Winery economics

by Jana Harvey on August 15, 2009

We are often asked how a standard winery business plan works.  As with so many things these days it is changing as our style of marketing changes.  In the past we depended on and sold most of our wine through distributors in what is known as the three tiersystem.  We produce wine, it is sold to a distributor who sells it to a store or restaurant who then sells it to you. 

Lets say our cost of goods (what it cost to produce a case of wine) is $50.  We then sell that wine trying to generate a 50% gross margin, which means we would sell the wine to the distributor for $100. Out of the $50 generated above the cost of goods we allocate $20 for cost of sales (what it cost to sell the wine, salesperson wages and expenses, any discounts, travel etc.) and $20 for general and administrative (the cost run the wine company) and hopefully there is a $10 bill left for profit.  It is what we call the 50, 20, 20, 10 rule.

The distributor than takes the case of wine they paid $100 for and add their laid in cost, (what it cost them to get the wine to their state and their warehouse, any state taxes, etc.)  The typical laid in cost for a case of wine from our Napa Valley warehouse to a distributor in Chicago is about $8 dollars.  So they take the laid in cost , now $108 and work off of that.  The distributor then marks the wine up 33% on laid in cost or 25% of their selling price.  This number is the same, $35.64.  $35.64 is 33% of $108 or 25% of $143.65.  Often,if the distributor will be offering quantity discounts, they will add this to the asking price, so they can discount it back.

Next the store takes its purchase price, now $144 and and works on 50% on cost or 33% on sale.  This number is $72.  $72 is 50% of $144 or 33% of $216.  So the case of wine that cost me $50 ($4.17/bottle) cost the wine buyer in Chicago $216 case or $18.00 per bottle. 

This distribution three tier system is rapidly being taken over by the larger wine companies that can get and hold onto the distributors attention.  As a small winery the amount of money generated by our brands for the distributor is far less than that of a large higher volume winery.  The amount of attention the distributor sales staff gives your wine is directly correlated to the percentage of gross revenue your brand generates for the distributor.  Therefore, we are being forced to find other ways to get our wine to the consumer.  If we can sell our wines direct to the customer either through our internet website, our tasting rooms, wine clubs, third party internet websites, we can keep a higher percentage of the customer dollar or sell the wine for less.  As we slowly change from the three tier distributor system to direct sales our 50,20,20,10 rule changes more to a 60,30,20,10 rule or 70,35,25,10 rule. 

{ 4 comments… read them below or add one }

Tracy August 17, 2009 at 8:29 am

Hey nice blog, and a great topic.
I think it’s important to say that that I know of only one distributor that we work with that actually works on a 33% markup.
That used to be the way it was back in the day, but you’d be hard pressed to find a distributor working on a 33% markup now.
The whole 3 tier system has changed with regards to markups, even retailers and restaurants vary from your model (some taking less profit, some more) which causes huge price differences for the same product.
Times have changed for sure! Keep up the blogging!

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The Winery Web Site Report August 25, 2009 at 6:00 am

Wine Pricing In Restaurants: What’s Fair?

What’s a fair price for a glass/bottle of wine in a restaurant? This question showed up as a comment to one of my posts. I’ll give you my opinion, with the caveat that I’m not a restauranteur trying to make…

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Jana September 11, 2009 at 4:50 pm

Hi Tracy, thanks for your comment. I mentioned to Scott since I do most of the programming that times have changed.

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Jordan 1 August 18, 2010 at 8:28 pm

Moderate drinking good for you! Alcohol on the body is hurt more than big! We should take good care of your body! Thank you for your suggestions! You’re a good person

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