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FOOD FOR THOUGHT - November 12, 2008
Mark R. Vogel - - Mark’s Article Archive


The Invisible Hand

Can you imagine spending $7,000 on a bottle of wine?  A bottle of wine.  Not rare coins or a famous painting that will probably increase in value.  Not even a product that won’t appreciate but will endure for many years and be used many times like an appliance or a new roof.  But a bottle of wine.  An entity that will produce a fleeting pleasure and be gone forever.  (Rare wines will increase in value but I’m assuming consumption and not investment).  I found the 1996 Romanee-Conti, indisputably regarded as the best Burgundy in the world, online for $7,000.  Oh, is seven thousand a little too steep for you?  No problem.  You can acquire the 2001 for $6,500.  Other vintages can sell for as much as $10,000 a bottle! And if you think that’s ludicrous, a Chinese billionaire recently purchased 27 bottles of Romanee-Conti, (which included a number of older and preeminent vintages), from a London based rare wine merchant for $500,000!  That comes out to about $18,500 a bottle!

     One’s visceral response to such extravagance is to immediately question whether any wine can be worth that much.  But “worth” is a tricky and subjective concept.  In its most practical sense, questioning if a product is worth its price is asking whether its quality and utility is commensurate with its cost.  In this sense, is any wine in the world so good as to be worth $7,000?  Of course not.  But, and here’s where we start to cross over into the proverbial gray zone……“worth” is inevitably judged by an array of subjective and individualized variables.  From a monetary perspective, if you’re a billionaire, seven thousand dollars in and of itself, isn’t worth as much to you as the person making a five figure salary.  In fact, a billionaire paying $7,000 for a bottle of wine is equivalent to someone making $50,000 a year spending 35 cents.  The other aspects of worth are the emotional, psychological, and often irrational factors that influence our assessment of a commodity’s value.  But regardless of whether a bottle of wine is worth such exorbitant costs, how did the price get that high to begin with?   Simple:  The laws of supply and demand.

     Adam Smith, (1723-1790), the pioneer of modern economic theory, proposed the concept of the “invisible hand,” to explain how individuals’ self-interest, in conjunction with the law of supply and demand, will inadvertently benefit society.  These forces are unforeseen, insidious and thus “invisible.”  Suppose a society needs more plastic than what is available to meet its manufacturing requirements.  Ergo, the demand is greater than the supply.  This will propel the price of plastic to rise.  However, encouraged by the potential fiscal gain, producers will be motivated to fabricate more plastic.  A twofold benefit to society will ensue:  more plastic will be available and the augmented supply will cause prices to fall.  This basic rubric can be applied to most commodities and services be it oil, medications, or employee salaries.  (Can you hear Michael Douglas from the movie “Wall Street” spouting “Greed is Good”?)

     However, there’s one little glitch.  Smith’s entire axiom is predicated on the assumption that there is competition.  If a monopoly exists, certainly they will boost production to meet rising demand and makes more sales, but there will be no concomitant fall in the price since they’re the only game in town.  There’s no competition to offer the product at a lower cost and initiate a price war.  This is why the US has laws regarding monopolization and when a monopoly did exist, (like the old days of AT&T), it was regulated by the government. 

     Now let’s get back to wine in general and Romanee-Conti in particular.  The 4 ½ acres of Romanee Conti is some of the best terroir in the world for cultivating the Pinot Noir grape, (the grape used to make red Burgundy), to its fullest expression.  “Terroir” is a French term referring to all the natural elements of a soil and its microclimate.  It embodies an exhaustive list of biochemical factors that can influence the outcome of whatever agricultural product is grown in a specific location.  Clearly certain plants grow and mature better in some areas as opposed to others.  When all of the variables in a particular location come together to produce the most optimal environment, the resulting product will be superior to other locales.  Such is the “perfect storm” that eventuates in Romanee-Conti. 

     The entire vineyard is owned by one purveyor and they produce a meager 500 cases a year, give or take.  Granted, there are other top-notch Burgundies, (Romanee-Conti’s neighboring vineyards produce wine of exceptional, nearly indistinguishable quality), but there is only ONE Romanee-Conti. They couldn’t produce more if they wanted to.  Their patch of land of superior quality is limited in scope and forcing the vines to produce more fruit lowers the quality of the resulting wine.

     So now the supply side of this outrageous pricing phenomenon is in place:  The most exceptional red Burgundy on the planet, under monopolistic control, and produced in limited quantities.  All that leaves is the demand.  It’s old news that world demand for wine, especially fine wine has been rising over the years.  Growing economies in China, India, and other Asian nations is producing more wealth.  With more wealth comes more desire for luxury goods and Asia in particular has a taste for fine French wine.  Now the perfect storm of terroir meets the perfect storm of inflation:  steadily increasing demand coupled with an extremely limited and fixed supply, controlled by a monopoly.  In simple terms, there are enough people in the world able and willing to pay $7,000 or more per bottle of Romanee-Conti for them to sell out their entire stock each year. 

     Adam Smith might still argue that this is a win-win situation.  That the invisible hand has steered the market toward what is best for everyone concerned.  The owners of Romanee-Conti certainly can’t complain, and neither can the customers.  After all, they’re willing to pay the price so it must be worth it to them.  Therefore, each party is receiving what they want. 

     But there’s another little glitch.  As prices rise for the very best wines, some customers who used to be able to afford them now cannot or simply won’t spend quite that much.  They downshift to the next tier of quality/price.  So now demand increases for expensive, but lower priced wines, let’s say $1000 - $2,000 a bottle as a rough ballpark.  But those wines will increase in cost from the higher demand, and some of those people downshift and so on, and so on and so on.  Thus, the overall increasing demand for wine, and the increased demand trickling down from more expensive wines, in turn causes the lower priced wines to jump in price.  (America’s falling dollar adds fuel to the fire as well).  So now the wines that middle class wine aficionados would occasionally splurge on for a few hundred a bottle, are out of reach. 

     It was only a decade ago when I could still find certain vintages of my beloved Chateau Latour, one of the best Bordeaux’s in the world, for $100-$150 a bottle.  Then they reached $200 a bottle.  It stung my wallet but I could afford one bottle a year.  Now you can’t touch Chateau Latour for under $500 and there’s no end in sight.  That’s beyond my ceiling and I’m afraid the bottles of Latour currently in my collection will end up being the last ones of my life.

     And it trickles down further.  Hoards of wines that were in the $20-$40 range are now closer to three figures.  Again, increased total demand, especially demand at the top, shifts some consumers downward, raising demand for lower level wines, and causing price jumps throughout the hierarchy.  In fact, this phenomenon descends all the way down to the least expensive wines.  Just the other day I shelled out $13 for a wine that sold for $9 last year. 

     The sad result is that because of a growing number of extremely wealthy individuals chasing the best wines, the average Joe has to pay more for his regular wines, and may not be able to afford the special ones he once could occasionally splurge on.  This means that more and more quality wines are out of reach of the general public.  Now instead of searching for that rare and more expensive bottle of wine, we must search for another kind of rarity:  wines that are inexpensive, (relatively speaking), but happen to also be of exceptional quality.  Regrettably, there’s less and less of those needles in the inexpensive haystacks. 

     Wine magazines frequently feature decent wines at affordable prices.  Your wine retailer can also steer you toward the good deals.  You’ll also have to engage in some trial and error and experiment on your own.  Or, you’re going to just have to take your “visible hand” and dig it deeper into your pocket.

Also Visit Mark’s website: Food for Thought Online



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