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Gross Margins: Breaking Down the Price of a Bottle of Wine

What contributes to the cost of a bottle of wine?
© Wine-Searcher | What contributes to the cost of a bottle of wine?
Is that $100 bottle of wine really worth what you paid for it? Tyler Colman deconstructs the price of a bottle.

Pull the cork on a $100 bottle of wine and an age-old question emerges along with the aromas: is this bottle worth 10 times as much as a $10 bottle?

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 Valley one, 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.

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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.

A $100 bottle on a restaurant wine list might be sold to the distributor for just $19
© Wine-Searcher | A $100 bottle on a restaurant wine list might be sold to the distributor for just $19

“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.”

Two buck chuck sells through Trader Joe's in California, cutting out the middleman
© Wikimedia/Anthony92931; Mack Male | Two buck chuck sells through Trader Joe's in California, cutting out the middleman

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 the Central 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."

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  • Comments

    Geoff Worden wrote:
    11-Jul-2014 at 23:19:54 (GMT)

    Great piece. I think there is a lot of useful info here. I would offer a few things: FOB is not "free on board" - that would be nice! - but "Freight on Board." I applaud the others who offer a more realistic perspective on wholesaler profits which are MUCH smaller than anyone thinks. Competent, knowledgable distributors are valuable to local wine communities when they provide quality product shipped responsibly - i.e. in refrigerated containers. Each tier does not markup wine 50%. There would be a lot more people in the game if that were the case. I worked in retail and wholesale for many years and retailers in my market occasionally make 50% on deals but usually operate on something more like 20%. Wholesalers sometimes achieve 40% but the norm is more like 25%-30% and that can go lower for retailers buying quantity and/or restaurants getting a deal for serving a wine by the glass. This is misunderstood in the marketplace and that is the one unfortunate part of this piece. It would be great to see a small correction offered. That being said, restaurants routinely pay for the entire bottle with one glass...that's a helluva markup and Bo's observation gets glossed over.

  • paddy wrote:
    07-Jul-2014 at 01:55:29 (GMT)

    Great comments, Joel Distributors, at hear large wine distributors would love to make 30 points on a case of wine. Occasionally, this happens with some independent, boutique wineries. On the larger companies discussed (gallo, constellation, wine group, majestic), 25 point a would be phenomenal. True margin there is likely 15-20. Yes, the wholesaler makes good money, lots in volume even though winery companies throw weight around and erode past margin. As for those who thrash distributors and want them out of the picture, you need to think about that again. You would actually get less choice and higher prices. Distributors have the sales force, account relAtionships and, very importantly, the trucks and warehouses to distrbute the wine. Think about the mess if restaurants and stores had to buy direct. Large wineries (like those above) would rule as would very large retailers like costco, total, bevmo and huge grocery.

  • KG wrote:
    30-Jun-2014 at 22:29:26 (GMT)

    great article and for the most part quite accurate. i would only contest the comment suggesting retailers "have the largest markups in the distribution chain." this statement is just not accurate. the winery itself has the highest margin at 50%+ for many offerings then the broker/wholesaler will be around 20% while standard retail is 30%. however, as referenced in the article, retailers feel the competitive pricing environment more than anyone else and are often forced to price at lower margins.

  • Alleah @ Bliss Wine Imports wrote:
    25-Jun-2014 at 06:22:25 (GMT)

    This story is pretty spot on. The key to finding great value wine is to know your dollars are going towards the factors that actually increase the value of the wine. If a wine is made in Napa, there is a chance it is better than a non-Napa wine, but will certainly be more expensive that a non-Napa wine. So paying for a famous region doesn't actually get you higher quality wine. You need to look at the factors that actually make a wine better (high quality grapes, high quality process, careful attention from a winemaker so to minimize the need of stabilizers and additives.) The wine you are seeing for $10 per bottle is normally leaving the winery for much less than $3 per bottle. Quality grapes are not necessary because additives are used to sterilize the wine and get the desired taste qualities. There are huge profits made in the under $10 bottle scene because its leaving for .25-.75 cents per bottle. As an importer I get offers all the time, for example, private label burgundy wine for $1.50 per bottle. It is pretty bad wine and I don't believe in the world of private labeling mass produced wine.

  • Weino wrote:
    23-Jun-2014 at 12:06:42 (GMT)

    Good story! One cost missing was Taxes--Federal on import still wine is $3.11, state tax varies ie, Florida has one of the highest at $5.35 a case (9L). While 45 cents a bottle isn't much on a bottle of Bo's wine it is almost 25% of a bottle of Two Buck Chuck. Taxes on Champagne/sparkling are even higher regardless of whether it is Dom or J. Roget--if it has bubbles the tax usually triples!

  • Joell Butler MW wrote:
    21-Jun-2014 at 19:28:22 (GMT)

    Very good essay, Tyler! Forgive this long diversion! One thing missing from Bo's $19 FOB price is that half of that (at least!) is profit. This is a reasonable figure, no doubt. I too, have been in this business over 40 years at all levels. Years ago, when Heitz Martha's Vyd Cab was only(?!) $20-25/bottle, many of asked ourselves, "how dare he (Mr Heitz) charge so much, knowing what the cost of Cabernet in Napa was in general. Even factoring in a premium for Martha's Vineyard, small quantities etc, We figured that it probably cost no more than $4-5/bottle to produce, and probably less! This at a time when a high price for Cabernet might have been $700-800/ton, or about $1/bottle in grapes)! Add in profit, however, and using the multiples that others have noted, one sees how you can arrive at $25 (tops!) for something that costs so little to produce, yet represented a much bigger profit/bottle for Mr Heitz that what most other producers were working with at the time. My take-away then, and now is that even the most expensive wine's retail is still way too high relative to costs, primarily because of this multiple profit-taking. E.G.Napa Cab purchased at $16,000/ton = $20/bottle in grape cost compared to avg Napa CS price of $5500/$6.87) plus attending maturation, processing, labor and packaging costs; perhaps an additional 50% all in. Total cost = $30. (NOTE: talks in Bordeaux a couple of years ago with a very well known Medoc Cru Classe producer suggest that even Ch. Lafite's ultimate cost/bottle is probably less than $18/bottle, excluding "marketing" costs). Double that for winery profit so FOB =$60 to distributor. Distributor to retail=$90. Retailer to consumer+ $135 or so. Effectively, a 4x over gross cost of production. If we extrapolate these margins (very generous!) to the opposite extreme, then a $2 FOB =$8/bottle to consumer, for a wine with just about $.45/bottle in grapes! Discounting at all levels in a difficult market often is necessary. Who bites the bullet the most? Depends, but I agree that the producer has the least control on the matter and perhaps the most fixed costs. Retailers often do absorb a big hit, while restaurants (scandalously)rarely lower their margins (US margins typically are 3-4x wholesale price, except in a few enlightened places where 2-3x is more common). Fundamentally, it comes down to how much profit/tier is ethically responsible. The system is weighted completely against the consumer from the profit POV, yet has succeeded (at least until recently with the advent of direct on-line sales)from the producer POV in getting their product in front of people covering vast geographic area with long supply chain lines, in the most efficient manner. No doubt Rob McMillan's figure is accurate for a vast majority of producers-Agriculture is expensive with little reliability possible due to weather and other factors. But to Bob Franzia's point(heavens!),at the higher end, SOMEONE is making way too much profit

  • Response from Larry wrote:
    20-Jun-2014 at 20:14:13 (GMT)

    Nice story. Rob McMillan gave me my first loan in the wine business and puts out a lot of good information. But I would disagree somewhat with the comment below (which is also supported in the article). I have worked 40 years with wineries dealing with distributors on one side and retailers on the other. They take the least % of all the elements noted above. Usually they try to make a living on 20% gross margins. They are also annoying and do in some cases run up the costs but it's more often in freight, which isn't broken out here as a separate category. They provide cash flow to the wineries (they are our literal customers, they send us a check) and they do get the wine into places where people never would have known about it otherwise. I don't like the 3 tier system and it surely will pass away sometime in the next generation, but to say the distributors create nothing is not true. They provide local inventory, cash flow, and sales reps who find retail/restaurant outlets where you can find things you wouldn't otherwise see. Buy wine as directly from the winery as you can by all means. But arrogance about the distribution chain is just ignorance.

  • Chris wrote:
    20-Jun-2014 at 19:01:06 (GMT)

    the shame if this model is that in the US the distributors, who create nothing, take such a large piece of the price. Eliminate that outdated system and make products available direct via cellar door or retail/restaurant. Stop these antiquated mark-up games. Better access and prices for the consumer, better profit for the creator of the product. Everybody wins...

  • Chris Wyser-Pratte wrote:
    20-Jun-2014 at 07:11:08 (GMT)

    Anything manufactured anywhere in the world and sold to retail customers through a multi-level distribution channel costs just about 5x at retail compared to what the manufacturer gets for it out the door. It's an almost iron-clad rule. That's why manufacturing cost control is so important. I used to be CEO of a company that made a consumer electronics product for recreational use. Our fully allocated cost of goods sold was $79. We felt it had to sell to the consumer for less than $350. Getting the last $9 of cost out of the thing required massive capital investment to develop a proprietary chip which would cost less in volume than off-the-rack components.I would also add that the rule holds in farming generally, not just the vineyard. Apple farmers sell apples for 39 cents a pound into a retail distribution chain that puts them on the grocers shelves at a cost to the consumer of $1.95. And that's why a farm stand, or a private wine list customer, is so profitable to the grower--he pays full retail with no middle man.

  • Wal Britton wrote:
    12-Jun-2014 at 22:31:43 (GMT)

    Very interesting article. Love the comment; 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. By the way the website does not need to be adjusted for scrolling as Ed states. It works perfectly.








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