The Influence of Country/Region Reputation on Willingness to Pay for Wine

How much someone is willing to pay for a bottle of wine is a somewhat complicated beast.  Studies have shown that there are many factors that influence just how much someone will put down for any given bottle, including -but certainly not limited to- the variety, year/vintage, or even the design of the label.  Additionally, the reputation of the region from where a given wine originated plays an important role in wine selection and willingness to pay by consumers.

Photo courts Flickr user Tony Webster

For example, Napa Valley is a highly reputable wine region and studies have shown that a wine from Napa Valley is able to get, on average, double the price of a Chilean or Argentinean wine of equal quality. Even if the consumer doesn’t know the specific brand they are purchasing, simply having Napa Valley on the label almost guarantees they are willing to pay more money for it than they would for a wine from say Chile or Argentina.

The case with Australian wine hasn’t been quite so lucrative.  Australian wine in the 1990s, specifically Shiraz, saw a boom in sales and was regarded overall as a quality region. However, instead of collaborating, many wineries took advantage of this and tried to “free ride” on this success by pumping out lower quality Shiraz wines of their own, hoping to nab higher prices.  Unfortunately, this resulted in the market become absolutely flooded with lower quality wines, bringing the collective reputation of the entire region down and with it lowering the prices consumers were willing to pay for those bottles.

With Chilean wines, which have been dubbed “the best cheap wine in the world”, studies have shown that compared to Napa Valley wines of equal quality are consistently undervalued, getting 50% or more less than an equivalent wine from the Napa Valley.

Just how exactly does the country or wine region influence how much consumers are willing to pay for a given bottle of wine from that area?  And how does variety specialization (like Cabernet Sauvignon in Napa Valley, Pinot Noir in Oregon, Shiraz in Australia, Malbec in Argentina, etc) influence willingness to pay? A study published in December 2015 in the journal Academia Revista LatinoAmerica De Administracion, aimed to answer these questions by performing various economic models.

Brief Methods

This study utilized wine ratings/scores from 6 different vintages (1997, 1999, 2001, 2004, 2005, 2007) and 10 different wine regions (Argentina, Australia, Burgundy, Chile, Napa

Photo courtesy Flickr user cheeseslave

Photo courtesy Flickr user cheeseslave

Valley, New York, New Zealand, Oregon, Sonoma, and South Africa), published in Wine Spectator.  In addition to ratings/scores for each wine, the following data were collected: price, name/brand, variety, vintage, reserve years, wine region, and number of cases produced.

Only dry red wines were analyzed, for model simplicity purposes.

I won’t bore you with the details, but basically the researchers ran these data through an economic model based on Rosen’s standard approach of hedonic prices.

Brief Results

  • There was a significant positive relationship between wine rating/score and the price of the wine.
    • The higher the score, the higher the price.
  • There was a positive relationship between the age of the wine and the price.
    • The older the wine, the higher the price.
  • Country/region of origin played an important role in willingness to pay by consumers.
    • Ex: for the 2007 vintage, Argentinean and Chilean wines got 65% less money per bottle than a Napa Valley wine with the same rating/score.
  • Oregon wines showed an overall improvement in their reputation over the course of the vintage years examined.
    • In 1997, Oregon wines fetched 88% less per bottle compared to a Napa Valley wine of equal quality, while in 2007, the difference was only 39%.
    • The researchers speculated part of this improvement was thanks to the movie Sideways and its impact on Pinot Noir sales, but also rebranding and marketing efforts were just as successful in improving the overall image of the region.
  • Australian wines showed an overall deterioration in terms of willingness to pay per bottle by consumers over the course of the vintage years examined.
    • In 1997, Australian wines fetched 33% less per bottle compared to a Napa Valley wine of equal quality, while in 2007, the difference was greater at 61%.
    • The researchers speculated that this decrease in willingness to pay was due to the influence of lower quality bulk wine flooding the US market and causing an overall decrease in regional reputation.
  • Burgundy wines showed an overall deterioration in terms of willingness to pay per bottle by consumers over the course of the vintage years examined.
    • In 1997, Burgundy wines fetched 60% more per bottle compared to a Napa Valley wine of equal quality, while in 2007, the these wines fetched 10% less per bottle than Napa Valley wines.
  • Removing the region from analysis, results showed that even while controlling for quality, age, and number of cases produced, the willingness to pay for a bottle of wine was influence by the variety.
    • In other words, it appears as though BOTH region and variety are important in determining willingness to pay.
    • In 1997, Shiraz wines fetched 16% less per bottle compared to a Cabernet Sauvignon of equal quality, while in 2007, the these wines fetched 42% less per bottle.
    • In 1997, Shiraz wines fetched 16% less per bottle compared to a Cabernet Sauvignon of equal quality, while in 2007, the these wines fetched 42% less per bottle.

Conclusions

The overall results of this study indicate that country or wine region of origin is significant in determining the willingness to pay for a bottle of wine by consumers.  For successful

Photo courtesy Flickr user Mark Goebel

Photo courtesy Flickr user Mark Goebel

regions like Napa Valley, consumer willingness to pay for ANY bottle of Napa Valley wine (even if they’ve never tried that wine before) is higher than wines from other regions.  On the other hand, wines from Australia suffer from a significantly lower willingness to pay, likely due to the flood of lower quality wines on the market.

The authors concluded that the best way for a region to improve its reputation in the world of wine is to participate in more collaborations and be less competitive with other wineries in that region.  Free riders (i.e. a winery that takes advantage of the good reputation of another winery in an attempt to increase their own sales) will only serve to decrease the overall reputation of an area by their attempts to pass of plonk as quality wine, which for a region like Australia can’t be sustainable over the long haul.  Collaboration and cooperation are key to maintaining a higher quality perception of an entire region, thus elevating all of the individual wineries within that region by successfully demanding higher prices.

Source:

Berríos, R., and Saens, R. 2015. The country-brand in the wine industry: how important is variety specialization. Academia Revista Latinoamericana de Administración 28(4): 484-501.

1 comment for “The Influence of Country/Region Reputation on Willingness to Pay for Wine

  1. May 19, 2016 at 2:50 am

    What a fascinating read. I am an expat (from Denver!) living in the Barolo / Barbaresco area where wine prices are insanely high value. When I am back in the States I really struggle with wine prices when we’re out for drinks. And, I have an even harder time with price for Napa wines. I used to visit there a lot when I first got into wine. I got suckered into the branding and hype, happily paying $150 on a bottle because it said, “estate grown” and / or “Napa Valley” on the label. I’m a marketer by trade, so I get branding. But, having lived in an Old World wine region where I have experienced value and high quality at a different level I have an issue with the artificial creation of that value, as happens in Napa. Do most people know that to have “Napa Valley” on the label the bottle only needs like 85% of Napa Valley grown fruit? Or, that some of the best known brands are sold from winery to winery – they buy the label and then put it on the shelf with a low quality fruit, but get a silly amount because consumers will pay for it?

    I wish more people would explore lesser known regions and varieties. There is such incredible wine out there.

    Val

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