lurcher wrote:Getting away from the science and more to the business side...
How does one price a wine?
I've cut and pasted below what I wrote about costs on a prior blog. Pricing, however, doesn't depend solely on production cost. Obviously, one must price for profitability in order to stay in business, unless it's a vanity label for a mega-rich owner. Reputation (and "scores") can have a huge effect on demand and what the market is willing to pay. Cost has progressively lower correlation with selling price in the higher price brackets.
For What It's Worth Tue. July 8, 2008
Dan Berger, one of the more interesting wine writers around, would occasionally list various production costs when talking about wine prices. Some were very accurate, but others out of line with each other, e.g. cheap glass with expensive corks. In light of recent discussions on the w00t forums about price, quality and value, I thought it might be interesting to list our costs and some idea of the range of various costs.
Dan always gave the most detail about bottling costs, so I'll start there. Most of our bottles run around $9.00 a case, with a range from $7.50 to $12.00. Industry ranges are < $5.00 to > $20.00. Our corks are around 30¢ each ($3.50/case), with an industry range of < 10¢ to > $1.00 each (there are also low cost alternative closures). We use tin capsules, at 17¢ each ($2.00/case). Polylaminate, PVC, heat-shrink plastic and other alternatives run 2-10¢ each. Front labels @ 7¢ and backs @ 4¢ adds another $1.40 a case for us. Label cost is probably the biggest variable in packaging costs because there is a tremendous economy of scale; small runs of ornate labels can cost a dollar a label. Mobile bottling is around $2.50 a case. If you have your own bottling line (a large capital investment) costs are considerably lower. Bottling labor for us is around $0.60 per case. We spend $19 a case to bottle our wine. Big wineries can get it done for $7-8, high end “vanity labels” may spend as much as $50 a case or more.
Grapes are the biggest cost in Sonoma and Napa wines, but not in the Central Valley. Cabernet averaged over $4000 a ton in Napa in 2007, but only $330 in Lodi and $260 or less in the rest of the Central Valley. The average grape cost in a case of Cabernet is over $60 using Napa fruit, and less than $2.00 using Kern County fruit. Growing your own grapes can be a lot cheaper than buying grapes. In 2006 our own grapes cost us $1160 a ton, our purchased grapes averaged $2040 a ton. Our grape cost per case averaged around $26.
French oak barrels are $1000+ a pop. That means $20 a case for a winery that uses 50% new French oak, a common practice for high end Napa and Sonoma Cabs ($80 a case for Caymus Special Select @ 200% new oak). American oak is $200-350 a barrel; staves, chips and sawdust range from pennies up to $2 a case or so. We average $5 a case for oak (ranging from $0 to 20, depending on the wine). Other winemaking and lab supplies add up to a dollar or so.
Large wineries realize tremendous economy of scale with winemaking labor, often spending less than they do on bottling labor. Counting labor overhead and a portion of my salary, our winemaking cost is $7 a case. I won't consider consultant's fees here, but some vanity labels pay “superstar” winemakers six figure fees to create cult brands.
Overhead can be quite variable depending on renting vs. owning, taxes, depreciation, loan interest, etc. We spent a buck a case on utilities before we installed our photovoltaic system, now we have to add both the accelerated depreciation on the solar energy system and the interest on the loan to our “book cost” for IRS purposes.
I won't make you do the math. Our direct cost per case is around $57. Two Buck Chuck probably costs about $9-10 a case to produce, and an elite Napa Cab might cost $140-200. Add a bit of tax, warehousing, marketing (can be a huge expense) and overhead and you get to the winery cost of sales. Assuming sales through the three tier system, markup will be 100% between the winery and the store shelf. Hence Two Buck Chuck and $40-50+ Napa Cabs.