As we wrap up the 2016 harvest, wineries and growers begin to settle up for grape deliveries. What determines grape pricing and how does this pricing affect wine pricing?
Because Napa grape costs are the highest in California, virtually all red wine made with Napa grapes must be retail priced at $40 or more per bottle for the winery to receive a reasonable profit. The majority of Napa’s production is from two Bordeaux varieties, Cabernet Sauvignon (43%) and Merlot (11%). When the other three Bordeaux varieties, Cab Franc, Malbec and Petit Verdot are added, production totals 59% of Napa’s grape crop.
Napa’s lower priced grapes are dominated by white varieties, Chardonnay and Sauvignon Blanc, representing approximately 25% of Napa production.
Since Cabernet Sauvignon is the dominant variety in Napa, let’s focus on the economics of its production and pricing. For a winery to experience a reasonable profit, grape costs should not exceed 25% of the wine’s selling price. As a consequence, the tonnage grape to retail bottle price ratio should range from 100 for lower priced Napa Cabernet Sauvignon to as high as 140 times for more expensive Cabernet.
The attached winery profiles show the economics at various wine pricing levels. In each of these profiles, the winery realizes a profit equal to 15% of sales. Most Napa Valley wineries sell a mix of retail and wholesale through distributors. Traditionally, sales to distributors are at 50% of the retail price. As the wine price goes up, generally a higher portion of wine is sold retail, so while wine production costs increase in absolute terms, they will decrease as a percentage of sales. Offsetting this increased gross profit are higher selling and administrative costs per case due to the combination of lower sales volume, a higher percentage of retail sales and a lack of scale.
Bottom line, if Napa Valley wine is retail priced outside of this 100 to 140 times grape cost to bottle price range, the economics don’t work for the winery.
VinSights 
Is this analysis and conclusion a joke or real? Your conclusion has little relevance to the question you posed and seems to be missing many parts and pieces along the way.
I think maybe it is a joke. Surely you can’t be serious…
Question: “What determines grape pricing and how does this pricing affect wine pricing?”
Conclusion: “Bottom line, if Napa Valley wine is retail priced outside of this 100 to 140 times grape cost to bottle price range, the economics don’t work for the winery.”
Let’s try another lens…
Question: “What determines car engine pricing and how does this pricing affect car pricing?”
Conclusion: “Bottom line, if Ford Motor Company cars are retail priced outside of this 100 to 140 times car engine cost to car price range, the economics don’t work for any car company.”
… and don’t call me Shirley.
LikeLike
Ted,
This is no joke, but I see your point. Napa Cabernet prices range from $2,000 to over $25,000 per ton. Consequently, grape prices do influence wine prices. I’m trying to show the correlation.
Mike
LikeLike
Mike,
Thank you for the response and I appreciate what you were trying to do. My point is that you used illogical reasoning, weak arguments, and imprecise language and therefore your conclusion is not valid and/or true. The specific cases you provided may be true and valid but the generalizing conclusion you gave is not.
Wineries can and do retail price Napa Valley wine outside of the 100x-140x multiplier range and generate positive returns, often by focusing on the other 75% or more of the product cost and utilizing non-linear assumptions.
LikeLike
Pingback: Liquor Industry News/Links 11-05-16 | Franklin Liquors
Thanks for this thought provoking piece. I think the better conclusion is that if the ratio is 140 or higher the winery will struggle to be profitable. The lower the number is the more successful the winery will be. The part that this does not address is that almost all pricing is market driven not cost driven so the ratio is a result of the whole production equation not just target price based on grape cost.
Thanks for putting this together.
LikeLike
Mike,
Thank you for your analysis. I put some current actual numbers for wines we are producing, I would say that grapes above 100 times grape cost does not work for the winery. My assumptions are last year’s Napa Valley District average grape price of $6,800 (which should be higher for the current year) and using the Andy Beckstoffer ratio of grapes at 100 times bottle price, leaves the winery with a slightly negative net profit. My other assumptions include a 3-year aging and a 3 year-selling cycle for high end wine, and 3% interest, 0.02% insurance per month, and the biggest variable for each winery and each project is internal manpower to run marketing-sales-internet social media-distributors, etc. I am using 10% “sales cost” for my analysis:
Napa CS Bottle Bottle
Retail price $63.00 $88.00
Wholesale price $42.21 $58.96
FOB price $28.28 $39.50
Materials cost $8.33 $8.33
Winemaking cost $1.50 $1.50
Oak & storage cost $1.02 $1.02
Grape cost $8.20 $8.20
Interest&Insur. $3.56 $4.98
Sales cost 10% $6.30 $8.80
Pre-tax income $(0.63) $6.68
Pre-tax margin -2.2% 16.9%
Post-tax margin -0.6% 4.4% (yes, we live in California and the taxes are high)
(Please forgive me, I am over 30 years old and cannot figure out how to copy and paste a chart or pdf)
My conclusion is that in order for a winery to realize a 20% pre-tax return, he should pay only 70 to 80 times the bottle price. By no means, am I advocating for wineries to pay growers less for grapes, rather get the wine selling prices up. That means and next year’s projected district average price of $8,400 per ton, the winery better be selling wine at a retail price of $105 per bottle, or $190 to 385 per bottle for sub-Appellations like Tokalan, Oakville, Calistoga, Mt.Veeder, Howell Mtn., Diamond Mtn., Spring Mtn., etc.
If anyone needs grapes or premium custom bulk wine, please call our North Coast office at 707-252-4800.
LikeLike