Why does good California wine cost so much?

I am often asked the above question and my reply is that decent wine from most any country costs a fair bit of coin, not just California (though I think Spain is certainly an exception as well as the other occasional "steal" from one place or another). To help answer this question numerically, let's break it down - from the California perspective anyway. There are many variables (buy grapes vs. grow your own, buy bulk wine rather than grapes, own your winery or lease space, etc.), but to make this analysis simple, let's look at your basic California winery that owns half of its own grape supply and makes its wine at its own estate winery.

Let's work backwards from what you, the consumer, pays for a $19.99 bottle of wine:

$19.99 goes to your local wine shop. They make about a 33% profit on the bottle (sometimes bit higher than the distributor because they often hold the bottle longer, but I'll keep their markups the same in this example).

This means that the distributor sold them that bottle for $15. The distributor typically takes about a 33% margin (sometimes more, sometimes less depending where the wine is sold (wine shop or megamart)) and the leverage they have with the winery, meaning that they paid about $11.25 for the bottle from the winery. Typically, the wholesaler pays the freight to ship the wine from the winery, and that cuts into their margin as well.

This tells you that the winery received $11.25 for the bottle that you paid $20 for (and you can appreciate why those of us in the industry like having the connections that can get us that $11.25 wholesale price!). Generally speaking, for a winery such as our hypothetical example to be profitable, margins need to be near 50%. That means that the $11.25 bottle costs them about $5.62 to produce. The $5.62 means the grapes, bottles, cellar costs, barrels, labels, corks, etc. and doesn't include salaries for tasting room staff, sales people, marketing, and other overhead. Thus, of the 50% profit per bottle, usually about 40% goes to paying these overhead costs, leaving just over $1 per bottle for net profit. And since growing wineries need cash to buy more grapes, barrels, etc. that $1 (usually accompanied by another dollar or two from the bank) gets reinvested into the next vintage. That's why you often hear that "wineries don't produce cash, they build equity".

Typically, retail prices are about double wholesale, so the winery (and sometimes the wholesaler) may give a price incentive to the retailer to get the price from $22.50 ($11.25 x 2) down to $19.99. This is often in the form of a volume discount ("buy an entire pallet and I'll lower the price") or "free goods" ("buy 10 cases and I'll throw in 2 free") or, in the case of supermarkets, a direct price support like a club card - you know all those club card deals at your local megamart? Those aren't paid for by the megamart, they bill that directly to the winery and wholesaler. So, that $2.51 ($22.50 less $19.99) discount you get at the register sometimes comes directly from the winery's profits. So, if the winery pays half of the club card discount, their sale of $11.25 nets them just $10.00 per bottle! That's 25% of their profit margin, and can turn a profitable product into one that just breaks-even.

So, to summarize - the $19.99 you spend for that Sonoma Valley Cabernet breaks down as follows:

Retailer profit (before salaries and other costs): $5.00
Wholesaler profit (before salaries and other costs): $3.75
Grapes, barrels, cellar staff, etc: $5.62
Winery expenses: $4.50
Winery profit: $1.12

It seems crazy when you look at it that way - it takes a lot to get that $5.62 bottle of grape juice to you!