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Wednesday, 19 August 2020

Does a £7.99 Barolo Make Sense?

A £7.99 Barolo from German no-frills discounter Lidl

Wine journalists have an occasional tendency to wring their hands at various perceived injustices in the oenological world without necessarily offering actionable solutions. In this respect, they are just like the rest of us.

A few months ago, Susy Atkins tweeted her shock at at £3.49 Cava at Lidl; I wrote about it here: Arestel Cava Brut - Lidl. I liked the wine and bought several bottles of it.

This week's "outraged of west London" is Jamie Goode who also takes aim at the German no-frills discounter for its £7.99 Barolo (which I have not tried).

Jamie's comments echo Susy's; "Something is very broken in the world of wine when you can buy a Barolo at £7.99 great British pesos".

The argument here is essentially that the pricing is not sustainable and therefore, whilst ostensibly a bargain for the consumer in the short term, quality will need to be sacrificed in the longer term in order to produce wine at this sort of price point.

Oz Clarke said much the same thing about the Australian wine industry in an introduction to his Wine Guide back in 2004, so there's nothing new under the sun here.
In the case of the Cava, I tend to agree with Susy that the entire category is suffering from an image and therefore pricing challenge and that the only way out of it will be to strengthen the overall brand of Cava to the point where it can command a commercially sustainable price.

Given this, Lidl's £3.49 Cava is just one example of a more widespread issue that Cava faces as a category.

The Barolo situation is, I think, a little different, and there may be many reasons why a £7.99 Barolo makes more sense than a £3.49 Cava.

- the retailer may be taking a hit on the selling price and making up the difference on the rest of the shopper's basket, aka the classic "loss-leader" approach, as part of a growth strategy targeted at, for example, more affluent middle-class wine drinkers

- the supplier may be taking a hit on the price in order to shift volume and ensure certain cashflow with the opportunity to make up margin on other sales

Business craves certainty and accountants crave cashflow certainty in particular; in this context, a high volume order that generates a predictable cash flow from a large, creditworthy customer is highly desirable and provides much-needed funds to pay regular bills, such as payroll, rent and quarterly taxes.

The standard retail price of the Barolo at Lidl is £11.99, well above the national average purchase price of around a fiver per bottle. And this is a wine that, unlike the Cava, requires no expensive secondary fermentation in bottle.

It is worth noting that the Barolo has been listed at Lidl for years, so it seems that the public, the retailer and the supplier are all happy enough with the arrangement.

The reason I have not tried it is simple - at £11.99 (£7.99) for a 88-point wine, it is not as good value as other wines in the Lidl range where I can get a 90-pointer for £6.99 regular price.

Price promotion is not, however, without its downsides and it is impossible to tell at this stage whether these will create longer-term issues:

As marketing expert Les Binet points out, the more you discount prices, the more you train your customers to expect discounts. Discounting is a form of Sales Activation. The advantage of Activation is that it drives sales in the short term but these effects wear out quickly and they also increase consumer price sensitivity - i.e. your customers get used to paying less and therefore become more reluctant to pay more.

Businesses with good marketing departments use a mixture of 1) Sales Activation to drive short-term volume and 2) Brand Building to support and increase prices, with 3) an optimal split between Sales Activation and Brand Building being 60% Brand Building vs 40% Sales activation.

Are Lidl and the producer of the Barolo adhering to this best-practice approach? I do not know. Yes, a £7.99 Barolo to some extent tarnishes the overall reputation of Barolo as a premium category, so some brand-building is needed to offset this.

Lidl has no interest in the brand strength of Barolo - it is a general retailer, not a Barolo promoter - so it falls to the Barolo wine trade association to have an opinion on Barolo pricing.

Certain wine regions have a better track record than others of managing their pricing strategies - Austria and New Zealand are the most obvious examples where trade marketing bodies have successfully helped producers to command higher prices for their output. First Growth Bordeaux, Champagne and the entire rosé category also command good-to-generous price premiums.

So, my advice to you rather depends on whether you are buying or selling wine.

For sellers, it is to invest in building your brand, with tactical activation to drive volume for cashflow, and use that to create a price premium. I know it's a lot harder than that in practice, but that just makes it important-but-difficult, not irrelevant.

For consumers, it is to seek out the underpriced bargains; unfashionable wines like sherry or Greece, up-and-coming areas like Languedoc, southern Italy, South Africa and South America and, yes, take advantage of short-term, special offer price discounts and markdowns.

There is, however, one final point that makes everything that I have just written completely irrelevant: the more you pay for a wine, the better it tastes. On this basis, you should never buy wine on discount, never buy cheap wine and always pay a premium.

It's not advice I live by personally, but here is the research by Baba Siv, published by Standford.

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