richard sagala economic essay

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Wine MBA 2010/2011 Wine Economics Essay

What is the effect of critics on the wine market?

Richard Sagala

Wine critics play an important economic role in the wine world. They help consumers determine the value of an unknown good. Through their judgment and their assessment of the product's perceived quality, wine critics infer "experience" characteristics to the attention of a prospective buyer and help him solve the value proposition. Some critics are so influential that their scores and recommendations can trigger buy signals all over the world. Others influence locally, work for a media, judging at competitions where the winners are awarded medals, distinctive cues that help to differentiate the products. In order to study the effect of accolades such as the presence of a medal on a wine bottle, we have conducted a survey with 444 consumers enrolled in wine appreciation courses. Finally, we will look at future trends to see if the reputation market will continue to be shaped by expertise based wine critics or if new players (with new rules) may be entering the playing field. Via the power of social media may lie a new marketing opportunity for brands previously used to push their products from the top down to start developing a direct B2C1 bottom up approach directly engaging consumers with a focus on the new brand evangelists.

1 B2C= Business to Consumers

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Some fundamental economic rules to remember

For the aficionado, wine is a pleasurable product obtained by the fermentation of grape juice, but for an economist it is simply a good that can be exchanged on a market, i.e. a place where offer meets demand. Simply said, a good is a bundle of characteristics. Goods are valued for their attributes, the characteristics they possess. Those different characteristics make for the differentiation between them. In Quebec (Canada) from where this research was conducted, the sale and distribution of alcohol are under the control of SAQ (La Société des Alcools du Québec), a state monopoly acting as the channel captain for retailing alcoholic beverages in this predominantly French speaking province. SAQ possesses four hundred and sixteen stores, more than 10,500 references in its catalogues and generates CDN $2.5 billion in sales annually. Each product in the SAQ catalogue is a bundle of characteristics and constitutes a unique value proposition. The consumer is challenged by the amount of information available and there is a daunting asymmetry between what the producer and the retailer know and what the consumer knows and understands about the goods. As one person from the SAQ marketing department metaphorically describes: "We are a bit like shoe dealers with stores where all the shoes are in boxes and where clients look at clues on the boxes to decide what they want to purchase". The act of selling wine is based on extrinsics, external cues that will be processed and decoded heuristically by the consumer. SAQ has produced on its B2B website a ponderation (weighting) chart that shows, for the benefit of stakeholders, the criteria against which a product is evaluated prior to being selected (see figure 1 Figure 1: SAQ Ponderation / Selection criteria

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As part of Notoriety criteria, 2.1 Awards, medals and media contributes 25% of the total score for a Specialty product, making it a more important criteria than the (organoleptic) Quality (20%) and the second most important criteria after the quality/price ratio (30%). Why awards, medals and media are deemed so important to the trade? In an essay written by wine producer Robert Hodgson, the author tells how much wineries are committed to the pursuit of winning medals:

"To lift their brand above the competition, wineries spent more than $1 million in entry fees in 2003 at just 13 of these venues. The benefit of this expense is the belief by wineries that entry fees offer a valid return on investment: Gold medals sell wine"

Hodgson believes people, not medals, sell wine. But a medal can help when meeting with buyers for retailers.

"Retailers and distributors want to see third party validation of a wine's quality whether it be Parker, Wine Spectator, Wine Enthusiast, BTI or even the Grundy County Fair. And a related point, to promote a wine on shelf, the most useful tool next to a salesman recommending it personally, is a shelf talker. Short, simple, graphic communication to the consumer in the form of a big number or a big medal, gives them the confidence to choose a wine. Consumers aren't in a position to evaluate whether this rating is more valid than that, or this competition more prestigious than that one but they do need some validation that this is a good wine. And medals do that". (Vinography )

SAQ, for its part, publishes a List of magazines, contests, Notoriety criteria with a three level hierarchy (A-‐B and C) to weight the difference between ratings2. To the Montreal Gazette wine critic Bill Zacharkiw, "The SAQ is flooded with proposals for new wines...the SAQ relies on how U.S. and European magazines score the wines and how well it sells in other provinces."(The Gazette) On the consumer side, what is there to be appraised?

In Mueller et al.,"The consumer has to appraise the value of three types of characteristics: the 'Search' characteristics, the 'Experience' characteristics and the 'credence' attributes".

"‘Search’ characteristics are those that can be assessed before the purchase in front of the shelf. The producer, brand, region, grape variety and packaging are examples of search characteristics. ‘Experience’ characteristics, such as the taste of a wine and whether it is enjoyable, can only be evaluated upon consumption. These are often of course the main benefits a consumer seeks

2 The A category is garnishing more points than B or C. For example, in the "A" category we find American, UK, French and Italian publications: Wine Spectator, the Wine Advocate, Decanter, le Guide Hachette, Gambero Rosso, Bettane et Dessauve, La Revue du Vin de France. James Halliday and Alan Meadows are cited in the B category. It is worthwhile to note that almost all critics comes from abroad and are not sourced locally.

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from purchasing a wine. Other characteristics such as health effects, environmental benefits, ingredients or production methods used for a wine that cannot be assessed during consumption are called ‘credence attributes’. When purchasing wine a consumer uses any available ‘search’ information to infer the hidden ‘experience’ and ‘credence’ aspects. ...George A. Akerlof won the Nobel Prize for Economics in 2001 for his breakthrough findings on information asymmetry and its impact on market performance. He found that consumers would pay only a relatively low price when they perceive a purchase to be risky, and that whole markets can fail when the perceived risk is too high, resulting in no transactions. ...According to Akerlof this price discount or ‘risk premium’ can be reduced if market participants provide their trade partners with credible information, which reduces the perceived risk. "

Therefore, the trade actively looks at effective and efficient ways to reduce this 'risk premium' and allow the consumer to infer the hidden ‘experience’ and ‘credence’ aspects of a wine to increase its desirability. Signalling with cues3 on the bottle like medals, seals of approval and hybrids (a circle with a high score in it4) engages the consumer directly. Whereas shelf talkers may or may not be present (SAQ does not use them), scores and descriptions may be printed in a catalogue that not all prospective buyers may get, circular icons in the shape of a medal glued to the bottle follow the product everywhere. These icons may catch the eye and override the rest of the cues on the label, or might be what comes to validate them, solve the value proposition and trigger a buy decision.

When a sophisticated audience looks for (easier) ways to simplify the value proposition. People can process only a limited amount of information and, wine being a complex product, even dedicated aficionados may find acquiring relevant information costly and time consuming process. Mrs Jessica Harnois5 who was responsible for the marketing of the "en primeur" SAQ campaign and release of the 2009 Courrier Vinicole catalogue offering of Bordeaux wines, 3 Marketing as seen to produce more medal types than the standard ones. In the Addendum 1, picture 1, we can see that, for a same product, three different angles are used to signify a medal in the mind of the consumer. There is the classic (Gold-‐Silver and Bronze) medal, the medal-‐like displaying of a magazine high a score and the third way is to boast about having been selected as the "official" wine for an event (here a beach volley ball tournament). All three icons are made to look like a medal. 4 In Addendum 1 picture 2, we have a series of scores (attributed from the same publication) that looks to resemble like a string of medals. 5 Richard Sagala has conducted on the 18th of November 2010 an interview with Mrs Jessica Harnois responsible for the Courrier Vinicole, SAQ's high-‐end mail order catalogue.

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noticed how consumers are looking for simplification. Courrier Vinicole consumers are typically connoisseurs who buy from a printed catalogue exclusive super premium wines for their cellar. The last printed catalogue6 provided the description of the products and the scores from the major wine critics: Wine Spectator (WS), Robert Parker (WA), Revue du Vin de France (RVF), Decanter (D) and Jessica Harnois (JH) (see Figure3). Some products were graced with an additional "A Courrier Favorite" 7 red icon seal of approval lookalike and those, Mrs Harnois witnessed, sold almost immediately. Those twelve (out of seventy plus wines) red seals in the catalogue have effectively differentiated the goods. A simple icon with no description of the methodology for attribution or what it means to be "A Courrier Favorite" has elicited quick buying action from a sophisticated crowd. Figure 3 is an example of a product with the red seal "A Courrier Favorite".

6 SAQ Courrier Vinicole catalogue The Great 2009 Bordeaux wines unveiled. 7 Translated in the French version of the catalogue as a "coup de coeur".

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What do Quebec high involvement consumers think of medals when they select a wine?

During the fall of 2010, a questionnaire8 was submitted to the students of the SAQ wine appreciation courses, a high involvement9 cohort buying more than one bottle a month. Various topics were covered (see addendum 2); the E section covered criteria and attributes' importance when selecting a product. On the tenth question, students were asked to validate and grade a sentence according to what they thought about the presence of a medal on the bottle: "The last time I bought a wine, I chose it because it had a medal10"

They answered on a scale of one to five: 1-‐Not at all important ("Pas du tout important" in French) 2-‐Not important 3-‐Neutral, neither good or bad ("Neutre" in French) 4-‐Important 5-‐Very important ("Très important" in French) The occurrence of selecting a bottle with a medal would be most unlikely if they answered "1" and very likely if they answered "5". Results

Out of the 444 students, 118 (27%) selected "1", 97 (22%) selected "2", 129 (29%) selected "3", 87 (20%) selected "4", 13 (3%)selected "5."

8 The questionnaire was built on a model, a previous survey put together by professor Eli Cohen designed on the Likert scale, based on the best-worst scenario. An initial pilot was produced in the spring of 2010 and was tested and validated by an initial group of 20 students. Results were weighted and the standard deviation calculated (submitted to the T test). Limitations: E10 was the only question related to medals and it would be interesting to dwell more on the issue. 9 As per the definition of Professor Larry Lockshin of Ehrenberg-‐Bass Institute for Marketing Science: a high involvment consumer buys more than one bottle of wine per month. 10 Translated from French: "La dernière fois que j'ai acheté du vin, je l'ai acheté parce qu'il avait une médaille"

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Results where that less than one out of four students had a positive view of the presence of a medal on the bottle (20%+3%) with three per cent of them considering such presence as being very positive. 29% percent held it as neutral, neither good or bad information and, almost half (26%+22%) held the presence of a medal on the bottle as somewhat unimportant or not at all important.

Choosing a wine because of the presence of a medal

1-‐Not at all important

2-‐not important

3-‐neutral

4-‐important

5-‐very important

0 20 40 60 80 100 120 140

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An example of what consumers from abroad think about scores and medals. In Australia, Simone Mueller et al. conducted an experiment on how shelf information influence wine choices and:

"...The presence of sensory descriptions had an average effect of 7.4%, which had a similar impact as found for wine show medals (no medal to Gold & Trophy) with 7.6% ...and wine critics’ scores (7-‐ 10%). (Lockshin et al. 2009)".

The presence of medals increased the wine choice by 7.6%, slightly the same as sensory descriptions (7.4%), medals being a little more effective than scores when there is a wide disparity between the critics scores (7%) and less effective (10%) when the scores are more in agreement. Looking prospectively, where will wine critics fit in the new economic, i.e. social media augmented, wine marketing reality? Classic wine critics, Twinsumers and Social-Lites , 'the times they are a changin'.

With the advent of social media, will wine consumers continue to infer their 'credence' and 'experience' characteristics from (expertise based) wine critics scores or will they be influenced by other signals?

"In 2011, word of mouth and recommendations will be even more dependent on P2P dynamics. If Twinsumers, consumers with similar consumption patterns, likes and dislikes, and who are hence valuable sources for recommendations on what to buy and experience are all about improving 'search curation', Social-Lites are all about discovery, as consumers become curators; actively broadcasting, remixing, compiling, commenting, sharing and recommending content, products, purchases, experiences to both their friends and wider audiences. Why would consumers want to become curators? Because many of them are investing time and effort in building BRAND ME, via online profiles that record their opinions and recommendations. And as audiences in knowledge economies value interesting, relevant and useful tidbits, they bestow status on those curators or Social-Lites who share. Furthermore, it's never been easier to be a Social-Lites... social networks' streams allow users to easily broadcast information to a wide range of people. (Trendwatching)

Professional critics like Matt Kramer have mixed feelings about this11 although critics' scores are still favourably viewed and respected12 by the market (figure 4).

11 " (social media)... this is not good news for professional critics of any kind, never mind wine scribes such as myself. Am I ambivalent about this? sure I am. Professional critics labour-‐or should anyway-‐ under standards that exceed "Do I like it?" (Matt Kramer, On Wine). 12 "Mouton’s position as the poorest-‐performing 2009 comes as something of a surprise. Importantly, Parker did not rate the wine as highly as its fellow First Growths, and, as such, drifting Mouton 09 prices seem to

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Figure 4, Live-‐Ex December 2010.

The tech savvy cohort is an important target of wine marketing, and are the hope for replacing the aging, thus lesser drinking boomers. Millenials are favourably turning to their age group peers, the trendsetters they trust, to get advice. Conclusion

Wine critics grease the wheels of the wine economy, lowering the risk premium because they help solve the value proposition. Stakeholders, namely the trade, positively subscribe to this business model while consumers lend an ear, but also use their own alternative heuristic cues to infer quality. The appeal of wine critics accolades is not universal. Both the Quebec and Australian surveys indicate that less than ten percent of consumers13 seem to buy wine according to medal and score signalling. Perhaps the trade is asymmetrically enthusiastic about them. In some niche markets (Bordeaux Firsts Growths for example), critics are economically significant but in other markets they are less effective. Therefore, the trade may want to tap into other dynamic sources such as Twinsumers and Social-Lites to generate buzz and stimulate demand. A profitable scenario for brands could be to divert some of their marketing efforts from conventional (top down) scores and medals and seek to pursue a new (bottom up) B2C14 approach, directly engaging consumers, taking special care of all possible opinion leaders and trendsetters to get those "referrals by a trusted source"15, arguably the best recommendations one could win for his products. .

reflect that Parker scores are still influential in setting pricing" (Liv-‐Ex, Dec 2010). 13 This is said bearing in mind that less than ten per cent consumers (with great purchasing power) can be economically significant. 14 B2C= Business to Consumers 15 p.1, Scott Stratten, Unmarketing. Stop marketing. Start engaging

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Bibliography -‐Robert T. Hodgson, An Analysis of the Concordance Among 13 U.S. Wine Competitions[Online], Availableat:http://www.wineeconomics.org/journal/content/Volume4/number1/Full%20Texts/1_wine%20economics_vol%204_1_Robert%20Hodgson.pdf [Accessed 21 December 2010]. -‐Kramer, M., 2010. , On Wine, New York, Sterling, p. 73. -‐Live-‐Ex Market Report, December 2010, [Online], Available at: http://www.fairmonthk.com/userfiles/1291959468.pdf [Accessed 21 December 2010]. -‐S. Mueller, Larry Lockshin, Jordan Louviere, Leigh Francis, Patricia Osidacz, How does shelf information influence consumers’ wine choice? ,[Online], Available at: http://www.winepreferences.com/resources/page59/files/page59_1.pdf [Accessed 21 December 2010]. -‐SAQ B2B, 2010, Annual Report [Online], Available at: http://marketing.globalwinespirits.com/SAQ_B2B/2010_Annual_Report.pdf [Accessed 21 December 2010]. -‐SAQ B2B, 2010, List of magazines, contests, Notoriety criteria [Online], Available at: http://marketing.globalwinespirits.com/SAQ_B2B/Politique%20et%20Normes/Listofmagazines_contests_Notoriety_criteria_PMP_2008.pdfhttp://marketing.globalwinespirits.com/[Accessed 28 December 2010]. -‐SAQ B2B, 2010, Policy and Standards, Call for tenders [Online], Available at: http://www.saq-‐b2b.com/wx/en/MAIN.SAQ_INDEX_PAGE_PREP [Accessed 21 December 2010]. -‐Stratten, S., 2010. , Unmarketing. Stop marketing. Start engaging, New Jersey, Wiley, p. 1-‐3. -‐Trendwatching, Eleven crucial consumers trends for 2011 [Online], Available at: http://www.trendwatching.com/briefing/ [Accessed 21 December 2010]. -‐Vinography.com,[Online],Available at:http://www.vinography.com/archives/2009/09/gold_medals_do_not_mean_good_w.html [Accessed 21 December 2010]. -‐B. Zacharkiw, A Christmas wish: Treat us like adults, [Online], Available at: http://www.montrealgazette.com/columnists/Bill_Zacharkiw.html [Accessed 24 December 2010].

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Addendum 1, Types of medals, medal shape awards, points and seal of approval. Picture 1, from left to right, 1-‐Official (selected) wine for the AVP event, 2-‐Gold medal, 3-‐Medal shape points

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Addendum 1, Picture 2, string of medal shaped high scores (Scores from Wine Spectator).

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Addendum 2: Facsimile of the questionnaire submitted to SAQ students of Cycle I wine appreciation course

A. Par rapport au vin, quel est le niveau de vos connaissances actuelles? SVP indiquez votre degré d’accord ou de désaccord avec les propositions suivantes : Pas du

tout d’accord

Neutre Tout à fait

d’accord 1. Je connais peu le vin, mais j'aimerais

mieux le connaitre, c'est pourquoi je suis ce cours.

1 2 3 4 5

2. Je m'y connais bien et je m'y intéresse depuis quelques années déjà.

1 2 3 4 5

3. J'aime le vin et j'en parle dans mon milieu, j'aime communiquer mon enthousiasme à ma famille, à mes amis, à mes collègues de travail aussi.

1 2 3 4 5

B. Indiquez votre degré d’accord ou de désaccord avec les propositions suivantes : Pas du

tout d’accord

Neutre

Tout à fait

d’accord 1. Le vin a une place importante dans

ma façon de vivre 1 2 3 4 5

2. J’ai plaisir à consommer du vin 1 2 3 4 5 3. Goûter le vin sur le lieu d’achat, c’est

important pour me décider à l'acheter 1 2 3 4 5

C J’achète du vin : 1 Rarement 2 Une fois par semaine, au moins 3 Une à deux fois par mois 4 Moins d’une fois par mois

Nous conduisons une recherche académique, sans aucun but commercial, sur vos connaissances en début de session et votre choix de vins actuel. Nous vous remercions pour le temps que vous consacrerez à compléter ce questionnaire

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D Je consomme du vin : 1 Plus souvent qu’une fois par semaine 2 Une fois par semaine ou moins souvent 3 Seulement lors d’occasions exceptionnelles E. Comment choisissez-vous vos vins ? La dernière fois que j’ai acheté du vin,

je l’ai acheté parce que: Pas du tout

important

Neutre Très important

1 Il y avait une promotion en magasin 1 2 3 4 5 2 A cause du cépage 1 2 3 4 5 3 Il y avait des informations sur le rayon

(pastilles de goût). 1 2 3 4 5

4 A cause de la région d’origine 1 2 3 4 5 5 Un degré d’alcool en dessous de 13% 1 2 3 4 5 6 Il m’a été recommandé 1 2 3 4 5 7 Il permettait un bon accord avec mes

mets 1 2 3 4 5

8 A cause des indications sur la contre étiquette (endos)

1 2 3 4 5

9 C’est un vin que je connaissais déjà 1 2 3 4 5 10 Il avait une médaille 1 2 3 4 5 11 L’étiquette était attirante 1 2 3 4 5 12 A cause de la marque 1 2 3 4 5 13 Il avait la mention: produit écologique 1 2 3 4 5 Budget d'achat F. Combien seriez-‐vous prêt(e) à payer au maximum pour une bouteille de vin pour un repas normal à la maison:

0 $10 15 20 25 30 35 40 45 $60 ou plus Ou bien : F1 Je n’achète pas de vin pour des repas normaux à la maison G. Combien seriez-‐vous prêt(e) à payer au maximum pour une occasion spéciale ou un cadeau

0 10 15 20 25 30 35 40 45 $60 ou plus

Ou bien G1 Je n’achète pas de vin pour ce type d’occasion

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H Je suis: 1. un homme 2. une femme K Mon

groupe d'âge: L Comment voyez vous votre avenir (après ce cours) comme consommateur de vin ? SVP, choisissez la proposition qui vous concerne et indiquez votre degré d’accord: Pas du

tout d’accord

Neutre

Tout à fait

d’accord

1. Mon but est de boire mieux mais pas plus. Je vais acheter des bouteilles de vin plus chères, quitte à en acheter moins pour respecter mon budget. Je ne tiens pas à dépenser davantage.

1 2 3 4 5

2.

Mon but est de boire mieux et plus varié. Maintenant que je connais ma/mes Pastille(s) de goût, je vais explorer davantage mais pas dépenser plus par bouteille.

1

2

3

4

5

3. Mon but est de boire mieux, plus souvent, et à l'aide de mes nouvelles connaissances faire de nouvelles découvertes, soigner les accords mets et vins, acheter des bouteilles plus dispendieuses. Mon budget consacré au vin va certainement augmenter, c'est inévitable.

1 2 3 4 5

M : SVP encercler a, b ou c a) je préfère le vin blanc, b) je préfère le vin rouge, c) j'aime également les deux.

18-‐24 25-‐40 41-‐54 55-‐64 Plus de 64 1. 2. 3. 4. 5.

richard sagala economic essay

Technology

la dernire

vous prt

perceived

courrier favorite

risk premium

combien seriez

notoriety

credence aspects