How wine is priced can seem completely arbitrary when you are comparing bottles at your local wine store. How can one bottle be $10 while others are over $100? You may ask yourself, is the more expensive bottle always better? Not always…
How wine is priced is more of an art than a science. There are numerous intermediaries along the way each wanting to cover their costs and make a profit at the same time. On top of that, there are taxes and duties that can get tacked on along the way to the final consumer. All of these costs go into setting the price you actually pay for the wine.
Wine, like any product, is ultimately priced by the overriding economic law of supply and demand, meaning that the more people want a certain wine (demand), the price will increase as a signal to producers to make more (supply). However, the supply of quality wine is limited by how much was produced that year (vintage) and you can’t go back in time to make more. In addition, most highly desired wines have limited production quantities due to the strict requirements of the producing region, which means the producer can get away with charging a high price.
How much does it actually cost to make a bottle of wine?
The actual cost of making a bottle of wine can be difficult to determine, even for the winery, but we can estimate some of the more significant costs to get a feel for it.
The cost of grapes
The cost of the grapes used in making wine can be difficult to truly know even for the grower, but we can get a feel for it by looking at the prices to purchase wine grapes on the market. The prices in the table below are taken from winebusiness.com which runs online classified ads for wine grapes.
The large range of prices is an indication of the premium cost associated with grapes from better vineyards and the fact that some grape varieties are much more difficult to grow. Also, for high-quality wine, it is necessary to prune the vines to limit the number of grapes produced per acre so that the smaller number of grapes gets more concentrated sugars and flavors.
Depending on the grape and the winemaking process, a ton of grapes can yield anywhere from 120-180 gallons of wine. The highest quality wines only use “free-run” juice or juice that bleeds from the grapes with minimal pressure, for a lower quality wine, the winemaker is more likely to press more juice out of the grapes which will produce more solids and tannins and result in a harsher wine.
Taking an average of 150 gallons per ton of grapes, which is equivalent to 568 liters or 757 standard bottles of wine at an average price of $3,000/ton of grapes you have a grape cost of about $4/bottle for an average wine. Using the highest grape cost of $10,000/ton and only 120 gallons per ton, it goes up to $16.50/bottle.
It can be seen from this exercise that the cost of the grapes used in wine can vary greatly depending on the type and quality of wine being made.
Barrels, Barrels, Barrels…
Once the grapes have been converted into wine, it is time for the aging process. The aging process can range from sitting for a few months in a stainless-steel tank for most white wines and low-quality reds to sitting in first-use only French oak barrels for years for the highest-quality reds.
A new French oak barrel can cost around $900 and holds 300 bottles of wine, so for the most expensive, highest quality wines, the barrel costs alone add $3/bottle. If the winery uses each barrel three times, which would be more typical of an average quality wine, this goes down to $1/bottle.
Bottle, Cork & Label Costs
Have you ever picked up that nice bottle of wine at the store and commented to yourself, why is this bottle so heavy and “I wonder how much that bottle cost to make?!?”.
Wine bottles can range anywhere from $0.50 for a standard wine bottle up to $2 for the super heavy bottles with a deep punt and fancy embossing. Tack on another $1-2 per bottle for corks, labels, and capsules and you have a finished bottle of wine ready to sell.
All the costs we talked about above are just the raw materials needed for making the wine. There are obviously significant other costs such as the overhead to pay for the winery building and equipment, utilities, labor, and marketing which can add up to just as much as the cost of the raw ingredients.
So based on all this, our “average” bottle of wine cost $6 in raw ingredients and assuming an equal amount of overhead costs, a total cost of $12/bottle to make. Let us not forget the winery wants to make a profit as well which can be on the order of 50% for quality wine. It can be much lower for other wineries that produce a lower-quality wine and rely on higher sales volumes.
So all in, for this average bottle of wine, the winery would typically look to sell the wine for $18/bottle.
Why so many middlemen (middlepeople)?
Ever since the repeal of prohibition in the US, alcohol has been sold by what is called the three-tier system. The three tiers are 1) producer/importer, 2) distributor/wholesaler and 3) retailer. The three-tier system means that a producer, for example a winery, can only sell to a distribution company which can only sell to a retailer (store or restaurant) who can finally sell direct to the consumer. This was intentionally done to increase the cost of alcoholic beverages and decrease the rate of consumption. In some states, to further complicate matters, the government acts as the sole distributor or even the only retailer in the system.
These antiquated laws are slowly being changed around the country, in some states more so than others, such that one entity can act as multiple tiers in the system. The most common change has been to allow wineries and breweries to sell directly to consumers, mostly in states with a large number of wineries or micro-breweries.
We are not going to go into all the intricacies of laws governing the sales of alcohol, and we only bring it up to highlight the number of entities that markup the price of the wine before you purchase it. Typical markups along the way include 30-50% by the distributor plus another 30-50% at a retail store or 70-80% at a typical restaurant. We were once told by a local wine importer that an expensive restaurant will typically charge for a glass of wine, what they actually paid for the entire bottle! That equates to a 300% markup.
By the time everyone gets their cut, the price you pay for a bottle of wine in a store is typically 2-3x what the winery sold it for. It’s not hard to understand why industry groups have been working diligently to get these outdated laws changed.
Imported wine vs. domestically produced
So how does this work with wine imported from other countries? Generally, it works exactly the same, except in the first tier the producer is replaced by the importer, who by the way also marks up the wine 30-40% and you also need to add import duties which are around $1/bottle for wine <14% alcohol.
So how are imported wines able to compete after these additional markups? Because imported wines are either from an old-world wine country (Europe) where the vineyards are family-run and have been in the family for generations or they are from a new-world wine country (South America) where the labor and other regulatory costs are much less. Either way, this results in lower production costs to offset the additional markups along the way.
Is a more expensive bottle of wine better?
Yes, if you are comparing across similar varietals from similar regions. If you are looking to buy a nice bottle of Brunello, which can legally only be made in the area of Montalcino Italy, the typical retail price range in the US would be from $40-$130 depending on the vintage and the producer. If someone is selling a bottle of Brunello for $20, it is most likely of poorer quality.
In our opinion, once you go over the $25 per bottle price, the wine is probably of good quality and whether the more expensive wine is worth the extra money is a matter of personal taste. Price, however, does factor into a person’s perception of how good a wine is even if you don’t realize it. If you paid $100 for a nice bottle of Barolo, your brain may be convincing you that it tastes much better than a cheaper option.
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