Wednesday, November 15, 2006

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!


Blogger Benjamin Bicais said...

Hi Saint Vini, Very interesting break down of where your money actually goes when you buy a $20 bottle of wine. When you look at it this way, it seems more like a passion than a business for many wineries. I knew that margins were slim for producers, but I didn't realize they were that small.

November 15, 2006 12:36 PM  
Blogger caveman said...

does two buck chuck work on a similar 5% net?

November 16, 2006 3:22 AM  
Blogger St. Vini said...

Caveman: Its always hard to give specifics on individuals wineries -that's why I kept the example general. In the case of $2 Chuck, Franzia is using his own grapes from highly-cropped, machine-farmed vineyards in the central valley. Plus, he's a mega producer with very low overhead per bottle. Plus, he's selling directly to Trader Joe's in California (no wholesaler margin). Trader Joe's often takes a lower markup on wines as well. Combine all of these and yes, he's probably still making his 10% (or likely more) margin.


November 16, 2006 9:40 AM  
Anonymous K. Wallace, Wine School of Philadelphia said...

I often use a similar breakdown of profits for our AWCP students, and they always are stunned at the profit margin. A typical small winery get by with a 3-5% profit margin, and that is only after 5 years of production.

The flip side of the breakdown is another truth: most* wines priced above $30 do no show an increase in quality, only an increase in profit margins.

(*not including wines with added production costs, such as fortified wines, ice wines, sparklers, et al)

November 18, 2006 10:41 AM  
Anonymous victoria said...

I realized that the wineries got the short end of the stick but I had no idea it was that bad. And they do all the work! Doesn't seem fair, does it?

November 18, 2006 10:45 AM  
Anonymous jeff said...

you can really understand why wineries want to sell direct to consumers via their websites

November 18, 2006 10:09 PM  
Blogger St. Vini said...

Mr. Wallace:

Curious, no, fascinated to know how you evaluated the quality of wines above $30. What objective measures do you use??


November 19, 2006 7:24 PM  
Anonymous Mike said...

So I guess the big question now is...
How do some independent wineries in Spain and other places (even southern France) produce good wine that you can buy here in California for less money than the local stuff?

(what I am reffering to are mainly grenache based blends, but other wines too, especially whites)

November 21, 2006 12:17 PM  
Blogger St. Vini said...

Lower land costs. Covering interest payments on land here is a significant portion of the cost of a bottle (I'll do that in another post). In Spain, Italy and France, many of the parcels haven't turned over for 100's of years, thus the land is fully paid for.


November 22, 2006 9:30 AM  
Anonymous farley said...

I guess that's why they say the only way to make a small fortune in wine is to start with a large one, or something to that effect. The winery where I work was financed by the owner's medical invention. And we do fairly well, esp. selling direct, but the profits are always marginal.

November 29, 2006 10:55 AM  
Anonymous Anonymous said...

You people get it all wrong when you pay too much for wine, especially from local wine. What you want is an inexpensive wine from $6 to $8 or $8 to $15. Its really depends of your taste. Smaller vineyards have more control over their wine. But remember one year can be better than the next so when you find something good buy a lot of it and remember it doesn’t have to be brand name or expensive. Enjoy the wine and learn what you like and dislike or what you want in a wine. And pay attention to the history of your wine like is it organic? What amount of sulfite is in your wine? And how the yeast they are using can effect your health. Regards, MDA

October 22, 2007 10:33 PM  
Anonymous Anonymous said...

A 5% margin is quite average in most businesses. I think that if wineries were rendering profits of 10-15% (some of them certainly are, but not many), we would all be looking to venture into the business. I think that if we are to analyze the profit margins for both the distributor and the liquor store we would find that everyone is operating on roughly the same margin. Of the 33% that both the distributor and liquor store take, they have comparable costs like salary/wages, overhead expense, etc, just like the winery has.

February 12, 2008 10:49 AM  
Blogger Maru said...

The Bulk wine is highly sought after in many parts of the world because of not having any such beverage producer

November 10, 2014 7:18 PM  

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