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Monday, July 27, 2015

Why are some wines so expensive?

What controls the cost of a bottle of wine? They're all fermented grapes so how can some cost five bucks and some $500?  There are many things controlling the cost. Here are some of the major ones.

The interesting part of this to the consumer is some of these factors have no effect of the actual quality of the wine.

Some make wine like this
And some make wine like this

Scale

 Economies of scale exist as the cost per bottle usually decreases with large operations.

There are lots of capital costs in wine production. Barrels, stainless steel tanks, presses, bottling equipment, forklifts, etc. along with a temperature-controlled space for making and storing the wine all cost plenty. It's a bit easier to spread the costs out if you make lots of wine vs. a little. Most of the very small wine producers share or rent equipment.

Winemaking

The labor and materials that go into making the wine can vary quite a bit. There are lots of decisions affecting costs when it comes to sorting, crushing, fermenting, and pressing. One of the biggest has to do with barrels. As with most products you can get cheap ones and very expensive ones.You can also not use barrels at all. Sauvignon Blanc and Pinot Gris are a couple wines that don't require any barrel time so you've saved money already.

Some will buy used barrels, some will use wood chips or similar, to cut costs. In some countries where their money is valued low the cost of importing oak barrels is prohibitive.

Some wines get a lot more hand-holding throughout their time in the cellar where others are controlled by computer.

Cost of the grapes

This is tied to land prices plus supply-and-demand for the grapes. Napa Valley Cabernet and coastal California Pinot Noir are in high demand. For instance, in 2012 the average price for a ton of Cabernet grapes in Napa was $5000, $2300 in Sonoma, and $1300 in Washington state. Why? Because, as they say, this is what the market will bear. Sonoma County Sauvignon Blanc averaged $1400 a ton, but Pinot Noir was $3000. Some highly sought-after vineyards sell grapes for well over $10,000 a ton!

One vineyard might yield three tons per acre; another ten tons. The more tonnage per acre the lower the cost, but at some point quality suffers.

Some vineyards have a really good reputation for growing excellent Cab or Pinot and the owners receive a premium. Some vineyards are better maintained (more labor costs). Some are harder to maintain (as a mountainside vineyard).

The cost of purchasing vineyard land, or potential vineyard land, in Napa is very high. Some producers buy their grapes from growers every year and are susceptible to fluctuations in grape prices. Others have bought vineyards in the last few years so have large debts to pay off. The lucky ones have owned their own vineyards for a long time. 

As you can see the cost of the fruit can vary widely.

Time

Time is money. This goes for oak barrel aging. If you leave a wine in barrels for eight months then bottle and sell it immediately your costs are less than having a wine spend three years in oak then a year in the cellar before releasing it. The longer a product sits in inventory the higher the costs. Many wineries don't have space to store their finished products so they rent temperature-controlled space in a warehouse.

Region of origin

Some countries have a much lower cost of living. Portugal is cheaper than France. Napa is a lot more expensive than South Africa. But if you're in North America, transporting wine from South Africa costs more than from Napa.

Pedigree

A Mercedes will cost more than a Ford. English Bulldogs are more expensive than Spaniels. Lafitte-Rothschild First Growth Bordeaux will always be more expensive than anything with Gallo on the label. It's not always a sign of quality especially when quality is more subjective than something you can measure.

Demand

Supply and demand--good ol' microeconomics. Some of the well-known French Bordeauxs sell for thousands a bottle. There isn't much made compared to the high worldwide demand for these famous wines. This is what you call the rich people's playground--like buying old Ferraris.

Does this mean you should buy Cabernet from somewhere not so famous for Cab, like South Africa instead of Napa Valley? There's a reason Napa Cab is expensive vs. Cabs from many other areas. It goes back to supply, demand, and perceived quality.

Selling the wine

Marketing and distributing costs can vary widely. There are wines where less is spent on the actual product than is spent on marketing. When I see a six dollar bottle of wine from South Africa or New Zealand the first thing that comes to me is, I wonder how little they actually spent on producing the wine to get it to my store for maybe four bucks (I'm guessing the store paid no more than $4 if they're selling it for $6). That doesn't mean it's not worth the price, but I wouldn't expect much from it.

In the U.S. we have the inefficient and somewhat crooked three-tier system for selling alcohol. Booze has to pass through three hands to get to you (a lot more physical hands, actually). This is extra cost to the consumer with no real value.

It's of course subjective

There are some constants with labor and material costs, but the value of a bottle of wine is largely influenced by opinion and perception. This is how the consumer-driven economy works. A Hyundai will get you to work just as well as a Mercedes, but which would you rather drive if you can afford either? On the other side of that, is a Mercedes really worth five times as much? That's all for you to decide.