Last week my column focus was the macro issues influencing the price of a bottle of wine. This week, I analyze the micro issues of the cost to produce and the profit margin of the $75 and $30 bottles of “Cal Cabs” presented.
My hypothesis: How is it that two seemingly comparable wines may be significantly disparate in price?
Herein, “The Accountant’s Report” on the “average” cost of a bottle of wine and the ultimate shelf price of that bottle.
First, the accountant’s assumptions: smaller, family producers (10,000 cases or less) who grow their own grapes, harvest small yields and don’t invest heavily in packaging or in marketing their end product. This is the profile of over 80% of Napa producers.
Let’s break down the cost and pricing model into four distinct components:
- From the vineyard to the door of the winemaking facility. First the capital investment (winery construction, vines, trellises, irrigation, depreciation, interest on a land loan, lost opportunity cost of non-productive vineyards for 3-5 years). COST per bottle: $2.50. Second, maintaining the crop (fertilizers, pest control, cultivation, pruning) and harvesting the grapes. COST per bottle: $1.25. A total cost of $3.75 before the winemaker begins to weave his or her magic.
- From the winery doors to the doorstep of the winery’s marketing office. First, the winemaking process (crushing, fermenting, time spent on alchemy, aging in oak barrels, storing, taxes). COST: $1. Second, packaging (bottle, cork, foil, label, boxing) and bottling. COST: $2.25. Total cost: $3.25.
- From the marketing office door to the loading dock. In varying degrees, wineries a) operate staffed tasting rooms to ply a portion of their wares directly to consumers; b) sell to wholesalers; and c) sell directly to consumers through clubs and mail orders. COST: $4.50.
The grand total cost to a winery is approximately $11.50.
Now add a 10% – 20% profit for the winery – $1.50 to $2.30 – and the selling price to a wholesaler is $13 to $14.
Caveat: wineries with deep pockets may choose to invest more heavily, significantly impacting their costs – and pricing.
- From the loading dock to the retail shelf. To gain the widest distribution, producers solicit wholesalers to market their wines, who then sell them onward to retail shops and restaurants. The typical mark-up is 200%. In our example, the $13 bottle ultimately wends its way to the retail shelf for $26.
The bottom line? The $30 bottle we enjoyed at dinner has a cost basis of $11.50, yielding a rather tidy profit in the supply chain – except at the winery level. There, 90% of the effort results in 10% of the profit.
However, my model has within it a systemic anomaly. Several of you have likely surmised it. If the cost to produce is fairly uniform, what accounts for the higher mark-up of the $75 wine (other than the significant caveat noted above)? Here, the price elasticity of supply and demand does not necessarily follow its financial logic.
Working backwards, my model estimates the cost basis of the $75 bottle of wine should be $37.50. However, a different dynamic comes into play at this price level: market perception (what the market will bear), the game-changer for all consumer products.
Although my $75 bottle of wine may have a higher cost basis, the incremental pricing is geometric, not arithmetic. The sum total of the higher costs might be $18, implying a retail price of $36. The winery typically commands the same 10%-20% profit (perhaps higher); the remainder goes to the wholesaler and/or retailer (a 400% markup).
An example of this economic model: Screaming Eagle in Napa Valley has been dubbed a “cult wine,” produced in miniscule quantities (500 cases). Cost to produce? Approximately $18. Price to those chosen few on the winery’s direct mailing list? $750. Ah, but that’s not the final point of elasticity. An aftermarket of retail/auction demand has been spawned. Price? A whopping $1,500.
It is the micro issues that separate the marginally profitable winemakers from the prestigious, highly profitable entrepreneurs. And distributors and retailers are firmly attached to each producer’s coattails.
Nick Antonaccio is a 45-year Pleasantville resident. For over 25 years, he has conducted numerous wine tastings and lectures. Nick is a member and Program Director of the Wine Media Guild of wine journalists. He also offers personalized wine tastings and wine travel services. Nick’s credo: continuous experimenting results in instinctive behavior. You can reach him at firstname.lastname@example.org or on Twitter @sharingwine