Tuesday, September 23, 2014

Let's Raise the Price Again, They're Still Buying!

Financial reading is dull and usually has little to do with wine, the only regular link is that they both involve my wallet. Last night, however, two articles by the same author reminded me of pricing insanity that has long been part of the wine world. 
A fund I have a small investment with apparently bought some of the stock mentioned but their decision better not have been based on either article. The analysis began by admitting the company was having trouble attracting customers but then said everything is fine because they are making more money off of fewer people. In fact, his delirium over this so infected the author he continued to say the sky was the limit. Sure, as long as people are willing to pay $1,000 a ticket and $50 for a hamburger, the sky might be the limit. 
Steve Martin did a routine about this decades ago where he calculated how much money he was making and how much he could make. Eventually he reached a high enough ticket price, assumed a five digit audience count, figured he could retire and announced, "One show and goodbye!"  
Bordeaux, Burgundy and California, among many others, are all guilty of the same backward logic. We can make more money if we just charge more! That's great until one day you realize you've pushed it too far and revenue begins a slow (if you're lucky), steady decline. At first customers might keep coming/buying but less frequently. Then lots of them will find something else to do/drink. Suddenly your loyal cash cows are grazing in someone else's field and they're not coming back.
During the wild price escalations of the late 1990s I asked a winemaker from California how some people priced their wines. He told me the in vogue method was to gather a handful of similar wines from the area and taste them blind with a wine made in house. While the tasting was technically blind, winery people tend to recognize their own product and rate it more highly then the others, almost without fail. Then they would price the "winner" higher than the other bottles on the table. This led to prices spiraling out of control with, seemingly, no end in sight. It was a nightmarish Escher print of high end grape juice.
It happens on the spirits side too. Allow me to quote Stoli Group USA's president from this article in Shanken News Daily
“We’ve successfully moved our price up to premium, which was one of our goals this year,” says Esposito, adding that Stoli’s retail price now sits at around $25-$29 a 1.75-liter and $19 a 750-ml. “Previously, we were $3-$5 a bottle below Absolut. So right now we’re moving toward that, and we’ll continue to move it up. It’s where the brand belongs, and now that the advertising is there, we have a great opportunity to justify our pricing.”
Wow, wow, wow. No mention of changing quality, just a higher price - followed by advertising to justify that increase. If I drank Stoli and read this, I would be looking for another vodka, quickly. They are far from the only ones employing this style of pricing but this is just so blatant it was impossible to ignore.
But I never thought this upside down logic would reach the financial sector. In addition to the specious argument that declining attendees and higher costs result in a sound investment the author admits there is a lot of debt and that operating expenses are rising every year. Sounds great, how do I invest? Oh wait, I am invested...bye, I've got a call to make.

No comments:

Post a Comment