Supply and Demand and Ice Cream
Despite the name of the article, it is really about supply and demand. The basic idea of suppy and demand is basic to economics and business.
Here is an example. It is a really hot day and you are somewhat hungry and you have a chance to buy an ice cream cone. How much would you pay for it? You finish that and you are still hot, so you buy another. But how much would you be willing to pay for a third, fourth or fifth cone? Not much if anything. So the supply has exceeded demand and the price goes down.
Now, lets say that there are 4 people and there is only one ice cream cone to be had. They will fight over being able to get the cone and the price will end up higher than normal. In this case, demand exceeded supply and forced the price up.
Chinese and Fine Wine
Well, the same thing is happening with wine. There are many newly wealthy Chinese and a number of them have developed a taste for good wines, particularly from the Bordeaux area in France. There are so many Chinese and so many newly wealthy ones that it doesn’t take all that many to impact wine prices.
Typically if demand is driving prices up, you just make more until supply and demand balances and the price stabilizes. If you or you and other companies get over zealous and make too much, then supply will exceed demand and the prices will come back down again.
But with wine, it is different. Yes, you can make more wine, but the wines with a name and reputation are only grown in one place and there is no easy way to increase supply. That means there is only one direction for prices to go and that is up.
The Chinese obsession with red wines led to a bubble in prices in Bordeaux in 2011. A top wine like Chateau Lafite was going for $23,000 a case or almost $2,000 a bottle.
But, we said a bubble, implying that prices also came down despite no increase in supply. If there was no increase in supply, then there must have been a decrease in demand. Why would that happen?
Dutch Tulip Bulb Mania
Tulips were introduced to Europe from Turkey in the late 1500s. People really liked them. The more spectacular the variety, the more valuable it became. By the early 1600s, people being people were speculating on them and the price of tulip bulbs went up. Everyone wanted one and the prices went above anything reasonable or sustainable, but people figured prices were going to keep going up and they had been going up quickly, so better jump on the bandwagon and buy one.
But, it was artificial demand, stoked by people buying on speculation. When enough people decided they weren’t going to buy at the inflated prices, the process reversed and prices started to tumble.
Something similar happened to the wine market, where the prices started to drop after 2011 for the most expensive bottles and are now 40% lower than they were at the peak. But this means that they are still well above where they started. Even though the speculation has died out, the new added demand from China has probably permanently increased wine prices, at least at the high end.
One thing that has slowed down Chinese consumption is that a lot of the wine was given as gifts and over the last year or so, there has been a crackdown and conspicuous gift giving is much more frowned upon now.
Ironically, many people said the Chinese were new to the game and didn’t know what they were doing. But, unlike many Westerners who buy these top wines, they are actually drinking the wine. A number of Westerners buy the wine to cellar as an investment.