© Wine-Searcher |
While that final judgment rests with the person pulling the corks, there are certain costs related to different wines. Unfortunately, getting pricing data from wineries is notoriously difficult. Most wineries are privately held companies and are under no obligation to file quarterly reports or open their books to reporters.
But Bo Barrett, whose family owns Chateau Montelena in Napa Valley, is one producer who will talk openly about cost structures. Montelena makes a range of wines, including two Cabernet Sauvignons, a Napa Valleyone, which sells for $50 in a shop or at the winery, and the Estate, which retails for $150 a bottle. Besides Montelena, Barrett also partners with his wife, Heidi Peterson Barrett to make Barrett & Barrett Cabernet, which sells for $250 a bottle.
For the winery, the highest gross margin by far is to sell to the consumer directly. A visitor who walks out with a bottle of the Napa Valley Estate Cabernet pays the full retail price, all of which goes to the winery. But the winery does have added costs on that bottle – or one sold through their mailing lists – such as staffing, inventory management, and credit card processing.
Barrett says that the Napa Cabernet, which does well in restaurants, is made to be priced at $100 on wine lists. In this instance, the winery sells the bottle to a distributor for about $19, depending on the state, a significant reduction from the direct sale. This price, also known as ex-cellars or FOB (“free on board”), encompasses all the winery costs, from vineyards to winery to sales and marketing, loans (if any), real estate and building maintenance, and administration. Montelena uses a national broker for sales and marketing, who channels the wine to distributors. Each distributor then sells it to retailers and restaurants for about $33. The retailer will likely sell it for the suggested price of $50, though they may undercut that by a few pennies (or dollars) or mark it up more, depending on their zip code and business model. Restaurants buy the wine for the same $33 and then put it on the list for $100.
© Wine-Searcher | “In a restaurant, the person who brings the wine to the table, uncorks it, and pours it can make more in tips than we do at the winery,” Barrett points out matter-of-factly.
The costs of production do correlate with the final price, Barrett says, as even an incremental increase in the FOB then gets amplified over the distribution system. Starting in the vineyard, different sites have different costs to buy and to farm. Further, yields get lower – making the fruit more expensive – with each of his Napa, Estate and Barrett & Barrett Cabernets. While they perform a selection in the vineyard for all the wines – cutting off grapes during the growing season and leaving them to rot on the ground in order to have the plant focus its energy into the remaining grapes – the costs for the Barrett & Barrett are the highest. The vineyard is on a high and remote hillside, often raided by deer or bears who only seem to eat the best fruit. Thus there are often only two clusters per vine.
|“If you love what you do and you’re not great at math, [winemaking] is a great career” – Bo Barrett|
In the winery, different steps affect the costs. For the Montelena Estate Cabernet, the fruit is further sorted and about 20 percent of it does not make it into that wine but slides down to the next tier. The Estate Cabernet also receives a slow press, taking about four hours to press a ton; the Napa Cabernet moves through faster at eight tons per hour, while the Barrett & Barrett gets a small basket press. New French oak barrels cost about $1400 each, so using more of those adds to the cost (a barrel contains about 300 bottles’ worth of wine and is used a varying amount of times). New barrels made from Eastern European oak cost about $900.
Barrett dismisses blingy packaging and oversized bottles. Pointing to the carbon footprint of shipping glass, rather than wine, around the world, he says: “When you make your wine in a sustainable way, why would you want to put it in a heavy bottle?” That said, there are differences in the cork: the Estate Cabernet has a $4 cork while the Napa Cabernet’s cork costs about $1.
Even though the costs rise with the level of each bottling, are they fully commensurate with the price increases? Barrett is reminded of a story where Picasso is said to have been approached by a woman in a park who asked him to paint her portrait. He obliged, working swiftly and handing it over. “How much?” the woman asked. When he replied with an exorbitant sum, she was outraged, saying that it only took him five minutes. “No, Madam, it took me my whole lifetime. You only saw the last five minutes.” Barrett feels that he is drawing on his life’s experiences when crafting one of his top wines.
Overall, Barrett says the wine business is generally a good business that suffers perhaps one bad year in seven. If he had to put a figure on his profit margins, he would say it is roughly 30-50 percent when demand is high and 0-15 percent when demand is low. “It’s so capital intensive – you plant the vineyards, wait four years, buy tanks, barrels, tractors.”
Still, would he do it all again? “I’m a farmer. I love what I do. If you love what you do and you’re not great at math, it’s a great career.”
© Wikimedia/Anthony92931; Mack Male | At the other end of the spectrum, the economics of a wine that retails at or below $10 are quite different. Representatives from the top three wine producers (Gallo, Constellation Brands, and The Wine Group) declined to comment for this story about the costs of one of their wines. So while we can’t tell the story of a specific wine, based on interviews we can tell the story of a generic representative bottle.
Clearly, the focus is on cost controls. Starting with grape sourcing, getting the grapes cheaply is key. Fred Franzia, who runs Bronco Wine Group, has said that no wine should sell for more than $10. The makers of Charles Shaw wines, the famed “Two Buck Chuck” that launched a decade ago for $2 retail, get their grapes cheaply since they own more than 40,000 acres of vines – and have for decades. The bottles are light, the corks are cheap, and – most crucially – Bronco sells Charles Shaw directly to the retailer Trader Joe’s in California, thereby cutting out the wholesaler. (In other states, the wine costs more, reflecting the fact that Bronco must sell through distributors).
The top 10 wine producers in America all benefit from economies of scale. Looked at from satellite photos, the wineries resemble Department of Defense installations rather than something from the pages of a glossy lifestyle magazine. Grapes are purchased from less prestigious growing areas than Napa, with a focus on theCentral Valley. According to the 2013 annual crush report from the U.S. Department of Agriculture, a ton of grapes from the most bountiful district in the Central Valley averaged $340 while a ton of grapes from Napa averaged $3684 (a ton of Cabernet Sauvignon from Napa averaged $5474). While end-to-end vertical integration is prohibited because of so-called “tied-house laws,” which separate the three tiers of the system, Gallo has manufactured its own bottles for decades as one part of its economies of scale.
Because these types of wines are sold through retail, winery-direct sales are not an option so they have to be made on the basis that each tier will mark up the wine by 50 percent. So a $10 wine will likely leave the winery around $3 to $5 depending on how many entities handle the wine before it gets to the consumer.
Jon Fredrikson, a longtime industry observer at wine consultancy Gomberg, Fredrikson & Associates, says that it is “a competitive market now, which is great for consumers.” The competitive pressures on wines below $15, which account for more than 80 percent of the wines sold in the U.S., are bringing discounts that leave him “amazed.”
When discounts happen, it’s often the retailer who feels the pinch. This is because of increased competition on the Internet, but also because they have the largest markups in the distribution chain and can use wine as a loss leader to get consumers in the door to buy other products (especially where states allow wine sales in supermarkets). But each player in the three tiers can take a price reduction at any given time.
Rob McMillan, who founded and runs the wine division at Silicon Valley Bank and writes annual state of the industry reports, estimates on his blog that the profit margin in 2012 was about 6.9 percent – and that’s before tax. “That’s a lot less dreamy than many consumers might imagine.”