There was an article in the New York Times this week about what’s called “shadow inflation”: the idea that, even if prices aren’t going up, you’re not necessarily getting what you think you’re paying for given the decrease in quality or service.
The author, Neil Irwin, posits that the effects of inflation aren’t “just the prices you see and the numbers that are fed into economic models, or the news headlines and central bank inflation targets. It’s also that a given amount of spending buys experiences that are a little less satisfying, and that this adds up to an accumulation of frustrations that don’t necessarily show in the numbers.”
Now that I know there’s an actual term for this phenomenon, let’s talk about how shadow inflation has been rampant in the Bourbon industry for years.
One of the points that serious Bourbon enthusiasts like to bring up when confronted with price gouging at the retail level is the fact that Bourbon wholesale prices have remained relatively cheap compared to their market value. It’s a big reason the industry maintains such a loyal following.
Yet, because of those low wholesale prices and a lack of general availability, retail prices can fluctuate greatly. As an example, a bottle of Blanton’s should only cost you around $50+ or so given the standard retail mark-up over wholesale cost, but it might run you as much as $200 depending on where you shop.
When price gouging happens, Bourbon collectors blame the retailer for the greedy and unfair “inflation” on their favorite hard-to-find bottle. They know what the price should be, hence they know when someone is taking advantage of them.
But here’s what you might not know: American whiskey companies and their distributors have long been tying the purchase of other bulk spirits into the allocations of their most coveted labels, completely changing the investment requirement for a small retailer looking to carry an exciting selection of whiskies. Fifteen years ago, a retailer could order any Bourbon whenever they wanted it—no strings attached. Today, however, these bottles are packaged with a number of non-Bourbon products that most retailers don’t want and don’t need.
My question is: now that a case of allocated whiskey is tied to the purchase of an additional fifty cases of bulk spirits, what’s the real wholesale price of the bottle?
Granted, so long as the company can sell those additional bulk products for a profit in a reasonable amount of time, then the wholesale price is actually the price on the invoice. That’s why you see big box stores like Costco and Total Wine sticking to their standard mark-ups across the board. Absorbing a large drop of bulk goods is no issue for them, as they have the traffic to move those bottles.
But for a smaller retailer, tying up dollars in inventory that doesn’t move just to get six bottles of a rare American whiskey doesn’t necessarily add up. Hence, the retail prices you’ll find in their establishments often reflect that additional investment cost. While I can’t speak for all small retailers, I can say for certain that what some Bourbon customers consider price gouging is often times just the Bourbon industry’s own version of shadow inflation.
So why don’t Bourbon companies just raise their prices to reflect the market demand? Because raising your prices makes customers angry, which is the root cause of shadow inflation covered in the article. As Irwin writes: “Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices, but by taking steps that could give their customers a lesser experience.”
From a marketing perspective, it’s much easier to keep your wholesale prices the same, and force retailers to purchase additional products to help grow sales companywide. That way customers will continue to sing the praises of the blue-collar American Bourbon industry and their commitment to the common man, while demonizing the retailers who succumb to the perils of Bourbon’s own shadow inflation issue, ruining it for customers who are just trying to pay an honest price.
In my personal opinion, it’s a chicken shit way of dealing with the issue because it puts the blame on small business owners who are simply responding to the rules laid down by the producers and their distributors. I’m not a fan of price gouging, nor will I ever defend it, but if more consumers knew what was required from a purchasing perspective to secure even the tiniest allocation of rare Bourbon today, it would make their heads spin.
-David Driscoll
