Did you ever wonder why you pay $50 for a bottle of really well crafted wine?
For a $50 bottle of wine, within the three-tier system, here’s how it breaks down:
- 7% – cost of grapes and/or growing ~ $3.50
- 9% – cost of wine making ~ $4.50
- 4% – bottles, corks, boxes, labels ~ $2.00
- 2% – marketing ~ $1.00
- 13% – sales people, distribution from the winery ~ $6.50
- 3% – administrative costs ~ $1.50
- 2% – interest ~ $1.00
- 4% – taxes to government ~ $2.00
- 5% – actual winery profit ~ $2.50
- 20% – wholesaler markup ~ the people who get the wines to wine shops and/or restaurants ~ $10.00 (There are lots of overhead and payroll costs involved at this level)
- 31% – wine shop markup ~ $15.50 (There are lots of overhead and payroll costs involved at this level)
The more often you buy a bottle of wine directly from a winery, the more profit there is for the wine company owners. Because there’s more profit, it allows for those with advanced social consciousness to take better care of their workers, and they do. This exists even more so if the wine company is also growing its own grapes.
Yet another great argument for drinking local and buying direct from producers. Thanks for laying it out so clearly.
A $150 bottle of wine obviously nets the producer a lot more profit then, (assuming they haven’t spent a ridiculous amount on fancy packaging), and perhaps goes a long way in explaining the exorbitant prices of some wines, (especially in Napa.)
Of course there is no truly efficient way to determine the overinflated views some wineries have of their own wines, and the way they feel they must price accordingly 🙂
Buying direct allows smaller producers to stay alive… VA Wine Diva… I agree.
Vinogirl,
Truer words were never spoken (written, in this case).
Regarding overinflated… I’ve got one Juicy Tale…
I know of one brand that was carefully studied to be a $65 bottle of wine. Some new marketing genius came in (just before poop hit the big economic fan), and raised it to $85… just because she’s so brilliant.
That vintage still exists, two years later, unsold.
Hi, Jo.
In the case of the $85 vintage, why not just offer it at $65 again to move it out? Obviously, they were happy with the economics at $65. And, given that it takes up space, perhaps $55?
I’ve written a related post (linking back to yours here).
So now I have to ask the question: How much does it cost to MAKE a bottle of wine?
Hi Mike,
The person in charge isn’t really schooled in marketing, so I don’t see this happening – ever. (Too bad, but that’s what happens when someone is hired for the wrong reasons.)
I’d go your route, honestly.
Randy,
Yes… that’s a great question. We’ll have to now research what it costs to plant a vineyard and all costs associated with that, from land cost prices and taxes, to vines (purchasing, planting, labor and costs of nutrients/chemicals – perish the thought), to tending the vines until they produce, harvesting, fermentation (equipment et al), storing (stainless steel, tanks, barrels), bottles and bottling, labels, capsules, art work, etc… The list goes ever on… Yikes!
Jo,
This sounds like a domestic wine. How do the Spanish, Argentinian and Chilean wineries make any money when their wines are being sold for $10 in the US? There must be a big tax on the importing of the wine. I know some are co-ops that help reduce the cost. You compare that to a Swiss wine that cost alot more in the States.
Thanks for the great post.
You guessed correctly… domestic.
Import wines are completely different. their costs are substantially less than California’s – remember, and acre in Napa Valley is where now? $35,000 per acre?
Land in the Alentejo region of Portugal, for instance, is no where near that. Neither is labor and cost of goods.
Hey Jo-
Everyone is on the bandwagon of costs now. We have the big-boys giving away product (a – because it’s easier than doing their jobs or b – because their product were overpriced or under-quality to begin with). Note many of the small truly artisan wines were produced from grapes that cost $4k to $6k/ton (a quick down and dirty standard – bottle price should equal 1% of ton cost for winery to make std gm @35%).
Salaries and benefits costs keeping going up, along with utilities, insurances and taxes…
It’s going to take a village to help correct – 1) Growers & Pricing, 2)Wineries & OH costs-vintage pricing correction, 3) Restaurant Wine list pricing focused to move product, and encourage bottle and return business and 4)Customers who are loyal to artisan brands. This challenge didn’t happen overnight and I challenge writers to find the silver lining and encourage these wineries…please.
If you own a new vineyard, it’s worse, since the vines are non-productive for the first few years. So you need capital, not just cash flow.
Q: How do you make a small fortune in the wine business?
A: Start with a large one.
At some level, better not to own the vines (although vertical integration can improve quality, and obviously, a better marketing story).
You are a very informative person. Like the break down of the wine cost. Enjoyed your blog very much.
Denise,
Thanks for taking it to an entirely new level. The numbers given in this blog are just rough estimates, based on all the gathered info available. We have to trust that when it was gathered, it was the full range from artisan (thanks for not using that 1960’s “boutique,” fingers on the blackboard” word) to commodity. Economies of scale allow the big dogs to just about give it away; meanwhile, you have people like a Sean Thackrey working his fingers to the bone, as he’s said, “Seven days a week, 365.”
You’ve set the challenge bar high, my dear, but you’ve also provided a great topic to much on… “I challenge writers to find the silver lining and encourage these wineries…please.”
Mike,
Thanks for providing additional insight. It’s all so true…
Hampers,
Thanks for commenting. The best part of something like this is having the additional information provided by others in the business (Mike Duffy, Denise, for instance). They’ve added great depth to something that started out as superficial numbers.
I’ve enjoyed the posting, too, based on all the additional questions and comments.
Thanks for the info. I am going out for dinner tonight where I can pay $100.00 to $150.00 for that bottle.
>”I know of one brand that was carefully studied to be a $65 bottle of wine. Some new marketing genius came in (just before poop hit the big economic fan), and raised it to $85… just because she’s so brilliant.””(a quick down and dirty standard – bottle price should equal 1% of ton cost for winery to make std gm @35%)”<
Based on that ratio, 2007 gives us about 550-650,000 cases of Napa Cab that should be priced at $50+. Sounds like something has to give.
Thanks Jo, For the fascinating post! I had wondered about this myself–and had numerous people ask me. I knew about 50% was mark-up–hadn’t realized how little profit went to the winery in typical retail sales. Also, important points in the discussion–like the variations in price per ton for grapes has to be factored in. Most people don’t know how big a difference that can make for the small winery wanting to make the best product they can if they’re buying the grapes elsewhere.
You forgot to factor in the cost of closing out that same $50 bottle in 2 years when it hasn’t sold because nobody buys $50 bottles anymore.
(sorta a smartass answer but unfortunately true!)
Christian – always the man I run to when I need facts and figures research analysis, guys – thanks for this one. It’s just down and dirty lesson on how to make a profit and stay within the lines.
Thanks for your input!
Mike… it’s hard to take, I know, but is what it is.
I’m sure a similar study has been done on other items; peanut butter, for instance. But no other food and/or beverage item is so dissected.
Wine is such a fascinating topic.
Gwendolyn… No kidding on the price per ton variances. I learned about that one when I began working for Suisun Valley, which neighbors Napa on it’s southeast quadrant. At the time, Napa fruit on the Napa side of the fence was getting $3,000 a ton; and, same vineyard, manager, practices, etc. on the other side of that Suisun Valley side was getting $300 a ton. Times have changed as the years have passed, but that was when I first learned the difference an AVA marker makes.
Beantown… right you are. That bottle I wrote about is now costing that winery a lot of rental money. Yes, it’s getting older and better, but it’s a liability, when those who have an invested interest.
Hi Joe,
Do the same percentage apply for a lower priced wine or are some of the costs fixed such as administration and processing?
David,
Good question.
The percents are the same. I just used a $50 bottle to put things into more context.
Jo, Thanks for the great post. So, if a winery makes more if people shop local, do they price their wines cheaper in the tasting room? I haven’t seen that to be true, and sometimes the exact opposite. The three tier system may be to blame–I don’t know. But in Europe, it is much less expensive to buy wine directly from the winery. It would be nice if that was true here.
Amy,
No, it’s not cheaper in tasting rooms in the US. I know of two excellent reasons.
1) They make more money on what goes out of a tasting room, but then there are the costs associated with a retail outlet; so we can’t think they’re running all the way to the bank: Payroll, overhead for rent/ownership of the location, maintenance of that location, utilities, cost of all goods (glasses, towels, blah, blah, blah).
2) The last thing a retailer wants to know is that anyone can buy or order the wine, and get it for less than what s/he’s offering it; so, the winery has to offer it for at least the same. (Only a fool would up the costs, honestly, but there’s a joker in every deck, right?)
Jo,
Great post. Living in Texas, I am fortunate that I can buy most of my wine directly from wineries. At this point, close to 19 out of 20 bottles I drink at home were purchased through wineries or were wine club shipments. I’m glad that establishing a small relationship directly to the producer is of financial benefit to them. That’s how they can offer the discounts for members. Even if I buy a case of those $50 bottles at 25% off, the winery makes roughly 5 times the profit they would if I bought the same bottle at my local retailer. Even with shipping costs, I pay less when there is a discount.
It shows why the distributors spend so much money and effort into preserving the three-tier system. For every case of $50 wine I buy direct, the distributor loses $120. The wine I had shipped home after my fall visit to California cost distributors about $1000 based on these estimates. I’m just one consumer. Multiply that out in a city like Houston and it is easy to understand why the distributors are so opposed to direct shipping. There are literally millions of dollars at stake.
Monte,
Aha… You got to the bottom of that issue.
Also, wholesalers have been maxed out. Imagine any other business that cranks out over 6,000 domestic brands, then add all the imports on top of that, the limited shelf space and menu items, and you see an even bigger picture.
For new wine companies, they’ve arrived too late to the party. They’re forced to find all the direct sales ways and means that they can, because wholesalers just aren’t buying anything new right now that hasn’t been built as a brand. Selling directly to consumers is their current and only option for survival.
It’s a tough business… We’ve over supplied our options, is what I’m seeing.
As an owner of a 4,000 case Estate bottled Winery I am being killed by the “old” three tier system. Our wine sold 5 years ago at $65 a bottle retail. I am now being told by my Distributor than it needs to sell under $30. The Wine is great and has consistently won numerous Gold medals.
I can’t make money at $30 and I can’t spend money on marketing.
SO NEXT YEAR……..we are selling all our wines at the tasting room and doing so at $30 and hopefully making more than we did selling at $65 through the three tier system.
Doug,
My first reaction is, that’s just crazy… On so many levels…
It’s horrible that a wholesaler will take you on, then dictate a price they’ve decided upon that’s drastically discounted, without respect for what you’ve had to put into your production from blood, sweat, tears, and equity.
And, does it have to be so low at $30 in your tasting room?
I’m over here feeling your pain, and it seems that you don’t have to go that low. Are you successfully selling it at $65 in the tasting room right now, and selling through your vintages, just not selling it through your wholesale system?
It seems to me that there must be a better way… Like, just selling a wine slightly discounted through your wine club with specials… Or a special event at the winery, and for those who attend there’s a discount on that loyalty.
Jo –
The average..and I mean average; many wines are sold at a higher gp% – is 25%gp or 33 1/3% mu at the wholesale level. The average retail gp is 33 1/3 gp or 50%mu. Really.
Always interesting to dig into the facts and figures. This article combined with some of your other social media articles only belabors the need for wineries and partner organizations to do more with social medial and brand building in order to capture their customers more directly and eliminate the margins lost to the wholesaler and retailer.
It’s not to say that I advocate the disposal of the wholesaler and retailer as I am one, but I do think wineries should give more thought to what partners and methods they use in order to capture more sales directly for themselves.
I agree, Wine-of-the-Month Club.
With the thousand upon thousands of wine brands wanting self space and the attention of each one’s wholesalers, the numbers just don’t add up.
ECONOMY OF SCALE:
Those with the most marketing dollars will get the most attention. Those on the lower end of the totem pole, find yourself a great direct sales strategist, and get on with your lives. The future of your company depends on a great direct sales strategist, not a great wholesaler, per se.
If you find a great wholesaler, be prepared to work the market with lots of capital.
It’s that cut and dry, I’m sorry to announce. (Truth always hurts, but if someone is actually listening and is this demographic, s/he will be much better off.)
Your forgetting state taxes….in Illinois on a bottle of wine regardless of cost it is $0.27 a bottle (Wholesale tax not sales tax) whether the bottle sales for 5.99 or $50……This varies greatly as a percentage.
David,
Just be thankful you don’t live in Pennsylvania. They are the worst state for taxes. A $50 bottle of wine – in most states – just became (approximately) a $67 bottle of wine in PA, because of their tax system.
I think (as a post mentions above) that the 3-tier system thing you have in the US is responsible for a lot of your woes. When I first learned of it (a few years back now) I couldn’t believe it was true! I would hate to work with that – though here in Europe we have other problems!!!
Re costs of a bottle, etc, it would be useful to distiguish between large companies with 000s of employees producing 000,000s of bottles of wine, and small quality producers. The numbers will be different, no?
No different that in any other industry. Sort of like a farmer’s cut of an ear of corn versus what it sells for as a portion of polenta in a nice restaurant.
This is what distribution is all about. But to circumnavigate the system will, in most cases, cost more than you save. C’est la vie!
So true… Yet, if not in the business of commodities, it’s an elusive answer.