Monday, August 09, 2004

Why Does Wine Cost So Much? - Part II

Let's make a wine the way we did pre-2001. We'll make 20,000 cases of Napa Cabernet for an existing program. We don't have a winery or a tasting room (to simplify what's already a complex exercise).

  • Vintage 2000 Napa Cabernet cost $3,100 for a ton of grapes. We will crush 300 tons at a local winery that has some excess capacity for $300 per ton. By January, we have 20,000 cases worth of Cabernet wine sitting in a tank that has cost us $3,400 per ton or (at 65 cases per ton) $53 per case or $4.42 per bottle.

  • Now, we need some oak to age our wine in. Assuming that our wine needs 50% new French Oak, we will need approximately 400 new barrels and 400 old barrels to hold our wine. Further assuming that these barrels will be with us for three years before we kick them out, we will absorb $9.33 per case for the new oak and $1.69 per case for the older oak (trust me on that one, I'm not going to write out the calculation!) for a total of $11 per case.

  • We will also incur storage costs for these barrels. Let's assume that its about $3.50 per barrel per month - this will also cover some of the barrel work such as racking and topping. If we age our Cabernet for 18 months, we will incur an additional $2.50 per case.

  • Now, we're ready to bottle. Let's figure that we'll use a fairly conservative package that costs us $12.00 per case including labels, corks, bottles, etc. The use of someone else's bottling line will run us about $2.00 per case, so we're now down another $14.00 per case.
  • We still have to bottle age our wine and pay taxes. Assume $1.50 for warehousing and $3.00 (average) for excise taxes.

  • Total costs to date are as follows: $53 per case for fruit and crushing, $11 for barrels, $2.50 for aging, $14 for packaging and bottling, and $4.50 for storage and taxes. Total costs to date = $85 per case or $7 per bottle.

  • Now, let's sell our wine. We want it to have a price of $25 per bottle at retail which will put us on the low end of Napa Cabernet (remember this is vintage 2000, before the bulk wine market drove prices down) so we will establish our wholesale prices as follows: We don't have a sales force, so we will use a broker/sales and marketing firm to sell our wine. They will take a 25% fee for their services. Therefore, working backwards, if the consumer pays $25, the retailer wants to pay $18.75 per bottle to get their 33% margin, the wholesaler wants to pay $15.00 per bottle to get their 25% margin, and the broker will pay $12.00 to get their 25% fee. So, we sell the wine for $12 and it cost us $7 to make. That's a profit of $5 per bottle or $60 per case.

  • Nice, huh? Unfortunately, that $1.2 million is only gross profit. We haven't paid any of our overhead, employees, interest, taxes, or ourselves yet. We also need to have money available to buy next year's grapes and barrels somehow.

  • Winery overhead for a "virtual" winery like ours would probably be pretty low, around 5% of revenues or $150,000. We probably have a pretty big loan for our barrels and grapes, maybe as much as $1 million if we financed almost all of it - that would require an interest payment of $140,000 at 7% interest (for the two years we held the wine before selling it). We will pay around $350,000 in taxes as well. Leaving us with cash of around $550,000 to pay ourselves. Sweet! Except for one thing. We still owe the bank $1 million and we need to borrow for the next vintage.

  • So what do we do? Several things: We should have borrowed less money and started with more of our own, that lowers our return, but the bank probably won't loan us $1 million without some coin of our own at stake. We can raise our prices to the consumer or we look for ways to sell direct via tasting rooms and mailing lists. This gets us from a wholesale price of $12 per bottle to a retail price of $25 per bottle. Provided we don't take on too much overhead, this should help our profitability considerably.

  • The bottom line is that two axioms in the wine business hold true: "To make a small fortune in the wine business, start with a large one" and "you don't make money in the wine business, you build equity".


Anonymous chris said...

thanks for this blog. i've been researching on and off for awhile and think i plan to 'think' about getting serious and buying some land in the next two years and start growing some vines. your diatribe on the costs added to the body of knowledge I'm grappling with, and in the end, i think i will remain at my day job for awhile and invest in a hearty hobby of making wine and not try to dream of making it a living... for now;)
thanks for sharing your insight...

July 13, 2009 3:13 PM  

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