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

[Merrill_Lindquist]

I have not followed these situations, but I believe Nancy Sinatra had a wine label, and maybe Larry Bird? Who else? Where have they gone - were they “successful?” I am certain there are other “notables” who have had their own labels…just not sure and if they are in, still, or out.

Seaver, I believe (GTS) owns his own vineyard.

And I think there are others - even within these Boards - who live elsewhere other than Northern CA, buy fruit, hire a winemaker, and have a business with their own label. I would have to guess it is very specific to each owner how much involvement they have.

[D.Callahan]

@Mark Y

@SeanHarding

So, this is probably a stupid question, but asking such questions is one of my specialties. I’ve wondered about this in the past, but this provides a convenient place to ask…

If a “winery” sources grapes they didn’t grow, hires an outside winemaker to make the wine, has the wine made and bottled at third-party facilities, and hires someone else to sell it for them, what are they contributing to the process other than financing and marketing? Not that those are at all insignificant to a project like this; I’m just trying to understand how much (if any) influence they have on what the wine actually tastes like.

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

The owner adds a lot of satisfaction to his life supposing he has always wanted to be involved in the wine business. What we get out of it depends who exactly he/she uses as his/her consulting winemaker.

Always enjoy the info you put out Roy! Keep up the good work. I’m looking forward to your 2014 even if my wine stacks are reaching 6’ now.

[Casey_Hartlip]

@Carole Meredith

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

Carole, I’m so glad you don’t make Cabernet too. You guys make wines that have soul and purpose.

A question: outside of harvest, how much of your own vineyard work do you and Steve do? Things like pruning, suckering and wire moving?

[Brian_Gilp]

So back in the early 1990s when I first looked at the economics of a small Midwest or east coast winery, the minimum production level for profitability given the assumptions of that time was about 2000 gallons. It’s interesting how that level seems to still hold all these years later for a vastly different end of the market with very different operating conditions. Pure coincidence possibly but still based on the same economy of scale principles.

[lleichtman]

So, we hold with the proposition that to make a small fortune in the wine business, start with a large fortune.

[Michael_S_Monie]

@Casey Hartlip

@Carole Meredith

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

Carole, I’m so glad you don’t make Cabernet too. You guys make wines that have soul and purpose.

A question: outside of harvest, how much of your own vineyard work do you and Steve do? Things like pruning, suckering and wire moving?

Just as the “purpose” of living is dying, the “purpose” of wine is the drinking. Are you suggesting that Cabernet Sauvignon is incapable of “soul”?

[Kyle_Schlachter]

Seems to me that if so many people weren’t paying someone else to make so many different wines from the same vineyards the economies of scale might make for fewer $150+ Napa cabs. I know there’s a lot more to it, but all this market differentiation based on ego/lifestyle/keeping-up-with-the-Joneses is driving bottle prices above the stratosphere. Say Schrader took most of Tokalon from the beginning Fred could have had a 25,000 cases first growth that still could cost <$150 with ample margin.

[Kyle_Schlachter]

@lleichtman

So, we hold with the proposition that to make a small fortune in the wine business, start with a large fortune.

They add a paycheck to all others involved…

[Michael_S_Monie]

@Kyle Schlachter

Seems to me that if so many people weren’t paying someone else to make so many different wines from the same vineyards the economies of scale might make for fewer $150+ Napa cabs. I know there’s a lot more to it, but all this market differentiation based on ego/lifestyle/keeping-up-with-the-Joneses is driving bottle prices above the stratosphere. Say Schrader took most of Tokalon from the beginning Fred could have had a 25,000 cases first growth that still could cost <$150 with ample margin.

This certainly worked with first growth Bordeaux!

[Roy_Piper]

@Mark Y

@SeanHarding

So, this is probably a stupid question, but asking such questions is one of my specialties. I’ve wondered about this in the past, but this provides a convenient place to ask…

If a “winery” sources grapes they didn’t grow, hires an outside winemaker to make the wine, has the wine made and bottled at third-party facilities, and hires someone else to sell it for them, what are they contributing to the process other than financing and marketing? Not that those are at all insignificant to a project like this; I’m just trying to understand how much (if any) influence they have on what the wine actually tastes like.

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

I am a big believer that if the owner cannot somehow connect with the end buyer, than the consulting winemaker or scores will be far less effective. For example, Yao Ming now has I believe 95-points for his wine. And he uses ToKalon. But I don’t hear of many people here beating down a door for his wine. And he is a celebrity.

I think that as competition increases buyers want to connect with the winery, the owner, possibly the winemaker… all of it. There are score chasers, winemaker chasers… but no “owner chasers.” Owners need to leave some kind of imprint on the wine or be some kind of ambassador. Someone who has done this very effectively in my opinion for years is Juan Mercado of Realm. He does not make the wine and never has, but he has been the founder most visible to the public and the winery reflects his sensibilities. The MacDonalds, Bruce Phillips at VHR, Larry Fairchild at Fairchild, Aaron Pott at Pott Wines, Lou at Kapcsandy… these are some of the owners who are available to their buyers and it makes a huge difference. So there are people doing this over $150+, but not many.

I believe people want some kind of connection more than just the wine.

In the 2001-2002 vintage for NorCal there were 71 wines Parker scored 95 or higher and four got a perfect 100 score. This year there 446 wines scored over 95 and 40 received a perfect 100. More Cabs got 99 or 100 this year than got 95 or higher for the issue that covered 2001-2002.

With all those choices… who to buy? I contend it is Cabs where the people feel full-engagement with those deeply involved in the project, not where the scores are necessarily highest. This may well be true of ALL wines soon enough, not just those over $100 or above 95pts. There are just too many choices and people will increasingly buy for reasons other than price or score or pedigree.

[Kyle_Schlachter]

@Michael S. Monie

@Kyle Schlachter

Seems to me that if so many people weren’t paying someone else to make so many different wines from the same vineyards the economies of scale might make for fewer $150+ Napa cabs. I know there’s a lot more to it, but all this market differentiation based on ego/lifestyle/keeping-up-with-the-Joneses is driving bottle prices above the stratosphere. Say Schrader took most of Tokalon from the beginning Fred could have had a 25,000 cases first growth that still could cost <$150 with ample margin.

This certainly worked with first growth Bordeaux!

That is a different case, but still a valid point.

[Roy_Piper]

@Kyle Schlachter

@Michael S. Monie

@Kyle Schlachter

Seems to me that if so many people weren’t paying someone else to make so many different wines from the same vineyards the economies of scale might make for fewer $150+ Napa cabs. I know there’s a lot more to it, but all this market differentiation based on ego/lifestyle/keeping-up-with-the-Joneses is driving bottle prices above the stratosphere. Say Schrader took most of Tokalon from the beginning Fred could have had a 25,000 cases first growth that still could cost <$150 with ample margin.

This certainly worked with first growth Bordeaux!

That is a different case, but still a valid point.

For sure.

90 acres of Beckstoffer ToKalon. At 3.5 tons per acre and 2 barrels per ton equals 15,500 cases, roughly. Lets say half goes into the top blend (a la great BDX) and half to a second wine. So you have 7750 cases of wine at $150 and 7750 for the second wine at $75. if you average 96-100pts for top wine, I bet you could sell 1/3th direct and the rest at retail and restaurants (remember BDX sells nothing direct). The second wine would be 20% direct at 91-93 points and the rest at retail (half price.) Revenues for that scenario would add up to about $13.5 million. All-in production costs to make wine at that level would be by me estimation about $3.3 million ($35 per bottle). Add in amortization of your own $20 million dollar winery/tasting room on the estate and you would add another $1 million in costs per year. Total costs about $4.3 million on revs of $12.75MM. Profits of $8.45 million.

If a 20% ROI is the target (and that’s not that great), you could pay $42 million for the 90 acres ($469k per acre) and achieve that.

No way ToKalon could be bought for that price, though. I am guessing it would take $100 million to get that vineyard right now (over $1MM per acre.) This brings your returns down to 8.45% per year. Pretty poor.

It shows to me that in terms of margin, such a stand-alone ToKalon business looks good, with an excellent margin. In terms of return on investment though, it looks poor. Vineyards are WAY over-valued right now. It’s like owning a sports team… your yearly return would be poor, but the asset value keeps going up. The only way to really make it work is to build it up, wait for the economy to top and then sell it.

[mike_pobega]

Roy, to pick up on a conversation ‘over there’:
I think a $25 Cab could be made but it is a rare fluke and must be capitalized quickly. I have experienced one or two, Hardin being my number one.
I would never put much belief in anything Bob says so when he arbitrarily throws out a name I could give a care less. What is important to me is the fun I have as I watch the minions try to chase it down and thank him seven days to Sunday.

For those not following, Bob Parker found a $25 ‘winner’ in Daniel Cohn’s 2014 Bellacosa. A Napa wine made in Sonoma. “delicious,supple,and savory wine that defies the stratospheric Napa pricing”

Cheerios!

[Howard_Cooper]

Thanks a lot Roy. Fascinating.

But, I must admit that I really do not care about how much it costs a producer to make the wine when I am making purchasing decisions. I base my purchasing decisions on my perceived quality vs. price. So, if I can buy Ridge Montebello or Ducru Beaucaillou for $100 to $120 (current future prices), I will buy that and not a small producer wine for $150. And, if I can buy Ridge Santa Cruz for $40 to $50 (these are all just examples), it is highly unlikely that I will even think about paying $150 for a wine from a winery that has no track record for how the wine matures.

For me, the costs that these small producers have to incur just is their calculus on whether they have a business or an expensive hobby. Not my issue. If they can make the wine for $150 and sell it for only $50, too bad. If they can make it for $150 and sell it for $500, then good for them, I do not begrudge them success. Price is based on value as perceived by the market and not by cost.

[G_D_y_e_r]

@mike pobega

For those not following, Bob Parker found a $25 ‘winner’ in Daniel Cohn’s 2014 Bellacosa. A Napa wine made in Sonoma. “delicious,supple,and savory wine that defies the stratospheric Napa pricing”

I never really could understood the draw of the $20-$30 widely available ‘90+ point’ Napa Cab. That’s a fair value, assuming the score has some relation to the customer’s experience. But to hit that price point, they’re probably buying the cheapest Cabernet fruit (or multiple lots of distressed wine) available within the Napa appellation, back-blending with the maximum non-Napa Cab allowed to retain the Napa AVA on the label, and taking some kind of shortcuts on oak aging. Why buy the overworked scraps from Napa when better Cab fruit made less industrially is available from elsewhere?

Negotiant wines like Cameron Hughes make more sense to me. While negotiants are rarely going to get the top of the line finished wine, they can sometimes get small quantities of good quality wine that doesn’t pan out for one reason or another. Still, I personally wouldn’t buy a $25 CH Napa Cab because it’s Napa Cab, I’d buy it if it was a good, balanced and structured wine for the price.

Trying to get value from Napa is like trying to get value from Burgundy. Even the ‘value’ wines from those regions are at or above the mid-range of other established regions. Not every inch of Napa land is better than average to good terroirs in neighboring regions, yet the economics price the finished wines as such.

[Carole_Meredith]

@Casey Hartlip

@Carole Meredith

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

Carole, I’m so glad you don’t make Cabernet too. You guys make wines that have soul and purpose.

A question: outside of harvest, how much of your own vineyard work do you and Steve do? Things like pruning, suckering and wire moving?

Except for harvest, Steve and I do all of our own vineyard work, just the two of us. Occasionally we fall behind and will then bring some help in for a day to get caught up, but for the most part it’s just us. We hire help for harvest because we simply wouldn’t be able to get it all picked quickly enough by ourselves.

[Casey_Hartlip]

Thanks Carole. Kind of what I thought. All the more reason that I have the utmost respect for you guys.

You guys are wine growers. From pruning shears to bottling line and everything in between. And I’m not forgetting the sales and how much work that is too. You also don’t abuse your position on the wine boards either.

[rsmithjr]

I understand costs and production, Roy Piper makes great wines according to the scores (have never tasted myself).

G. Dyer brought up the negociant angle which is my current benchmark. Mr. Hughes is selling wines from vineyards like Monte Rosso and Stagecoach for around $ 35 a bottle or less. I really can’t justify having more than a few bottles of wine at $ 150 each. My cellar has about 75 bottles of Cameron Hughes wine.

They are really great wines and great QPR…

Roger

[GregT]

But to hit that price point, they’re probably buying the cheapest Cabernet fruit (or multiple lots of distressed wine) available within the Napa appellation, back-blending with the maximum non-Napa Cab allowed to retain the Napa AVA on the label, and taking some kind of shortcuts on oak aging. Why buy the overworked scraps from Napa when better Cab fruit made less industrially is available from elsewhere?

Not necessarily. Don’t forget, some people have been around since before most of the people on this board started drinking wine, so they or their families have owned their own land for years. Steltzner comes to mind, although they’ve recently sold, and Corley and Raymond and a number of others. As to shortcuts on oak aging, there’s really no reason Cabs have to be aged for years in new French oak. It’s less about scraps than about the fact that they don’t have to pay consulting wine makers or buy fruit from Andy Beckstoffer.

Of course, that’s not to say that there isn’t a lot of excess juice sloshing around. Then again I wonder how many people paying $20 for a bottle really care whether it’s from Napa or not.

As far as Parker goes - insofar as he’s responsible for probably most of the $300+ Cabs, I suppose it makes sense for people to look at his recommendations that are less pricey. There might be a lot less Cab business in Napa these days without him Would any of the people who opened wineries in the last 20 years have done so to make wines that got 86 points from Parker?

Screaming Eagle was only founded in 1986 with Colgin and Bryant commencing around 1992 and Harlan shortly after. But then from the last 20 years, Sine Qua Non in 1994 (not Napa), Schrader in 1998, Sloan in 1998, Hundred Acre in 2000, Kapscandy after 2000, Realm in 2002, Scarecrow (as a high-end producer) in 2003, Maybach in 2004, Yao Ming in 2011 and so on.

All started with some serious money and the goal of making high-scoring wines that could sell at premium prices. None of those are one-woman operations like Merrill’s. I would submit that they are all in existence because of Parker. And the biggest cost in Roy’s calculations? The consulting wine maker who was hired specifically to make wine that will get high Parker scores. Napa can grow a lot of good grapes, and w/out Parker, there would probably be a lot less Cab and more wineries like Carole’s, producing good wine from many grapes besides Cab, and selling them at fair prices because they weren’t paying people to produce high-scoring wines.

[Chris_S_p_i_k_e_s]

Roy, thanks for that great video! Very insightful for those of us on the outside just to see how each part of the equation contributes to cost and where the economies of scale exist.