Monday, December 21, 2015

Why Your Wine Is Priced The Way It Is

While you're decking the halls and making merry you're no doubt enjoying a sip or three. Maybe you're buying bottles of wine for gifts this year (ahem...yes, please!). Ever wonder why wine costs what it costs? Pour yourself something or, better yet, have someone else do it for you, settle in and I'll help explain it.
The best article I've seen on the matter, Breaking Down the Price of a Bottle of Wine, offers a solid perspective that you should read, including the comments (they are valuable, not rants). However, I disagree with some points and feel Mr. Colman completely missed others.
He nails the winery's desire to sell as much as they can directly to the consumer because they retain all the profit. No middlemen are involved. I once worked with a gentleman from a winery who, rather glumly, announced he had sold out for the year.
"That sounds like a success story these days, why do you sound unhappy?"
"Because nearly all of it went through distributors," he replied. "We actually lost money."
That may be a bad business model, where you sell out and don't turn a profit but it illustrates, brilliantly, the importance of direct sales.
Mr. Colman's math on distributor markup is inaccurate (based on my experience) and makes them look greedy. He shows a 75% markup for the wholesaler, based on the stated $19 cost to them and the subsequent $33 price from them. However, the FOB (freight-on-board, incorrectly written in the article as "free on board") price is the cost, per bottle, to buy the wine from the winery. Then the wine needs to travel. Temperature controlled trucks and refrigerated containers (reefers) are more expensive but much better for the wine. It's been a while since I have priced transport specifically but a safe assumption is between $1.00 and $2.00 per bottle just to get the wine to the distributor (this would include state taxes, duties, handling or consolidation charges, etc.). Factoring in even the lower end of that scale means that the markup drops to about 65%, a significant change which would be a dream for most wholesalers.
Sometimes, if your timing is good, and you buy enough, a wholesaler might hit a 50% margin, but generally, and I reiterate, this is based on my experience, the margins are 25-35%. (See comment #3 on the linked article, from Berndog, for some confirmation). Wholesale deals for volume in retail or special by-the-glass prices for restaurants means another 10% (or more) off that relatively lean figure. In Mr. Colman's article the price offered from the wholesaler would be more like $26-$28, not $33.
Then you need to account for retail and/or restaurant profits. Mr. Colman posits "that each tier will mark up the wine by 50 percent." If retailers achieved 50% markup, I would be one. I tried to be one even though the usual margin is closer to half what Mr. Colman claims. It is hard to generalize about wine because volume deals can allow bigger percentages and more ubiquitous wines might need to be priced at much lower numbers to remain competitive. While some retailers choose to price their wines as "loss leaders" to get people in the door with the hope they will buy larger margin items, like furniture, or become loyal shoppers, in grocery stores, for example. By law, in Louisiana, no one is allowed to sell alcohol below the minimum 6% markup. However, after credit card charges, that results in about 4% profit, until you consider the staff needed to stock and run the department. Typical retail on the wine in Mr. Colman's article would be $32-$38. Perhaps, if there was little coming to the market, the price might edge up a few more dollars.
Restaurants, to the surprise of no one, are a different story. First of all, restaurants traditionally employ a cost structure versus of one based on markup. Instead of taking the cost and multiplying it by 1.XX, with the Xs being the desired markup percentage, restaurants take the cost and divide it by their desired cost percentage. A $7.50 wine cost with a 35% markup is retailed at $10.12, perhaps rounded down to $9.99. A $7.50 wine cost in a program running a 35% cost would be on a list for $21.42 - rounded to $21 or $22, or, more likely, $25 or even $30 to accommodate some higher end wines being offered below their strict percentage price. The system allows for some wiggle room, usually making the lower end wines much more expensive and lowering some higher ends. The best system is when the sommelier/buyer uses his or her brain to offer some more reasonable prices on unusual wines (often that pair beautifully with the menu) while making more profit on "brand name" wines. I applaud this approach heartily but I am willing to poke around and try some wines others avoid.
Many restaurateurs cover the cost of the bottle by selling one glass, even though there are five in a bottle. This is approximately a 21% cost or more than a 400% markup.
This leads to the fantastic (and, perhaps, depressing) quote from Bo Barrett (winemaker at Chateau Montelena) in the linked article. Bo says, "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." This is akin to the usher making more than the director. Or the valet over the car designer.
I hope this helps you understand the price on the bottle of wine you are debating about buying for the holiday gathering or Aunt Gladys.

In my next post I'll share some of the decisions that need to be made at the winery level that affect price. You will think about wine pricing differently.