From vineyard to shelf: where your money goes

Pick up a bottle in a shop and ask a simple question: where does the money go? To answer it, economists build a cost stack, a list of every cost that goes into one bottle, piled up layer by layer. In this course we build the stack for a made-up everyday red with round numbers, then follow it all the way to the shelf.

The first layer is the fruit. Wineries that buy grapes pay by the ton, and a ton of grapes makes very roughly 700 to 800 bottles. We will use 720 bottles to the ton because it divides neatly. If our made-up winery pays $1,440 a ton, the grapes in each bottle cost $1,440 divided by 720, which is $2.00.

Grape prices vary enormously. In California, the official crush reports show that Cabernet Sauvignon from Napa Valley often sells for several times the price of the same grape grown in the hot Central Valley, where yields are high and the wine is sold cheaply. The same is true across the world: famous places and low yields mean expensive fruit. For a top wine, the grapes alone can cost more than the whole price of an everyday bottle.

Wineries that grow their own grapes do not get a bill per ton, but they still pay: for pruning, spraying, picking, machinery and the land itself. Dividing those yearly costs by the tons harvested gives a cost per ton they can compare with buying fruit. Either way, grapes are usually one of the biggest layers in the stack.

Remember Grape cost per bottle is the price per ton divided by the bottles a ton makes.

The third layer is the package: the bottle, the closure, the label, the capsule over the neck, and the cardboard or wooden case. Each piece is a variable cost, because every extra bottle of wine needs one more of each.

Packaging can surprise you. A heavy, thick-glassed bottle can cost several times as much as a light one, and it costs more to ship too. A long natural cork costs more than a screwcap. A wooden case with a branded lid costs far more than a cardboard box. Wineries selling expensive wine often choose heavy glass and fine labels because buyers judge the wine partly by how it looks, just as a phone in a beautiful box feels more valuable.

For our made-up everyday red, let us put the whole package at $1.25 a bottle. On top of that comes a share of overhead: the costs of running the business that are not tied to one wine, such as the office, accounts, website and marketing. We will put that at $0.50 a bottle.

Now we can add up the stack. Grapes $2.00, winemaking $1.25, packaging $1.25 and overhead $0.50 make $5.00. That is what one bottle of our made-up everyday red costs the winery before anyone else touches it. Keep that $5 in mind, because in the next lesson we will watch it grow on its way to a shop.

Remember Our made-up bottle costs the winery $5.00: $2.00 grapes, $1.25 winemaking, $1.25 packaging and $0.50 overhead.

Governments take a slice too. In the US, wine pays a federal excise tax, a tax on a particular product, collected by the Alcohol and Tobacco Tax and Trade Bureau. For ordinary still wine it works out at roughly 20 cents a bottle before credits that small producers can claim. States add their own excise taxes, and most add sales tax at the till.

Imported wine may also pay a tariff, a tax on goods brought in from another country, paid by the importer. US tariffs on European wine have changed several times in recent years. Here is why tariffs bite harder than they look. Take a made-up imported wine that lands at $8.00, then use our chain: a 25% distributor markup and a 50% shop markup. Without a tariff it goes $8.00, $10.00, $15.00. Now add a made-up 20% tariff: $1.60 more, so $9.60. The distributor's 25% takes it to $12.00 and the shop's 50% to $18.00. A $1.60 tariff has raised the shelf price by $3.00, because every percentage markup is charged on top of it.

So what is left for the winery in our domestic example? It sold at $8.00 a bottle and spent $5.00 making it, a profit of $3.00. That is just 20% of the $15.00 you paid. The distributor took $2.00, the shop $5.00, and the rest went on making the wine.

That is why so many wineries try to sell directly, through tasting rooms, wine clubs and websites. Selling a bottle at $15.00 to a visitor, instead of $8.00 to a distributor, keeps far more of the price, though selling direct brings its own costs: staff, shipping and marketing.

Remember Taxes and tariffs get marked up along the chain, and the winery often keeps only a small share of the shelf price.