21st February 2016    9 minute read

Price Formation In The French Wine Market (Part I)

Price Formation In The French Wine Market (Part I)

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The price of French wine is only partially derived from the wines objective characteristics and is also based on a social process of qualification. In this process, several market actors – wine producers, distributors, experts, journalists, industry associations, marketing specialists and consumers – participate in establishing the qualities of French wine. As a result, what qualifies as quality often depends on the social class and status position of the consumer.

In economic sociology, this raises questions as to how we justify the representations and price formation attributed to French wine. Indeed, classifications that define products are key in the determination of market rules. Due to most factors that determine the quality of wine being focused on distorted effects caused by opportunistic actors and information asymmetry, the discussion of proper functioning market institutions is prevalent. French wine, where the value is drastically being redefined as a result of globalisation, represents a product with a strong significant component and prices often act as a differential feature. This seems to be the blind spot of neoclassical economic theory and as a result, the economic coordination of cultural goods cannot be reduced to homogeneous or differentiated goods.

Specific Nature of French Wine and the Industry

La belle France!. . . What a wine! What diversity, From Bordeaux . . . to sparkling champagne! What variety of  white and red, from Petit Mâcon to . . . Aÿ mousseux! tweet

Friedrich Engels, “Seine und Loire” (1848)

With an extensive history and culture in wine, France is a dominant player within the wine industry. With an estimated 46.2 million hectolitres in 2014 – i.e. one-sixth of global production – the French wine industry employs over 58,000 agricultural workers, which provides nearly 30% of the agricultural employment in France. The importance of the French wine market towards French work is a cause for the heavy French wine regulation through the Appellation d’Origine Contrôlée (AOC) system. Moreover, total exports reached $11.7 billion in 2015, making it France’s second most valuable export industry, above perfumes and cosmetics and just behind aerospace.

France has kept this leadership position despite a steady decline in both wine acreage and overall production over the past 40 years. These declines are presumably a consequence of past overproduction, governmental subsidisation of grubbing programs for wine acreage, and the growth of New World wine production. As a result, French wine must increasingly rely on exports to foreign markets. Consumption in other wine markets, however, has also been decreasing, such as in Italy, Spain and Portugal.

Traditionally, France is the word’s largest consumer of wine, but there is a steady decline in consumption. This has resulted in a persistent wine glut, often called the wine lake, which is a continuing surplus of wine. Such surplus has led to the distillation of wine into industrial alcohol and state intervention subsidising wine producers to pull up their grape vines through pull schemes, a process known as arrachage in French. Immune from the decline in wine consumption up to date is the market for Champagne and expensively ranked or classified wines. These markets, however, constitute roughly only 5% of French production.

Shaking the Wine World’s Status Quo

The leading producer of wine, at a general level, provides a classic illustration of the market status quo. Producers are ranked according to status, which is based on classifications that regulate the wine market. Such classifications incorporate judgments from various wine guides or critics, official classifications based on legal stipulations such as through the AOC system and by several regional and national IFCs, and other judgment devices. Consumers, as a consequence, are ranked according to the quality of wine they purchase.

Simultaneously, the French wine market has some form of an established structure, where actors observe an internal differentiation of the market into one section that adheres more strongly to the status model and another section that follows the standard model. French wineries that work according to the principles of craft production and a philosophy of terroir, which is at the base of the AOC as a model for appellation and wine law, are able to develop exceedingly distinctive ideas about taste differences, which contributes to the development of a very fine-grained status hierarchy of wines and wineries, often referred to as Craftsman pole. On the other hand, large-scale producers adopt principles of industrial or mass-production, often referred to as industrial pole. The industrial pole fails to establish the status order of wineries and wines, and instead just references the chemical composition of the wine by-laws set out by the AOC. This parallel appearance of a standard market and a status market for wine can be applied to all wine-producing countries as well as other markets.

It should be clear, though, that the French wine market applies two segments, a craftsman pole and an industrial pole. These are based on the status market; the industry adopted in which status is based on classifications that regulate the wine market. Though some wine-producers in each segment are not controlled, it is documented that the status market makes up only a minimal share of the wine produced, but is responsible for a sizeable part of the revenues and controls a substantial export value.

A Bifurcation Between the Best and the Rest: Wine Producers/Merchants and their Interests

Contrary to the dirigiste tendencies of the French state, in which the state exerts a robust directive over state investment and a substantial role in the assessment of wine quality, the politics of the appellations since 1935 indicate a high degree of self-regulation by the wine producer. The politics of production allow for producers to apply mostly self-governing structures in which the state only plays a background role. This is due to reforms implemented by the government as a result of the steady decline in wine consumption and the level of French wine exports. The study of politics of quality wine production describes, from the perspective of legal sociology, how the law written in the books often diverges from the law practiced. The law in the books sets out the official regulations implemented by the French state and is often reinforced by the logic of viticulture practice of terroir. However, the rules set out are often broken as producers follow an economic logic, which they get away with due to the delicate state of the industry.

This highlights the power producers hold in the French wine market as they apply their norms and values that characterise the market. Several major wine producing areas apply a hierarchy of production as the interests lie in preserving quality classifications as a region, and maximising profits as an individual producer. To preserve quality classifications, several regions, such as Médoc, Graves, and St. Emilion, apply their hierarchical classifications. Producers apply signalling strategies through information economics to indicate to consumers that their product has a certain traditional significance or credence attribute. To establish such signalling strategies, wine producers need to qualify to produce wine from a particular vintage by complying with standards set out by the producers’ association syndicat de défense.

This association is comprised of growers and producers of a given territory and governs the value imperatives of each territory. The signalling strategies that are considered information economics, however, assume that adopting such strategies are less costly to producers who offer products of higher quality standards, which is in their interest, compared to wine producers preferring mass production. This establishes a sorting equilibrium in which producers who solely offer quality classifications can credibly signal this quality to consumers. This benefits both the consumer and producer, as the consumer is guaranteed wine that meets regulations by the producers’ association syndicat de defense and the high-quality wine producers can charge higher prices for the wine they sell.  To regulate the quality of the wine, the grapes used for wine production must come from within the geographically delimited zones, as mentioned above.

If a particular vintage or vineyard, in for example Médoc, does not comply with the standards of the appellation, then the wines will fail to be certified, and will be passed down the hierarchy to the next appellation, which in this case would be AOC Haut-Médoc. If the vintage or vineyard again fails to meet the standards imposed by the larger AOC, then it could be downgraded once more to the AOC Bordeaux Supérieur or AOC Bordeaux, the most general appellation in the département of the Gironde.

The other norms and values that are imposed relate to a commercial perspective. Négociants, also known as merchants, assemble the produce of growers and wine makers and sell the result under their brand name. Négociants buy grapes in various stages of the harvest from several growers and produce wine to sell subsequently a final good on the market. The proprietors, or château owners, and négociants have grounded their relative power through a dynamic tension over the past 150 years. While the horizontal stratification of the market is based on quality within the French wine sector, the vertical boundary between the production side and the commercial side has been an important aspect over time. Ultimately, wine producers and négociants realize the importance of both quality and commerce as they are both essential towards the preservation of the French wine sector.

Institution for Collaboration: State Intervention

While the politics of the appellations indicates a high degree of producer self-regulation, the state, on the other hand, has employed substantial laws to control the quality and production of French wine. These laws follow economic logic, and there is a close attachment between the French wine producers and the regulatory bodies involved. Through a collaborative process of standard setting and sharing of technical expertise between both parties, the French government realises the importance of the French wine market for the economy. As a result, they are supportive towards the appellations and their form of self-regulation. This does not mean wine producers have free reign. However, they do enjoy certain freedoms that are in both the French government’s and wine producer’s interest.

Commentators, consumers, and other actors who do not have a share in the appellation system frequently accuse producers of being insensitive towards market demand, in particular due to their efforts at typicité, which refers to the local or regional character of the wine. A commentator, however, stated, “We don’t make wine to please consumers. We make wines that are typical of their terroirs. Fortunately for us, customers like them.”  Is it, therefore, safe to assume that it is in the consumer’s best interest that quality classification is organised and regulated through the appellation system?

Click here to read Part II of this article

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