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Breaking Down the Cost, Part II

Written By: Kasey Carpenter on Wednesday, May 7, 2008

The second installment of Kasey Carpenter's innovative look at the price of doing business in the wine world.

Recently ( Read Part I ), we considered the basic costs of the "fun part" of the bottle of wine; in fact, we only really discussed the stuff you see, the tangibles, which came to $15.36. And of course we all know there are other things there, and this week we will have to wave the white flag and address those less sexy components of cost.

Winery - this one is pretty volatile, but let's assume that you want your own space (versus using a service like Crushpad -- which is nice, but you have scheduling nightmares come harvest), so there is that cost to factor into the cost of each bottle of wine. Let's go modest and assume a facility that is under the 1MM mark, and leased in someplace to garner traffic, like Healdsburg, or even SF proper.

Utilities -- $350.00/month -- basics such as water, gas, electric
Mortgage/Lease -- $2500.00/month (dirt cheap and with a triple net assumption)
Food and Flowers -- I'm not sure why, but it seems as though a winery tasting room cannot be opened and operated (state law?) without these two staples. Lets go low and figure $200.00/week for nibbles and petals.

Tasting room/mailing list employee (full-time) - $20/hr at forty hours a week. This is one you won't find an intern for, as there are not many people looking for real time retail experience to support their hospitality degree. (Those people are called waiters.) Figure also you may want a part-time employee for weekends and seasonal work. If you have a willing and compliant spouse, there you go, "free" labor. Otherwise, figure on another $20/hr for about 10hrs per week for about 9 months. Total $48,800.00/yr

Website - $450.00/yr managed by someone, with an email newsletter and shopping cart function. This is, unfortunately, after the development costs that are required to get the site up and running. Such costs can exceed five figures, but we aren't going to do that, are we? No, not until Constellation comes knocking at our door asking where to back up the money truck. Then we'll add vineyard cams, blogs, video highlights of harvest, etc... So for now we will low-ball it at $2500.00 Like your labels and capsules, you could go cheap, but this is your baby, and there is an image that you want to uphold, so, inflate those marketing projections my son... let's say with hosting and development costs, you should expect $1100.00/yr for the first four years. Of course, by the time you pay off those development costs, it'll be time for a new site...

Bank - basic merchant services, online, checking, payroll, etc... $2500.00/yr

Broker fee $2.50/per bottle, generally a percentage of you FOB pricing (Freight On Board - the price at which you let go of a bottle of wine for distribution, i.e. sell it to them) that can range anywhere from 10% -15%. We'll go with 10% for now. We'll address how we came to this figure when we set our FOB pricing

Marketing/Market Visits - this one can get out of hand quickly. And while we have chosen to go with a local broker in each of our respective markets, you still want to show your face in those markets at least once a year. Five markets, plus home (CA) makes six trips. Six round trip flights, six car rentals, six hotel stays of at least two days each, plus food, and the lunches and dinners you will be footing to entertain (read: woo) potential buyers.

Again, this is minimum. You need to be in the market at least once a year because, let's face it, no matter how good your distributor and broker are, no one listens to them quite like they listen to the man (or woman) himself, the actual craftsman, the Pope, the winemaker. The hardest and most self-assured buyer who's seen it all and could care less about you will sit there, elbows on the bar and starry-eyed with his head cradled in his palms as you regale him with tales and woes of last year's harvest, the earwigs you didn't catch at the sorting table, the demonstration of the propane cannon gone wrong, your competitors' bad year despite the same fruit, and the guy who asked for an eight ball of coke to seal the deal in Chicago. You are the celebrity, and you have to play the part. You are the smoke and mirrors. Budget for it. No matter what.

Remember the scene from A Civil Action where the small boutique law firm that John Travolta and William H. Macy ran had to meet to talk terms with the super-firm? They had to blow a large chunk of their budget on a meeting room at a posh hotel. Why? Image. I'm not talking about the conceited type of image-consciousness megalomania we see in some of the fancier wineries out there, but the fact that you are a crafter and purveyor of a luxury good. Bottom line. And once you realize that, you use it to your advantage.

Though the initial cost can be ugly, you get that money back in faithful sales and reorders. There's my marketing rant for the week. So for our little winery, let's budget one trip per year to six markets, one of which is California, but will still involve some travel and such. $12,000.00/year.

Shipping - while your wholesaler will foot the bill for travel to their state, you still have to have the wine shipped to a trucking and staging facility, which usually doubles as your off-site storage facility. These expenses are not that much in comparison to others you may incur. Also, when someone buys from your website, direct, the trend these days is to offer free (read: free to them) shipping on a case or more. This can run up to $2.70 per bottle for the specialized shipping boxes, insurance, 21-and-up signature guarantee, and overnight delivery in the warmer months/locales. Let's assume you sell a third of your wine direct, and that they are all sold by the case (the usual amount), and the remaining two-thirds are sent to your shipping/trucking company of choice. Figure about $.10 per bottle for that service.

Side note: this figure grows if you are a Willamette producer because most people only send trucks to Napa when it comes to wine. So you, as a counter-culture winemaker up in Oregon, have to split the cost with the distributors and have the wine shipped down from Oregon to Northern California. Not a great distance, but more distance nonetheless.

State and Federal Licenses, AKA Compliance - Okay, you'll love this one. First there is the whole setup for being a winery in California, which depending on your level will cost you according to the number of cases you plan to produce. And if you go over your permit rating, hello penalties and fees! But that just takes care of California. Oh, and then if you want to sell in California, you need a separate license for that.

And let's say you want to move those two-thirds of your wine to the other top markets in the US, then you need licensing for those states as well. Let's say you want NY, TX, FL, IL, and because you have family in Denver who would get a kick out of seeing your wine at their local café, you need CO as well. Five states, with an average of $400.00 per year in label approvals and registration. Ah, compliance. So plan on about, $4500.00/year for production and interstate sales compliance licensing. Support your local government.

Setting your FOB price - okay, so with our previous column's total of $15.36 for the basics, we now have to add all of the above -- which adds another $5.81, which brings us to a total basic cost per bottle of $21.37. This is how much you need to charge per bottle to break even. So now you have some big decisions to make. How much should I charge for my wine? Remember, while you have great fruit and a pretty package, your track record is short, and maybe you only received some love from the smaller "satellite" press outlets, and haven't had a high 90's bestowed upon your bottle of juice. So you probably can't come out and ask for a c-note on year four.

But $45 seems to be a sweet spot for hand crafted, pedigreed-fruit-source RRV pinot. The good news is that what you sell from your winery/mailing list will mean you make a really nice profit on each bottle, to the tune of $23.63 per, which comes to $378,080.00 -- not bad at all.

Now the bad news: the other two-thirds are going to have two other layers of cost, two other mouths demanding rather large pieces of that $45 retail price pie. And to ensure a price point of $45, you have to really lower your profit expectations and your out-the-door price.

Some may ask why the need to "gouge" the buyers who buy direct. Why should they have to pay the same price as the wine that has passed through the distribution and retail channels? Well, there are two mitigating factors. 1) The wine sold to distribution and other markets yields a pretty paltry profit, and 2) you will have a hard (read: impossible) time trying to convince any distributor, retailer, or restaurant to bring on your wine that you say should retail for $45 when you are selling it off of your website for $35. So while the winery counts on the juicier profit of direct sales, it also has to keep its product "line priced" with the rest of the market so as to ensure warm and happy thoughts from those markets (read: reorders and timely payment).

Distribution markup 30% - this is a conservative number, but we'll hope we are dealing with distributors who have some sensitivity to our wholehearted endeavor to produce a fine wine at a somewhat approachable price. This figure does not include the dreaded billbacks and sample charges. Generally the easiest way to combat these accounting nightmares is to simply give the distributor a 2% discount off of your FOB, a kind of factored-in cost that gives them the room to fund sampling and account for any breakage or corked bottles that a retailer will want credit for. Keep in mind that each distributor is different, and each state forces them to behave differently.

Also realize that if there are any special pricing requests from larger retailers or restaurants, you will be contacted and asked to "kick in" for that. And if you land with a large distributor who has a portfolio the size of a phone book (not the best marriage for a small boutique winery such as ours, but in some states it's the lesser of all evils) you will have to fund promotions from time to time to stand out in the crowd. So take your FOB and add 30% and you will get an idea of what the distributor will charge the retailer.

Retail markup 30% - by retail we are talking about "off-premise," i.e. wine shops, liquor stores, etc... this is where the $45 retail price really holds water. And the figure is just a guide, some retailers will want to be way below that price, but do you think they are gonna eat their percentage to facilitate that? Not without testing you first. So some will want a lower MSRP, while others will want a longer margin, as high as 50% (and still others will want both). Take your distributor's price and multiply that by another 30% and you will see what John Q. Public will be expected to pay for your bottle of wine.

Restaurant markup 30 - 300% - all bets are off when it comes to restaurant pricing. You have the wine bars who are more concerned with turnover than huge profits. They can run as "lean" as standard retail. The other end of the spectrum is what we call the "chophouse markup," which is found in those dining establishments that charge you a la carte for your carrots, potatoes, pat of herb butter, pretty much everything that isn't physically connected to your $40 steak. This is the home of the expense account business traveler. Stockholders buy dinner here, and the wine is priced accordingly. Why do they do it? Because they can. What the market will bear. Your $45 bottle will probably sell for close to $150 on this wine list. But fear not, a glass of so-so Chardonnay will cost $18, so it is all relative.

Boom - final price -- with these figures, you realistically cannot ask more than $27 per bottle for your FOB price. This means you will only make $6.63 on the remaining two-thirds of your wine. Which comes to $21,210.00 -- add that to your profits from the direct sales, $378,080.00 and you get a total profit of $590,240.00 -- more or less. Not bad. Not stellar from a business standpoint, but not bad.

So, is it worth it to you?

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  Be the first to comment on this article


trod20
Jacksonville, FL
Posted on 6/06/08

what would be the correct math ivan?


lvansickel
,
Posted on 6/05/08

Your math is wrong in the last paragraph....


trod20
Jacksonville, FL
Posted on 5/12/08

It must have taken awhile to really compile this info and get it all straight in your head. I can see how cost could really get out of hand quick if you aren't careful.


shadowoptics
Miami, FL
Posted on 5/12/08

Thanks for this guide Kasey. The thing that always strikes me is the cost and convolution of shipping. Wine has to be one of the worst victims of out-of-date shipping laws.


apples7
Santa Barbra, CA
Posted on 5/09/08

Kasey... amazing writeup!1 question - what square footage did you assume for rent and utilities?Also, what is the average square footage of a wineries facilities? Cheers!

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