The Economics of Wine

The inspiration for this post came from, where I suspect many future posts will come from, a comment fight on the Internet. I try to avoid these things, but if something I'm passionate about comes up... well, I'd need two bouncers to hold me back. I'm not going to lie, part of the idea for this blog was for me to have a place to formulate my comment debates into a well thought out essays that drives my point home.

This particular discussion started when a friend posted an article about how Charles Shaw (2 Buck Chuck) won double gold at a wine competition proving once and for all that cheap wine is as good as or better than expensive wine.

My stance?

First, the article is eight years old and discussing a ten year old wine, so I felt it to be a bit outdated (and we'll go into further detail about the significance of the years). Additionally, I feel that its possible for wine to be too cheap. That doesn't mean you need to spend a small fortune on twenty year old wines imported directly from the heart of France. There are a lot of really great wines in the $10 range and those few extra dollars can make a huge difference in the quality of the wine you end up buying.

My Background

I'm not going to say I'm some sort of wine expert. I like to refer to myself as a "wine connoisseur-in-training." I love wine, I'm a member of two wine clubs, I have a few wine books and I read several wine articles. I'm not an expert, I have never taken a class. I know what I know about wine from buying and drinking a lot of wine.

My credentials

Economics, on the other hand, is a different story. I have a Bachelor's degree in Economics from a leading university, I've worked in finance for four years, I read economics books for fun, and I constantly calculate my opportunity cost (opportunity cost is what you have to give up in order to do/buy something. For example, I think of how many hours I would need to work to pay for something I'm going to buy vs. how many hours I'll enjoy it).

So here is an Economist who loves wine, telling you a little but more about what it is you're paying for. I got a little carried away with this post so the rest is after the jump!

The Basics Behind Charles Shaw

Let's start with the basics - How does Charles Shaw work? The brand is owned by Bronco Wine, which is run by the Franzias (guess what they are known for?) who have been in the wine industry for decades. 10 years ago, they approached Trader Joes to start a $2 wine called Charles Shaw. Originally, the wine would be inexpensive to produce because it would source grapes from wineries that have a surplus or have gone bankrupt (the brand name was also purchased after the original Charles Shaw estate went bankrupt). These days, the brand additionally operates their own wineries throughout the California Central Valley, but continues to bottle in Napa so that they can lay claim to the region.

What About These Awards and Things?

There are two facts here that are key to explaining how Shaw likely won their awards in 2002. First, since they source surplus grapes, they are able to blend them in order to improve taste. Since 2002 was one of their first vintages, the company had all of their initial grapes accessible in order to start off the brand with the best grapes they were able to source. For a label that is sourcing grapes, 2000-2002 would have been great years to buy grapes as there was a huge economic downturn. Therefore, it's quite likely that the grapes Shaw purchased for their 2002 vintage were sold at a much lower than they would have been in subsequent years, allowing the brand to have an unusually superior vintage.

The Chemistry and Aftermath of Cheap Wine

However, 2002 was a long time ago and I doubt that anyone has been aging a bottle of $2 Chuck for ten years so let's take a look at the wine today. I'm not going to lie - when I was fresh out of college and adjusting to "the real world" and full autonomy, I was elated to take home an armful of wines without breaking a twenty. However, once I started drinking slightly nicer wine, I noticed that I had the worst hangovers when I broke out the cheaper bottles. My mom, who is a big fan of spending less than $5 on wine, came to visit me and broke out some of my favorite wines from the clubs I order from. The next morning she told me that she surprisingly had no hangover, unlike when she shares a bottle of Chuck with my dad. It was a phenomenon that I noticed too - even though I was enjoying more wine with dinner and usually sticking to wine when I went out, I only felt bad the next day if I ended up opening a cheaper bottle.

I wanted to do some research into this hangover theory. I did some reading on the interwebs and found that cheap wines are notorious for putting extra additives into their wine for a variety of reasons. Charles Shaw has been accused (I have no proof) of adding grape concentrate, sugars, flavorings etc. For example, cheap wine may cut costs by putting oak chips into its wine instead of aging it in an oak barrel. Although you may end up with a product that has a taste profile similar to a wine that runs 4-5x the price, it's due to these artificial ingredients rather than the aging process, so you're more likely to have a rough morning after if you have a few glasses of the stuff.

Here's where the opportunity cost comes in. If I feel sick in the morning, I could be an hour or more late to work, just from buying cheap wine. If I spend $10 more on a bottle (and I make more than $10/hour) than the time that I'm in work instead of clutching my head in agony is money in the bank.

And... Back to Economics

A big part of the reason that Charles Shaw can keep their prices so low is because of their mass production (economies of scale). The larger the quantity of a product produced, the lower the average cost will be to produce each unit, and since Charles Shaw is producing millions of bottles a year, they can be more efficient and keep their costs low. The company also cuts costs by using cheaper glass, plastic corks, etc. The biggest cost the company faces is actually in distribution as can be shown by the $2.99 price tag outside of California (In some ways, they're just exhibiting good micro-economic principles).However, some cost cutting does make for an inferior product. As I said above, cheaper wine companies tend to add additional substances to their wine order to mask the flavor of cheaper grapes.

Other times, the higher price isn't caused by the wine at all, but factors like property and production costs. A winery charging a bit more may grow their grapes in an area that creates better natural flavors, but has a higher price for land. Perhaps you just really like a winery in particular but they are a small operation that doesn't benefit from the economies of scale that a mass producer like Charles Shaw can benefit from. If you happen to like foreign wine, you're paying for that bottle to travel quite a distance on top of it's original cost.

Sometimes you really are just paying for a superior product. I'm a proud member of the Francis Ford Coppola Winery. As far as wineries or wine clubs go, it's a little hokey... but I love that. I love that the labels show the artistic expressions of a visionary director. I love that the wine has a variety of price points from house wines to supermarket wines to reserve wines. I love that they have a pool and movie paraphernalia at their estate in Sonoma. I love that I have a private shopper that I can email when I want to make an order and that they make my life as a customer incredibly easy. They're easy to contact, they give great customer service, they have a wide selection, they constantly email me deals. I love putting my dollars into a company that is going to give me great service and I'm willing to pay a premium on the wine for that (however, as a member, I do get a 30% discount). 

Membership Benefits

So How Much Should I Spend?

You don't have to look far on the Internet to find a lot of posts about how wine doesn't need to be THAT expensive, with results from double blind taste tests, etc. I've had those articles pushed in my face plenty of times when I say I don't like cheap wine. Let me clarify my pricing scale - I think $2 is cheap. $4 is extremely inexpensive. $10 is a fair price. $25 is a very nice bottle of wine. $40+ and I'm probably holding onto it for a special occasion or an investment. After all, I'm 26 and I don't have a small fortune to spend.

The articles that you are throwing my way are calling $8-10 bottles of wine "cheap" and comparing them to $25-50 bottles. Most of the wine I drink is around $10-15 and I don't feel a huge need to jump out of that price bracket largely in part because I fully agree - you can get a lot of amazing wine at that price point.

Ten Dollar Wine? Go on...

Less than $10

Although my friends often call me a wine snob, I want to reiterate that you don't need to spend a ton of money to get a good wine. Here are a few of my favorite wines that won't break the bank.
-Blue Fin Petite Sirah, $3.99, Trader Joe's (they also have a Pinot Noir, Chardonnay, and Viognier)
-Coppola Votre Sante Chardonnay can sometimes be found on sale at Trader Joe's (also a Pinot Noir but I wasn't a big fan of it)
-Louis Latour is a great French wine which currently has a Chardonnay blend for about $8 at Trader Joes

Trader Joes also frequently features staff picks on affordable wines and I've used those suggestions to branch out to new wines as well.

A lot of Coppola, Benzinger, Kendall Jackson, and Mondavi wines can be found in the $10 range as well, if you can find a special or a discount store, (Target is a good place for this) but they can also be higher so it's good to shop around and see how the price varies at different locations.

Another tip is to shop the Five Cent Sale at BevMo. My biggest tip here is that sometimes the prices are marked up before the sale. They also tend to offer the same wines each time around so if you see a wine at the Five Cent Sale, do not buy it when it's regular price because you're likely overpaying at that point.

And for even a little bit more, one of my wine clubs, Club W, sells a wide selection of wine's each month for $13/bottle including tax and shipping. There is a 3 bottle minimum each month but you can skip months at will. The club will also quiz you on your taste profile and recommend wines to you each month based on your answers and your ratings of any of your orders.

I Judge Wine, Not People

If you like cheap wine or Charles Shaw, there's nothing wrong with that. Wine is an acquired taste. My dad lives off of Charles Shaw and Carlo Rossi and that is perfectly ok with him. The way I see it, it's like those people who only drink Budweiser or eat fast food for dinner most nights. There might be better options out there that are better for you, but if you don't mind then more power to you. Charles Shaw, Budweiser and McDonald's are also great - as starters. Wine, like beer and food, have different layers that you grow different tastes for. If someone tells me they've never had wine before, I'm not going to suggest they order a ten year old Cabernet Franc just like no one would hand a pint of Guinness to a beer virgin. You start with something light and maybe after they get used to that you suggest a lager, then a Blue Moon, then they can move onto other Belgium beers and then ales and so on. Some people never feel the need to move out of that and that's great, save yourself the money and be happy with what you know you like.

It's the same thing with wine. If someone told me they had never had wine before and wanted to know what they should start with, I would tell them to get some Charles Shaw or Sutter Home White Zinfandel and then we'd move forward from there. These wines are great for getting people started. Sometimes that's enough and sometimes you grow a greater interest and want to go on tastings and try different brands and varietals. Sometimes you end up being a "wine snob" like me and try to fill your brain with as much wine knowledge as you can.

But How Do You Really Know?

The one thing I wasn't able to tackle in this post was an actual blind taste test. As much as I love an excuse to crack open a few bottles, I know that this should be a fully blind taste with a variety of pallets. I also hate wasting even the cheapest of wines but didn't want to get stuck having to drink $2 Chuck. Instead, Cinnamon Geek is going to have an official blind taste test and... we need volunteers!!! We need person to prepare the blind pours and film (yes! the future of Cinnamon Geek is in video!). We also need a couple of extra tasters to increase the statistical significance of this experiment. If you are interested in participating and live in the Bay Area, tell me why you're an awesome judge of wine in the comments.

Sources

In addition to any links embedded in this post, I've listed any articles I read while doing my back up research on this post (after the jump) because I needed to be absolutely confident in what I was putting here.

• http://evewine101.com/2011/01/17/rusty-sly-whats-up-with-two-buck-chuck/
• http://www.morssglobalfinance.com/the-taste-of-wine-%E2%80%93-does-it-matter/
• http://money.cnn.com/2007/09/05/news/companies/Two_Buck_Chuck.biz2/index.htm?postversion=2007090703
• http://winecast.net/2012/02/04/charles-shaw-what-a-long-strange-trip-its-been/
• http://www.wired.com/wiredscience/2011/04/should-we-buy-expensive-wine/
• http://www.newyorker.com/reporting/2008/05/26/080526fa_fact_acocella?currentPage=all
• http://www.7x7.com/napa/why-some-wines-give-you-hangovers
• http://abcnews.go.com/Business/story?id=8311451&page=1#.UCVWEaFlR_Y
• http://www.cbsnews.com/8301-505144_162-57191651/4-things-not-to-buy-at-trader-joes/
• http://www.winedigs.com/wine-love/cheap-wine-hangoverswasted-hangover/
• http://kalw.org/post/evaluating-taste-and-cost-two-buck-chuck