I think we’d all like to believe that wine is made to be the best wine that it can be. Unfortunately, I’ve come to learn that wine is made as much as, if not more so, according to the economics of wine as it is to the ideal vinicultural and enological standards and practices. I hate to de-romanticize good vitis, but I think it’s for the best because having a better understanding of the business of winemaking should make everyone a better wine customer. It took interning at a winery and writing this blog for a few years for me to learn and appreciate the impact of business-side factors on the wine that I drink, and it’s brought me to a greater appreciation of the industry and its product.
Knowledge of the business helps consumes because business-side decisions ultimately shape the product we buy: the type of glass and bottle chosen, its vineyard sources and how the grapes are harvested, barrel regime and winemaking methods, where it gets sold and how it is priced, and more. It turns out that many of the winemaking decisions winemakers talk about as being stylistic choices are made from a list of options constrained by the economic realities and business limitations imposed upon them by ownership, regulations, sales structures, distribution and the marketplace.
A good understanding and appreciation of wine therefore requires not just knowing where it is from and how it was made, but also the economics of making, marketing, distributing and selling it. With this in mind, I’m offering a list of what I believe are five pivotal wine business realities for consumers to know.
Myth #1: The Wine Business Makes People Rich
Fact #1: It is extraordinarily rare to make millions in the wine industry.
There’s a saying in the industry that the way to make a small fortune in wine is to start with a large one. Though one might assume this joke (and rule of thumb) applies more to higher cost areas like Napa where choice acreage can go for as much as $1 million per, its applicability has as much to do with location as any other factor, of which there are many.
The wine business is a low margin one, and therefore requires sufficient volume to turn a profit. The largest wineries have tackled this with a model that produces a lot of wine that doesn’t require expensive inputs so they can sell higher quantities at lower prices. Making really good wines in this category is an art, though also a rarity.
On the other end of the spectrum, small boutique producers sell very high quality and expensive wine in very limited quantities. Between these two ends of the spectrum are a variety of sizes and models designed to turn a profit on the kind and quantity of wine they want to produce. Some are a hybrid of both ends, paying their bills with entry-level higher margin wines at bigger production numbers and while getting their high quality fix with higher end limited production wines. Hess Collection is a great example of this hybrid model, making good wines at price points from ~$10 to over $100 (click here for more on Hess). All this being the case, profit margins are driven by numerous factors of which the cost of production is just one.
Why this matters to consumers: It is helpful to know that 99% of wineries are not significant money makers even though you may be paying quite the tariff for a bottle or tasting fee because it contextualizes a number of things, among the most important (1) you’re not entitled to special treatment by a winery because you buy their wine or visit them (an expectation that occurs more than one might anticipate), (2) because wine is a hyper competitive market, what they’re offering you likely represents the most they can offer while maintaining profitability, (3) this is why discounts are usually small and connected to higher quantity purchases, (4) the wine industry is not full of wealthy people living a lavish lifestyle, so you’re not as disconnected from them as you may think, and (5) don’t look down your nose as necessarily selfish or shallow actions like cost-saving measures, decisions to “sell out” by selling to a parent company or advertising campaigns meant to attract customers who are unlike you.
Myth #2: Quality Wine is Overpriced
Fact #2: The price you pay for a wine – any price – is a realistic reflection of how much that bottle costs to produce multiplied by the winery’s need to sell it and the market demand of that specific bottle compared to its peers.
Though this formula is subjective, it is not as subjective as you might believe. Let’s take on pinot noir as an example. Pinot is an expensive wine to buy relative to most other red wines. This is mostly driven by the following factors:
- It is more finicky to grow and more delicate to make relative to most other red wines, meaning there is more that can go wrong in its production relative to other red wines. Quality and quantity are not as consistent from year-to-year as they are for many other red wines. These factors create a high opportunity cost for pinot producers that gets passed on to consumers to maintain economic viability.
- Many believe the best pinot noir is made by aging in French oak, which creates a self-reinforcing consumer expectation for it, and is expensive relative to most other barrels.
- The demand side pushes cost because pinot is more desirable relative to most other red wines. This is a more subjective cost driver than input costs, and is increasingly subjective the higher in price you go. While the generally accepted best entry level pinot noirs from pinot regions like California, Oregon and Burgundy start at around $20-25, the biggest jumps in prices come towards the higher end and reflect scarcity and exclusivity more than quality. The difference in quality and uniqueness between a $75 pinot and a $150 pinot is generally less dramatic than the difference between a $25 and $75 pinot. The most expensive pinots, regardless of where they come from, reflect their scarcity and prestige in the price more than any dramatic difference in quality.
A number of people in the industry have told me that the most appropriate price for a wine is the amount people are willing to pay for it. Some brands carry certain reputations that allow them to charge more than their peers, which often means those brands are doing extra work to build and maintain their reputations, including (but not limited to) producing smaller quantities to maintain exclusivity. While these efforts don’t necessarily reflect the quality of the wine, they can reflect an added cost input. It’s no secret that part of what makes designer products so expensive is the amount they spend on advertising and promotion. The wine industry is no different in terms of the high cost of generating and maintaining excitement and desirability among certain customer demographics.
Why this matters to the consumer: The final price you pay is reflective of how much it costs to produce, where consumers place it among its peers and the extent to which the wine is desirable. This is to say, you’re likely paying fair market value even if you feel like you’re getting a bad deal.
Myth #3: The Framework for Distributing and Selling Wine in America Benefits Consumers
Fact #3: Our three tier system limits customer choice, hurts small wineries, and makes wine more expensive to buy.
With all due respect to my friends in the distribution and wholesale tier, and those in the regulatory agencies, the compromises this country made to get out of Prohibition suck. In addition to adopting the three tier system, the compromise that ended the federal prohibition on alcohol included giving each state the protected right to set most of the laws that affect the liquor business within their respective borders. Regardless of one’s political ideology, it shouldn’t be hard to understand why fifty independent sets of regulations, rather than one, is a bad thing.
The three tier system is made up of, yep, three tiers: the producer, the distributor/wholesaler, and the retailer. For a consumer to purchase a bottle of wine outside of a winery, the winery must first sell to a distributor or wholesaler, who must then sell to a retailer, who can then sell to the consumer. The middle man second layer adds an extra margin to the price while also doubling marketplace competition (the winery must offer a competitive price to the distributor/wholesaler who, in turn, must offer a competitive price to the retailer) that puts extra pressure on the producer to create room to bargain on unit price, often achieved by reducing costs (which can reduce quality). I could write a tomb on this, but won’t. I could also make a career out of ending it if someone had a decent number of billions of dollars to fund my efforts (anyone?). So, in brief, a few things to chew on:
(1) Corruption happens in highly regulated industries. Alcohol is very, very regulated. The ability to get a liquor license, distribution permit, import permit, retail license, permission to ship out of or into a state, and more, are all effected by corruption in one way or another. This artificial influence on the marketplace creates artificial – noncompetitive – distortions that skew consumer choice and inflate or deflate prices (depending on the situation).
(2) Fifty sets of regulations plus three tiers of selling means the financial and labor cost of meeting the regulatory burden and expanding one’s market (paying for distribution) is incredibly high. Further, because it raises the cost of doing business out of state the same amount for each winery regardless of size or profits, it disadvantages smaller and many medium-sized wineries that can’t afford the costs. This limits the geographic footprint of their prospective consumer base – and the number of consumers who both want their wines and are able to get them.
(3) The combination of #1 and #2 creates semi-monopolies for the large winery ownership groups/corporations that can pool resources from across their portfolio to ensure all of their labels are available everywhere. Depending on how the ownership group/corporation handles this advantaged position, this can be a good or bad thing for the industry. Some do it more humbly and intelligently than others.
(4) It incentivizes distributors and retailers to push larger labels (and wineries owned by larger labels) because they offer the distributor and retailer higher profit margins than smaller production wines that come at a higher per-unit cost but retail for the same price.
Why this matters to the consumer: Government regulation and an entrenched interest group (the second tier) are creating and enforcing a distorted marketplace in which you are forced to pay an artificially inflated price for wine you’re choosing from an artificially limited selection.
Myth #4: Growing Wine Grapes is Simple
Fact #4: Vineyard decisions are major decisions that can be significant drivers of cost and quality.
One of the most cliché things you hear about wine is that it’s made in the vineyard. But even though the point gets overused, it can be very true if a winery wants it to be true. And for many of us, our favorite wines tend to be legitimately made in the vineyard.
Vineyards are also where some of the biggest unknowns in winemaking exist because the unpredictable and cruel Mother Nature sets the course. Vines are susceptible to weather events, pests, bacteria, hungry wildlife, fires and much more. This makes vineyard management an inherently defensive, reactive enterprise even though there are strategies and tactics for setting a vineyard up for success before there’s a problem. To hear winemakers and vineyard managers describe any particular vintage, they talk about all the proactive stuff they do, but when the unfortunate and inevitable “but” drops, it is almost always an act of nature that couldn’t be prevented. This makes making vineyard-driven winemaking risky and challenging, and explains what can be dramatic vintage variation from low-intervention winemakers. Preparing for and coping with Mother Nature is one of the factors that separates the Winemakers from the winemakers.
Additionally, vineyards require a lot of money and planning and take at least three years to mature once planted before commercial wine can be produced, if not five. Terroir-driven wines benefit most from well-planned vineyards, meaning the right sites and soils are found, then prepared prior to planting, and planted with the right vines, clones and rootstocks, and given the TLC needed to raise them right. From site scouting to purchase; from doing the soil and climate research needed to identify the right varietals, clones and rootstocks and the year it takes to get them once ordered; from the planting to the nurturing of young vines for at least three years before production-worthy grapes are produced, it can take upwards of six or seven years easy before a vineyard is producing. It takes many more years before all the investment is paid off and a profit is turned.
Why this matters to the consumer: Knowing how wineries approach their vineyards and vineyard sourcing (buying grapes from other growers) helps one differentiate between wineries in terms of the planning, care and investment they make in their vineyards. Those wineries that do it right, meaning those that take the time to do the research and don’t rush the process, are more likely to produce a greater run of better wine than those that don’t, all other factors being equal.
Myth #5: If it’s on the Shelf, it’s Ready to Drink
Fact #5: Most premium wine will never be consumed at its best.
Estimates vary, but it’s safe to say that at least 90% of wine sold in America is consumed within a week of being purchased. The actual number is probably at least 95%, especially during COVID. The vast majority of that segment buy their wine from grocery stores and large wine sellers like Total Wines, which means most of that wine is sub or barely “premium wine” (a term that is usually defined as $20+ per bottle) and likely the current release (most recent vintage released for public sale). Sub or barely premium is fine (and in most cases probably best) to drink upon release like this.
However, most premium wine, I would argue red and white, improve over the three to five years following their release. I would put most New World premium red wine into this category, and a fair amount of wines from Old World regions. A smaller but sizeable chunk of premium wine doesn’t show its best for at least a decade. This is mostly Old World wine, with some New World in the mix.
It is impossible to know how much premium wine is captured in that 90%+ statistic, but I can offer significant antidotal evidence that it’s a statistically significant percentage. I’ve spoken with dozens of premium wine producers, and often ask them how many of their clientele, do they think, age their wines to full maturity. The answer is usually something like “very few” or “barely any.” Further antidotal evidence can be found looking at wine reviews on CellarTracker, a website used predominantly by discerning consumers that purchase the world’s better and best wines, where numerous reviews show evidence of premature consumption of wines that show their best years, if not decades, after release.
One could argue that the industry should shift to consumer preference and make more wines that are more accessible (meaning wines that require less aging to fully mature) upon release. That’s a fair argument, and a good chunk of premium wine producers make two levels of wine – somewhat less expensive and more accessible wines, and more expensive and age worthy wines. But for a small but dedicated segment of the market (where I reside), there’s nothing better than a fully mature premium wine. Thankfully, plenty of winemakers fall into that camp as well, and are able to make a few wines each that we fellow old wine lovers choose to age for years and years.
Why this matters to the consumer: Unless you thoroughly enjoy (or even prefer) young premium wine, you’re not getting the experience out of the wines you are buying that the wines – and the winemaker – intend you to have. Therefore, you may want to rethink your purchasing decisions because you may end up getting more pleasure out of different – and often less expensive – wine. Or, you should consider buying a wine cooler and putting some of your more structured wines to rest for a few years.
Author’s Note: This is the first Good Vitis piece focused exclusively on the business side of wine, which means it may be one of the more controversial pieces from this blog among our industry friends and followers. I hope it will be one of the more useful pieces for our readership. Regardless of whether you’re industry or a consumer, I’d love to hear your feedback. Please share it either with the group (post a comment) or send it directly to me at goodvitis(at)gmail(dot)com.