01 Feb Truth in Wine: What Is a Bottle of Wine Worth?
I’m surprised by the intense discussions online regarding wine prices. The cost of a bottle inspires more interest among many than the taste of the wine itself. And while I appreciate a good price for a good bottle of wine as much as anyone, I believe many consumers are overly concerned that they are paying too much money for their wine.
Before revealing “the truth” behind bottle prices, I would like to share my secret to success as a wine consumer:
I don’t buy wines I can’t afford; and I don’t drink wines I don’t like.
This simple philosophy solves a lot of problems. Even if I come across a wine I really can’t stomach, I haven’t paid more for it than I can afford, so damage (to my pocketbook) is minimal.
The current (dare I say, perverse?) obsession with price has been noticed by a winery in Oregon that is now proudly advertising its fully calculated cost of goods to customers—just to prove that they are charging reasonable prices. However, the real estate cost of purchasing vineyards doesn’t seem to be included in their cost-of-goods, which skews things pretty bad. And all their wine sales are direct-to-consumer, which is something wineries dream of. Essentially they get double distributor pricing (see below). Alas, most of us (wineries) can’t corner enough of the direct market to make this the norm.
So let’s first talk about pricing. Because of what’s known as the “3-tier system,” more often than not, wineries do not recoup retail prices for their wines. In a nutshell, it’s like this:
- A winery sells its wine to a distributor at half of retail (called FOB)—sometimes even less than that. If the retail value is $40, the winery gets $20 from the distributor. (FOB is less when we export; somewhere around 30% of full price.)
- A distributor then sells the wine to a wine shop or restaurant at wholesale, which is about 33% over FOB—$27.
- Retailer then sells the wine to consumers at a 50% markup, or about $40.
You can see why wineries wish they could sell more wine direct to consumers. We lose 50% off the top to our distributors. But we need our distributors to help us distribute wine. It’s virtually impossible for a boutique winery making more than a few hundred cases to cover the territory required to sell out of wine. And distributors need to make money too—hence the markups. Same goes for retailers. Until a winery has got a “cult wine” that is in such demand that it’s always out of stock, distributors are a necessary part of business. Very few wineries can dispense with their retail and wholesale partners.
Restaurants have a more fluid approach to pricing. They buy at wholesale, but they sell at whatever mark-up they think is appropriate. This can be quite high. But again, no one’s forcing you to buy the most expensive wines on a restaurant wine list! Usually, I can find good wines at a good price on most restaurant lists.
What about the actual cost of goods? It varies drastically from region to region and varietal to varietal. Napa Valley Cabernet grapes can cost 10 to 20 times as much as Lodi Zinfandel grapes, for example. Why? It’s partly supply and demand. And it’s also partly a reflection of quality—or at least perceived quality. The same applies to wine or grape prices from the best appellations in Bordeaux or Burgundy. Reputation and location have a lot to do with it. Let’s say a winemaker purchases Napa Valley Cabernet grapes at the county-wide stated average—about $6,000 per ton. ($10,000 would be more “normal” for high-end Napa Cab.) That translates to about $10 worth of wine in the bottle, depending on your juice yields. But after that, you’ve got the cost of bottles, corks, capsules and labels: about $2 per bottle.
OK, so now we’re in for about $12 for just the raw materials visible to the consumer. I forgot to mention barrels. French oak costs about $1,000/barrel. Again, it depends how much new oak you use, but that’s about 30 cents/bottle.
In addition to the cost of what’s in that bottle, the cost of running a winery can be extraordinary. If you don’t own your winery or vineyards outright, there are mortgage or rent payments. Plus salaries (a huge expense), taxes, shipping, storage, insurance and winery equipment (like tanks, barrels, barrel racks, glycol heaters, compressors, pumps, forklifts, winery vehicles, electricity, water and office expenses). Getting the wine in bottle is expensive too. Either you buy a bottling line (expensive!) or rent one (still expensive!). All this can be daunting for winery owners.
And the equipment breaks down too, so you are constantly repairing things. Not cheap.
We are a small winery making about 7,000 cases of wine in California and about 2,000 cases of wine in Israel. But we’ve got 10 people working for us on two continents. The math adds up quickly. If you want to build a 10,000-case winery, count on about $1.5 million to $2 million in construction costs for a Spartan design. And you’ll still need to hire an architect! Or you can blow a fortune on your fancy winery, too. Buying the land is separate. In Napa Valley, you’ll pay $500,000/acre or more for choice vineyard land, if you can find any available. In other regions, you’ll pay less—maybe a lot less. But who wants to live in Oregon’s Willamette Valley? (That’s a joke.)
By the way, I didn’t mention travel and marketing, the cost of which mounts up rapidly as well, especially when you have markets on 3 continents like we do. Needless to say, we travel a lot. We also pay marketing professionals to help us get the message out. That’s more money off the top!
The ultimate irony is that to figure out what each of our wines really costs us requires a highly specialized accountant who charges us a lot of money just to get us the information. Oy. There are so many tax and financial-related calculations, I find it impossible to fully understand.
So let’s get back to that $40 wine that really only yields about $20 to a winery using the 3-tier system. (Or the $20 wine that fetches only $10 for the producer.) With all the variables, it’s impossible to say with any certitude what profit a winery is going to make on this wine. But it’s very possible that the total investment in that bottle—given all the costs of doing business—is perilously close to the price that the winery charges for it. It’s a bit of a Catch 22. How does a winery get ahead? This is why most start-up wineries require 7 to 10 years to get into the black. And by the way, as a general rule, $10K/ton of grapes translates to $100+/bottle price. Alas, the winery is really only getting about $50/bottle (FOB) for most of this wine. The industry “standard” is skewed to those elusive direct sales.
Suffice it to say that I’ve been in the wine business for nearly 30 years, but I have yet to make any “easy money.” In fact, for the first 10 years of Covenant, I made no salary. Instead, I made wine for other people and wrote books to make ends meet.
The old saying that the best way to make a small fortune in the wine business is to start with a large fortune is really not that clichéd. If a winery can stay in the game long enough to become profitable, it’s doing well. Some wineries do get really lucky and make a lot of money quickly on a highly regarded, highly reviewed wine. And they deserve the success, because everyone works hard in this business. The rest of us are generally happy to stay afloat and make wines we are proud of—at a number of different price points.
In truth, I don’t expect most of you to stop complaining about the cost of wine. I guess it’s human nature. But remember there are really good wines at many prices. Look for the ones you can afford. And drink up!
Vintner Jeff Morgan is the co-owner of Covenant Winery, in California and Israel. He’s also the author of nine books on food and wine and a former wine journalist.