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Wine ranges in price from $2 to $2000 a bottle.

How is it possible for a similar product to have such an extraordinary range in price?

And is the cost of a bottle of wine a reliable indicator of its probable quality?

 
 
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Why Does Wine Cost as Much (or as little) as it does?

Part 4 of a series mainly about Washington wine trail touring and tasting
 

Have you ever wondered at the substantial variation in cost for wine?

Have you ever worried that a cheaper bottle of wine might be 'no good' and bought a more expensive wine 'just in case'?

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

 

 

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

 

Chteau-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

 

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Originally published 15 May 2009, last update 02 Jul 2017

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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