The Price of Wine

In my previous post, I stated that price has no fundamental bearing on a definition of Fine Wine: at DFW, we call Fine Wine what can be directly and verifiably traced to very specific, well farmed vineyards and very specific, capable and passionated winemakers - that's all. I define it that way because I want the selection of our wines to be driven by natural pedigree and quality considerations, rather than by considerations around markets and prices.

However, and obviously, price is both important and limiting to most of us. But even more, and after all, there must be such a price, below which a wine could not possibly, by any means, be called a Fine Wine, right? Well, yes, of course there is - and we'll address that, today with this article. Ultimately, the larger purposes of this post are to (1) provide fundamental elements to this audience about the most relevant factors that impact the retail price of wine in the United States at this point in time; (2) presenting reasonable price ranges that wine consumers can expect for products subdivided in various useful price categories; and finally (3) how does Fine Wine relate to those pricing categories. 

Introduction: Wine Price Categories

As a first definition, by 'price of wine' here I mean the dollar amount charged to a consumer for a standard 750 ml bottle (or equivalent) of wine, when bought in person from a licensed retailer, to take away. The table of commercial categories used at Delfino Fine Wines (which is not very different from information that can be found from various other sources) is as follows:

Commercial Category	Retail Price of 750ml
Super Value	$4.99 and under
Economy	$5.00 to $9.99
Popular	$10 to $19.99
Basic Premium	$20 to $39.99
Super Premium	$40 to $79.99
Ultra Premium	$80 to $149.99
Luxury	$150 to $999
Exclusive Luxury	$1,000 and above

 

Thus, a 'Super Value' is defined as a wine that retails at a store for $4.99 or less per 750ml, and 'Economy' is between $5 and $10; a 'Popular' wine is what you can buy at a store for $10-$20; 'Basic Premium' is between $20 and $40 and so on into a couple more Premium price categories, up to what we define here as 'Luxury' priced wines, retailing between $150 and $1,000 per 750ml. Finally, regarding the most expensive category of 'Exclusive Luxury' wines, defined in the table as priced at over $1,000 per 750ml, these are exclusive products in the true sense of the term, meaning that these wines are just not readily available to anyone with the money but instead often requirie prior allocations, introductions between the parties made through trusted intermediaries, and some varying levels of negotiations and agreements between winery and clients, either within the centuries-old winemaking aristocracy, or the emerging stars panorama - in these cases, the wines become iconized and reach disproportionate greater demand than these small boutique operations can and want to supply.

Now, a few clarifications and elaborations on the table presented above are needed.

• First of all, the pricing table presented above applies to wine retailed in the US, pre-tax, and in a very generic fashion. In particular here, variations between different US states and markets certainly occur, but are not that large in my experience, especially for products that are mass-produced and mass-distributed (i.e. not Fine Wine per my definition).
• The pricing table also lumps together and does not distinguish between the many types of wine. At an elementary level, it does not even differentiate between white wines and red wines, or still and sparkling. Intuitively, and factually in most cases, still red wines vinification is generally more involved, i.e. more expensive and riskier, than still white wines vinication, thus feeding the general knowledge that, for equal 'quality' (let's say, same winemaker, same land), the red wine will retail at a bit higher price than the white wine of the same producer line. Similarly, a sparkling vinification is generally more involved than a still vinification and thus generally more expensive for the producer, and more pricey for the consumer. Although those are all valid points, there is still a lot of use in the single pricing table presented above: from a simplicity point of view, first of all; and moreover, also considering the fact that the reported values are a depiction of some extent of "semi-official pricing segmentation" in the US wine industry. In other words, the table reflects the fact that in the US, it is more likely to see a white and a red from the same producer / same brand line, priced at say $25 and $35 respectively ('Basic Premium' range), than it is to see them priced at $35 and $45 (across two pricing categories); more likely to see $60 and $75 ('Super Premium'), than $75 and $90 (across ranges). 
• Third point. The prices in the three lower categories - Super Value, Economy, and Popular - are driven by production costs and as low as possible. The prices in the Premium and Luxury categories are driven by (1) consumer's demand and taste of the wine (in first place, ideally); (2) industry recognition and awards received (in second place, ideally); and by (3) the 'halo' of desire created by marketing activities (in last place, ideally) - however in different relative proportions from case to case. A "graduation" of a brand or product from lower to higher 'Premium' and 'Luxury' categories must necessarily be backed by increased metrics on at least one of those three parameters, and preferably increased on both the first two as listed, if any chances of long-term success are sought. 
• No shipping fees are considered in the pricing table as presented. Shipping fees by online retailers are sometimes embedded in online prices, and sometimes even waived, perhaps based on order's quantity (and with some states, as for example California, specifically regulating the terminology aspects, i.e. "shipping included" is OK vs. "free shipping", not OK) but in all cases, it is undoubtful that direct-to-consumer (DTC) shipping brings considerable added costs to the retailer. These costs include DTC licensing fees, reporting requirements and privilege taxes at the States level, shipping materials and staff time for custom packaging, and then the shipping fees charged by a licensed carrier. Without entering into multifaceted dynamics of costing-pricing in wine economics, retailers margins and business models, online-only or brick-and-mortar + online shipping, next-day or same-day or even two-hours wine delivery by large grocery stores in metro centers, etc., the point I want to make here is this: unless shipping is explicitely and separately quoted, or unless it's an obvious and recognizable promotion (in which case the retailer decides to take on themselves the shipping expense thus reducing their margins, in part or whole, for a limited time or permanently on specific products) when buying wine online and especially from online-only merchants, you should assume that 'free shipping' or 'shipping included' means about $5 per bottle for shipping, to be subtracted from the wine value. So for example, let's consider a 750ml bottle that is offered online at $13.99, total price delivered to your place (i.e., shipping included, or 'free shipping'). Looking up our table above with $13.99 would indicate that this bottle is in the 'Popular' price category; however, accounting for the shipping/delivery costs (again, to be considered in the vast majority of cases, only excluding exceptional deals and promotions), I would actually consider this $13.99 bottle, total price delivered home, as an 'Economy' wine in the $5-$10 range (if US produced) or even sometimes as a 'Super Value' wine under $5 per 750ml (if imported - next bullet).
• For imported wine, the importing cost from a producer abroad into the US trade is an adder that is ultimately embedded in the retail price, in a way or another. We should keep in mind that such importing costs are both 1) greatly increased (i.e., doubled or more) after the Covid-19 international supply chain impacts, still unresolved as of the time of this writing; and 2) strongly dependent on whether the imported wine was finished and bottled (or otherwise packaged for retail) abroad, or if it was instead imported as bulk wine in shipping totes or tanks, and further processed, bottled/packaged later by a separate licensed facility in the US (which brings on processing and bottling/packaging costs in the US and also which, by our definition, would be an exclusion to the 'Fine Wine' definition). About the second point, transportation costs are about half if wine is bulk transported in large totes or tanks, than if it is transported in glass bottles: a glass bottle is in fact just about a 2x multiplier on both volume and weight of a wine. In practice, my suggestion for imported wine is to subtract $2-$3 (imported in bulk and further processed/bottled/packaged in the US - read the label!) to $5 (bottled at the origin and imported fully finished) per 750ml, from the retail price in order to find the value to enter in the table above and determine the wine price category.
• The previous two bullets can be summarized with two examples as follows:
  • A US wine that retails for say $17.99 in a brick-and-mortar store is in the same category as an imported wine (bottled at the origin) that retails at $22-$23. Specifically, they should be considered as both belonging to the 'Popular' pricing category ($10-$20).
  • A US wine retailing online at say $13.99, shipping included, is in the same category as a bulk-imported wine (further processed and bottled/packaged in the US) retailing online for $15-$17, namely both of them should be considered as belonging to the 'Economy' price category ($5-$10).

Just a Bit Deeper on Price and Cost of Wine.

Now let's expand a bit more on the pricing categories defined in the table above, with an end in mind: how does Fine Wine relate to these categories? In order to address that goal, we now need to take a look at the cost of wine, which we'll define here as the dollar amount that can be directly attributed to making one unit of wine, taken as 750ml fully finished at the winery (or at the final step of a producing process with multiple facilities) and ready for the market. It should be clear that this topic too is very complex and hardly adaptable to a generalized analysis and narrative. Here, I'll state just a few, bounding assumptions and then will just proceed to reporting the results of simplistic and rough estimates, with very large ranges, but still reasonable and useful for the low- and high-ends costs of making a bottle of wine.

We consider the following as the main adders to the cost of wine:

• 1. The cost of the grapes to be made into the finished wine; or the cost of bulk wine bought from someone else, to be processed into a finished wine product. The following are the costs that we will assume as low- and high-end, for the US: 
     • The cost of the grapes needed to make wine ranges from $0.30 to $30 per 750 ml 
       • Note: these are not absolute minimum and maximum, as outliers exist on either end. However, these values can be considered as bounding of the large majority of situations for the purposes of this discussion. Moreover, this is based on the cost of grapes on the US winemaking market with a very wide range of about $200 to $20,000 per ton, thus it generally bounds on the high-end the lower expected (but not always realized!) grape costs for those winemakers who are also growers and use their own grapes. This range also covers the cost of wine grapes cultivated and used abroad, which generally amounts to much less than the US costs, especially on the higher end of the range.
     • For bulk wine processors/bottlers, the cost of 750ml of input bulk wine used to make a finished commercial wine product currently ranges in the market from $0.40 to $25 per 750 ml.
  2. The cost of the "consumable physical resources" (energy, water, process materials, containers and cooperage, other materials, time in settling/aging) and the human labor needed to make the finished wine from input grapes, or from input bulk wine. Again, a very complex topic, highly situation-specific, but this is what we'll use with our rough, simplified and bounding estimate:
     • The cost of consumable physical resources and labor used to make a finished wine product ranges widely from $0.20 to $20 per 750ml. 
  3. The cost of packaging incurred to make the finished wine. We will use a wide range of $0.50 to $10 per 750ml of finished product.

We will not consider in detail any other costs, mostly indirect (of which there are many - real estate, capital equipment, licensing, financial, commercial/banking, insurance costs, etc..), but instead we will use a 1.5x multiplier on the sum of the three adders, essentially assuming that the three elements listed above only account for 66% of all costs.

This simplified and bounding estimate finally results in a cost of making wine ranging from about $1 to $100 per 750ml of finished product. The lower end of the range estimates the cost of mass-producing wine in large, industrial style processes, while the higher end of the range estimates the cost of making wine in a boutique winery with 'luxury' selections all-around. To my knowledge, this range, obviously very wide, bounds the majority of information derived from more rigorous economic analyses, which in some instance are published, but that in most cases are kept business confidential. Typical producer costs per finished 750ml that I've directly seen or indirectly calculated are:

• Between $1 to $5 for industrial wines (let's say worldwide, for the purposes of this discussion).
• Between $2.50 and $20 for Fine Wines made in the Old World.
• Between $5 and $50 for Fine Wines made in the US.

I realize that I am not addressing any New World Fine Wines from South America, South Africa and Oceania (plus a few other wine-making regions) and hopefully I'll be able to add that specific information in the future. For this discussion, however, imports from these regions can be considered as Old World wines (i.e., it is generally less expensive to cultivate grapes and make wine in those regions than it is in the US; then, they need to be imported into the US). Now, considering that about 90% (order of magnitude, see previous post) of all wine in the US trade is of industrial nature, it can be argued within the assumptions made here that for 90% of the wine products in the US market, the cost of making a finished 750ml of wine at the producer level is $5 or less, while the remainder 10% of products is distributed in a wide price range of $5 to $50+ (not uniformely, but tailling off significantly; i.e., very, very few commercial producers are making wines costing them $50 or more per finished 750ml, and when they do, it is for very small batches sold in the 'Luxury' price categories). 

Finally: The Price of Fine Wine.

The details behind the estimates above may be reported in a following post, but now we'll proceed to assess a minimum retail price for Fine Wine in the US, both domestic and imported. 

Between the producer cost and the retail price, there are a number of logistics steps that are needed to take the product to market. Again, this is quite a complex topic, given the variety of commercial models, advertising strategies, numbers, size and quality of the players involved in the distribution network; and all obviously highly regulated at the Federal, States, and local level (which does not come gratis, and each US state is different from the other in terms of alcoholic beverages distribution rules). To simplify once more, we'll consider a low-end and high-end multiplier on the producer's costs (the cost of wine) to estimate the total markup ending with a retailer price (the price of wine). We'll use 2.5x for the low-end and 4.5x for the high end (and excluding international shipping, which needs to be added before the multiplier, lumped with the foreign producer's cost). In other words, this multiplier represents the total markup accounting for producer's profit and importation if applicable, all costs and profits in the logistics and marketing chain between producer or importer and retailer (i.e., the distribution), and retailer's profit. Let's make a few examples:

1. Let's consider a bottle of industrial wine, costing a US producer say $2.25 per finished 750ml.  The producer sets its supplier price at $3.49. A large distributor handles the logistics and marketing, resulting in a wholesale price of $5.99 to the retailer. The retailer, let's say a national supermarket chain, lists the product at $8.99. This would be a typical example of the 3-tier system at work in the US, resulting in this example in an 'Economy' priced wine, and a 4.0x multiplier as total markup from production cost to retail price.
2. Another US 3-tier example: same arrangement as above but with a Fine Wine, say with a production cost of $8.50. This producer sets its supplier price at $13.00 (and let's say, its Tasting Room retail price at $30, further discounted to $25 for Wine Club members). Given the brand name recognition that this producer was able to build over the years, as well as a notably stable production quantity of this product to say 20,000 cases per year, a large distributor accepts trading this wine, resulting in a wholesale price of $19.75 to the retailer. The retailer, let's say a local supermarket or wine shop, lists the product at $29.99. In this example, we have sees a 'Basic Premium' wine making the market, with a 3.5x multiplier as total markup from production cost to retail price.         
3. Third example: an online subscription model with bulk imported wine (i.e., not Fine Wine!). Let's say a US wine processor/packager buys enough bulk wine from a producer abroad to make a small batch (but again, not Fine Wine in my book!) of 5,000 cases of a finished product (12x750ml per case). That is 450 hl (hectoliters), or about 12,000 gallons. Let's say the foreign producer negotiates its price at $1/liter, or $0.75 per 750 ml, to the US wine processor. In addition, let's say that this US business incurs importing costs of $1 per liter of bulk wine, as well as further processing and packaging costs at its US facility of $1.75 per 750ml. The total direct production cost of this wine product is thus $3.25 per finished 750ml. Let's say this US business sells wine online, direct to consumer with a subscription model, advertising a "no middle man" or "winery direct" model. They set their online price at $13.99, with "free shipping" when bought together with other products for a minimum quantity of, say, 12 bottles. In this example, we have seen an 'Economy' wine making the market, imported in bulk from abroad and packaged in the US (enter the pricing table with $13.99 -$2 for bulk import, -$5 for free shipping = $6.99 = 'Economy' wine) with a 4.3x multiplier as total markup from production cost to home delivery price.

With these (plus all the above) assumptions, and seen some examples, the results are finally in...

• It is highly unlikely that an American Fine Wine can retail at a brick-and-mortar store for less than $15 per 750ml.
• It is highly unlikely that an Old World Fine Wine can retail at a brick-and-mortar store for less than $20 per 750ml.

• It is highly unlikely that an American Fine Wine can be delivered directly to your place for less than $20 per 750ml.

• It is highly unlikely that an Old World Fine Wine can be delivered directly to your place for less than $25 per 750ml.

• On the other hand, it is unjustified from a sole costing/pricing point of view that a Fine Wine, domestic or imported, should retail in the US for more than $450 per 750ml. When that is the case, you know that the extra is due to the name and the fame, and you should then be aware and decide informed, what is worth what, according to your own situation and decision-making process.

Cheers!