HOW MUCH IS AN AVA WORTH? HOW ABOUT A 25% PRICE INCREASE ON EVERY BOTTLE OF WINE
by Andrew Chalk
That is what Harry Peterson-Nedry estimates. He is the founder of Ribbon Ridge Winery and Ridgecrest Vineyards in the Ribbon Ridge AVA (American Viticultural Area) in Oregon. Ribbon Ridge AVA is a sub-AVA of Willamette Valley AVA. Wines from Ribbon Ridge are entitled to use either appellation on the bottle label. At a presentation to The Texas Wine and Grape Growers Association (TWGGA) annual conference this week I posed him the following question: If he bottled one of his wines and prepared two labels. One specifying ‘Willamette Valley AVA’ the other ‘Ribbon Ridge AVA’, what would be the difference in the price that each would command in the market?
I was stunned by the response. He said 25%. That is due to nothing but the value of the AVA. Consumers consider Ribbon Ridge AVA wines to be sufficiently superior to Willamette Valley AVA wines that they are willing to pay, in his estimation, 25% more. Harry was the original petitioner for the Ribbon Ridge AVA so he should know what he is talking about. The AVA was approved by the U.S. government in 2005, so it has had 15 years to establish its reputation.
The price differential of otherwise identical wine is crucial, as it is the definitive measure of AVA value: the measure of how much consumers value the wine from the area, versus the wine from outside the area.
I had expected Harry to report a price premium between zero and five percent, not 25 percent. This was based on what I had found in the past. I once did some research on the Castelli di Jesi Verdicchio Riserva DOCG (in the Marche region of Italy), and tried to estimate the price premium versus Verdicchio dei Castelli de Jesi DOC. The two AOP areas exactly overlap and the DOCG was created in 2010 to promote the best of the Verdicchio wines in the DOC, which had existed since 1968.The difference in requirements of the DOCG versus the DOC were a lower yield, more ageing, higher alcohol, and more oak options. All of the DOC producers were eligible to make wine to the DOCG standards but, albeit with skimpy data, I found two things. First, only some 2% of the DOC area had been transitioned to DOCG and, second, DOCG wines commanded little if any price premium. The DOCG had only been in existence for eight years, so time may change these numbers. However, as of that time, the DOCG had been a total failure. The extra cost of compliance had led to only a 2% conversion rate from DOC to DOCG and it had not raised product prices (in the USA, AVAs do not impose higher costs, they only geofence).
Does this mean that producers should just declare an AVA to raise wine prices? Not so, Harry points out. The wine quality must vindicate the AVA decision or consumers will not continue to pay the higher price. The effect of the creation of an AVA is to reveal, not create, the quality of the wine. And that revelation requires years of marketing by the producers in the AVA to inform the consumer.
There is a more subtle, longer-term effect of the increase in the price of AVA wine. Producers find it viable to invest more in making it. For example, better clones in the vineyards and more ageing or better oak in the winery.
The Ribbon Ridge and Castelli di Jesi Verdicchio Riserva experiences are just two data points. Broader, systematic research is required before we can consider that we have solid results. However, these data points should be considered suggestive that the gains from creating an AVA could be considerable but have a wide variance.
This AVA effect is not confined to wine. It is actually a well understood economic phenomenon called “The Market for Lemons” discovered by an economist named George Akerlof, who received the Nobel Prize for his work. The details are too complicated to explain here but are well covered on Wikipedia.
Harry Peterson-Nedry would probably suggest wineries and vineyard owners use their geographic value factors to create an AVA. However, don’t do it unless the effects are real as the time for approval can be long and variable. Another AVA petitioner, Ed Auler, who created the Texas Hill Country AVA, got it approved in six months (it may have helped that he was a trained attorney). Ribbon Ridge took over four years.