evaporate, though at a very slow rate. Even with the very small amount of evaporation, the wine that is left in the barrel becomes more concentrated.
Oak barrels are very expensive, which is why the wineries that produce the value wines simply cannot afford to use them in production. Here’s an interesting fact – only two barrels can be made from an 80 year old oak tree. As such, you can see that oak barrels will significantly increase production costs.
Another element that makes expensive wines expensive is time. Especially with red wines, there is an assumption that “the older the better.” Time can make certain wines taste much better the more they age.
The passage of time can change the taste of the fruit flavors, and it will reduce the acidity and tannins as well. A wine that is aged well will be noted by fruit notes that become much more subtle, and as the acidity and tannins are reduced, the wine will become much smoother. We have already learned how expensive it can be to age wines in oak barrels.
Now picture a winery storing its wine for years before it is bottled and sold. Holding the wine for years takes up space and costs a considerable amount of money. Think about it, if a winery ages its wine for five years, a single oak barrel, which is expensive to begin with, will be effectively “tied-up” for five years, meaning that the winery will have to purchase additional oak barrels for the following four vintages. These costs are a major reason of why certain wines are expensive wines.
We had mentioned the term terroir earlier in this article, and this refers to a particular wine’s taste being indicative of the location that the grapes were grown. All great winemakers will say that great wine is made in the vineyard, meaning that to make a great wine, you need great grapes. In order to make great grapes, wineries will focus on reducing yields.
By making their vines produce fewer grapes, the grapes that are produced will have a much more intense flavor. How does a winery grow a low yielding grape? The vines need to be grown in an area in which the vines struggle to produce grapes, such as a hill with very low nutrient soils. Higher yielding vines will be found in fertile soils on flat lands. This being said, those wineries that are located in areas that favor the lower yielding vines will produce an inherently better wine. Lower yielding vines lead to higher production costs, which lead to an increase in the price of a wine. Couple this with the fact that a better tasting wine theoretically should have a higher demand. This higher demand, together with a limited supply, lead to a much higher priced wine.
There has to be another reason that expensive wines are expensive, right? Well, there is the belief that expensive wines are expensive simply because they can be. Compare this thought to a traveler who stays in a $700 per night hotel room. The traveler could have found a room at a different hotel for a fraction of the $700, but the traveler still chose to spend the $700.
Both hotel rooms include a bathroom and a comfortable bed, but this traveler is willing to pay for the perceived value. This phenomenon, known simply as “perceived value,” shows that how much a consumer is willing to pay affects the price of a good or service. Production costs simply cannot explain the entire story when it comes to expensive wines.
There are wines that carry a hefty price tag of $500 or more per bottle that will sell out each year. They sell for $500 or more, simply because they can. There is a demand for wine at that price point, whether it is a rational demand or not.
While expensive wine may be considered to always be of a higher quality, the value of a wine is also subjective. One person may get a ton of enjoyment from an expensive wine, while another person gets the same level of enjoyment from a $15 bottle of wine. Enjoy the best wine that you can afford!