Wine Should Be Expensive. Seriously.

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Posted November 6, 2013 by Jim Silver in Features

generic-wine

Wine should be expensive — and by “expensive” I mean it should pay for its own existence.

Wine, as you well know, takes a long time to grow, a long time to make, a long time to brand, and a long time to sell. When overly-powerful retail-market forces press suppliers to roll back price points that natural competition drives off the last scant profits that may exist for that producer. When distributors mandate ever-increasing contributions to marketing from the producer, usually in the form of actual cash discounts, or dedicated sales representatives, there is very little left for the producer to reinvest in his business. And when consumers themselves – those tourists who demand lavish tasting rooms, live entertainment, and club-like privileges simply for visiting the winery – claim their own discounts or else they’ll “shop with their feet” one can see how it would be difficult to produce a nine or ten dollar bottle of “everyday” wine.

The market is hard on wineries. When Yellow Tail produced its one billionth bottle  they did so at the expense of perhaps the entire Australian wine industry. That wine, now exported to fifty countries, has clearly determined the class and category people think about when they think about wine from down under. Their direct competition reacted by meeting Yellow Tail with repositioned and repackaged Rosemount, Lindeman’s, Rothbury, Wolf Blass, Wynns and Penfolds and yet they failed to impress anyone. When price points are depressed, costs must be cut, yields must be increased, and wine gets tedious and simple.

When I started in the business twenty-five years ago we used to taste wines to determine whether or not they were drinkable, never mind their actual qualities. Today, generally, all wines are competently made, safe, hygienic and drinkable. The worst thing that can be said about a wine is that it is boring. Right now there’s plenty of that to go around, and more is coming.

The future of Long Island Wine country is in an honest, realistic and very long-term approach to raising the quality, reputation and price. 

Smaller producers are often the hardest hit, but that’s not to say their problems aren’t shared by larger producers too. A small producer in New York will pay $2,500 for a ton for merlot, and at least that much to grow their own. That is approximately $3.50 per bottle before it is even picked. If we used averaged costs, the consumption of barrels, glass, capsule, label, cork or screw cap adds another $5.30. A crew of one winemaker, one vineyard manager, one salesperson, one bookkeeper, and four vineyard workers who together produce (let’s say) 5,000 cases of wine per year adds $4.33 per bottle without consideration for taxes, benefits, licenses, fees, fuel, equipment, maintenance, physical plant or utilities. Somehow we’re already at $13.13 per bottle, but you can imagine it should be even more. If you add 28% margin for a wholesaler, and 33% margin for a retailer, this bottle sits on the shelf at $29. Do you know what we left out? The profit of course – we forgot to add that part. You may think that’s an extreme example, but sadly it is not. It is in fact the norm here on Long Island, somewhat less than that upstate, and considerably less than that in California (where cabernet can be had for $1000/ton.)

So at what point does it ever make sense to make “everyday” wines? It’s a noble idea, and people really want us to, but can it be done in New York? Shouldn’t we press on with improvements to quality and improvements to our bottom line and do our best to ignore the competitive market forces that are driving us nearly out of business?

I’ve been reflecting on what I’ve learned in my ten years on Long Island, and mentioned in another article regarding my relocation to CA that wholesale distribution and agri-tainment wasn’t working; that agri-tourism was the correct path for the wineries. Allow me to expand on that a bit.

Small wineries feel pressure to distribute in wholesale, and I’ve been a verbal proponent of this, and strenuously too. My point that wineries that didn’t distribute “are not part of the greater question of regional ascendancy” seems to suggest that they are doing something wrong. Well, I was wrong. Whether or not the decision to distribute their wines (far and wide) is based on ego, or perceived demand from the market, or the level of production, this is one seriously expensive decision. Frankly, I don’t see any winery in New York under 10,000 cases per year that could support wholesale outside of the state. These wineries would be best served to live on a sustainable scale and closer to home with lower overhead and higher prices, rather than trying to reach out, flailing their arms at customers with whom they’re not really familiar.

On Long Island, the equation is made much worse. That is, while wholesale distribution robs the winery of any potential profitability on that product, it secondly serves to put downward pressure on the retail price points. Worse still, the general visibility and availability of the product in the region’s many retailers (the region that provides 90% of the tourist visitors) further depresses the desire for on-the-spot retail sales at the tasting room by those customers. If I can get it at home, why do I need to buy it from the winery at inflated prices?

And so, weakened bottle and cases sales are supplemented by aggressive wine-by-the-glass, food, and tchotchkes. Promoting heavy traffic requires agri-tainment schemes (usually music, art, food, events, etc.) that very often detract and distract from the craftsmanship required to make this wine.  This culturally pleasant pattern becomes a slippery slope requiring more and more infrastructure (read: labor) to feed.

Long Island has developed itself into a destination for “day-trippers” many of which aren’t even interested in the wine as much as they are interested in the many distractions the wineries can provide them for the day. In contrast, when people drive hours upon hours from all over the country to reach the wineries of the Finger Lakes, they return home with cases and cases of wine that they labored to experience and can’t normally find where they’re from. These are what I call “wine-trippers.” They came (primarily) for the wine. Day-trippers come for the day.

Not every winery does this naturally, and you know who you are, but the question is what to do about it? Why and when did the North Fork of Long Island’s wineries become a destination for bachelorette parties? If you needed a better example of the very worst type of customer than that, I can’t think of one. One need look no further than Sound Ave. to find this type of customer exploited, embraced and the whole notion of “wine country” perverted by dance parties and drunken revelry. In 2010, when I saw my own tasting room sliding into a vortex of salsa dancing and conga lines, I recoiled with distaste and moved to curtail it. But they kept coming. For every wine enthusiastic couple, there were 50 partiers in limos and busses. My extremely capable team at the time, Laura Hoch, Katherine Jaeger and Megan Hamilton, I must commend for their sincerest pursuit to protect the integrity of our product (and our property.) Every single day was a conference amongst ourselves where we tried to balance what was tolerable, what was appropriate, and what was best for our reputation. But they kept on coming. The huge crowds, the cash register ringing, a thousand glasses of wine per day, and the crush of happy tourists pouring over the lawn did not translate to what you might think. It’s because wine must pay for its own existence. And our wine needs to be more precious.

There must be a real profit in it if it is to sustain the laborers and their families, the owners and their families, and the industry itself. How can people call for greater distribution, for expansion of vineyards, for greater diversity of plantings, for greater and more talented people to come and work here, if this cannot pay for itself?

The future of Long Island Wine country is in an honest, realistic and very long-term approach to raising the quality, reputation and price. The messengers will not arrive in a limousine, I promise you.

 

Editor’s Note:  NYCR Business Editor Jim Silver is the General Manager of Peconic Bay Winery and the founder of Empire State Cellars and the Standard Cider Company.  In November Jim and his wife Claire and family will be relocating to Santa Rosa, California.  Jim is currently seeking a new employment opportunity in the California wine business.  Jsilver165@gmail.com


19 Comments


  1.  
    Bryan

    Great story Jim! It really hits home in Niagara where bachelorettes have completely taken over Saturdays in wine country and the number of people trying to walk through the door with bottles of light beer in their hand increases every week. Raising the quality, reputation and price may be the only option over trying to cater to the masses or diluting the wines for mass market appeal.




  2.  
    Matt Covey

    I wholeheartily agree and that’s why I tend to frequent the LI wineries that don’t engage in overt Agri-tainment. We recently visited Raphael for the first time in awhile and I was totally taken aback by the aggressive music, the knick-knacks for sale and the general party crowd.
    I have no problem with paying a premium price for a premium product in support of a local industry. I also don’t need a palatial tasting room or to be entertained, I just need you to pour me the most honest wine you can make and explain to me the who, what, why and when.




  3.  

    Excellent article! The same things hold true in Texas. When talking about the party buses and limos, it is becoming so common in the Hill Country and Wine Road 290 that it is often difficult even finding a spot at the tasting bar. It may bring lots of people, but I don’t see lots of bottles going out the door.




  4.  
    Edward

    True Jim however temecula does not a have a limited season and they get more tons per acre and for about a third the cost per acre.

    LI has a limited busy season and cost of doing business is out of control.




  5.  

    “Can great wine be made?” and “Can a great business be built?” are definitely two different questions.




  6.  

    And yet here we are on the eve of yet another colossal waste of time that is a hop on and off bus service weekend. I can just see the hoards of people carrying bottles upon bottles of wine they’ve purchased as they skip along the wine trail. I was going to reserve my judgement until after the event actually occurred, but I’m sure the press release hailing it a success has already been written, so what’s the point?

    I desperately want this region to win, and I know eventually, after much gnashing of teeth and clinching of fists, it will, which is why we bought into it. There’s a huge amount of potential, but it’s going to take people on all sides (winery owners and the wine loving public) taking a step back to re-think things. Because I agree with Jim, the other option, the path many are on now, is a quick race to the bottom.




  7.  

    I have thought for a long time that prices are too low. However to raise them there must be genuine and perceived quality that merits it. I have advocated a Canadian style Vintners Quality Alliance (VQA) system for New York but completely voluntary. It will quickly give credit to wineries making the effort to raise the bar and reward them and the customers with a visible symbol of wine worth having.




  8.  

    There are expensive wines and there are wines priced to sell, either way, consumers ultimately decide who wins, loses, or goes extinct entirely. No reasonable business person would purposely price their product outside of its respective market.




  9.  
    Bob Henry (Los Angeles wine marketer)

    AS A FIRST-TIME READER OF THE NEW YORK WINE REPORT (DIRECTED HERE BY WINE BUSINESS MONTHLY’s E-MAIL NEWS BLAST), FORGIVE ME IF THIS POST IS A “LITTLE” L-O-N-G. BUT I BELIEVE THERE IS GENUINE WISDOM TO BE GLEANED THROUGH THESE NEWSCLIPPINGS . . .

    ONE THE SURPRISINGLY LOW COMPARATIVE COST OF PRODUCING “EVEN THE [WORLD’S] BEST WINES . . .”

    Excerpt from The Atlantic Magazine
    (December 2000, Page Unknown):

    “The Million-Dollar Nose”

    Link: http://www.theatlantic.com/past/docs/issues/2000/12/langewiesche3.htm

    By William Langewiesche

    . . . For those in the business, maintaining that [elite drink] image is important not only for commercial reasons but also for reasons of personal prestige. Every stage of the trade is involved in establishing the high prices, but ultimately those prices can be sustained only through the retailers and their sales efforts. The problem for the retailers is that wine — unlike luxurious hotel rooms and other hyperinflated products generally covered as business expenses — is usually paid for directly out of the consumer’s pocket. This makes for a scary business, especially toward the high end, where The Wine Advocate roams.

    The truth is that even the best wines cost only about $10 a bottle to produce, and they are not inherently rare. If the initial cost is tripled to allow for profits along the path of distribution, one can reasonably conclude that retail prices above $30 are based on speculation, image, and hype. . . .

    CITING JIM’s STATEMENT . . .

    “A small producer in New York will pay $2,500 for a ton for merlot, and at least that much to grow his own.”

    . . . 20 YEARS AGO, THE RULE OF THUMB IN CALIFORNIA WAS: TAKE THE COST PER TON OF FRUIT (SAY $2,500), DIVIDE BY 100, AND THAT IS YOUR PROJECTED SUGGESTED RETAIL SELLING PRICE ($25.00).

    ON THE (CIRCA 1988) INPUT COSTS OF PRODUCING A NAPA VALLEY CABERNET (CITED SO OTHERS CAN DEVELOP THEIR OWN COST INDEX) . . .

    Excerpt from Los Angeles Times “Business” Section
    (June 15, 1988, Page C3ff):

    “Profit a Key Ingredient of Fine Wines”

    Link: http://articles.latimes.com/print/1988-06-15/business/fi-4284_1_wine-market

    By Bruce Keppel
    Times Staff Writer

    [Certified Public Accountant] Dennis Groth prices his Napa Valley Cabernet Sauvignon to sell for $13 retail. That price, he said, will net his family’s young winery here just 34 cents a bottle in profit.

    Groth is far from complaining, mind you. After all, he points out, 34 cents represents a 5.2% return on the $6.50 he collects from distributors. “That’s about midway among the Fortune 500 companies and a fair return on my investment.” . . .

    According to Groth, the $13 retail price of his Cabernet Sauvignon provides for a 34-cent profit and 34 cents in federal and state taxes. Payments on the loans taken out to acquire the 165 acres of vineyards take $1.46, and he figures another $1.43 to cover the cost of growing and harvesting the grapes. Producing the wine itself costs $1.19, and marketing it adds $1.74. That, at any rate, is the way Groth allocates the $6.50 wholesale price he receives from his distributor.

    The distributor, in turn, will typically take $2.17 for bringing the wine to market, where the wine merchant will add $4.33 to promote and sell the bottles to the public, producing an undiscounted retail price of $13.

    “To survive,” Groth said, “I have to be successful at that price. Nobody in the Napa Valley will survive on producing the low-end wines. I want to be in the top third of the marketplace.” . . .

    [Aside: For those with long memories, Groth’s 1985 “Reserve” Cabernet was the first California wine to be awarded a “perfect” 100 point score from Robert Parker and The Wine Advocate. As I recall, the suggested retail release price was $150?]

    ON THE SUBJECT OF LUXURY GOODS PRICING . . .

    Veblen goods – http://en.wikipedia.org/wiki/Veblen_good

    [Excerpt: “Some types of luxury goods, such as high-end wines, designer handbags, and luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products.”]

    Giffen goods – http://en.wikipedia.org/wiki/Giffen_good

    [Excerpt: “Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products.”]




  10.  
    Rob Bralow

    What does it say about a winery, whose wines cannot command the prices that pay for its existence? I’m sorry, but investment and quality go hand in hand. If the quality is there, consumers (and wine buyers like me) will respond by investing in the product. I get asked repeatedly by customers why I do not carry yellowtail wines, and my response is, “why would I support bad wine?” It’s true that you can mimic customer investment by raising money through other means, but when those means begin to cost you more than the making of the wines (rock concerts at the winery, lavish events, etc.) then you are no longer a farmer selling wine, you are an entrepreneur selling an experience. You can even get your return on a product by a massive marketing campaign. But if you don’t back it up with quality, then once the marketing is over, those people who are influenced by marketing will just move on to the next marketing product. By the way, has everyone tasted the new Jim Beam Cider? Disgusting…




    •  
      Peter Bell / Fox Run

      There’a apparently a Jim Beam salad dressing or barbecue sauce – I don’t want to learn more – that is beyond disgusting. This is the power of marketing at work. What’s next – Pennzoil-flavored instant pudding?





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