Banana peel economics

Column - Robert Joseph

Robert Joseph
Robert Joseph

It’s one of those classic scenes from a slapstick film of the 1920s. Hungry man, down on his luck, discovers a bag containing a banana. He eats the fruit and throws away the skin. Further down the road, he finds another bag with another banana and repeats the pattern, throwing the skin a little further. Man walks a few yards and falls over first banana skin. Gets up. Walks a few more yards, falls over second banana skin. 

In the 1930s, the European wine industry — and there was no other — was very hungry and down on its luck, after the triple blows of phylloxera, World War I and the Great Depression. The market was flooded with fake examples of wines such as Chateauneuf-du-Pape and Nuits-Saint-Georges. The banana that came to its aid was the official regulation of regions of origin; wines had to be produced in the place named on the label, using approved methods from approved grape varieties.

Two decades later, in the wake of another global conflict, the second banana took the form of the recently invented supermarkets. These offered millions of people the chance to pick up bottles of wine along with the washing-up liquid and dog food.

These were evidently very good, nutritious bananas, but what were the skins?

While appellations, DOs and DOCs, offered famous regions like Chateauneuf and Chianti legal protection against fakery, helped hundreds of others establish their own styles and prevented homogenisation, they created long-term structural problems. Until the arrival of reforms such as Vin de France, AOC rules effectively outlawed innovation and differentiation. Making every wine in a region more or less resemble the others inevitably fostered a race to the bottom in which merchants and consumers sought out the cheapest available version of the most popular denominations. And, of course, not all appellations are equal. Good wines from Moulis struggles to command the same price as average examples from neighbouring Margaux.

Some producers — principally in regions like Bordeaux and Champagne — understood the need to put their brands above those of the appellation; no one buys Léoville Las Cases because it’s a Saint-Julien. But these were the exceptions to a rule that effectively commoditised wine. The downward pressure on prices cut producers’ margins, denying them the marketing funds.

This situation was exacerbated by the second banana skin. No one is better at exploiting commoditisation than a modern supermarket chain. If their economies of scale enabled them to cut prices, their very nature allowed them to break a basic rules of capitalism: they did not have to make a sustainable profit on every bottle of wine they sold if it “built footfall” and attracted customers who bought other, more profitable items. The UK Walmart subsidiary Asda illustrated this perfectly when it led a move against selling wine below cost — and then defined “cost” as the excise duty and VAT sales tax.

Worse still, these big chains had zero interest in building brands for producers. They often demanded that most of the meagre promotional funds the winery might have at its disposal go straight into discounting. And the low prices created by this policy further undermined brand value.

To navigate this increasingly tough course, many of the bigger producers signed a devil’s contract with the retailers — supplying them with own- and private-label wines in return for getting a place on the shelf for their brands. The logic was simple: “If we don’t give it to them, our competitors will.”

A calculator isn’t necessary to work out how this let retailers offer wines that were comparable — and often preferable — to the branded examples. And when supermarket own-label wines win medals in competitions, what incentive is there for the consumer to buy the pricier branded example on the same shelf?

To return to my film clip, after falling over, the actor gets back on his feet — and that’s what I see beginning to happen to the wine industry. Producers in regions that struggle to sell for premium prices are either embracing liberal regimes like Vin de France or striving to build reputations for their wines that transcend the appellation. I can’t be alone in noticing the shrinkage in the font size of the AOC or DOC on some labels. As direct to consumer (DtC) sales grow, many are taking back control of their distribution destiny.

Until, of course, they grow hungry again and feel the need for another banana.

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