One of the things that I find interesting about the wine industry is that there is massive price ranges. One could buy a bottle for $7 or one could buy a bottle for $200. What’s often unclear to me is how much of that pricing is driven by true costs versus markups (supplier, wholesaler and retailer).
I set out to try and understand the cost structure of a bottle of wine. For this exercise, I split it the economics into two parts: costs to the supplier and costs imposed by the three tier system. For this simple exercise, I broke down a bottle of wine into its various component parts (grapes, oak, glass, etc.) and built a simple bottoms up model to price out a case and bottle. For this exercise, I assumed that the supplier is a premium supplier that buys grapes (instead of growing them). The first part of the model is below:
While this should not be surprising, grapes dominate the price of wine accounting for upwards of a third of the the cost structure. Winemaking operations are also a massive cost bucket which includes the cost of equipment, overhead, utilities, employees, etc. That said, there is seemingly a lot of flex with the rest of the cost structure. While I was conducting this research, pricing on some of the other items like label, closures and even oak varied quite significantly. That indicates that there is some flex for a supplier to eliminate costs should they want to.
Overall, I am left with the impression that winemaking is not exactly a cheap endeavor which I thought going in to this exercise.
I’m going to continue this series in which I track the costs imposed by the three tier system. In that example, I assume a markup for the supplier and track the costs of everything from freight to excise taxes. The idea is to see how much of the final price the consumer pays is imposed by forcing suppliers to use the three tiered system.
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