The Wine Blokes

Jon F.

 The other day I was speaking to a friend who worked vintage in a winery a few years ago, just to try something different. He’s in the construction industry, and had no previous experience prior to working vintage.  He was telling me how he used to think wine was a rip off and couldn’t understand why a bottle of wines cost so much, and why the range of prices was so large.  After working in the industry for a short time, he now understands, and now says he sometimes can’t fathom how a wine could be so cheap.

So it got me thinking that many wine consumers must have similar views.  I will briefly run through some the associated costs with making wine, and it may give you a better idea of why it costs what it does, and that in a lot of cases, you are getting extreme value for money, compared to plenty of other commodities.

Bear in mind, this summation is based on Australian conditions, and assumes the producer has purchased the land, set up a vineyard, built a winery, and is attempting to sell the product.

1. Captial Infrastructure: 

Can you think of any other industry that takes up to 5 years before it generates any income, and between 10 and 20 years to break even.  There arn’t many, and you’d have to be crazy to try and make a go at anything with these ROI time frames, right? This is the wine industry.

 Producers can spend millions of dollars on a very modest setup before they have even harvested any grapes at all, and add in the unpredictability of climate, pests & disease, and markets, and you’d have to be nuts to attempt it.  Maybe this is why the Wine Industry has the most amazing array of characters, because you have to be a little crazy to be in it at all.

Capital costs to start up will include:

- Purchase of adequate land

- Planting of vineyard including irrigation and trellis systems

- Purchase of vineyard machinery

- Building of winery

 Lets just assume a couple of million (at least), for say a modestly sized 20 hectare vineyard capable of producing 14,000 cases of wine annually.

2. Cost of Grapes:

The cost of producing the grapes varies depending on variety, region, and market.  It can cost up to $400 / tonne in warm irrigation areas, to $2000 / tonne in cooler climates where pest, diseases, climatic factors, and lower yields all impact on cost. Some typical vineyard costs include, labour, machinery operating, pest & disease control, harvesting, and irrigation.

 So lets say $1500 / tonne cost, and a wine yield of 700 Litres / tonne, that’s approx $2.15 / Litre of wine just for the cost of the grapes.  Bear in mind that this only includes the grape cost for that year, and does not include any capital expense.

 So far we are at $2.15/L 

3. Winemaking Costs:

Winemaking costs are quite variable and depends on the scale of operation, and the style being produced.  A large winery with cost efficiencies and producing a style to be drunk soon after vintage might be able to achieve a cost of $0.20 per litre. A smaller producer who matures the wine on French oak barrels for 18 months could have a cost of up to $2.00 per litre.

Accumulated Cost: $4.15 /L

4. Packaging Costs:

Packaging costs are a major consideration for Australian wine producers and distance, monopoly, and small scale of dealings with cork, bottle and carton manufacturers make it a very costly exercise. General packaging costs range between $2.00 and $3.00 per litre.

Therefore the cost of production can range between $2.00 and $10.00 per litre.  We will assume around $3.00 / litre.

Assumed Accumulated Cost: $7.15/L

5 . Wine Price

Most winemakers would be looking for a ROI of around 20%, or $0.20 / wholesale $1.00. If we then factor in general sales expenses such as freight, distribution, marketing, and storage of around $0.25 / $1.00, a gross margin of around 45% is required at the wholesale level. 

Our criteria is based around a mid range bottle of wine and if we assume production costs of $7.00 per litre, plus 45% = $12.72 AUD wholsale.

In Australia, producers pay 40% WET (Wine Equalisation Tax) and the retailer adds around 45% margin on top of that.

Therefore this bottle of wine should have a shelf price of $57 /L

Or  $42.75 / bottle, or $513 AUD per dozen.

So just for the winemaker to make 20% return the wine must sell for $42.75 in the shop.

 How many wines sell at this price and above.? I can tell you the pyramid is very pointy at this end of the price range, and very few can do it consistently.  More than likely this bottle of wine would sell in a retail bottle shop from between $25 and $30 AUD. 

Who is loosing money?  I can guarantee it’s not the retailer, or the distributor or the marketer. You guessed it, the producer has to absorb the loss, decreasing their return just to stay in the market.

Now this example is quite ambiguous, but it does give you an idea as to why wine costs what it does, and in a large majority of cases, the consumer, you, are getting fantastic value for money.