Wine Consumer

Magazine

Small Wine Producers, Real Wine Quality, and the Destruction of Consumer Value

Wine Consumer Magazine, Sean Piper
01/24/2014

 

Small Wine Producers, Real Wine Quality, and the Destruction of Consumer Value

I am thinking a lot about wine quality, price, and value. Outside of the “fighting varietals” (which includes the largest bulk producers), everyone else in the wine business (most small winemakers) get their start by spending a lot of their own money— i.e., they make their money first, and then go into wine. Most of these producers then spend their entire time breaking even or coming out slightly ahead. Rarely do they ever recoup their initial costs. It is why the saying came to be, "How do you make a small fortune in the wine business? You start with a big fortune."

Given that truth, if you factor in all the real costs needed to produce a good wine on average they’re barely covered in the selling price of the wine, at least from the small winery's perspective. Some deals are better than others, but in general the price you pay is only covering the costs to make that wine.

That may be too broad a statement because it mostly pertains to the middle of the market for wines from $15 to $50: the market where absolute quality and absolute value converge.

Real Quality

Under $15, the volumes are so large that the costs can be reduced by the sheer economies of scale. You can get decent wine finds almost anywhere in this range, particularly by shopping close outs, inventory reductions, and wines that never caught the public's eye.  At the opposite end of the scale for wines over $50 the price is starting to exceed the production costs and as that price goes up, so does the mark-up and the gross profit margin.

Now let's look at the $15 to $50 market—this is the most difficult range for a small wine producer to make money. These are the wineries most at-risk in the years to come. If a wine producer wants to make wines with real consumer value (and I define real value as trying to keep the lowest selling price compared to the actual cost of real quality), then the $15 to $50 range is the perfect price zone. Considering that most small producers do not make much money in this price zone, on average (industry wide), consumers get these wines at cost! Of course, some deals are better than others, that’s a given. But as a whole, wineries in this price range must sacrifice profit to create a bargain for consumers.

On the other hand, if a consumer spends in the zone of $50 to $100 (or above) then the price far exceeds the cost of real quality. The markups increase, and so do the profit margins. Most projections show wineries in this price range will probably remain financially secure in the future. However, they offer little real value because of the divergence of selling price and producer costs.


So what about this quality bottle of $30 wine that I got from a small local producer? Is it a value overall? Hell yes! It costs the producer roughly $35 to make it—so it’s almost like he’s giving me a $5 bill with every bottle I buy. In reality, his best tasting wines do sell better and he charges $36.50 for those. However, his more challenging vintages (unfavorable production years) do not sell as well, even when he sells them at $26.00. But on average he is offering the best price for the best quality possible.

Some wineries write off the wines that are not selling and give them to marketing companies to sell over the phone or as a part of wine club promotions. Bottles that might have sold for $30 in the winery are sold to these marketing companies for $1.50 to $2.00 and are then marketed back to the public for $15 to $25. Wow! Those markups are some of the biggest in the industry. Are they offering value? Why didn't the winery just mark down their normal price to half off? The answer is because they would never sell their other wines as long as they have deeply discounted wine sitting on the same floor.

Destruction of Value

Many states (although not California) mandate a “three-tier” distribution system. Producers MUST sell to distributors who then sell to retailers or in some locations to state-run stores. In the process, the price of the wine goes up an average of 140%. Follow the money and you will discover that wineries generally break even, the retailer makes a small profit, and the distributors get filthy rich. The distributor gets the lion's share of profits in this arrangement. These middle-guys are the big corporate brands, and owned by mobsters and folks who run for president. Across the U.S. two or three wholesalers alone determine what wines are available in most states. The 10 largest wholesalers control more than 60% of the U.S. market

The three-tier system is a relic of prohibition and historically propped up by organized crime. From the consumer’s standpoint, this is what destroys value: an unnecessary middleman who gets involved and needlessly marks up the product without adding any value whatsoever. In fact, the effect of the middleman is to reduce competition and make wines less available throughout the nation.

If we, as a nation of consumers, were to remove state's rights to control alcohol and instead made this a nationwide uniformly regulated commodity without the three-tier system, the immediate result would be lower wine prices across the board—and more variety available to the consumer. However, until that happens, we will continue to see the destruction of consumer value, especially for wines from smaller producers.

Aside from very expensive wines, small local wine producers offer excellent value. If they sold their wines for less, they'd be gone—and so would their wineries. The fact remains: the only range where consumers can expect to find both “real quality” and “real value” from small producers is $15 to $50.

Consumers who opt for wines that are more expensive cannot expect to find real value, and in fact they aren't even value conscience—so it doesn’t bother them much. I guess that’s the privilege of money!