The selling price of a bottle
of wine bears only the weakest of relationships to its
underlying cost price. A $10 wine might have more or less
of its cost relating to the actual grapes used to make the wine
than a $5 bottle, and similarly to a $20 bottle.
But the pricing isn't all about
the quality of the wine, either. Continuing our example
above, there's no certainty that a $10 is any better than a $5
wine, or that it is any less good than a $20 wine.
In this part of our wideranging
series we look
at some of the economic and marketing issues that underscore the
prices we pay for the wine we drink.
How Much does it Cost to Make a Bottle of Wine?
If you're in one of the states where the excellent retail chain
Trader Joe's is active, you're doubtless familiar with their
'Two Buck Chuck' (sadly, three buck Chuck in WA due to our high
liquor taxes here) - their own house label ('Charles Shaw') of
average wine which they sell for $1.99 in many states and $2.99
in WA.
This is probably the cheapest wine of any acceptable quality in
the US, and indeed, especially after the reds have been given a
generous amount of time to breathe, the wine quality is
perfectly good for normal table wine.
Now look at some of the bottles of wine you'll sample on a wine
tour, where the wine maker is asking up to perhaps $50 a bottle.
How is it possible that this $50 bottle of wine is 25 times more
expensive than the $2 bottle of wine - particularly when you
realize that the winemaker gets all of the $50 you pay him,
whereas the Charles Shaw winery gets much less than the $1.99
you pay to Trader Joe's.
Here's an
interesting analysis that costed out a bottle of TJ's Two
Buck Chuck as comprising a mere 14¢ worth
of grape juice back in 2007. The analysis suggests that a
top of the line wine might contain $8.30 worth of grape juice.
That's a lot more than the $2 wine, but it doesn't explain a
possible difference in retail price between $2 and $50.
And wine prices don't stop at $50, nor do the underlying costs of the grape juice. It is
possible on rare and notable occasions for the grape cost to be
even higher. For example,
this article refers to a small sale of 1.5 tons of grapes at
a cost of $37,301/ton in 2007. A ton of grapes typically
produces enough wine for about 165 gallons of red wine or 150 -
160 gallons of white wine, so the $37,301/ton figure translates
to a per bottle cost of about $45.21 for the grape juice.
There is more to the cost of a bottle of
wine than just the underlying cost of the grapes, of course.
There's the cost of a bottle, a label, and a cork. Then
there's the cost storing the wine while it matures, and a number
of other items too.
These costs can be considered to be about a
dollar, and no more than $2, per bottle of wine. It is
somewhat simplistic, but acceptably accurate to say that most of
these costs are closely similar, whether the wine be low quality
or high quality, inexpensive or very costly. A standard
wine bottle doesn't vary much in cost, labels cost much the
same, and so on. Sure, there's a difference in cost
between cellaring the wine in plastic containers, in stainless
steel vats, or in oak casks, but these cost variances are
usually much less than the variations in the cost of the grapes
and certainly have no relationship to the massive swings in a
bottle of wine's final selling price.
Grape Costs in
Washington state
Grapes in Washington typically fetch almost
twice the price, per ton, as they do in California (and grapes
in Oregon can be more than three times the price of Californian
grapes).
In 2008, Washington grapes sold at an
average price of $1030 per ton. Red grapes were more
expensive (average of $1227/ton) than white ($837/ton).
The most prolific grapes and their per ton average prices are :
Grape |
2008 $
Cost/ton |
Approx $ cost
per bottle |
|
White
White Riesling |
$812
|
0.98 |
|
Chardonnay |
883 |
1.07 |
|
Sauvignon Blanc |
771 |
0.93 |
|
Pinot Gris |
879 |
1.07 |
|
Gewurtztraminer |
720 |
0.87 |
|
Viognier |
1,007 |
1.22 |
|
Chenin Blanc |
705 |
0.85 |
|
Semillon |
747 |
0.91 |
|
Other |
913 |
1.11 |
|
Overall White average |
$837 |
$1.01 |
|
Red
Cabernet Sauvignon
|
$1,306
|
$1.58
|
|
Merlot |
1,126 |
1.36 |
|
Syrah |
1,149 |
1.39 |
|
Cabernet Franc |
1,246 |
1.51 |
|
Malbec |
1,655 |
2.01 |
|
Pinot Noir |
1,233 |
1.49 |
|
Sangiovese |
1,481 |
1.80 |
|
Other |
1,454 |
1.76 |
|
Overall Red average |
$1,227 |
$1.49 |
|
Total Average |
$1,030 |
$1.25
|
|
source - USDA, Jan 24 2009 |
|
So, most of the time, a bottle of Washington wine has - on
average - about $1
worth of grape juice in it if white, and $1.50 if red. Remember that when looking at wines priced anywhere from $10 up
to $100 per bottle.
The Disconnect between Wine Costs and Quality
Here's an
interesting blog entry which quotes from a March 2009
NY Times article, a Revue de Vin de France article, and
other sources to come up with the cost and selling prices of
various wines.
Wine |
Cost to Make |
Selling Price |
|
Petrus |
$40.50 |
$6075 |
|
Dom Perignon |
$30.80 |
$175 |
|
Château-Lafite Rothschild |
$13.50 |
$315 |
|
Generic French wine |
$1.85 |
$2.50 |
|
|
While few of us fill our wine cellars with such special wines, consider the implications of these numbers - a wine that
costs $30.80 to make sells for nearly half the price of a wine
that costs $13.50 to make. And a wine that costs $40.50 to
make sells for 35 times more than the $30.80 wine.
Clearly, there is a total disconnect between the selling price
of a bottle of wine and the underlying cost of making the wine.
This is perhaps similar to fashion goods, where you're paying
more for the label than for the fabric.
The 'law of vanishing returns' applies with a vengeance to wine,
as does the same disconnect between cost and value in the case
of fashion clothing. Another example is whisky
- if you read a whisky tasting book such as Jim Murray's annual,
you'll see that the very best whiskies, scoring 95/100 and
above, are as likely to be only moderately aged (ie under 20
years) and moderately priced (ie under $100/bottle). The
ridiculously old (ie over 40 years) and ridiculously priced (ie
over $1000/bottle) whiskies seldom if ever score as well as
whiskies one third their age and costing ten times less.
In other words, a more expensive wine may not be any more
enjoyable than a wine costing much less than half as much.
Not only might there be no better quality in a more expensive
bottle of wine, but the underlying costs might be no greater
than the less expensive bottle of wine, either.
Most of the justification for setting price points on wine
involve vague concepts such as pricing to reflect the
marketplace demand for the wine in question, adding premiums to
the cost of a wine if it wins any notable awards, increasing the
price as it gets older (but not necessarily any better), and
setting price points across an individual wine maker's range of
wines to reflect his feelings about their respective values and
qualities and quantities.
The Importance of Overhead Costs
One of the largest costs for small winemakers, and a still
measurable
part of the costs for larger winemakers, are the fixed overheads
incurred by the winemaker.
Think about it this way - a small winery that produces only 5000
bottles of wine a year has to make enough money to cover the
capital costs of setting up the business (the wine making
equipment, etc), the ongoing costs of renting business premises,
the winemaker/owner's salary needs, and extra costs for any
other staff as well, plus some allowance for promotional costs.
Maybe the winery has an annual capital amortization/depreciation
cost of $15,000, and perhaps it pays $20,000 for premises rent.
Add a modest amount for promotion ($5000) and some money for
part time staff ($2000), and there are basic fixed costs of
$42,000. If the owner wants to make a gross income himself
of $58,000, then the winery has fixed costs of $100,000 a year.
This means that the winery has to recover $20 per bottle of wine
for their fixed costs of operation. Add to the $20 the
underlying cost of the grapes, the cost of other supplies and
consumables, the cost of a bottle, cork and label, plus some
assorted other packaging and handling costs, and you can quickly
be looking at a bottle of wine that has an underlying per bottle
cost of perhaps $4 but an extra $20 share of overhead cost, and
so the bottle needs to net a return of more than $24 to allow
the winery to break even each year, even though the all-up
direct cost of the wine itself is only $4.
This is why a small winery can price its wine at $40 retail,
give a 40% discount to a wholesaler, and struggle to break even
for the year, even though the wine cost per bottle is $4.
Now consider this - if the winery makes twice as many bottles of
wine a year, the $20 per bottle overhead share becomes $10.
A larger winery could potentially sell the identical wine at $14
whereas the smaller winery needs to sell it at $24. One
wine is neither better nor worse than another, even though there
is a 40% difference in cost.
Another example using the same data - a very large winery, with
more efficient production, and perhaps better purchasing
contracts for the grapes to start with, might be able to make
the same wine for $8 a bottle. Again, the same identical
wine, but now with pricing ranging from $8 - $24, based solely
on the business model of the winery.
Overhead costs clearly have nothing to do with the quality of
the wine the winery is making. Whereas, all other things
being equal, there is some sort of weak correlation between a
winemaker buying better/more expensive grapes, and making better
(and more expensive) wine, there is no relationship at all
between wine quality and the overheads a winery incurs.
Beware of 'Positive Price Parity' and 'Brand Equity'
Marketers are taught that some people will assume a more
expensive version of a product is better than a less expensive
version - a phenomenon sometimes known as positive pricing
parity. They are also taught that some people will pay
more to buy a product with a brand the purchaser recognizes.
You'll see the value of branding at work with yourself, every
day in your local supermarket, when you walk past the generic
goods and buy the leading brand goods.
As for positive price parity - a notion that works best with
slightly complex products that can not be clearly/readily
understood or evaluated, examples abound. Do you really
think that a Cadillac, with essentially the same body and motor
as a regular GM car, is twice as good as the regular GM car just
because it is twice as expensive? Do you really think Bose
headphones are three times better than competing headphones with
the same underlying product cost but three times lower selling
price? Do you really think that a perfume costing ten
times as much as a competing perfume is ten times nicer?
And so on.
Wine suffers from some outrageous pricing parity actions where
wineries will shamelessly price their wines high just to lure in
people with more money than sense.
The Relevance of Price when Evaluating Wine
So, now we've 'proved' that an $8 bottle of wine might be
identical to a $24 bottle of wine, and seen how a $175 bottle of
wine costs more than twice as much to make as a $315 bottle, how should you factor in the
price of wine when deciding what you like and what you want to
buy?
Easy.
Ignore the cost of the wine entirely while deciding which wines
you like and don't like. The cost of a bottle of wine
bears
very little relation to its quality.
Choose the wine you do and don't like based solely on its taste.
And then, having decided if you like a wine or not, look at its
price and decide if it is a sensibly priced affordable wine that
you can afford and justify to yourself, compared to all the
other good quality medium priced wines available to you in your
local supermarket or elsewhere.
Two Important Price Lessons
There are two lessons to be learned here.
The first is that wines that are very much more expensive than
other wines are not necessarily any better.
The second lesson, pretty much the mirror image of the first,
but important enough to state clearly, is that cheaper wines are
not necessarily any inferior to more expensive wines.
To put these two lessons together - there is precious little -
and often no - relationship, either positive or negative,
between a wine's selling price and its quality.
Never buy a wine on price alone.
A Rule of Thumb
We enjoy touring and tasting around wineries, and do it
regularly. It is a fun way to spend a weekend afternoon.
But we always know we've had enough to drink when we find
ourselves thinking about actually buying some of the wine we're
tasting (unless it is priced sensibly). Wineries tend to price their wines at
impressively high price points that bear no relation to their
innate quality or value, but which rather reflect the
winemaker's need to make a profit and sometimes his own wishful
thinking about what the wine should be worth.
Caveat bibitor (let the drinker beware).
Part
four of a series on wine trail touring in WA, see
also
1.
About the US wine industry in general
2. Wine making in Washington state
3.
Wine touring in Washington state
4. Wine costs, pricing, and quality
5.
Wine trail
tours and tasting around Seattle - the large wineries
6.
Touring the
boutique wineries in the Woodinville area
near Seattle
7.
Wine trail tours
around Leavenworth
8.
Wine tasting in downtown Leavenworth
Related Articles, etc
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Originally published
15 May 2009, last update
30 May 2021
You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.
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