Editor:

I've just been reading "Grape Prices: higher, but not high enough?" (October 2005), in which Jim Gilmore of the North Coast Grape Growers is quoted as saying that distributors get 40% of the cost of a bottle of wine.

I teach wine marketing here at UC Davis, and for 22 years managed a small winery, Orleans Hill. I am plenty critical of distributors and the service they offer, which is primarily a warehousing and delivery service, rather than active marketing. But there is no way that distributors get 40% of the price of a bottle of wine.

Most retailers work on about a 30-35% margin on sell (unless they are a volume discounter), and most distributors work on about 28% to 30% margin on sell for lower volume, slower moving wines.

So let's work backwards on a bottle of wine that retails for $20.

The retailer takes a 33% margin on sell, or $6.60 a bottle, so he purchases the wine from the distributor for $20 minus $6.60, which equals $13.40.

Let's assume the wholesaler is working on a 28% margin on sell. He is selling the wine to the retailer at $13.40, and 28% of that is $3.75. So his cost is $13.40 less $3.75, or $9.65.

Now, he is buying the wine FOB from the producer, so the distributor has to pay the actual shipping costs from California to his warehouse and the state taxes. That can vary a lot, but let's say $4 shipping and $2 state taxes, or $6 a case, which works out to 50 cents a bottle. So he is buying the wine from the producer at $9.65 -- 50 cents = $9.15 a bottle, or about $110 a case FOB the winery.

Let's assume the winery is working on a 50% gross margin, meaning that half of the FOB price goes to cover the winery's sales and marketing, general administrative costs, interest, taxes, and some profit. That leaves another 50% to cover the cost of goods. In this case we have $55 to go to cover the cost of goods, which include grapes, oak of some sort, packaging materials, production labor costs, etc.

Let's say package costs and bottling labor come to $14 a case.

Let's say the winery is using used oak barrels and some oak chips, and has a cost of $6 a case for oak.

Let's assume a production cost of $2 a gallon, or $4.80 a case.

Added together that comes to $24.80, which leaves $30.20 a case to cover the grape costs. Assuming 65 cases to the ton, the winery can afford to pay just about $2,000 a ton for grapes that go into a bottle of wine that retails for $20 (the old 1% rule of thumb).
If you go back and review the math, you will see that the retailer received 33% of the revenue. The distributor received 18.75% of the retail price. Shipping and state taxes were $6, or 2.5% of the retail price. The winery kept $55 per case--or $4.58 a bottle--to cover operating costs, sales, state and federal income taxes and (hopefully) profit. That comes out to just under 23% of the retail price.

Grapes, at $30 a case, were about 12.5% of the retail price, which agrees with Gilmore's estimate.

I suppose the point of all the above is that we all need to understand the distribution system and the numbers before we start pointing fingers.

s/ James Lapsley, Ph.D.
Dept. of Viticulture and Enology UC Davis
via email

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