Wine production economics 101

Every business, from a lemonade stand to a famous château, runs on three numbers. Revenue is the money that comes in from selling things. Cost is the money that goes out to make and sell them. Profit is what is left when you take the costs away from the revenue. If the costs are bigger than the revenue, the profit is negative, and we call it a loss.

Here is a made-up winery with round numbers. It sells 10,000 bottles a year to shops and restaurants at $20 each. Its revenue is 10,000 times $20, which is $200,000. Growing the grapes, making the wine, paying the staff and buying the bottles costs it $150,000. Its profit is $200,000 minus $150,000, which is $50,000.

Profit on its own does not tell you much. A giant company making $50,000 would be in trouble; a tiny family estate might be delighted. So economists also look at the profit margin: profit divided by revenue, written as a percentage. Our made-up winery has a margin of $50,000 divided by $200,000, which is 0.25, or 25%. That means a quarter of every dollar it takes in is kept as profit, and three quarters goes on costs.

Notice that the winery sells at $20, not at the price you see in a shop. The shop and any wholesaler in between add their own share, so the winery's revenue per bottle is usually well below the shelf price. Keep that in mind: when people say a bottle costs $30, they rarely mean the winery received $30.

Profit matters for more than greed. It pays for new barrels, replanting old vines, and surviving a bad year. A winery that never makes a profit eventually runs out of money, however good its wine tastes.

Remember Profit is revenue minus costs, and the profit margin is profit divided by revenue.

A winery needs grapes, and grapes need land. Vineyard land is measured in hectares (one hectare is about 2.47 acres, or roughly one and a half football pitches). Its price varies more than almost anything else in wine. The best grand cru vineyards of Burgundy trade at many millions of euros per hectare, while land for bulk wine in other regions can cost a tiny fraction of that.

Why such a gap? Land is worth what it can earn. A grand cru plot produces wine that sells for hundreds of dollars a bottle, and there is no way to make more of it, because the boundaries were fixed long ago. When something is scarce and many people want it, its price rises. Land that makes wine selling for a few dollars a bottle simply cannot earn enough to justify a high price.

Land also brings a hidden cost. Suppose a family owns its vineyard outright, with no loan. It can feel free, but it is not. The land could be sold and the money put somewhere safe to earn interest. What you give up by choosing one option over the next best one is called opportunity cost. Here is a made-up example with round numbers: if the land is worth $1,000,000 and that money could earn 5% a year elsewhere, the family is giving up $50,000 a year by keeping it as a vineyard. A careful economist counts that as a cost of making the wine.

Planting a new vineyard also takes patience. Young vines usually need about three years before they give a crop worth picking, so a new grower pays for land, vines, posts and wires long before any wine is sold.

Remember Land is priced by what its wine can earn, and even land you own outright has an opportunity cost.

A value chain is the series of steps that turns raw materials into something a customer buys, with value added at each step. For wine the chain usually runs like this: a grower farms the vineyard; a winery crushes, ferments, ages and bottles the wine; an importer or distributor moves it to the right market; a shop or restaurant sells it; and finally someone drinks it.

Each step costs money and each business in the chain wants a profit, so the price climbs as the wine moves along. That is not automatically unfair. The distributor stores the wine, delivers it, and persuades shops to stock it. The shop pays rent, staff and electricity and lets you buy a single bottle on a Tuesday evening.

Not every winery does every step. Many wineries own no vineyards and buy grapes from growers. In Burgundy, a négociant buys grapes, juice or young wine from many growers and sells it under its own name. Some small growers sell their whole crop and never make a bottle. Others do everything themselves and sell straight to visitors at the cellar door, keeping the shares that would otherwise go to the middle of the chain.

Where a business sits in the chain shapes its risks. A grower depends on the weather and on finding buyers for the grapes. A winery ties up money in wine that may sit in barrels for years. A shop worries about wines that do not sell. Understanding the chain is the first step to understanding why a bottle costs what it does, which is exactly what the next course on this site works through, step by step.

Remember Wine passes through several businesses on its way to you, and each one adds cost, value and its own profit.