Should I buy local wines at Costco?
Friday, September 17th, 2010
We’ve talked about Costco before, a conversation in which I argued that monolithic, small-business-destroying category killers still have a place in the kitchen, even proximal kitchens, if for no other reason than because saving money on staples allows us to allocate a larger share of our budget to the locally produced goods of premium quality (and, let’s be honest, at a premium price), that we like to cook with. But what about buying locally produced goods at the Big C?
If the identical local product is offered at the farmer’s market, the local health food store, and Costco, and I choose to buy more of it, at a lower price, at Costco, should I pat myself on the back for being such a savvy, sustainably-minded locavore and supporting the production of good, local food, all while saving my family money? Or, should I offer myself up as whipping boy du jour for the inevitable and copious tongue lashing and politically correct cacophony emanating from the barbarous hordes of checkbook liberals and self-described apostles of some quasi Pollan-esque faith lying in wait?
Let’s consider the case of wine: The wine industry is Sonoma County’s largest single employer (directly accounting for some 19% of all jobs county-wide, excluding all the ancillary but clearly material employment in restaurants, hotels and gift shops generated by wine country tourism), and total wine-related revenues account for 40% of the County’s entire contribution to the nation’s GDP. So one thing is clear: Where and how I spend my wine dollars matters to Sonoma County.
Or does it? If I buy Bordeaux in-bond from a broker in London, then you might argue that I’m not doing much to support artisanal winemakers (not that that should stop anyone from drinking the occasional Bordeaux, mind you – the road to deprivation is littered with the carcasses of overzealous locavores, and I, for one, have little interest in dinner-table asceticism), but it’s far from obvious that I’m doing harm to our local economy. Suppose I take the total number of dollars that I would have otherwise spent on Sonoma County wines, at tasting rooms and specialty retailers in my neighborhood, and instead spend those same dollars, on the same wines, at Costco? Who wins, who loses, how much is at stake, and should I care? The answer is not as obvious as you may think. (Unfortunately, this post is about to run quite a bit longer than usual; call it the curse of the two-handed economist. I promise to get back on-thread tomorrow.)
Costco, the nation’s largest (although I’m never sure if this statistic refers to volume, revenue, or both) wine retailer, is the elephant in the cellar, and their fine-wine pricing can be very competitive, provided you can separate wheat from chaff, because their selection, and the price/quality ratio thereof, can be inconsistent; the prices are never bad, but some of the wines are distinctly mediocre, and at prices no better than you’ll find in about 5 minutes on Google. That being said, here is what I picked up the other day on a completely random visit, 3 outstanding examples of Sonoma County Pinot Noir (out of at least a half-dozen options), each from a premium local winery that I could easily drive to, and collectively a representative sample of just what is at stake, from my wallet’s perspective:
- 2006 Keller Estate “La Cruz Vineyard” Pinot Noir. Costco price: $18.49. Winery price: $44.00 (current release – 2007).
- 2007 J Vineyards “Russian River Valley” Pinot Noir: Costco price: $24.99. Winery price: $35.00 (identical bottling).
- 2008 Pellegrini Family Vineyards “Olivet Lane” Pinot Noir. Costco price: $19.99. Winery price: $35.00 (identical bottling)
Thus confronting the data, we find an average savings of 43% of retail, or better than $200/case, and moves a few of what I would otherwise consider “luxury” wines back into the “maybe not for every day, but plausible and guilt-free” category. Still, while total dollars spent remain constant, who gets those dollars does not. I’m a trained economist with a weak suit in micro, so I enlisted the help of former classmate and top-shelf game theory wonk, Mad Dog, and we came up with the following economic implications:
- My wallet, and my palate (although perhaps not my liver) win, because I get to consume more and/or better wine for the same outlay.
- The County coffers are indifferent, because my total taxable consumption, as well as overall wine industry receipts, remain constant.
- The wineries are a slightly trickier story: Definitively, some of what they would have made now goes to Costco, and their gross margins suffer; their cost-of-goods-sold likely falls (e.g., less labor, no tasting room lease), but I think it’s safe to assume that, on balance, winery profits decline on a per-bottle basis. But there is a price and volume story here: It’s entirely possible that the winery sells so many additional bottles, by virtue of the Costco distribution channel, that the absolute level of winery profits actually increases.
- Even if total profits in the economy may remain unchanged (it’s hard to see them falling, or else the business model wouldn’t persist), the reallocation of profits from the winery to Costco would shift some income out of the County, inasmuch as winery capital is locally owned and Costco capital is not. Still, that does not necessarily imply a net loss to the County, because of what we gain in return: If Sonoma has a competitive advantage in making wine but not in selling it, then we, collectively, will be better off if we “pay” Costco to sell it for us, thereby reallocating our resources to more productive ends. (This is, essentially, the “gains from trade” argument. Don’t let the “anti-globalization” whack jobs bamboozle you, they have no idea what they’re talking about, a world without trade would be a far darker, colder, and generally poorer place for nearly everyone.)
- Employment at Costco gains, but at the expense of jobs at the wineries. I’d rather work in a tasting room than Costco, but that’s a purely personal preference, it’s not my place to say which job is “better”. I do, however, think it’s fair to assume that Costco labor is more productive (in the economic sense, i.e., it takes less person-hours to sell the same dollar volume of wine), which would imply fewer total jobs for the County. However, one has to be careful, because that does not necessarily imply a net loss of income, but rather a reallocation of the share of total profits away from labor and toward capital, which is unequivocally bad only if you’re still reading that threadbare copy of Marx from your freshman year.
- All the preceding is an inherently partial equilibrium analysis, and there may be more complex, general equilibrium considerations, particularly along the temporal dimension: It is possible, for instance, that the winery will eventually go out of business by selling via Costco, even if doing so maximizes its short-run profitability (or minimizes its losses, as the case may be). The Keller wine is a case in point: I don’t know what Keller’s cost structure looks like, but I seriously doubt they are making money by selling a $44 Pinot for well under $19 (remember, Costco has a margin in there too, of that we can be certain). More likely, they lose less, which is a perfectly rational thing to do, but hardly a sustainable business model. It is at least possible, therefore, that I will contribute to the demise of the local wine industry by consuming its wines exclusively through Costco. (General equilibrium analysis can get very complicated: One could argue that the failure of an otherwise unsustainable business leads to a more overall economic efficiency in the long-run, in which employment, consumption, and tax receipts could all actually be higher in the absence of the business than they were in its presence.)
- You could argue that one should “shop locally” in order to “support” the local economy, which is all fine and dandy, but starts to get awfully close to subsidization, if not outright charity. While I’ve got no axe to grind with charity, it’s not at all clear what that should have to do with my consumption decision: If I want to subsidize a winery, I don’t need to overpay for their wine, I should just write them a check and save everyone the trouble. A useful test: Would you mind buying the wine for less at Costco and sending the price difference, in cash, back to the winery? That (to a close approximation) is the economic equivalent of a subsidy, so if that doesn’t make sense to you, then you probably didn’t want to subsidize them by paying more than you had to in the first place.
This is hardly an exhaustive analysis, but the lesson is simple enough: First and foremost, you should buy the wine you like to drink at the best possible price. If knowing that the wine is local confers other, non-pecuniary benefits (e.g., it makes you feel better about yourself), then by all means, buy locally – heck, I like our local wines on their merits, and purchasing them makes me feel good about our community. Similarly, if tasting rooms have value to you – as they do for me – then, again, buy some wine directly from the winery (especially the stuff that you’ll never see at Costco). And if you can only afford to drink local wines from Costco, or you just want to spend as little as possible, then don’t sweat it – you may be doing a lot more for the local economy than you think.