Economics of the wine business?

Hi all -

I’m a wine consumer who’s curious to learn more about how a bottle gets from a vintner to my table, and how the economics work, especially with the three tier system. (Yes, I was an econ major, and this is what runs through my head when I pop a cork…) Anybody willing to offer some perspectives on how the pie gets sliced and who gets what revenue?

I’m particularly interested in the importer (though a complete picture would be great); I think I understand the retailer and distributor roles decently well. How does the importer get paid? I’ve seen posts on other forums that say importer revenues vary from a 10% to 30% markup to just $3 to $5 a case to just marking up the brand registration fees. Is that the difference between a national and state importer? Does the importer really get paid more if the wine is more expensive? And what services does the importer provide for those fees?

Super-interesting, and thanks in advance for any thoughts!
Andrew

That’s a big question, Andrew, and it’s different for different regions. Are you talking primarily of the American system with American wines?

Thanks for asking for clarification, Todd - though I’m not sure I’m educated enough to know how to answer your question!

I really started thinking about the question on a trip to Italy a few years ago, so maybe that’s the right place to start. If I buy a bottle of Chianti for $20 in a wine store here in the US, how much of that does the vintner see vs. the importer vs. the distributor vs. the retailer? Or the national importer vs. the source of supply in my state?

Hope that helps - if not, let me know how else I can clarify.
And thanks for taking the time!
Andrew

Well I’ll bite from a U.S. standpoint.

Where I worked in CA, we expected the cost of the wine (grapes, barrels, winemaker, storage, etc) to be roughly 25% of the retail price. Sales, administration, and profit made up the difference between that and FOB, which was roughly 50% of retail. The distributor sells to the retailer at roughly 65-70% or retail, and the retailer gets the rest (and obviously offers any discounts out their cut).

Here is an example for a wine retailing for $24,
Wine & winemaking - $6
Sales, Admin, Profit - $6
Distributor - $4
Retailer - $8

Your mileage may vary.

Rick,

Do you know what happens at the extremes? For example, how would this breakdown change for a very inexpensive wine like Charles Shaw on the one hand or for say Sloan or Screaming Eagle on the other?

I’m afraid I don’t know. The winery I worked for had suggested retail prices ranging from $12 (which FOB’d at flat to production cost) to $50 (highest margin product we had). I will say that buying and processing grapes from Napa was significantly more expensive for us than the same in Sonoma or Mendocino Counties, and we bought almost all our grapes. I suspect that at the lower end a lot of the blend comes from purchased wine.

I’m particularly interested in the importer (though a complete picture would be great); I think I understand the retailer and distributor roles decently well. How does the importer get paid? I’ve seen posts on other forums that say importer revenues vary from a 10% to 30% markup to just $3 to $5 a case to just marking up the brand registration fees. Is that the difference between a national and state importer? Does the importer really get paid more if the wine is more expensive? And what services does the importer provide for those fees?

Let’s look at the steps.

The importer buys from the winery. Sometimes wineries offer terms like 30 days, 90 days whatever. Sometimes they want 1/2 up front and 1/2 when the boat leaves the dock. Sometimes they give it to you on consignment.

As an econ major, you realize that all of those result in different costs to the consumer.

So let’s look at some of the considerations that affect the price you pay at the store. Keep in mind that you can be an importer, a distributor, or both. These are part of the middle tier of the “3” tier system, which is really subdivided more than that in many cases.

  1. Most basic = cost of goods at the winery.

  2. Terms offered, if any.

  3. Cost of the transport company to clear the wine at the European end.

  4. Refrigerated transport? It’s not that much per bottle, but it’s an additional cost.

  5. Size of container. If you load a 20 foot container with your wine exclusively, it is cheaper to ship than if you only have a few pallets and the rest is filled with wine for a different importer.

  6. Ports. Some ports are just pains to ship from.

  7. Brokers fees, if any

  8. Customs and clearing fees and taxes on arrival

  9. Self-stored or not. The importer clears customs and takes it to his warehouse. But sometimes he’s small and he pays someone to do that. If he’s paying another party, that party will charge him every time he touches a bottle.

  10. Self-distributed or not. You want samples to show customers? Delivery made somewhere? If you are not storing and distributing yourself, you pay. Also, you’re not licensed to distribute in every state, so if you’re multi-state, you have another party that needs to add his piece to the final price.

  11. Union. The big distributors may be union shops with high labor costs that need to be figured in. If you’re an importer/distributor, you are affected by those. If just an importer, then they’re a function of who you distribute through.

  12. Volume. Wineries may offer volume discounts and distributors definitely do. That affects the price you pay in the store, but also the mark-up and margin made by the distributor or importer.

So say you’re an importer/distributor. In other words, you own your own warehouse and delivery services. Your 1 case price to retailers is $120. A wine shop that buys a single case will price accordingly. If the shop takes 25, 50, 100 cases, it’s not going to pay $120 per. It’s price will be closer to what you paid at the winery. How did we get to that $120?

Everyone has a different formula for calculating their mark ups. Roughly speaking, you figure the bottle on the shelf will be around 3-4 times the price it cost the importer at the cellar in Europe. That doesn’t mean you yourself can go over there and buy all of your wine at those prices though.

One reason you hear different things is that people do use different formulas. One guy might take his landed cost and divide that by .68, which is his price for selling to the distributor. The distributor tacks his own price on. Say he also divides by .68 to get his front line price. If the importer is his own distributor, he probably won’t mark it up as much and the wine will be cheaper in his state than in the state where he hires a distributor.

Another guy might take 40% over his landed costs, or 30% if he’s working at lower margins.

For his money, the importer will have made sure the wine has label approval, will pay import duties, VAT and excise taxes, brokerage and logistics fees and clearing agents fees, any other government or customs fees, inspections, freight and insurance, currency conversion, Customs bonds and fees, demurrage if applicable, warehousing and storage, reloading on trucks and domestic transportation, reloading truck and delivery to customer destination, and in NYC, the fines that every delivery vehicle gets each day. Those are a major source of revenue for the City, so it’s important to calculate them into your cost structure.

So a bottle that costs $5 at the cellar can go to the retailer for over $10 and then to the customer for about $15. But figure $10 avg because the retailer will be getting some kind of volume discount. We figure a bottle that is $2.75 at the winery should be on the shelf at just under $10. When I look at the store prices, I see that wine from $8.99 to $11.99.

Importers, distributors, and retailers all work on their own models, so there’s plenty of room for variance in prices and margins at every step.

Wine is a low margin commodity from a retail standpoint. Average margin is probably 25%. In competitive markets it can often be lower. Higher at convenience stores. The small wine shop has the worst scenario: highest cost of goods due to buying in small quantities (compared to big stores and grocery store chains) and higher overhead per sq. ft.

+1. There are lots of good things about owning a small wine shop, but financial reward isn’t even on the list.

[cray.gif]

I don’t own one but I’d like to one day and this makes me sad!

Don’t worry, there are other perks. 1. You have a great cellar to choose from. 2. Vendors want you to taste wines, its just knowing which ones to taste. 3. Continuous wine education. 4. Berserkers show up with/without wine and something just has to be sacrificed to the Berserker way of friendship. flirtysmile grouphug

OK sounds better already…

Ironically, I just finished reading this post by Dr. Vino complaining that everything is great about small wine shops EXCEPT that they overcharge! Either you can’t make enough money or you are overcharging… headbang

When small wine shops are great-and when they disappoint - Dr Vino's wine blog Dr Vino's wine blog" onclick="window.open(this.href);return false;

Our shop is only 1/2 mile from one of the largest wine stores in southern California (one of the most competitive wine markets in the US.) We can’t over charge or we would have no business. I agree with the perks of being ITB. The cultural enrichment and people are definite benefits.

I’m only 2 years into the experiment but I think wine is one of the most difficult retail products and developing a client base is a very long process.

PS. All Wine Berserkers are welcome to visit us! Just say you are a Berserker, and I’ll give you 25% off tasting flights!

It’s not that they’re overcharging, their costs are simply higher. If you tell me you’ll take 2 pallets of a wine I show you, clearly I’m going to give you a better price than someone who takes a case or two.

That’s unfortunate, because the price shopper is often going to pass on your store as a result.

Of course, it’s not always that simple.

For example, there are 2 stores that are w/in a few blocks of each other and people in the neighborhood know both. One has been there for 20 - 30 years. It’s run by immigrants. They are very responsive to customer requests, but make absolutely no pretense to knowing the first thing about wine. They sell a lot of lottery tickets and half-pints but if you were to request any wine, they’ll get a case for the store and if it sells, they’ll continue to stock it.

The second store is newer and flashier. It’s the “hip” store, holding tastings, classes, on all the social media, etc. No lottery tickets. They also sell liquor, but it’s not their focus. The neighborhood has completely gentrified, which is why the store opened. People walk past the first store to get to this one.

Both often buy the same wine in large quantities and consequently get substantial discounts. The immigrant store pays its bills immediately so even gets an additional discount. They also own their own building and don’t have high rent costs.

The second store? They get a discount but sell as if they only buy a case at a time. That keeps them within average prices, so nobody complains. And of course, nobody knows that their margins are super high. But then maybe their non-wine costs are a lot higher too, so their net profit at the end is lower than the other guys.

The first store completely undersells them, but the “wine-lovers” don’t go there so they have no idea that they could buy the exact same bottle for less just 2 blocks away.

We sell a lot of wine to both, so I know their cost of goods. But there’s a “cool” factor, which is really a kind of snobbery, that can make people completely blind.

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One positive for small wine shops in Oregon is that the state dictates that prices must be the same to all retailers. There are a few ways around this, but for the most part, wine is available to all retailers at the same price.

Wow. I think I might move to OR!

Wow. I think I might move to OR!

Why does this appeal to you?

…because, I’m in CA and I’m fantasizing about having place where everyone pays the same wholesale price. It would be nice to compete solely on experience and service.

That is just simply not the American way…

That’s why we don’t have anything like BevMo up here, and we have a lot of really good small wine shops.

By the way, the way to get around this is for a Distributor to set a special price for something one day and have a single retailer buy it all immediately.