How is this still a business?

wineMarketPlace radio show tried to answer a reader question on wine pricing. A reader asked them to investigate,

How do wineries set the price of a bottle of wine?

The reporter answered this by calling on many different wineries. The answer from all of those interviewed is exactly the same – based on costs. And worse, with fixed cost allocation for each bottle of wine.

Adding up Costs -“… the price depends on three big costs. It would be vineyard, then production, then sales,”

Marketing Costs allocated to each bottle of wine – “80 percent of the cost of a $30 bottle of wine, distributed nationally, can be advertising”

Expecting customers to pay more for operations  – “And we’re pulling out any bugs, any leaves, any stems”   (To this the reporter replies, “I am willing to pay for wine without bugs”.)

Don’t forget to add packaging costs – “The grapes are going to be about 15 percent. The package might be 10 percent. The production is the vast majority of the cost for me.”

2012 NYTimes article on winery business points to dismal state of profitability in wine business. It is the only business where success is measured by ability to break even rather than ability to turn a profit. Once again we can see this cost driven thinking,

He said the costs of making a high-quality but small-production wine make it difficult to turn a profit. There are the salaries of the vineyard manager and the winemaker and also the costs of the bottles, labels and corks, which, he said, are $2 each.

The old saying in the wine business, “How to make $1 million in wine business? Start with $10 millions”,  seems to be explained by this pricing philosophy. If you look at this closely winery is one of the least customer driven of all businesses. There is no understanding of customer segment, why they buy wine to what wine to make. If they understand there is lot of factors affect the final product that are not under the maker’s control.

So you wonder how is this still a business? Only explanation is what one of the winemakers said,

“This wine business, we don’t make any money,” Mr. Ross said. “I do it for love. I sell shower doors for money.”

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