Have you ever heard talk of the “Veblen Effect”? The economist Thorstein Veblen proved how when a luxury good was not expensive enough, and therefore failed to convey its top-of-the-range position, demand for it remained weak. Is it this theory that has pushed certain fine wines to up their prices considerably in recent years? It is hard to say but the notion put forward by British journalist Andrew Jefford in his article “Why I’m giving up on the best wine”, published on www.decanter.com on Monday, is clear: “The best is overpriced.” He is leaving it to others enjoy the pleasure of buying the most expensive wines around, especially those who earn a “minimum of £91,300 per year”.
What does this article tell us? The main problem for me is that of the client’s perceived value of the bottle. Desirability is at the heart of the problem raised by the journalist. And the experience we have in luxury marketing in the wine world leads me to make two comments:
Comment 1: The best wines are not bought (only) by people earning a minimum of £91,300 per year. Very roughly there are three types of target: 1) A marginal group displaying a desire to differentiate themselves from other consumers. They are indeed rich and it is to this group that Andrew Jefford rightly refers 2) Wine lovers who, just like lovers of other products like watches and cars, are prepared to make sacrifices to acquire one or several bottles of these fine wines. They carry some weight in fine wine sales. 3) Other consumers who can now also access luxury goods for special occasions. Here the consumer will decide between purchasing a fine wine or other gifts amounting to the same sum to treat someone or treat themselves.
Comment 2: YES “The best is overpriced” and at that price, to my mind, too many fine wines these days lack sufficient desirability to conquer a new, much richer, clientèle. To that I would add that these luxury wine brands do not maintain a sufficiently special and privileged relationship with their target: a rich, cosmopolitan clientèle, international and nomadic for the fine Bordeaux wines for example.
If truth be told, it is not as simple as all that because it is much easier to position a new wine than to reposition a wine that already has history. Greatly increasing the price of a wine that has a long history – however grand it might be – is no easy matter. Context is, of course, essential because a new price increase can seriously jeopardise client loyalty. Between the “Veblen Effect” and a subtle dosage of “exclusivity” and “desirability”, wine labels need to think through their international marketing strategy because one does not become one of the most “exclusive” and “desirable” brands simply by putting up ones prices.
In fact some wine connoisseurs have lost all desire for wines with a very (too) high price tag. Beyond the intrinsic quality of the wine, it is desirability that should dominate in the world of great bottles as with all other luxury products. While the super-luxury world of wines is a niche market because it represents wines produced in very limited quantities (see Burgundy for example) luxury wines can, with an appropriate marketing strategy, manage to win back the hearts of those who no longer wish to buy the best wines. It seems worth the effort; the best offerings in the world of luxury wines will enjoy the best profit margins in their sector. When it comes to luxury, the gross margin can be anything from 25% to 35%. Not bad wouldn’t you say?