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On Luxury Wine

For wine drinkers, luxury wine is a mug's game – but it's one we all play.


On Luxury Wine

We know that there is only a tenuous link between the premium paid for a luxury brand and the palpable increase in quality as you advance up the pricing pyramid beyond the purely functional. Owning a reliable car makes more sense than having one which is likely to break down. Buying a Bentley when an Audi will get you to your destination equally swiftly and just as safely is an indulgence that has nothing to do with need, and everything to do with ego.

If we have the disposable income, we choose to buy up where we think the spend makes sense. We talk ourselves out of “cheap” wine by saying that the more expensive option tastes better and we may save ourselves a headache. It's easy enough to use that logic to get from the basic product, to a finer example of pretty much the same thing, from no-name cabernet to the entry-level product of a reputable large producer.

There's even a way of quantifying why it makes sense to do so. The dry goods (glass, corks, labels, and boxes) cost pretty much the same for a no-name product as they would for the perceptibly better entry-level wine of the big-name brand. It costs much the same to transport product around the country, excise is levied on the volume, not the value, so it is the same for all wine, irrespective of price. Accordingly, it's possible to argue that at least some of the increment in price goes into better juice. When you pay R100 instead of R70 for the cabernet, at least R10 of the increased cost goes into a better basic product. Since the pure wine cost in the R70 bottle is probably not more than R10 – R15 in the first place, the additional investment should yield a significantly improved beverage.

We also know that there's a law of diminishing returns, which starts kicking in at the R100 per bottle price point for lightly (or unwooded) wines and at about R150 for properly oaked examples. From then on, if you double the price, you might get a 5% - 10% improvement in perceptible quality. This is partly because once you're making decent enough wine, the investment in labour and technology to nudge the quality upwards is disproportionately high, relative to whatever gains may even possible. Moreover, once you cross a threshold (about R300 in South Africa) there's very little extra that could be or has been done: from that point onwards, you're paying for perceived luxury or perceived rarity.

Some wines are good and rare, some wines are rare (but not necessarily good) and some wines are good, but available in such vast quantities that shortage will never play a part in determining the price. Insofar as rare wines are concerned, some are intrinsically and genuinely rare (Romanée-Conti is an obvious example) but others have rarity thrust upon them. Take for example the major Medoc chateaux: most – including all of the First Growths – declassify a portion of their vintage. Some have second labels (Carruades de Lafite or Pavillon Rouge du Chateau Margaux) which fetch reasonably high prices, and a few even have third labels (Pauillac de Chateau Latour). The ostensible reason for this system of tiering is to ensure that only the very best casks make it into the Grand Vin. While it is true that whatever is declassified is considered less than perfect, there is another material reason for the process: it takes a certain volume out of the market, which in turn allows the proprietor to maintain or increase the price. I know a broker who deals in declassified chateau stock, and he confirms that while there is a connection between the quality of the vintage and the percentage removed from chateau bottling, the state of the economy and the level of international interest in top Bordeaux play an important role.

At the point in time where a Medoc chateau actually bottles its vintage, the die is cast: there's obviously no way that the proprietor could satisfy a sudden surge in demand by “borrowing” from the second or third label. However, until that point some discretionary decision-making is possible: if the market weakens dramatically, the producer can decide to hold back on what is released (for ageing in the chateau's cellars) or to allocate more wine to the second label and that way drive sales and cash flow. In short, while Cru Classé Bordeaux is an acknowledged vinous luxury, its price and prestige are partly driven by supply manipulation. 

South Africa's luxury wine market is in its infancy. We have countless producers who use price as a proxy for quality. (“If it's expensive, it must be good.”) Up to now, as long as the wine has been well received, and the quantities relatively small, this strategy has worked: allocation selling, special releases, and known volume environments like the CWG auction have all proved quite successful. While the economy was buoyant, and consumers operated competitively rather than selectively, the fulcrum point favoured the producers and the marketeers.

This is not necessarily how things will be going forward, and the fragility of the auction market this year – two quite weak Strauss/Wine Cellar sales, and a further decline in average prices at the Guild auction – suggests both a growing intolerance of high prices as well as a decline in the number of buyers chasing these vinous treasures. The Cape Fine & Rare (CFR) sale was the only auction to exceed the published pricing guidelines and emerge with virtually no unsold lots. Even here the volume on offer was substantially down on what was traded at the previous (Nederburg) platform. To the extent that it succeeded, the CFR auction offered buyers genuine shortage and genuine rarity and (except for the three unsold lots) reasonable reserve prices.

Does this mean that our wine buyers are showing judgment as well as less discretionary spending power? I think, for the time being, the answer must be yes. The human brain is (largely) a truth-seeking device. It knows the difference between an indulgence and a necessity: when its organoleptical senses cannot discern the reason for a price premium it interrogates the dichotomy: do I really care for the taste of this, or am I just indulging myself? We do this all the time: rational people who have some – but not vast amounts of - money don't choose to live in squalid tenements so that they can buy Bentleys.

Given the state of the economy, there has been a predictable cut back in what is spent on luxury (indulgence) wine. The R300 bottle still tastes better than the R150 one by enough to justify the purchase. The R600 is much less tempting, and the R1200 is largely off the radar screen – especially if it's young, too fresh to drink and unlikely to be sold out any time soon.

Published On: 11/26/2019

Michael Fridjhon

Twitter @michaelfridjhon

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