Video: The Cost And Profit Breakdown of $150 Cab.

WINE TALK
21

Totally, but this video was not about what lifestyle is in it for the owner, it was about financials for most wines at $150. Most $150 wines don’t own their own vineyard, nor will they. Most would love to have their own, high-quality vineyard but it’s simply not an option for most. If suspect if you were to buy your own property now at current market prices, you could not afford it. So although it is a great lifestyle advantage, it’s not really applicable to the financial discussion for 95% of the $150+ wines out there, so I did not address it.

Don’t pay an expensive consulting winemaker (I think you said you don’t, Roy) if you don’t have to. Excellent fruit goes a long way. Don’t pay for that big-shouldered glass at $4.00 a pop - at these levels of production you are not looking for an image of being a big boy on the retail shelf. Pay a buck; it costs less to ship, too. Custom crush where they have their own bottling line.

At $150, these are the standards. Go with fifty cent corks and $1 bottles and unknown winemakers and winery will struggle in my opinion, unless they are able to somehow get the non-monetary, emotional attachment from the buyers, or have already created their brand and have success already. That takes a lot of time. Once the price hits three-figures, many buyers don’t like taking chances and gravitate to either the winemaker or the vineyard, or both. Packaging helps send a signal that it is a serious operation, but is less important than the fruit and winemaking. But at this price point it ALL matters. Two out of three just ain’t good enough. You have to fire on all cylinders.

You can minimize the cost for new French oak barrels by cutting the percentage of new oak. This gets into style, but you are not wrong on the cost for a new oak barrel. I pay way more (I think) for labeling. Artist costs, photo costs, and per bottle printing costs are high for screen-printing, as I do.

Costs can be cut in all sorts of ways, but one can’t cost cut your way to a $150 wine and expect to succeed. It’s a different world where everything has to be right. Buyers will sense they are not getting the packaging they expect and it will cost the winery in lost sales because potential buyers will wonder if costs are being cut in other areas.

I agree about labeling. Most $150 wines spend $20,000-75,000 just to get their label designed. And $5000-20,000 for photography and $10,000-50,000 for their website. I did not include these costs because I am looking more at yearly costs than amortizing start up costs. But yes, labels matters. Presentation matters. Silk screening is still not overly expensive though, just $1-2 per bottle? Bottle costs for most $150 wines far exceed the costs of a silkscreen.

I disagree about photos being critical, though. Screaming Eagle has none and they have no problem. Harlan had none for 15 years and they did fine. I have yet to know of ONE wine buyer that bought because they liked the photos on someone’s website. I will tell you as fact that 80% of all Cab buyers only see the order page of a website. They go to it to purchase when the offer goes live. That’s about it. I’ve seen the metrics that prove that.

22

Roy…briefly…when I mentioned photos, I meant for the label screening process. Every time I produce a new vintage, the photo charges by the imprinter are there. Print 20 cases? Same as 200 cases. Impacts the cost per bottle to package.

My website is way out of date for photos. Just not my area of focus.

Again, I think your presentation is very good, but as you well know, if you post, you will get commentary. That’s what it is about, correct?

23

And Mr. Piper…you skipped over my number one reason to own a vineyard is CONTROL. Control of your fruit source. Lifestyle is second. Way second.

Control over what, some might ask. Over farming practices, price, quality, pick date, on and on. No one can control the weather, but after that it is access and ability to manage the process.

24

Oh, gotcha. Your wine is a perfect example of getting a label right. It’s a sweet design.

Totally up with commentary, but I am certain that unless you already made you bones in the 80s or 90s, trying to start or run a $150 Cab in Napa now is a losing proposition without BOTH a winemaker and vineyard of pre-existing repute and then also top tier packaging. There is one other option… going all-out to make an emotional bond with the end user, through access. But even then, one is more likely to do that with the vineyard, winemaker and packaging that people find interesting. Is it an easier path to success with Thomas Brown as your winemaker or someone no one has heard of? A wine from ToKalon or some no-name vineyard. Packaging that looks like Buccella (in my opinion still the most wine beautiful bottle around) or a 90 cent bottle? Can it be done without these? Maybe. I actually doubt it. But it can be done a lot easier when you don’t fight what your buyers expect.

BTW, all these things kind of get lessened under the $100 price point. And for Pinot and Syrah, it is a whole different thing, entirely. I know one producer that makes both Bordeaux and Burgundian wines… they have almost completely different buyers for the two wines with little crossover. It’s like they are running two wineries within one. Clients are often looking for something different from Pinot and Cab. Totally different sensibilities.

25

Not sure I agree, actually. Perhaps a few years ago, but I am slowly becoming a contrarian on this subject lately. It’s not always an advantage. It’s a… convenience.

I would rather have an A+ vineyard with B+ farming than a B+ vineyard with A+ farming. Control is somewhat important. But I’ve never once paid a quality price because I had to wait three days to pick. The quality of the soil trumps the control aspect almost every time. This is assuming we are talking about a $10,000+ per ton vineyard on really good soil. I prefer fanatics on excellent soil (who doesn’t) and thus I don’t need control much at all. In fact, with Steve Moulds for example, I would rather give HIM control, because he is obsessed. His vineyard has his name on it and he knows 10x more than me.

Essentially, the better the vineyard, the less the winemaker needs control. If I need to control what happens in the vineyards I source from, I need to find better vineyards. Most top vineyards get big bucks because they do a nice job in the vineyard. Good vineyard management at the high end is becoming the norm, not the rarity. So can I add more to the equation by having control? Not so sure! Only if I know how to run a vineyard better than the owner who lives on the property. Most times, I don’t.

Of course, you have a vineyard with a killer location and you like to spend a lot of time in it. A nice combo I and most can dream of, but probably not replicate.

26

Seems like a lot of the overhead could be reduced by small brands working collaboratively to acquire a custom crush with a TRB-like consultant contracted as the house winemaker. Wishful thinking, I know, but the economies of scale are brutal at these quantities going it alone.

This appears somewhat like house flipping in a high-cost area. First get the expensive raw materials that yet need significant further improvement, then contract to specialists to hone the raw material. Works great when the economy is solid and you can hit your target, but can easily implode if you get stuck with inventory you can’t move at a profitable price.

27

With all of these “image” issues (name-brand flying winemaker, gonzo bottle, new oak) so important in the Napa scheme of things, I can see why I do not gravitate to this area for wine. I could care less about all that.

One question about crushing fees, though. If it costs substantially more to crush in Napa, why not just cross over and do it in Sonoma? It seems many wineries that source throughout the state bring their grapes every which way to crush them (examples like Ridge, or Rhys (which I assume crushes their Mendocino grapes at their Sunnyvale location, Sandlands, etc.).

28

Here goes the thread drift. One thing I’ve noticed in the past couple of years is the popularity of custom crush in the town of Sonoma. There are a bunch of operators at the ‘8th street wine ghetto’ in Sonoma. Makes sense as it’s very close for those high paid consulting winemakers to pop over and rack up those billable hours. Apparently much less problems with new winery permits and other regulatory issues as well.

29

What an interesting discussion. Roy, thanks for starting it.

We don’t fit either Roy’s or Merrill’s model. We own our own vineyard and do our own farming and winemaking. We have no consultants. But we don’t produce Cabernet, so we often feel out of place in Napa. We’ve chosen to grow the varieties that we think are best suited to our cool site and that we enjoy drinking (Syrah, Mondeuse, Malbec, Zinfandel). And none of our wines are priced over $50. If we had been more market-driven at the beginning, we probably would have planted Cab and made a lot more money. But we are not sales and marketing people, and never will be, so it is what it is.

Anyway, I’m enjoying this discussion at lot.

Carole

1 Like
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A real eye-opener, thanks Roy! I confess that the prices being asked for start up Napa Cabs have always looked unjustified to me . . . . I’m inclined to be a lot more sympathetic now.

I would love to see this kind of analysis for a First Growth Bordeaux, as they are large scale, fully self-sufficient operations (with centuries of ownership in some cases) so in light of what you’ve revealed, they ought to be able to operate in a very cost efficient way for the level of wine they make.

31

Custom crush is getting more expensive all the time. I would say the prices are up 50% just the last 4 years, which is more than fruit costs are going up. So many small brands being made.

32

I think it might have to say “Produced and bottled in Sonoma, CA”. That might not be the image a Napa producer wants on their Cab. It’s just the way it is.

33

You and Steve do what you want to do, and throughout Napa Valley, there is huge respect for you, Carole, and for your label. There are so many different variations on the theme, here.

There is absolutely no denying that a new label will get a huge jump-start from engaging a top-rated/well-known winemaker. For people who are not able to be in Napa to taste frequently (and feel/live the pulse), there is no other way to keep up with the new labels and productions other than to rely on known and respected winemakers and vineyard sources. That makes perfect sense. But I think once the initial buzz has quieted down, people will rely on their purchases and tastes, and the wine has to be good…very good…for a new label to succeed.

My neighbors Araujo’s Eisele (now owned by Latour), Hundred Acre, Kelly Fleming, and Fisher Lamb are probably all well over the $100 mark.

My “regular” Black cat sits at $70 for initial release, and quickly goes to $85. The “Special Selection” has been $90, and is going to $95 for the 2014. And something I have never done before is take an entire barrel and devote it to a single label. I am doing this with a 20 case offering to honor my Sparkles, the original Black Cat. But also because that barrel is THERE. Has been since initial taste. It will be $135 not because of a cost-plus model, but because I believe that is the market for this wine. (If I am wrong, it will be fun to drink, here. [cheers.gif] [cheers.gif] ) When we rack, we rack back into the barrel that we originally barreled into from press. My eye is on this one, but it will be produced without any detriment to the Special or the regular. I have a potential 200 cases, and I am having a blast working through the possibilities.

When the experience becomes only an exercise in numbers, I’m out. And I’m not saying that Mr. Piper’s post is only that - I went to bed thinking in numbers, and I woke up to the same. It’s all good.

34

I think your first paragraph is part of the core issue here, but for me, it’s meaningless. I feel winemakers should be under no obligation to “justify” the cost of their wines. If some actually do need to charge triple digits based on their cost of production - well hopefully the market will support that price; but if you don’t NEED to charge that much, but can, why shouldn’t you?

Your second point hints at this as well - Latour produces 18,000 cases per year. You think their production costs are $100 per bottle? I’ve heard, in other formats, that with reasonable scale (ie couple thousand cases) it’s tough to spend more than $40-50 making a bottle of wine (which Roy’s analysis seems to support), so by that logic, most Bordeaux is wildly overpriced. Now, I may agree that it’s overpriced, but NOT because they’ve got a reasonable cost of production. They’ve also got the added benefit of being able to sell futures, thus flipping Roy’s IRR calculation on its head.

35

Bumping this question - i’m curious as well… what does the owner add in value??

36

Roy, thanks for your post – it’s really interesting. And I have the same question Sean H asked.

37

As in any business, the owner provides the risk capital. The consultant, the marketer, and all those providing services to the winery get paid upfront. The owner gets paid back (or not) when the product sells (or doesn’t sell). In the scenario Roy presented (and as others have noted, there are plenty of alternative scenarios), the owner still has quite a few decisions to make: Which consultant to hire, what the scope of work the consultant will undertake, perhaps provide input on grape sourcing, making the choices Ray outlined such as bottle type, label type, marketing strategy. Of course these could all be outsourced to a professional manager or perhaps the consultant (I don’t know the typical scope of their involvement). The owner may choose to be more involved, for example telling the consultant winemaker “make a 95pt Parker Cab” or “Make RRV Pinot”, “Use only native yeast”, etc etc.

Are they providing “value”? I suppose that’s more in the eye of the beholder. Without them though, the entire thing does not happen. So if you like the wine, they made it happen. That’s at least some value, to me.

38

Great video. Still, this makes me even less sympathetic to most high end winery owners. If most owners aren’t making their own wines, if they don’t have time to do their own marketing, if they aren’t working directly in sales, if they’re not even getting muddy working 16-18 hour days during harvest, what exactly are they doing? Shopping for Hermes scarves and Gucci loafers, spending the rest of their fortunes they’ve made elsewhere I suppose. Wine is like art, you can’t really have sympathy for someone who is/stays poor following their passion, as honorable as it is. Oregon really has something special going on up here.

39

Great post Roy, and even better discussion. Ahhh…how I love to watch you two chat, Roy and Merrill–takes me right back to that wonderful dinner we had in May. Keep it up!

And remember, that $150 bottle of Cabernet? That’s C$225 for me now, even without any imposition of duty or taxes. Maybe this is a piece of the discussion that should start to creep in. I can tell everyone on the board, it is beginning to affect some mailing list decisions for me.

Mike

40

I was never looking at it from a cost of production perspective - in fact, quite the opposite: I’m not the sort that would be able to, nor am I interested in, paying the money for a culty Napa Cab. But I understand that the market can and does support those prices. So, when I saw new Napa Cabs with no track record released at the price of say a 2nd Growth, and that prior to them even receiving any critical press, I questioned why they though the market would be willing to support it. The best answer I had come up with is “there are lots of folks so more well off than me that they don’t think much of spending that kind of money on an experiment.”


Your second point hints at this as well - Latour produces 18,000 cases per year. You think their production costs are $100 per bottle? I’ve heard, in other formats, that with reasonable scale (ie couple thousand cases) it’s tough to spend more than $40-50 making a bottle of wine (which Roy’s analysis seems to support), so by that logic, most Bordeaux is wildly overpriced. Now, I may agree that it’s overpriced, but NOT because they’ve got a reasonable cost of production. They’ve also got the added benefit of being able to sell futures, thus flipping Roy’s IRR calculation on its head.

Same as my above logic: the 1st Growths have arguably the most established track record of any wineries on earth, and the market is willing to supports the prices. I never had any notion that they were actually tied to the cost of production. It doesn’t cost them so much more to make the wine when it gets 100 points than when it only gets 95, after all (in fact if anything, their costs are probably higher in years that they can ask less for, due to increased effort in the vineyard and winemaking). Just to be clear, I can’t afford them anymore than I can a culty Napa Cab.

Anyway, I don’t think we disagree, though our perspectives probably differ.