The "hollow middle" and wine.

One of my favorite blogs has an article that mentions another of my favorite topics, the "Hollow Middle." I'll let Mr. MacEwen sum up the "Hollow Middle" model:

"An increasingly prevalent industry structure sees firms migrating both to the high end, high-value, premium quality level, and to the no-frills, low-end, commodity level, with little comfortable territory remaining in between."

As an example, Mr. MacEwen points to jug wines and Screaming Eagle -- wines at the extreme ends of the price spectrum. Oddly enough, I've been thinking about the same thing lately due to an ongoing debate on Wine Spectator's various blogs (see here, here and here) about the skyrocketing prices of new releases or the lack of value from some regions.

So, why have I been thinking about this issue with regard to the price of new releases of wine? I think we may be seeing the creation of the Hollow Middle in the wine world. First Growths and Cult Cabs are pushing the prices for new releases into the upper $100s -- if some producers haven't reached the four digit price range yet, they are approaching it. So, what does this mean for the rest of the market?

First, for the "premium" wines, it raises the ceiling on the asking price on release. For example, Penfolds Grange currently releases at $250 a bottle. A Clarendon Hills Astralis releases at $350. If the top bottles from other countries release at at least $500, where does that enable producers to move the price on these bottles to? If the market for First Growths and Cult Cabs is sustainable, those producers have a few $100s they can add to the price of a bottle.

Second, for the "commodity" wines, they can continue to exploit a market for everyday consumption. A $20 or $10 (or cheaper) bottle of wine is a bargain by comparison to a $500 wine.

So, what happens to the mid-range producers who cannot compete at a few hundred dollars a bottle? Consider someone who produces wine that costs $75 a bottle -- They can't compete (in terms of perceived quality or investment potential) with a "premium" wine. If that producer happens to be located in a region with high production costs (e.g., Napa Valley) -- costs which will continue to increase (e.g., illegal immigration crackdowns) -- he or she cannot reduce the price for each bottle of wine to match those producers whose wines retail at $10 to $25 a bottle. In effect, the mid-tier producer gets squeezed. Thus, thanks to increased globalization and the Hollow Middle model, we may be on the verge of some major changes in the wine market. Will the mid-tier producers be around ten years from now? Maybe not....