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What's Behind the Bottle Price

When it come to figuring a wine's final price, production costs count, but image is the wild card

Dana Nigro
Posted: December 19, 2002

 
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There are plenty of $15 wines on the market today that in terms of flavor and enjoyment rival wines costing three or four times as much. So how can some producers justify charging so much more for commensurate levels of quality? High prices may actually make the wines more attractive, at least according to many vintners.

It's all wrapped up in the image that a wine projects. Wineries use many tools to convince consumers that their wines are worth more -- fancy bottles, designer labels, sophisticated advertising, even celebrity endorsements. The higher up the price ladder you go, the more the purchase price reflects reputation as well as materials used -- though you won't get a lot of high-end wine producers to admit that directly, at least not about their own wines.

Producers have to look closely at competitors in their market niche and assess where their own wines fit in terms of quality and price. Are they selling a luxury product consumed on special occasions? An easygoing varietal geared for consumption at the family dinner table? Or something in between? Charge much more than the competition and consumers may balk. But charge much less, and consumers might not believe it's a quality wine.

"People's perceptions are driven by wine pricing," explains Gayle Dargan, senior vice president at Robert Mondavi Winery. "If all consumer decisions were driven by blind-tasting, it would be a very different world. That's not reality. Price is a signal to people of our commitment and the efforts we are taking through our vineyards and our winemaking to put out the best wines out there."

Several other factors loom large in the intersection of image and pricing. Scarcity, or the perceived rarity of a wine, can be key, because motivated consumers are willing to pay for the prestige associated with small-production bottlings from coveted appellations such as Napa Valley or Burgundy's Côte de Nuits. For larger-production wines, the global market has an effect -- the most notable example occurring with classified-growth Bordeaux, which have become commodities subject to price speculation.

The role of ratings by publications such as Wine Spectator cannot be ignored either, as consumers are directed to high quality wines, and wineries raise prices in response to intensified demand.

Besides the intangibles of image, there are certain concrete costs that go into every bottle of wine. But these vary enormously based on the type of wine, the size of the winery and its location. A tiny new label may have major start-up costs, while a big player sees the cost-per-bottle go down as production goes up. "There are tremendous economies of scale for a brand that sells millions of cases of wine vs. a smaller brand of the same quality from the same region," says Mike Jaeger, president of Canandaigua's table wine group, which owns brands such as Columbia in Washington.

The risks of the business are numerous as well. Poor vintages, economic downturns, and long-term investments that require predictions about the future of an unpredictable market can all make winemaking a losing proposition.

Each of these factors must be taken into account when determining a wine's final price, explains Michaela Rodeno, CEO of St. Supéry Vineyards & Winery in Napa Valley. "We are trying to balance our need to cover our costs and have money left over with what the market will bear and what our competition looks like," she sums up. "It's not mechanical, it's an art."

Starting in the vineyard and ending in your local wine shop, here are the major cost factors behind every bottle of wine. Whether it's really worth $15 or $50 in the end is up to you.

Grapes and Vineyards

Grapes, including the labor involved in growing and harvesting them, are usually a winery's biggest single cost -- up to 60 percent of the production exenses, according to Dargan -- and frequently the most variable one from high-end to low-end wine.

One common formula wineries use for pricing-estimates, according to Rodeno of St. Supéry, is that a bottle of wine should cost 1/100th of the price of a ton of grapes. For example, a winery that paid $4,000 for a ton of Cabernet fruit would charge $40 for a bottle of Cabernet, implementing this formula.

Grape prices depend on the appellation, variety, yields and harvesting methods in a specific vineyard, supply and demand, and the overall economy. With a vast supply of Chardonnay in California, the popular variety was still selling for an average of $837 a ton in 2001, while the decidedly untrendy but also widely planted French Colombard only brought in an average of $129 per ton. Out of all the state's appellations, growers in Napa earned the highest on average of all its grapes -- $2,839 a ton last year -- with Oakville Cabernet going for a whopping $4,000 to $10,000 a ton. Little wonder that its wines are the most expensive in the state.

Buying land for vineyards adds substantially to wineries' costs (though it does give them more control than if they buy all their grapes and are subject to market fluctuations), and its impact on a wine's price is a reflection of the size of the mortgage payment.

A California producer who bought land in a prestigious Napa Valley subappellation for more than $100,000 an acre at the height of the economic boom is going to have to charge more for his wine in order to turn a profit than is the winemaker who invested in Paso Robles at $15,000 to $20,000 an acre.

Then there are the planting costs, which can be as much as $30,000 per acre, say winemakers, depending on vine and root stock, density of the plantings, trellising methods, irrigation systems and so on. And don't forget the interest on all those loans.

Winery Facilities and Equipment

To produce wine, no matter the price, a fairly lengthy list of equipment is needed: a grape press, a crusher-destemmer, pumps, hoses, stainless steel tanks, barrel racks and more. Each one has its own useful life span, explains John Conover, general manager of PlumpJack in Napa Valley, with oak barrels needing to be replaced as frequently as every two or three years, while stainless steel tanks should last at least 20 years. "Then there are the repair and maintenance issues, the yearly tune-up," he adds.

A 10,000- to 15,000-case winery can easily be outfitted for about $125,000, estimates Richard Olsen-Harbich, managing director and winemaker of Raphael, on Long Island's North Fork. But vintners may choose to buy basic equipment that does the job or to spend far more for state-of-the-art pumps and presses.

Within a certain range, as the number of cases increases, the production cost per bottle shrinks. "Whether you are making 5,000 or 15,000 cases, you need similar equipment. The tank space will change, but that's one of the least expensive items," Olsen-Harbich explains. "Once you start going above that, you need to revisit what your equipment is, and recapitalize."

How this equipment is housed, whether in a Quonset hut or a cathedral of wine, depends on what type of image the vintners want to project.

Winemaking

Stylistic decisions have a big impact on a wine's price. A $50 wine is likely to be a rich, powerful red that received lengthy grapeskin-contact during fermentation and was aged almost entirely in oak -- at $300 (American oak) to $700 a barrel (French oak) -- for two years or so. A wine priced at $5 to $15 is usually meant to be fresh, fruity and drunk young; it may spend most of its time in stainless steel or used oak. If it has toasty flavors, it probably didn't get them from barrels; more likely, it was pumped over oak chips.

Barrels are the second-highest production cost for many producers, according to Bill Murphy of Clos LaChance, in California's Santa Cruz Mountains. "Our typical barrel strategy is a third [of the wine] in new oak, a third in 1-year-old, a third in 2-year-old. Then we rotate them out. With our premium wines, we may have a higher percentage of new barrels, so those costs are going to be higher."

Aside from oak, Murphy cites a number of other production decisions that can add to labor costs. For example, he says, "With our Chardonnay, we do all whole-cluster pressing, as opposed to using a destemmer-crusher. You get half as much material in the press, and it takes twice as long, so the labor is twice as high. But we think it adds to the quality."

Then there are all the little things that comprise the administrative costs of winemaking. These encompass the federal and state licenses required to make wine, the utility costs of running the equipment, accounting systems, insurance, salaries of office staff and office supplies.

Time

Yes, time is money. At PlumpJack, for example, the winery waits three years before picking its first crop from a new vineyard. "Then our estate Cabernet spends two years in barrel and the reserve spends almost 30 months in barrel. Then the wine is bottle-aged for eight months," Conover explains.

"You've got five-and-a-half years of capital and cash flow tied up into running the operation," he continues. "Meanwhile, you're paying the salaries of everyone -- the accountant, the manager, the winemaker, the vineyard manager -- before you are ready to go to market with your product, before you are ever pulling money in to repay your previously incurred debt to get to profitability."

The time investment is shorter for white wines because they don't require as much aging. That's one reason why you don't find many white table wines priced above $100 (Marcassin and white Burgundies being the notable exceptions), while reds break that price barrier routinely nowadays (Also, prices for white grapes are generally lower than those for red varieties.)

Packaging

More expensive wines tend to have more expensive packaging. "If you're going to spend $25 or more on a bottle of wine, it needs to look good on the table," Murphy says. The package needs to be tailored to where and how the wines are sold. A mass-marketed wine often has a label that jumps out from a supermarket shelf, while a pricey wine's label may look more crafted.

A flat-bottom, generic Burgundy-style bottle (at 50 cents per) may do just fine for a less expensive wine. But if a vintner wants to make an impression with his higher-priced wines, he or she may select a bottle style with thick glass, a thick neck and a deep punt (at more than $3 a pop). If it's really high-end, the bottle may be custom-designed, with raised glass, etching or enameled art (like Perrier-Jou't's flower bottle).

Corks may cost pennies or a dollar each; a wine built for extended aging will have a longer, higher-quality cork to minimize the possibility of oxidation or taint.

Sales, Marketing and Distribution

Once the winery has its wine packaged as it would like, it has to get it to the customer. That takes money for advertising, public relations, point-of-sale materials and promotions, a sales force, wine tastings for the public and the trade, samples to the wine press, warehousing, shipping, distribution, and oh, yes, money for those hefty excise taxes. This set of expenses, which again can be wildly variable, contributes to around 15 percent of the retail price, says Dargan.

Warehousing and shipping account for a big chunk of that. "It's a heavy product," Dargan comments. "Wine is unlike many other categories, where you have production facilities in the Northeast and the South, which allows you to never have to ship the product very far. For us, it's driven by agriculture. For people in the Northeast, wines may be less expensive coming from Europe than across land from California."

And state laws -- which can be extremely varied and complex -- jack up expenses as well, points out Dargan. Most states require that wines be distributed through a private wholesaler (or in some cases, a state agency) to the retailers. "The three-tier system has its advantages, but it adds costs at a lot more places in the stream," says Dargan.

Wholesale and Retail Markups

How much difference can there be between a $15 and a $50 bottle when it comes to distribution? It seems fairly simple at first: The wholesaler buys the wine from the producer, pays for shipping and local taxes, marks up the wine to cover his costs and earn a reasonable profit, and then sells the wine to restaurants and retailers. Surely, you say, a wholesaler's expenses can't vary that much by the bottle.

Well, they can. Wholesaler markups typically range from 20 percent to 35 percent of what the distributor pays for the wine, though some vintners occasionally cited even higher figures. Those margins vary by state -- depending on the regulatory requirements, taxes and transportation costs -- and by the price and size of the brand.

"Very high volume wines are typically at a lower margin, with some justification," explains Smoke Wallin, executive vice president and director of National Wine & Spirits, a distributor headquartered in Indianapolis. "You are moving them quickly, you're not sitting on tons of inventory. The cost structure is quite different than that for the boutique wines, for which you have to hand-sell every bottle. The margin is typically higher on those products."

And the same mark-up percentage yields very different dollar amounts depending on the original purchase cost. That accelerates the price escalation of wines that were expensive to begin with.

Just as with wholesalers, retailers' markups can vary dramatically by the size of the brand, from as much as 50 percent on a case of an unusual item that takes six months to sell, to 10 percent on a mass-marketed, million-case wine that is available in many stores and disappears quickly. (Some states actually have a mandated minimum markup to prevent predatory pricing.)

Likewise, the markups depend on the outlet, says David Moore of Moore Brothers Wine Company, a specialty wine shop in Pennsauken, N.J., near Philadelphia. A club store such as Costco or a supermarket chain that buys in large volumes can offer bigger discounts than can a tiny corner liquor store or a fine-wine shop that hires experts and provides a higher level of service.

Winery Profit

After federal and state corporate taxes, which may take around 40 percent of a winery's pre-tax income, what's left for the winery? Depending on all the aforementioned costs, it could be nothing, it could be a respectable 10 percent of its price to the trade, or even a whopping 50 percent -- if it's a pricey wine in such high demand that the winery has almost no selling costs. In general, the wine business is not extremely profitable and wealth comes in the long-term, through the accumulation of assets.

But even if a winery is bringing in a substantial profit, it isn't all earmarked for BMWs and mountaintop mansions. Wineries are constantly reinvesting -- replanting vineyards, buying better equipment, doing research on new techniques. "We have to earn a certain return to be able to continue to invest in quality," says Dargan of Mondavi. And once again, those investments may not pay off for decades.

"Your costs seem to keep going up as you sell more," explains Matt Trevisan, who founded Linne Calodo, a boutique producer in Paso Robles, Calif., in 1998. "You're constantly exploring and experimenting, trying to better the wines and better the vineyards and find some sort of inner peace somewhere down the road."

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