The economics of the bottom shelf – Why Europe can make cheap wine, but America, Canada, and most new world producers can’t

In yesterday’s thread on French supermarket wine, a number of redditors were amazed by how the Europeans can make decent cheap wine, but American, Canadian, and most new world producers cannot. Now to be fair, a lot of really cheap European bottom shelf wine is crap too, but it is obvious that European producers can turn out cheaper wine than new world producers can.

If you look at any European supermarket, you can see tons of wines for less than 2 Euros. In Southern Europe, you can even find wine at less than 1 Euro. Even if you ignore the fact that European consumers sometimes pay less in sales and sin taxes on wine, it is incredible that European producers can come how produce wine far, far cheaper than new world producers typically can.

Why is that? Well, I want to quickly discuss the economics of new world vs old world wines, and why European producers can churn out really cheap wine.

For the purposes of this discussion, I would focus mostly on US and Canadian producers, although the vast majority of these factors also impact other new world production regions like Australia, New Zealand, etc.

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**New world producers pay excise tax:**

Excise tax refers to the tax levied on producers at the time of production – A cost that will inevitably be passed on to the consumer. Excise taxes are levied at the Federal level, the provincial/state level, and sometimes the local level.

In Canada, the federal excise tax is 50 Canadian cents for a 750ml bottle. In America, the federal excise tax is between $1.07 – $3.40 (USD) per gallon – So between 26 cents and 68 cents per standard 750ml bottle. There is usually a further state level excise tax and occasional local excise taxes – In Oregon there is an excise tax of $0.67-0.77/gallon, in Ontario there is a volume tax of 29 Canadian cents a liter.

In Europe? the [big producing regions have no excise tax](https://files.taxfoundation.org/20210818173726/2021-wine-taxes-in-Europe.-Compare-excise-duty-on-wine-including-germany-wine-tax-spain-wine-tax-and-france-wine-tax.png) \- Spain, Portugal, Italy, Greece, and Germany have no excise tax. France has a 3 cent per bottle excise tax.

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**Not only do old world producers not pay excise tax, they receive subsidies**

Not only do old world producers not pay excise tax, many European countries subsidize wine production – A lot of bottom shelf wines cannot be profitably made without taxpayer subsidies.

In Europe, the wine sector is heavily subsidized – Both production, capital investment, and promotion. [Between 2014 and 2018, €6024 million was spent on wine subsidies](https://www.eurocare.org/media/GENERAL/docs/reports/europesbillioneurowinespillage.pdf) at the EU/Federal level with the CAP.

In many European wine producing countries, there are also subsidies in vineyard capital investment and human capital investment. For instance, in France vine replanting gets a government subsidy, and young vintners getting into the industry receives various forms of government support.

Finally, sometimes wine production is simply not profitable due to external events – When this happens, European governments routinely enact price supports and supply destruction. For instance, support wine makers and shield them from the impacts of Covid=19, the French government announced that they will bulk purchase 250 million bottles of wine to distill into hand sanitizer and industrial alcohol.

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**Most new world producers are still trying to pay off land costs**

Vineyards are very expensive. At the absolute bottom level, agricultural land suitable for grape production costs $10,000 an acre, better production regions cost $100-200 thousand an acre, while prime real estate can cost up to $1 million an acre.

Vineyards yield 1000- 7000 750ml bottles an acre per year. If you assume an average of 3000 bottles an acre, and your vineyard costs were $100 thousand an acre. If you put down 20% down payment, and get an agricultural mortgage at 6% for 30 years, yearly mortgage payments on that acre of vineyard is $9144. At 3000 bottles yield, you are looking at $3.04 per bottle on land costs alone.

Most new world production regions are relatively new. For example, in 1970 there were only 5 commercial wineries in Oregon, today there are 1056 of them. Most new world wineries were established in the last 30 years, and thus, they still have to pay off the mortgage on their land.

Old world producers? For most of them the owners have owned the land for years, generations, they paid off land costs years if not centuries ago.

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**What does this mean? Unless you are a premium winery charging higher prices, or a huge industrial scale winery producing massive volumes, new world wineries are pretty much tourist attractions and event venues**

Scilion Valley Bank provides business loans to a lot of wineries, so [they produce a report on the state of the American wine industry](https://www.svb.com/globalassets/trendsandinsights/reports/wine/svb-state-of-the-wine-industry-report-2023.pdf). On page 65 of the report, there is a very interesting breakdown of the wine industry’s sales channel mix for the average winery.

[Extracted from the report here](https://imgur.com/Ff5QVAd).

Wholesale off premise refers to liquor stores and grocery stores that sell wine for consumption “off premise”, and wholesale on premise refers to bars, clubs, restaurants who sell wine for consumption “on premise”.

For the average American winery in 2022, 3 times more wine was sold out of their tasting room than out of liquor stores and grocery stores. This means that their business is not built off selling wine wholesale to retailers for people to buy and drink at home.

Instead, these wineries survive by attracting visitors – Visit their winery, eat at their restaurant, tour the fields, and in the end, stop by the tasting room and buy a bottle. Perhaps if you like it, you can join their wine club and get a few bottles delivered to you every month.

by Uptons_BJs