Where Do Wine Prices Come From?

At auction, rare and illustrious bottles of wine can fetch six figures. In the bargain bin of your local liquor store, the asking price for a vaguely labeled table wine might be more in the neighborhood of six dollars. And in between the trophy-hunting wine collector and the budget-conscious college student, most wine lovers simply want the best wine we can get for the price we're willing to pay.

At wine bars and restaurants—where we do a lot of our wine drinking—wine prices may not span multiple orders of magnitude, but they certainly can vary drastically. You might pay $15 for a bottle in a local wine shop and then see it at a wine bar for $45. If you encounter the wine while traveling through Europe, it might be half that much. What gives? To find out more about how the wine in your glass gets its price, I asked a few industry professionals about the contributing factors.

Some of the answers are pretty basic: the forces of supply and demand affect the prices of everything, including wine. Climate, gas prices, taxes, and the cost of land and labor can, too. Praise from prominent wine critics can drive up the price of wine. And the tiered systems of alcoholic beverage distribution that are mandated by many U.S. states definitely affect how empty your wallet will be after buying a bottle or a case.

But it all begins with grapes.

From Vineyard to Warehouse

"I was just up in the Sierra foothills, which is just east of Sacramento, up in elevation, up in El Dorado County, with a winemaker," Brian Pilliod tells me. "When he went up to the foothills in the late '80s, he was paying $400 a ton for grapes. He's now paying $3,200 a ton"—an increase of 700 percent. "The vines were younger [back] then," Pilliod continues, "they were less in demand. El Dorado county was not something you necessarily put on [a wine's] label. He did, but a lot of people were just pulling grapes from up there—they were home winemakers, and everybody was paying the same amount. That has changed dramatically in 20-plus years. There are a lot more younger winemakers going up there; the demand for grapes is higher than the supply most of the time."

As American portfolio manager at T. Edward Wines, a New York City-based wine importer and distributor, Pilliod stands at a pivotal waypoint in the wine distribution chain. He works closely with the wine producers that his firm represents, as well as the T. Edward sales teams, whose customers are bars, restaurants, and wine stores located in New York, New Jersey, and Connecticut. From this vantage point, Pilliod can see what's happening at both ends of the stream.

He knows, for instance, that the winemaker he visited in El Dorado county is hardly alone in his experience. Numerous winemakers—particularly those based in California—have seen their costs increase dramatically over the past several years as the price of grapes has soared, "because very few if any of our producers actually own all the property that they get grapes off of," Pilliod notes. (By contrast, many a French wine is the handiwork of a vigneron who both farms his or her own grapes and makes wine from the fruits of that labor.)

Clay Mauritson, the winemaker behind Mauritson Wines, says that "Grapes are our biggest cost in a bottle of wine." He purchases nearly all of the fruit for the 20 unique wine labels in his brand's portfolio from his family's vineyard—an operation that is run separately from Clay's winemaking enterprise. In an average vintage, the Healdsburg, California, winery will produce around 12,500 cases from approximately 200 tons of grapes. Mauritson says, "Grape prices in general have risen steadily over my tenure in the industry."

In the case of El Dorado county grapes, the rise in price resulted from increased demand. "If a region becomes much more en vogue," Pilliod says, "then the cost of grapes go up, because there's a lot more people wanting those grapes." Even those winemakers who grow all their grapes can experience shortfalls in yield—due to factors such as drought, unseasonably low or high temperature at critical periods during the growing season, and insufficient soil fertility—which can result in elevated pricing. "If [wineries] have a very short vintage, prices have to come up because the fixed costs are still the same for our producers," he adds.

It's hard to bring the cost per bottle down. "With our limited-production wines," Mauritson says, "it's really hard to 'control' costs. We do not get any advantages of economies of scale on the production side nor the packaging." To try to stay on budget, Mauritson keeps an eye on that packaging: "Even with 20 wines a year, we only [use] five different glass molds. We also utilize the same back label for multiple wines and, whenever possible, we will print multiple labels and vintages at the same time." And like many wineries of similar size, Mauritson hires a mobile bottling line that comes to the property by truck. "They have minimum daily charges, so we try and bottle multiple wines at a time."

By the time a wine has been produced, bottled, and prepared for shipping, the winemaker's costs—everything from labor and equipment; to storage and electricity; to glass, corks (or screw caps), and labels—serve as a baseline for determining the price he or she will sell it to distributors for. Then a crucial discussion takes place. Pilliod says, "The conversation of where we price the wine for retail and to restaurants"—a number that comprises the winemaker's price plus the distributor's markup—"is extremely important to our producers. They're relying on us to give them good advice." This is where a distributor's expertise in looking both up- and downstream is crucial.

"In a sense, it's a very simple process," Pilliod says. "We buy goods, we mark them up, and we sell them to our customers, who mark them up and sell them to the consumer—whether that's on the floor of a restaurant or in retail store. But there's a tremendous amount of effort and dialogue and protecting of interests that happen during that process...that could be five ideas converging into one"—in which the price the distributor surmises that the consumer would pay bumps up against the realities of the inherent fixed costs that must be offset. "It's a little bit of a moving target that we try to stay in the middle of." He adds that, "The volume you want to go through, and making sure it hits a price point that works for the market—where we can move through the quantity that's needed within our states—is a big part of how we mark up."

Distributors must factor in the costs they incur as part of running their business when determining markups. "A lot of that has to do with the transport that we pay for [in order] to get the wines across the country or across the world," Pilliod says. Throughout both transport and warehousing, the wine must be kept refrigerated—a costly but critical expense to ensure optimal quality. "We also pay a tremendous amount in warehousing for the wine, and in commission to our sales force," Pilliod notes. The costs of office space and the administrative staff—who oversee things like logistics, bookkeeping, and billing—also affect their thinking about wine pricing.

Ultimately, there's no magic, universal percentage that a distributor can simply apply as a standard markup. As Pilliod notes, "Everybody is different in their margins, in what they feel is appropriate to mark a wine up." Plus, for every new winemaker who joins the market, the competition for sales becomes that much more acute.

Into the Glass

Once the distributor's price is set, the wine is one step closer to a decanter near you. At bars and restaurants, the task of pricing wine typically falls to the beverage director or sommelier or both. As a co-founder and the beverage director of New York City's Epicurean Management Group, Joe Campanale performs this job for not one but four wine-centric dining venues: dell'anima, L'Artusi, L'Apicio, and Anfora.

"You set up ahead of time where do you want your business to be, like, how much do you want to make when it comes to wine—what are your goals—and then you have to back it in from there," Campanale says. This process entails deciding what percentage of the final sale price ought to be made up by the cost of goods—that is, the wholesale price the restaurant paid for a bottle of wine from its distributor. Proceeds from the markup go toward all sorts of expenses, including rent and servers' salaries, glassware and someone to wash it... and replacement glassware if glasses break. If the business is healthy, some sliver of the markup likely also goes toward the owner's income (also known as profit).

"Let's say you want you wine's cost to be 30 percent," Campanale says. "Then I think it's the goal of the beverage director to get the customers the best possible wine, and still hit your 30 percent cost. It's our job to find that value for the customer." He cites a common scenario: "If you're looking for a Chianti at $15 wholesale that you're going to put on your list at $45 or $50 or $55 or whatever your pricing is, you have options of industrially made stuff that's picked by machines or there's lots of chemicals added to it, and it really doesn't really speak of the place it comes from. Or you can choose a really artisanal product that has a lot of human time involved in it and is really an expressive and soulful product. And those might be at the same exact price point. It's doing your research and really tasting and learning about the producers."

Are the markups on glasses and bottles of wine the same? Not always, says Emily Johnston, the general manager and wine director at S.Y. Kitchen in Santa Ynez, California. Johnston explains: "The wines by the glass get a higher markup, and the expensive bottles get a lower markup. But everything in between is marked up about the same." One reason the markup is higher on glasses of wine than bottles? "To cover costs due to spoilage or over pouring," she notes. (At S.Y. Kitchen, an opened by-the-glass bottle is either sold through or dumped after one to two days.) And although the precise percentage markup on a glass may vary, Johnston says, "For most restaurants who get four pours of wine per bottle, they make up the bottle cost on the first glass. We generally follow the same format."

Bottle markups are also lower than by-the-glass markups at Anfora, Campanale says, but the rationale is slightly different. The wine bar aims to share the owners' passion for amphora-aged wines and encourage guests to taste the centuries-old style that had nearly disappeared from the map before a recent resurgence. The price of a glass is around the price Campanale pays wholesale for the bottle. "We're able to keep our bottle prices a lot lower at Anfora because we're selling so much of our wine by the glass." Campanale says that anywhere from 80 to 90 percent of Anfora's wine sales are either by-the-glass wines or full bottles of the wines it offers by the glass. "At the other restaurants, it's significantly less." Campanale notes that "if there is something off the beaten path that is funky and we're really fond of, we'll often take a lower markup just to have it on the list."

Johnston says that a restaurant's location can also influence how it marks up wine—and not simply because of the cost of rent. "Being based in a wine-producing area with a lot of local winemakers and wine-loving residents as our guests, our markup is less than that of restaurants in cities, or even in restaurants I visit in Santa Barbara," she says. "We have to appeal to a crowd of people who have a lot of wine at their fingertips.

Both Campanale and Johnston say that their staffs' passion and knowledge play an important role in wine sales—but getting sales to that point requires investment. "I put in extra work to train the staff so that they know the story behind bottles I would like to highlight," Johnston says. At Anfora, Campanale says, "We do a lot of training; we are always opening up tons of product for training"—an additional cost to the wine bar's bottom line that Campanale believes is essential. He notes that, "We deal predominantly in grapes that people don't know. We don't have on our by-the-glass list a lot of the kind of familiar players, the easy-to-recognize wines. I think the big thing is the staff; if they love a wine, it's going to sell...If your bartenders and servers are into a wine, they're going to move it."

Johnston stresses that a beverage director's wine-pricing strategy also has to take into account the immediate competition. "I have to be constantly aware of how much people are paying for a bottle elsewhere in the Valley," she says. "Luckily, importing and shipping costs don't factor in very much in our expenses."

Campanale doesn't have that luxury. Thousands of miles from where most of his wines are made, he has to find other ways to control his wine costs. One approach—which is allowed by New York liquor laws but not necessarily available elsewhere—is to buy from distributors in bulk for discounted rates. (Price breaks typically come at orders of three and five cases.) For the physically larger establishments of the restaurant group, which have more storage space, Campanale is able to take on more wine inventory per order. "We can buy deeper on something at a bigger restaurant," he says.

There are, in essence, two ways of looking at the process of bringing wine from the fields to your glass. On the one hand, every stakeholder passes on their costs of doing business to its customer, all the way down to you. On the other, each step in the process also involves a passionate wine professional who gets excited about a wine and wants to get it in the consumers' glasses at the best possible price, so that we drinkers experience it as not only worthwhile, but special.

When he finishes his story about the winemaker in El Dorado County, Brian Pilliod notes that the winemaker "was very aware that when he was buying grapes back in the day that he was on to something that had a lot more potential than what he was paying for. Which is kind of what every winemaker should search out." The same can be said of us wine drinkers.