Wine prices - defending the indefensible?

A standard 750 ml bottle of red wine can be bought in UK retail for as little as £3.49 per bottle (Toro Loco Red from Aldi) or as much as £120,000 (Penfolds Block 42 Ampoule at Hedonism). Both prices are, in their own way, insane.

The Toro Loco is so cheap that it makes little if any profit, meaning that continued investment and prosperity in the wine trade is constricted - although to be fair, people have being saying this sort of thing for at least the last 20 years, and wine continues to survive. The Penfolds wine is from a limited edition of 12 bottles and the price includes an extravagant wooden case, and the personal attendance of the head winemaker to open the bottle for you, wherever you are in the world.

Does that mean that both prices are indefensible? Or are they merely reflect the reality of market forces?

Taking the £3.49 red, we can estimate how (un)profitable it is. According to the UK wine tax calculator app, £2.66 is Duty + VAT. This Bibendum report fixes packaging and logistics cost at £0.56 per bottle. That leaves £0.27 to cover profit margin for the retailer and to pay for the actual wine itself, from vineyard to bottling line. 

It may well be that Aldi can afford to sell Toro Loco at minimal profit in order to drive footfall that results in a more sustainable average basket margin. Whatever the model, it is clearly working judging from their recent success in the UK. But what about the producers of the wine? Can they survive on mere pennies per bottle?

Perhaps the more pertinent question is: if they can't survive, how does this wine exist? The producer's website reveals that up to 3,500 families contribute to the co-op that makes this wine. Many of these will be part-time growers with main sources of income elsewhere, while the winery will operate on a scale that keeps costs to a level way below what an independent producer could achieve. Bulk wine like this is still made on a huge scale around Europe. It just so happens that Toro Loco is the brand that made it to the shelves. There are tankfuls of unsold alternatives waiting to take its place. So is the retailer evil to enforce such a low price - or does it simply reflect the laws of supply and demand?

What about the notorious Penfolds Ampoule? Here, price is governed by two factors. Supply and demand is one of them: only 12 of these ampoules have been made. While the packaging and logistics might cost significantly more than £0.56 per bottle, the £120,000 price tag mainly reflects that rarity. At the same retailer, the same wine itself can be bought in a standard bottle for £1,142.60 - but that's not the point of owning the ampoule.

This brings up the second point; that of relative value. By creating a wine with such an audacious price, the rest of Penfolds wines can be made to look like relative bargains. The current vintage of Penfolds Grange can be bought for £330 a bottle. For Australia's most legendary wine, that starts sounding like a good price; yet three years ago the wine world was aghast when Grange hiked its release price by 25%. Introducing a new product with a hugely inflated price is a well worn tactic to justify the prices within the rest of your range. It's standard practice for fashion, cars, scented candles, spirits - so why should wine by any different?

As the wine trade, we make a lot of noise about how educating consumers and championing terroir, but we shouldn't forget that laws such as supply and demand exert a far greater force on the market.