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The Value of Wine

Prof. Brian Kantor


The relationship between the price of a bottle of wine and the score given at tastings by experts shows that the price may have more to do with marketing intangibles than the science of wine making says Prof. Brian Kantor.

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.

Actual and predicted value of 236 South African and Australian wines available for sale in the US

Source: Wine Enthusiast Buyers Guide and Investec Wealth and Investment

Adding New World Wines to your Investment Portfolio

Beating the market in wine is perhaps a lot easier for the retail consumer/investor seeking value than the value investor beating the market in stocks or shares where all the information is captured in the price of a security.

Beating the market in wine production (earning above normal risk adjusted returns on capital invested) appears even more difficult. The intangible influence on perceived value makes predicting price and revenues from wine sales so very difficult.

But fully understanding the intangibles that make consumers pay up for certain wine brands rather than others can help realise exceptional returns. The wine industry in South Africa, to prosper, may have to rely more on art than science – more imagination and knowledge about trends in the market place than in the cellar or the vineyards may be called for.

Perhaps it is not the average return on investing in wine that drives the investor in the industry. This may be particularly true of wines produced in the new world, where a long record of past performance is not available.

Reputation earned over hundreds of years cannot be the guide to pricing wines in the new world as it is with the great very expensive wines of France or Italy. It is the small chance of the very large rewards that comes with a newly developed winning wine, one that will sell for much more than it costs to produce, that may motivate the owners of the expensive boutique wine farms in South Africa, California Australia Argentina or Chile.

If so, investment in the new world wine industry may have less in common with the average business and much more in common with the entertainment and sports industries, as well as the fashion business, where average earnings are very low - most who try fail - but where the small chance of making it very big compensates and encourages participation.

The wine consumer may well benefit from a characteristic feature of the human condition – the long shot bias that leads participants in the market to trade off low average returns for the small chance of a very big win.

This article is for general guidance only and should not be relied up as constituting advice suitable to your particular circumstances. You should seek your own independent advice from a suitable professional before taking any action following this article.