After seeing a box of Franzia for the fourth or fifth time since coming to Whitman, I began to wonder why decent wine is so expensive. The full retail price of a bottle of high-end cabernet sauvignon (a commonly made wine in the Walla Walla Valley) falls, on average between $30 and $40. Until I began looking deeper into the workings of the Walla Walla wine industry, I had assumed that the average bottle of decent wine has a high price because the cost of production is high. I learned recently, though, that this is not the case.
I asked Gordy Venneri of Walla Walla Vintners to go over the cost of production of a decent bottle of cabernet sauvignon made in the Walla Walla Valley with a full retail price of $35 (which, as mentioned above, is the average price for this type of wine). Let’s examine what he relayed. Note that the following numbers are averages.
Cost of grapes: $4.16
Cost of bottling (glass, cork, capsule, label, and bottling truck fees): $1.25
Other costs (building, labor, equipment, energy, misc.): $2.67
This cost of production is actually very low compared to the price. Because the bottle sells for $35 and the cost of production is $8.08, winery owners should profit $26.92 per bottle. The average winery produces 3,000 cases of wine a year with 12 bottles in each case. Therefore, an owner of an average Walla Walla winery should have a gross profit of about $969,000 if they sell their wine direct-to-consumer, and assuming they sell 100% of their wine.
The majority of wineries sell some (if not most) of their wine through the three-tier-distribution system, which (as I explained in my last blog post) only allows for the winery to receive about 50% of the retail price. Even if the winery owners sold all their wine through the three-tier system, though, they’d still get $9.41 a bottle, which would mean they’d receive an annual gross income of $338,760.
I am not the first person to have done these calculations and come to the conclusion that winemakers should be rolling in dough. Because of this conception and the idea that making wine is a romantic occupation, many people start wineries in the Walla Walla Valley with huge expectations of success. Very sadly, most of them fall short of their initial expectations, usually because the winery owners don’t take into account when creating their winery and business model that there is a latency between the time of manufacturing wine and the time of selling that wine, meaning they must face other costs before their wine goes to market.
Let’s look at a specific example to examine this concept. Take the fictional person Joe. Joe decides to move to Walla Walla and set up a plant that produces sprinklers. He will need to develop a production facility, purchase equipment and raw materials, pay for labor, etc., just like any production company owner would. Joe will (in theory) begin selling his sprinklers immediately after production, meaning he will likely see immediate cash flow. Now, take Sarah. Sarah moves to Walla Walla and starts a winery. Her product won’t go immediately to the market after production because wine must be aged in barrel prior to bottling and settled in bottle before coming to market. This means that a bottle of wine doesn’t go to market until at least two years after it was made. For this reason, she has to face several financial hurtles the Joe doesn’t. The first is that for the first two years of owning her winery, Sarah must pay for all the costs of production of the first two vintages of wine as well as her own cost of living, and throughout this whole time receives no cash flow from sales. Unless Sarah is independently wealthy, she will most likely finance her venture with borrowed money (i.e. loans), thus incurring debt. Further, she will likely want to increase production yearly, meaning that until she stops making wine, she will always be producing more wine than she’s selling. She must also pay to have her product stored for two years.
In summation, the reason a decent bottle of cabernet costs so much is that typically, wines are not sold until two years from when production began. Expenses come immediately and cash flow comes much later. So the price of the average bottle of wine is reflective not just of the cost of production but also of the cost of bring the product to the market. I asked Duane Wollmuth (Executive Director of the Walla Walla Wine Alliance) about the financial success of winery owners and he also stressed this difficulty. He states that, “the average turn around may be about 8 to 10 years. I would say a minimum of five years. It’s more of a lifestyle than anything else.” There are winemakers in the Walla Walla Valley who have been successful in getting through that turn-around (the time that passed before they saw profit). These people have either had very good business sense or they’ve been wealthy and have made wine more for the lifestyle than for a living. Both Ron Coleman of Tamarack Cellars and Duane Wollmuth shared during their interviews with me a common saying in the Walla Walla wine industry, “The easiest way to make a million dollars in the wine industry is to have three.”
Coleman, Ronald. Personal interview. 30 Sept. 2014.
Venneri, Gordy. Personal interview. 4 Nov. 2014.
Wollmoth, Duane. Personal interview. 30 Sept. 2014.