What’s In the Price of a Bottle?

Ξ December 16th, 2008 | → 7 Comments | ∇ A Day at a Time, Wine News |

Dollar signI’ve been contemplating writing this article for a while. I’m a wine buyer for an importer/distributor. The only buyer, I say what is bought, what isn’t, pricing and when, where and how. I have an entire portfolio to build within a budget to find new and exciting wines for our market to purchase. So I kinda run a thin line doing an article about pricing.
 
The reason I wanted to bring this up is the wonderful wine consuming nation that is the USA doesn’t often really know what an effort it is get good wines to you at fair price. Being in the wine industry isn’t for everyone, very competitive, you must know a lot about your products and the overheads are high. We really do it because we love wine and want to be around it, and to say the least: I get a lot of cool points when people find out what I do.
 
Now I’m not trying to host a sad violin party for myself, but I have read a number of forums, blogs, etc where there’s a lot of moaning about the price of a bottle of wine compared to what it cost to make it. But it’s really not a big mystery why wine has markups.
 
Let’s run it down, and this really is the short version of what’s required, it all depends on your state, the states liquor sales system, as they are all different, local, regional and state legislation, and a thousand other different factors. So for the experts out there analyzing what I’ve about to say, it’s just a rough speculation, so to speak.
 
First you have to apply for an importer or distributor license, which depending on the state runs $2,000 to $10,000.
 
Then you have to have a licensed warehouse to house your stuff, license costs around $5,000 plus around $2,000 for monthly rental. Now if you live in California or New Jersey or another large wine distribution state, you can buy warehouse space. Cost depends on how much space you’re using monthly.
 
That set up, you gotta hire sales staff, sales manager, bookkeeper (who can do books and keep track of all the continually changing legislation). And whomever else you need.
 
At this point without buying any wine, you’re out about $120,000.
 
Then if you aren’t qualified to be a buyer you got to find one, someone who’s market savvy in the industry, can maintain a portfolio of hundreds of wines, keep them ordered and in stock, and appease the sales staff by continually bringing in new products for them to sell, maintaining a minimum net percentage off sales and steadily monitoring the market for pricing. There aren’t many buyers who can do it all, and they’re not cheap. I know, I am one.
 
Ego aside, okay, you got your foundation in place, but you still need wine. You then have to go find products one of two ways. Shipping containersEither through importer’s collections that aren’t being carried in your market. With the exception of Bordeaux, most distributors have exclusives on the products they carry in the market. It’s done so as not to be undercut and have your brand go into a pricing war, which is disastrous. Or if you’re lucky enough, you have enough cash and you’re an importer, you can ship your products directly from overseas. You wonder why Bordeaux doesn’t go into pricing wars with having market exclusives? Bordeaux is a chateau based market system, they maintain the prices themselves, and they don’t let them go crazy. Bordeaux likes to make money and they’ve had the system for hundreds of years it, so it works pretty well. It’s a lot more involved than that, but that’s the short version.
 
Most distributors buy from known importers first and then graduate to containers from overseas or domestically. Profit margins are much less when purchasing locally (locally meaning within the USA) then buying full containers. However, you can buy just a few cases locally to sell or a container of 10 to 20 pallets.
 
Let’s say you weren’t affected by Wall Street this year and you want to buy a container from overseas. Average cost of a container is about $80,000 for $15 retail product. Plus $20,000 in shipping and taxes to bring it into your warehouse. Domestic shipping ranges from about $500-$4000 depending of the distance and quantity of your shipment, plus extra for refrigerated shipments during the summer. Besides sales costs, transport and taxes are the highest costs associated with the price a bottle is sold for.
 
MargauxSo you get all this glorious wine you have your markups and then you give it to your staff to go sell. Well, they need marketing materials, so if you’re not savvy, you got to contract a graphic designer if your producer doesn’t give you any material. Lots of times, you’re finding unknowns and they don’t know what a graphic designer is, they just want their wine sold in the states. So you will give your contract person about 20 hours of month work. They’re not cheap.
 
Now your sales team is set. It takes about 3 months to introduce a product into your market. All the while you’re sitting on existing product you’re ordering new products to keep a balance in your stock levels. The absolute worst thing you can do is run out of stock. So you end up keeping a minimum of a months worth at any time so your staff doesn’t freak out when they lose sales.
 
And lastly, when you buy that wine, it’s yours, you can’t return it. You have to make it work, it’s a heavy burden and mistakes in predicting what the market is going to like is quite costly. It’s quite risky.
 
Of course then you say why do restaurants have high markups? I personally don’t believe in the 3 times markup and I don’t frequent restaurants that have it. When I do, I make sure it’s an expensive restaurant and I buy a high dollar bottle because I get more value because the markup isn’t 3 times on expensive bottlings. I’ve actually found some bargains even compared to what a retail markup would be. But you say I have an advantage being in the industry; that’s true, but I was a “civilian” at one time and I learned pretty quickly what I liked to drink and what is cost retail versus in the restaurant.
 
I don’t begrudge a 1 or 2 times markup though because, the same as a distributor, if they want to have a good wine list, they have to build a cellar which can cost upwards of $30,000, plus training for staff, sommelier on staff or more than one sommelier on staff, that is preferred. Then they have all the time dedicated spending with various distributors finding products that meet their image. It costs a lot of money a year maintaining a good wine list. I mean a lot, anywhere from $30,000 to millions. And many of the bottlings need aging, so they aren’t making any money with the bottles waiting in the cellar waiting to be ready to drink. But they know better customers drink wine and spend more money. So a wine program is a must for any decent restaurant serving entrees $13 and over.
 
Retailers for the most part are pretty good with their markups, however, there are some I would never buy from. In order to make sure you are getting a fair price, fair is within 15% of the market price, you can find out on wine search engines like www.winesearcher.com. If the wine isn’t listed, then bargain; your retailer might have an exclusive and it shows they look for rare and unique products. I’d keep them if I were you as they obviously dedicated the time, energy and money into looking for interesting products. From my perspective, I look for cool stuff for these guys. I love them. Gives me a chance to find some super neat stuff and there’s a lot of neat stuff out there.
 
So I’ve given you a peek at my world. The next time someone grumbles at a wine costing $$$, once they know where came from and that upfront costs are half that price, they might now understand why it does. Keep it in perspective! Compared to the real costs, it’s still pretty cheap.
 
Donna

 

7 Responses to ' What’s In the Price of a Bottle? '

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  1. Alfonso said,

    on December 16th, 2008 at 9:42 am

    Great post! too many mis-informed folks on the internet assume all importer/distribs are evil.

    And with the current crunch, in all scales, it’s a challenge.

    Hang in there!

  2. mydailywine said,

    on December 16th, 2008 at 7:49 pm

    I thought you were going to write about how much it cost the wineries to produce a bottle of wine.
    Importers and distributors are clearly hard working, wine-loving folks. I know because I have worked for both.
    But all of this makes the direct to consumer model mighty attractive. Free the grapes!


  3. on December 16th, 2008 at 10:12 pm

    The direct to consumer model allows retailers to ship to other states within the USA. It gives the consumer access to out of state retailers who buy all their products from distributors.

  4. Marcolo said,

    on December 17th, 2008 at 9:24 am

    I understand how it can cost so much to bring an imported wine to your grocer’s shelf. I’m just a simple domestic wine maker – with all the costs involved, how do you explain a $2.99 bottle of imported wine?

  5. Morton Leslie said,

    on December 17th, 2008 at 10:45 am

    For balance you possibly forgot a couple offsets to your risk in “building brands”, like supporting politicians who pass laws effectively giving you a lifetime franchise on the brand irrespective of how well you sell it, leaving it to the supplier to pay the fees and weave its way thru the bureaucracy you created at the state level, the charging back to the supplier for your costs like routine samples, charging off a case or two samples and the price of a table and participation at your company’s annual trade tasting, charging back portion of print advertising, asking the supplier to support your local charities, extending payment terms unilaterally to 60 to 90 days, coming back for depletion allowances or other sales incentive programs at the suppliers cost when the wine doesn’t sell itself, spinning off slow selling items luxury wines that you stored (in your un-airconditioned slum lord warehouse) at below your cost to the bargain bin discounter forever destroying the suppliers price point in the market, then coming back and complaining to the supplier their wine won’t sell at that price, buying and promoting what scores well in Parker or the Wine Spectator, not buying or promoting when it doesn’t, arranging for a winemaker dinner at one of your better customers, getting the winery to provide special wines and fly in the winemaker, make sure there will be no literature or information presented about direct to consumer sales……then at the last minute fill the small room with your own personnel since no one made any effort to sell the dinner to real customers. I’m sure I have forgotten a few, but I only had a minute.


  6. on December 17th, 2008 at 10:57 am

    How do you explain the phenomenon of Charles Shaw?

    I personally haven’t seen a bottle of current vintage imported wine for $2.99 in a long time.

    I’ve seen closeouts getting rid of small amounts of old unsold vintages for that price.

    Basically you have the ways and means to produce over 150 million bottles of wine. Then you rent the ship that brings it over. The more you transport, the less it costs. Which is about 11,000 containers something like that. You’re gonna get a good deal versus 1-20 containers.

    BTW, there’s nothing simple about being a domestic wine maker. Hat’s off to you! Most of my portfolio is small producers with less than 2,000 case productions.


  7. on December 17th, 2008 at 11:09 am

    Morton,

    Luckily I have 3 well air-conditioned warehouses. Where I’m at wine is considered a food product and must be treated as such. Unconditioned slum lord warehousing not allowed. That aside. I personally in my years of being in the industry have never experienced any of what you described. Certainly never had to fill a dinner with my own staff.

    But it does describe additional expenses some winemakers and their distributors must do to promote their products.

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