How much is too much?

Recently, the prices of South African premium wines have soared. Are we still getting value from our producers? asks Christian Eedes. Some five years ago, Anthony Hamilton-Russell, owner of Walker Bay farm Hamilton Russell Vineyards, put his single-vineyard Ashbourne Pinot Noir '96 on the market at the price of R130 per bottle. Back then, this was an audacious move, his wine being significantly more expensive than anything else produced locally. All of a sudden, however, there are quite a few producers who feel justified in asking the local consumer to fork out in excess of R100 a bottle. Which poses a question: What is a reasonable sum of money to pay for a quality wine?

An obvious way of approaching this question is to compare production costs with sales price. Let's do the breakdown on producing a wine of the most outstanding quality possible. One ton of grapes produces about 62,5 cases of wine. Or 750 bottles. Or R75 000 gross at R100 per bottle.

Cabernet Sauvignon is the variety that currently fetches the highest average price per ton - R5 393/ton in 2000. For the sake of argument, let's assume our boutique producer is paying R10 000 a ton. This leaves R65 000. If our producer then insists on a 100% new French oak, he is going to require two 225l barrels, which will set him back twice R6 000, a total of R12 000. Miscellaneous chemicals used in the winemaking process - R150. Still R52 850 in hand. Speak to the various suppliers, and it emerges that monsieur the winemaker could pay as much as R10 for an imported bottle - another R7 500. He might end up spending R1,50 per bottle for a fancy label, embossed and with foil - R1 125. Corks at R6 each - R4 500. Capsules at 35 cents each - R262,50. If we total this up it amounts to R13 387,50, which when subtracted from his gross income leaves our producer with just under R40 000.

What are we forgetting? Labour, for one thing. However, it is difficult to represent this cost in terms of a per bottle rate, because it applies across an entire production run, and the economics will differ according to just how many cases are being produced. The smaller the producer, the more profit he will have to make per bottle in order for him and his staff to make a decent living. Nevertheless, it should be noted that very few local wineries of quality make less than 5 000 cases, meaning the cost of labour shouldn't feature unduly in the ultimate selling price of any one wine.

We also need to make provision for a return on investment on the actual value of the vineyard. One hectare of the very best Stellenbosch land currently goes for R300 000. Then there's the cellar: the more elaborate this facility, the more it will have to be accounted for in the price of the wine. All the same, you'd imagine that the farm owners would take a long-term approach to accommodating these cost factors.

Viewed purely in terms of production costs, it's difficult to see how a bottle of premium wine could possibly sell for more than R50, maybe R60. So how else to explain triple-figure price tags? Speak to the producers and they are all adamant that the consumer really is getting more for his money: fruit from selected vineyards, low yields, extra barrel time, finest packaging. None, however, claim a direct correlation between production costs and price Eddie Turner, marketing manager for leading Stellenbosch farm Vergelegen, outlines the process according to which prices are set for their top-end wines. "Essentially, it's about positioning: samples of wine of similar quality are obtained from all over the world, and we peg our prices so as to be competitive in the international market". The Vergelegen 1999, a Bordeaux-style red blend went for R141,09 off the farm and is already sold out. "Margins are healthy, but not enormous," insists Turner.

It feels, though, that this is still not the crux of the matter. Could it be that a few of our local wines are now subject to prestige pricing? Product categories exist where the ultimate selling price is greatly in excess of the production costs. Think luxury cars, think designer fashion, think fine art. Essentially, the producer is charging the most the market will bear. Explaining his motivation for launching the Ashbourne '96, Anthony Hamilton-Russell argues that by being close to the market, he was confident that the wine would not only sell at a premium price, but still offer value. "We wanted to change the psychology of what great wines could be worth".
Referring to his pricing policy in general, Hamilton-Russell is frank. "It's absolutely about prestige pricing. I'd be happy if the market were to pay treble what my wine currently goes for. Nobody sheds any tears for us in a bad year when the wine takes more to make than we charge for it."

To some extent, it can be argued that price influences the perception of quality. The closer any of our local wines comes in price to the going rate for the top international wines, the more likely the market will view them as being in the same class.

Consider the Rustenberg Peter Barlow 1999. This wine made from a 100% Cabernet Sauvignon, sells for a hefty R170 per bottle from the cellar door. Does this necessarily establish its credentials as a great wine?

Dave Hutton, marketing manager of this Stellenbosch farm gives an overview of Rustenburg's pricing policy, and again it's all about finding a niche abroad: "What we do is compare our wines with others of similar quality available on the overseas market, and then set our price accordingly. It's a matter of careful research - our intention is to accurately benchmark our wine in international terms".

Hutton goes on to say that "the Peter Barlow still has some way to go before it could be considered an 'icon wine' - the current vintage sells for £19,99 (R320) per bottle in the United Kingdom, while research suggest that a wine needs to come in at no less than £25 (R400) to have icon status".

As loyal as he is to Rustenberg brands, Hutton is also convinced of the need to boost the status of South African wines generally. As Australian wines are increasingly perceived as one-dimensional and no longer offering value for money, South Africa has the opportunity to capitalise.

"As long as we see Australia as the competition, and not ourselves, we are bound to succeed in the long term," Hutton says. In this respect, he is particularly scathing about one or two local producers who have launched extravagantly priced wines with no track record, "making life difficult for the established players". No names mentioned.

Jeremy Borg, marketing manager for the Fairview and Spice Route labels is unapologetic about the prices being fetched locally by the Spice Route Flagship range. "We wanted to create super-premium wines that deliver value to the connoisseur - the person who's interested in the aesthetic value of wine". Continuing in bullish fashion, he notes, "Already in our short history, we've achieved high accolades from around the world. The market has found its equilibrium: I could sell double the quantity of wine, if I had it".

But Borg, like Rustenberg's Hutton, also feels strongly about the strategic importance of promoting Brand South Africa. "For too long, South Africa has been perceived as the bargain basement of the wine world. In order to be taken seriously by the international consumer, we need high profile wines, as well". As a caveat, Borg points out that it is crucial that local wines deliver value at whatever price-point they go to market.

All well and good. If one takes a more cynical view, it could be argued that prestige pricing means selling on snob appeal. Some consumers are inclined to assume that price and quality are more closely linked than they actually are. As with all cases of prestige pricing, limited supply is crucial. As soon as the wine rates well, everyone keen to impress will want to get their hands on a case or two. The lucky will be able to buy on allocation; those not able to buy direct, will have to endure retailers' sharp mark-ups, or try the few auctions that are around. As the wine becomes more sought-after from vintage to vintage, the winery can continue to increase its price, knowing this will be absorbed by its rich and label-conscious clientele.
Wine as lifestyle accessory? Hamilton-Russell won't stomach this. "It's the market that sets prices in the long-term, and not the producer," he insists. "Only by consistently delivering a certain quality level, can we sustain our pricing". He goes on to make the point that "there's a whole (media) industry designed to guide the consumer to value. An over-priced wine is going to get shot down sooner or later".

Hamilton-Russell relates the anecdote of three university students who bought a bottle of his Pinot Noir for a friend's 21st birthday, and shared the cost between them. To him, this demonstrates that his wines sell to those with sophisticated palates, not merely the rich and famous.

New Stellenbosch farm De Toren is an interesting case study. The farm makes only one 'super-wine', a Bordeaux-style red blend consisting of five different varieties, hence its name: Fusion V. 1999 was the maiden vintage, retailing for R115 per bottle, and it sold out almost immediately, helped in part by a 90 point rating from American critic Robert Parker. What's interesting is that owner Emil den Dulk concedes that his price was determined solely in terms of what he might fetch overseas.

Because the De Toren brand was unknown locally, he thought he had priced himself out of the domestic market. Then as the wine's reputation began to spread by word of mouth, interest grew. This, he agrees, is an indication that the local market is prepared to pay for quality.

What of marketing and promotion? Vergelegen's Turner remarks that "absolutely zero" allowance is made for marketing in the cost of Vergelegen wine. "We want to avoid being perceived as overtly commercial. As soon as you run lots of advertising for a wine, it is regarded as commercial, and then there is a limit to the price that it can fetch. We want to base our price on reputation: 4 and 5 Star ratings are what matter".

Dave Hutton also plays down the significance of marketing as a factor in the price of their top-end wines. "Right now, we simply cannot meet demand. It's development rather than marketing that we're costing in - we want to upgrade our vineyards and improve our viticulture".

All seems very business-like. Our top producers are making wines that when sold overseas, offer excellent value in terms of their ratio of quality to price. Local prices are going to be set relative to what the wines are fetching on the international market. Take a wine that retails for £15 (R240) per bottle in London. The local producer cannot really sell the wine any cheaper on the local market than he is selling it to his overseas distributor. If the distributor is paying £6 (R96) per bottle, then the producer is compelled to set his price ex cellar at a level that equates to more than £6. As the value of the Rand declines, so the price of local wines will inevitably climb. Ouch!

So how much is too much? It's not about whether a wine is expensive or not. It's about whether a wine offers value: is the quality that the wine offers in proportion to its price? It has to be acknowledged there is value at every price level. If an expensive wine is impressive enough, its price is justified. Conversely, a wine that is less good may represent even better value if its price is lower, too. Right now, the South African wine industry is struggling to assert itself in the international market. If anything, we are selling quality at a discount: our premium wines are starting to receive just as much critical acclaim as their counterparts from other wine producing regions, while still selling for less. Not only are our wines approaching greatness, but they offer great value. Any wine enthusiast with some savvy won't miss the opportunity. . .