Michael Fridjhon, a well-known wine connoisseur in South Africa, is much perturbed about the state of the South African wine industry.
The problem for the industry, according to Fridjhon, is irrationally low wine prices – that is prices that do not reflect the underlying quality of the wines produced.
This may be good for South African consumers, but very tough on producers determined to compete in world markets, but unable to extract the prices that would make the effort profitable. South African wines, they argue, compete very well on score but badly on price.
Wine Tastings and Blind Tastings – an impact on price
Wine, however, does offer another explicit measure of quality in addition to price that is not usually available to consumers of most goods and services: the scores received at organised wine tastings.
In these very public events, experienced wine connoisseurs taste and smell the wine “blind” and award scores based on the well recognised desirable characteristics of wine. The tasters are not informed about the origins of the wine or its grape, variety, vintage or (especially) its price.
However the relationship between wine prices and their quality (as measured in organised wine tastings) is not nearly as consistent as Fridjohn might recognise.
Testing a Hypothesis
Years ago I examined the relationship between the prices of South African wine and their tasting scores as reported by the South African Wine Magazine. I found that the correlation between price and score was (fortunately for the reputations of the professional wine taster and the producer aiming at improved quality) a modestly positive one. The higher the score, the higher the price – the relationship was and is statistically significant, of the order of 0.67. But this statistical relationship is one that leaves much scope for other forces to influence price, other than “quality”, as measured by experienced wine tasters.
Therefore it occurred to me to test the Fridjohn hypothesis - that the markets are in fact biased against South African wines; firstly by re-examining the strength and reliability of the relationship between tasting score and price; and secondly to test whether South African wines get a bad deal from the wine market compared to their rivals in America.
For this exercise, I compared South African wines with Australian wines as scored by the Wine Enthusiast magazine published in the US.
Price versus Scores – Taste and its influence on Price
A few points need to be made.
While price should not influence score (if the tastings are genuinely blind) scores achieved in public tastings will surely influence prices charged. Good scores will become widely known and lead the distributor to seek and realise higher prices.
Furthermore, while the scores range between a practical minimum of 80 and a maximum possible 100, there is no limit to the prices that may be charged from the $10 per bottle minimum that is barely enough to cover packaging and distribution costs. This improves the chances of significant outliers: wines that sell for much more than other wines with similar scores.
A statistical evaluation of wine prices
A regression equation crafted from the scores realised an R square (or goodness of fit) of 49%. That is to say, the value equation explained only 50% of the observed price.
This is a satisfactory result for the theory that tasting scores influence price, especially given the statistically significant influence of score and vintage on price. The equation also proves that score and vintage matter (consistently and significantly) when it comes to the price charged.
It does therefore indicate clearly that wine makers will be consistently rewarded for adding quality or age to their wines.
But it also proves that there is much more than quality and vintage at work on price. These regression results still leave 50% of the price of a representative bottle of South African or Australian wine sold in the US to be explained by other forces: it becomes very difficult to assert a bias in wine prices when more than 50% of the value of a bottle of wine cannot be attributed to its quality and/ or vintage.
It’s the intangible that matters
The other 50% is to be explained by what might best be described as intangibles, the marketing magic or perceived values that consumers are willing to pay for and which we understand so little about. After all taste and preferences are registered in the brain rather than the mouth and our knowledge of how the brain works is very much a work in early progress.
The regression equation can be used to estimate the “fair value” of a wine if the only price influences were the tangibles, tasting score and the vintage year.
As may be seen, the overpriced wines, or rather what may be better described as the especially successful wines in the market place are rare and more conspicuous than the value buys (those that sell for less than their estimated value).
Some of the outstandingly overpriced wines in the sample are identified below. From the producers’ perspective they should be regarded as among the great success stories to be emulated by their competitors.
However those who produce great value for money wines – from which consumers benefit so greatly – presumably know the science stuff pretty well too. It is the art of turning grapes into money, rather than into wine, that needs to be learned by the South African wine producers if they are to beat the market: they need to achieve prices that exceed the costs of producing the wine.