An economic anomaly, wine sees demand increase as the price rises while also selling almost identical products for at such a wide range of price points. We look at the unit economics and changing world order of wine.
How often do you see a bottle of wine advertised for slightly more than a bottle of water? Grapes grown for months, fermented, bottled and shipped across continents are priced equally to collected rain. How can this be? Let’s look into the economics of aged grape juice.
At its core, winemaking isn’t an overly complicated process. Growing, picking and bottling grapes can be scaled to a relatively low price. After all, we are able to buy jam or olive oil which go through a similar process at a reasonable price.
The question should be, why is some wine so expensive? There are several steps in the process that add costs to the producer. From the prestige of the vineyard to the use of oak barrels or even cork, each bottle can reach a high cost to produce before the markup from marketing has come through.
It’s no surprise that Italy, Spain and France are the biggest wine producers on the planet: the “old wine world”. Behind these nations are a host of “new world” countries trying to establish dominance in the industry. Chile, Australia, and America are some of the bigger secondary producers while China is hot on their heels. China has the third most vineyard growing area in the world yet is not even one of the 10 biggest producers of wine. But they will get there. Vineyards take decades to mature and reach peak production. Since the turn of the century, the country has been laying the groundwork for a strong local industry and just now is that coming to fruition.
Going deeper into the numbers, no one drinks more wine than Europeans. The continent makes up for 50% of all volume consumed annually. It’s estimated that annual wine sales total close to US$33b. Despite drinking the most, European countries largely prefer more standard options. Ireland, New Zealand and Australia are actually the world’s biggest consumers of premium wine, those bottles priced at greater than US$30.
A quirky fact to finish, wine is uniquely known as a “veblen good” in economics. A product that sees demand increase as price goes up, defying the laws of supply and demand. Just like diamonds and fine art, the high price tag on wine often makes it more desirable.