Wine Talk

Snooth User: EMark

Cost of a Bottle of Wine

Posted by EMark, Jul 20, 2017.

The Sunset magazine that arrived today had a (very) short article on some relatively modestly-priced domestic wines.  In that article was a breakdown of one producer's cost for a bottle Pinot Noir.  The producer is Alit.  I am unfamiliar with this winery, but it looks like they are in Oregon.

  • 20.6% -- Price of the fruit.
     
  • 7.8% -- Labor--winery staff.
     
  • 16.1% -- Fermentation and aging--the winery, itself, plus barrels and other equipment.
     
  • 10.5% -- Packaging--bottles, corks, labels, boxes. . . .
     
  • 45% -- Profit.

It is only one report from one winery.  So, I have no idea how it compares to anything like an industry norm.

One thing that I would expect to see is an entry for SG&A.  It doesn't seem likely that something like that would be bundled into the winery staff number.  Maybe it's in the "Packaging" cost.

The Profit percentage is higher than I would have expected.  Of course if your SG&A is zero, that would have a positive effect on your profit.

Replies

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Reply by rckr1951, Jul 20, 2017.

Interesting, I've read other articles about this and they are similar to those numbers with a little +/- thrown. Of course those were stateside numbers and I really have no real idea what those numbers are like in the EU and other areas.

I'd be interested in reading and comparing.  Good report.

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Reply by dmcker, Jul 20, 2017.

Depending on how you define Sales, General and Administrative expenses, portions of the latter two categories could be covered by what's already shown by Sunset. Certainly, Sales & Marketing & PR seem to be missing. And what about long term debt and other such financials? So yes, much of SG&A seems spotty here.

Where is the winery located? Imagine profit margins in percentage terms are different for many Napa wineries versus already-paid up wineries in less expensive (for both land and services) locales. 

The summary does make it seem the article was fairly well dumbed down. Is there a link to it?

Stephen might be able to provide some useful generic figures for South Australia, were he so inclined. We used to have a number of European winemakers on these boards, but they went walkabout several years ago now.

To me a more interesting article might be the next step--how does the winery set its price, and then activate all its 'machinery' to make that price work?

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Reply by duncan 906, Jul 21, 2017.

I notice your breakdown does not include Duty or VAT

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Reply by EMark, Jul 21, 2017.

DM, I completely agree that this report was "dumbed down."  Sunset is not exactly a pillar of intellectual excellence.

The numbers were provided by Alit winery, which, I think, is in Oregon.  I'd never heard of it--no big surprise, there.

I looked for this article on-line, but drew a blank.  My guess is that Sunset will put it in their archive in a month or so.

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Reply by Stephen Harvey, Jul 22, 2017.

Can do for Australia

The key components for wine are as follows

Grape Cost  range $250/tonne for E Grade to $10,000/tonne for A Grade

Extraction Rate at winery range 550 litres/tonne crushed for small wineries to 750+ for big wineries [eg Gallo's big winery in Central Valley]

Winery overheads including depreciation wage costs chemicals electricity etc etc ranges from $0.35/litre in the big wineries to $4+ in the small wineries

Oak if used - French Oak 330 Litre Barrel is around $1,500/barrel depending on exchange rate, American Oak say $1,000

Wastage 4% - typically we use 9.4 Litres to make a standard 12 x 750ml case

Packaging, bottles, closure, cardboard box etc and labour cost typically ranges from $8/case to $20/case

So if I take a typical mid range Barossa Shiraz made in say a 500 to 1,500 tonne crush facility using B grade fruit

1 tonne cost of grapes $1,800/tonne

Extract 600 litres/tonne

This gives grape component $3/litre

Overhead say $1.50 litre

If American Oak with say roughly 12 months in oak on the basis of  third new Oak/third 1 year old oak/third 2 year old oak is approx $1/litre

Based on each barrel doing 330 x 3 years = say 1000 litres and cost of $1,000

Holding Cost usually about $1 per litre per year based on 2 year release cycle $2/litre

This gives finished wine at $3 + $1.50 + $1 + $2 = $7.50/litre

9.4 Litres/case x 7.50 = $70.50 + Packaging at $14.50 = Packed at $85  =  $7.08/bottle

Typically the margin to the winery should be around 50% 

Winery sell price = $14.16 say $14

In Australia Wine equalisation Tax of 29% of winery sell price takes price to $18.06

If it goes through our normal distributor retailer retailer channel then with a final GST of 10% it will sell for $40-45

Sadly most of what we pay for is tax and channel margins

Hope that is useful

 

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Reply by dmcker, Jul 22, 2017.

Well done, Stephen, thanks.

$7.08/bottle = $45/bottle. Makes sense to the distributors, anyway....  :-(

Now how do people feel paying retail price when they're members of a winery's club?

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Reply by Stephen Harvey, Jul 22, 2017.

Generally you can get better deals with wine clubs or buying cellar door

But you still pay the Taxes 

Whilst my example showed a 50% margin to winery that is a target and many are only achieving 20-30% and that is excluding selling and marketing

Probably should have gone the full distance as we also know through the benchmarking work I have done is that selling and admin costs in the bottle about add between $2-$5 a bottle

Also whilst my example is a calculated one you have to take into account that poor vintages can increase costs significantly and fixed costs are a big part which can eat up profit

Again I think it can be very simplistic to try and calculate value based on cost because once you get above about $75/bottle the cost does not increase very much at all

Also you need to consider how the winery in financed etc

All of my studies over 20 years shows that a winery must achieve a margin of around 40-50% average to be sustainable and if you can get more wine sold online/cellar door wine club etc you will improve margin but in Australia the Retail Channel to still the dominant way we buy wine by a long margin

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Reply by EMark, Jul 22, 2017.

Let me add my appreciation to your work, Stephen.

I think the 40-50% margin goal is the most interesting.  I'd always thought it was lower.  I'm not making a value judgement, here.  I love learning the truth.

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Reply by dmcker, Jul 23, 2017.

Also obvious that that winemaker's margin is greatly exceeded by what's taken by distribution channels. And we're not even talking the case of imports where it's perhaps more understandable. Looks like an opportunity for some disruption there...

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Reply by outthere, Jul 23, 2017.

Roy Piper did a good video on the cost associated with producing a $150 Napa Cab. It really comes down to economy of scale. The higher your production numbers the better the profit margin. But this is considering direct to customer sales. Distributors eat up a large portion of the profit so DTC is really preferred when you get into higher end wines. Roy covers the subject in depth in this video clip. Well worth the view --> https://vimeo.com/151466168

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Reply by Really Big Al, Jul 23, 2017.

Very good video OT.  I would like to see an extended assessment where he looks at what changes in a $100 and even $50 per bottle cost.  I'm sure the cost of the fruit goes down, as does the level of your wine maker and distributor.  It makes you wonder how wineries can stay in business in the long term if their wines are not ranked highly.

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Reply by outthere, Jul 23, 2017.

You won't see a video like that from Roy because that's not where he does his business. The majority of wineries look at the cost going in. Cheap fruit and a non-discerning customer base keeps you in business. Seriously, most wine drinkers are happy with sub-$10 wines. Producing for the masses is easier than for the enthusiast/wine geek. That's why you notice that even the ultra premium wineries (ultra premium being $35+/btl) have entry level wines offered and normally at a much higher production level than their premium wines. Gotta keep the doors open somehow.

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Reply by EMark, Jul 23, 2017.

Thanks, OT.  Once I saw it, I remembered that I'd seen it before.  It is an informative piece.

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Reply by GregT, Jul 24, 2017.

Cost of the fruit depends on whether you buy, as is common in CA, or whether you own and when you bought. And what fruit you're buying. The price for Sauv Blanc for example, is a fraction of what you get for Cab, while the other costs remain relatively constant.

And as mentioned, if you import, you have to figure all those fees into the price, so it's not just production costs.

At the end, cost and price have little to do with each other except for the fact that if the latter doesn't exceed the former by a comfortable margin, you're out of business. You charge what the market will pay. Roy did a great job.

As far as ratings go - sometimes they matter, or at least they used to. Parker could make a winery by giving it a high score. He's pretty much out of business now and nobody has nearly the same clout, so a 93 point score doesn't really mean all that much any more, since you can always find someone to give you one, and most reviewers are unknown to the public.

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Reply by rckr1951, Jul 24, 2017.

 ..."so a 93 point score doesn't really mean all that much any more"....

I agree with you to a certain degree.  For those us that don't live amongst the growth and production areas as some of you guys do, write ups are a way to help figure out things.  I give the forum here at snooth as a balance and Halcon and Rocca are examples.

However, I will say this - when you see a wine that 3,4,5 90+ pt. ratings behind it - myself and others tend to think there may be something there worth trying.  But you are right, an individual high rating isn't worth the hoopla.

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Reply by Stephen Harvey, Jul 24, 2017.

Excellent point on ratings

You almost feel that 90 is a pass these days and that its an almost Geometric progress from there

I agree that a reasonably priced wine with consistent ratings around 90 across a number of vintages is worth a try

We also see what a describe as the shooting star wine where it launches with a 95+ rating spectacular for its first vintage but fades into memory as it never repeats those highs

There is clearly a disconnect between price and cost - I suspect that DRC RC probably costs less than EUR30 to make but sells for EUR3000+ Petrus the same   Off course we need to recognise that none of these wines have the captial cost of their special vineyard sites built into their cost structures.  I imagine that the DRC VIneyard and the brand would sell for at least an 8 figure sum if did ever sell 

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Reply by dmcker, Jul 24, 2017.

DRC might even go low nine figures, depending on what billionaire was feeling the vanity. Petrus mid-eights or higher. 

Greg's point about you charge what you can get is spot on. That's why I said what I did at the end of my first post in this thread. 


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