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  • Alexander Smith

The price of wine, a short story

Wine can be purchased anywhere from $2 up to $1,000+ upon release. The latter can then go on to sell at an even higher price in the secondary market. When you look at the nuts and bolts of the operation it was recently discovered that it costs a top Bordeaux producer no more than $50 to produce their $1,000 bottle of wine, that is a markup of 20x! These markups are crazy, however the price of wine is driven mainly by one factor. Supply and demand.



How can those across the globe justify to spend a $1000 on a bottle of wine which costs less than $50 to produce? It is a question which very few will have an answer for. I believe there are a few answers.

1) Those who are wishing to re-sell at a premium, hence this would be an investment

2) Those who are looking to have a certain prestige with owning these wines (who would buy it in the secondary market at a premium, and further into it's drinking window)

3) Those looking to experience, understand and learn from these historic and famous wines.


So let me get this right, Bordeaux, Burgundy and Napa wineries are charging over $$$ for a bottle which will cost barely $50 to produce? Yup, pretty much. What is interesting is that one of the main factors in the 1855 classification of Bordeaux was the price of the wine. The higher the price, the higher in the classification you were able to be, makes sense right? Absolutely not ;)


There are other factors to consider as well, which is why we could consider a bottle costing more than $50 to produce. Additional costs such as equipment, winery and land are not factored in. The additional capital you have on top of the above price allows you to improve the quality of your facilities and hence the end product. So as long as the final product improves most consumers would agree that paying a premium is probably worth it. Let us dive into the different factors which increase a standard bottle of wine.


Land prices: When we look at land prices, we have seen the largest increase in Napa, where an average acre is around $400k. With an average acre producing 200 cases of wine, you can quickly see why the cost of a bottle of wine is increasing at a rapid rate. For new wineries, it takes years to get a return on your investment (and most never do!).


Equipment: Technology is constantly improving and to ensure you are on the latest trends, new equipment is constantly needed. Sensors, optical sorting machines, drones, frost protection methods, hail protection methods and bottle authenticity all cost the additional $$ which smaller and lower cost wineries can't afford to have. Everyone can produce good wine is good vintages, it is the difficult vintages which show the men (or woman) from the boys (or girls!) and sometimes that additional optical sorting machine can make or break your year. Olga Fusari, winemaker at Ornellaia, told me she would not have been able to produce a wine of such high quality without the optical sorter in 2017, it would have been too difficult to select the right grapes one by one. The optical sorter is unique since it is able to distinguish the quality of the grapes by scanning the inside of it! Here is a short video of this amazing piece of technology:




It is important to note that not all wines produced cost $50, and you can produce wine at less than $1 a bottle assuming you cut most corners and use machine harvesting, high yield varietals/clones, fertilizers, no oak, cheaper corks, bottles etc. However for those who are looking to produce premium and quality wine, a certain additional cost must be added to the final price of the bottle.


Now you know the factors that go into a bottle of wine, you have a better understanding why a bottle of wine may cost $30, $100 or $1000. There are exceptions to this rule, and more often than not a $1000 bottle might be only worth $100, and that extra margin may be due to an appellation or name on the label. Below I have given a high level overview of the different price points and what should be expected and why it is at that price point. Again with so many different variables it is impossible to generalize, however this give you an idea of what to expect.


$10

Mechanical harvesting

No oak

High yielding

Low retail estate (certain areas of Spain, Australia, U.S and South America)

Little sorting in the vineyard

No consideration towards the environment

Bulk production


$30

hand/mechanical harvest

second use oak

lower yields

medium retail estate (many many regions)

can be made with a certain environmental consideration


$100

hand harvesting

1st/2nd use oak

low yields

excellent retail estate

detailed sorting in the vineyard/winery

Made with environmental considerations


$1000

What is in a $100 bottle+

highly detailed sorting (including optical sorter)

highly priced retail estate (Napa, Bordeaux, Burgundy)


So at this point, some readers will still ask the same question as before: why would I pay more than $15 for a bottle of wine? A good comparison to make would be a restaurant meal. Why would someone pay $1000 for a meal when they could have a Macdonald's for $10. If you can't answer that question, then your reading is done ;)


This brings me to my second part of the discussion. Increasing wine prices.



I will now try to stay neutral and not call out clear offenders, however most of the wine which cost $500-1000 today, cost less than $100 15 years ago. There is no reason why these wines should increase at this rate, period.


Over the last 15 years we have seen a dramatic increase in prices in both California and Burgundy as both of these regions see an increased interest in their wines. Even though quality has improved, most of this increase is due a few wine critics, notably Mr. P, for both good and bad reasons. Burgundy will argue that vintages have been tough in recent years and that the consumer is driving up the price of the smaller than average yields, and not the producer.


As a consumer I am more than happy to accept up to a 5% increase in prices on a year by year basis with an increase in quality, however I am finding certain wineries will significantly increase their prices without an increase in quality. I have dozens of examples where within 5-8 years a price of a wine has increases by more than 50% yet the quality remains the same. On the other side of the coin, some regions remain very flexible in pricing. Bordeaux remains a fantastic example and how prices will vary depending on the economic climate and the quality of the vintage. The 2017 vintage is already struggling to sell in the secondary market, and with cellars stocked of 2015,2016 and 2018 a reduction had to happen, and it did with the 2019 vintage. When I turn to California very little reduction in prices (if any) are seen with the upcoming 2017 vintage which is less impressive than the 2016 vintage, however with the price of land, manpower and upcoming global slowdown, do they really have a choice?


Pricing of a wine in 2020 is extremely challenging, mainly due to the balance required between the quality of the vintage, improving the quality in the winery, economic climate and keeping your loyal fans loyal. There is a certain balance and one which is difficult to achieve. There are wineries across the world that I will buy wine from every year, and I will be happy to buy as long as prices remain reasonable and that any significant increase in price is justified with an increase in quality. If this is not the case I am more than happy to take my loyalty elsewhere, I am sure others agree with me.


Summary: I have no issues with increasing prices, just make sure it is justified and quality follows, not greed.

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