How much did it cost to produce your shirt? How much did the chef pay for the vegetables you’ve just enjoyed with your fish? What is the difference in profitability between a Village Burgundy, a Premier and a Grand Cru?
Or, to focus briefly on a topic a UK wine professional raised with me recently, how do the production costs of an English wine compare to the ones for Champagne? The question was a response to a perennial complaint that bottles of fizz from the United Kingdom tend to be as pricey as ones from north-east France. It’s not that English fizz with its low yields and short harvests shouldn’t be so expensive, goes the argument – it’s more that Champagne should be cheaper.
Attempting to analyse the production costs of any bottle of wine is not easy. Do we have to factor in the need to pay back the money spent on buying vineyards or equipment or the construction of the new cuverie/tasting room? Should the price rise and fall in line with yields, irrespective of quality? How much are the workers being paid? Is the family giving its own members proper salaries? How do we factor in any kinds of subsidies or cheap bank loans? And surely the Champagne houses’ hefty marketing budgets have to be included in their costs?
The wine industry is no different from any other. Whatever you make has to be sold for more than it costs to produce. If the rent on the restaurant you’ve just opened is too high for the prices your customers are prepared to pay, your business will fail. Whatever it costs to make a bottle of British fizz, producers will need to add a decent percentage to that figure; they must also pay for the marketing necessary to persuade people to buy it. And if those sums don’t add up, well, maybe they should think of doing something else.
As someone whose job is to try to make sense of the wine industry, I’m fascinated by the reasons behind any price tag; it’s a topic I’ll certainly come back to on another occasion. For this post, though, let’s accept that it costs more to make a bottle of Pricey Estate than of Château Nobargain, both of which are on sale for the same price.
That difference may be of existential importance to the owners of the two wineries, their accountants, shareholders and competitors, and it is certainly of intellectual interest to analysts, consultants and business writers like me. But, unless low prices depend on abusive exploitation of people or the environment or of a monopoly, a winery’s production costs and margins should be absolutely nobody else’s business.
Diners don’t stop to consider how much more profitable the pepperoni pizza or spinach omelette might be to a restaurant than the chicken and bacon salad or the burger – as a Forbes Pricenomics article revealed.
And I’m sure the same is true of those who buy wines from the LVMH portfolio. Do any of them care whether the luxury giant makes more or less from its Cloudy Bay Sauvignon Blanc than from its Mercier Champagne or Cheval de los Andes from Argentina or Ao Yun? They’re buying a luxury they find desirable, and that’s what matters.
At more everyday prices it can be different. In the early days of this century, UK supermarkets employed their own winemakers to ‘work with’ and learn from their private label suppliers. It didn’t take long for these retailers to exploit this information in their purchasing negotiations, and to introduce the notion of ‘open book’ prices that required wineries to provide detailed justification for every cent they were charging. When this model was applied across all of Tesco’s purchasing in 2001-2, it apparently saved the company £200m ($343m).
Inevitably the supermarkets also tried to use this inside information to drive down the prices of branded wines, limiting the producers’ ability to promote them in any way beyond discounting. Strong brands were able to withstand this pressure, but in the wine industry, strong brands are the exception to the rule.
Using transparent pricing to force down the cost of cheap wine is potentially disastrous for long term sustainability of the industry and the environment. But focusing on the production costs of super-premium wines is a waste of time. Whenever anyone does it, I invite them to take a long hard look at the spirits sector. What justification can anyone offer for the price of a super-premium gin, vodka or tequila?
If your costs are too high there’s probably a fundamental flaw in your business plan. And if you’re forced to admit how low they are, you lay yourself open to being hammered into the ground by your customers.