American wineries struggle as production cost increases far outstrip price increases in wine.
American wineries struggle as production cost increases far outstrip price increases in wine.
by Uptons_BJs
10 Comments
grapes_and_yeast
Now show consumption vs. production through time…
While the cost of production has undoubtedly skyrocketed for American wine producers, one of the major problems is that wineries increased their production when COVID increased demand, but now consumption is on the decline, leaving producers with lots of expensive to make wine that they can’t sell
Uptons_BJs
The guys at AAWE post some fascinating stuff every once in a while.
To explain his in more detail:
Jan 2015 (10 years ago) is indexed to 100 for both metrics. The green line (producer costs for US wineries) has gone up 30%+, while the red line (Wine prices calculated through the CPI metric) has gone up only 7%.
This suggests that wineries in the US are heavily squeezed, as they cannot effectively pass on their production cost increases to the end consumer. Although I would suggest that perhaps things don’t look as bad for US wineries as the graph suggests.
PS: The way CPI is calculated is that it takes a geometric mean of price changes. IE: If bottle A’s price changed X% last month, bottle B changed Y%, and bottle C changed Z%, the geometric mean of X, Y, Z is the change in price for the price category including produces A, B and C.
Thus, it is likely that for wine consumers, the actual price change is lower than you intuitively think, since the wine category is massive with tens of thousands of bottles on the market. When you calculate a geometric mean, hot producers in in-demand appellations are dragging up the average, and these are the producers you are paying attention to, while garbage producers in poor appellations are lowering their prices, but you don’t care for that!
IE: You look at hot appellations like Napa, Barolo, Burgundy, etc, and see spiking prices skyrocketing, and you might think “No way prices only went up 7% in a decade”, but don’t forget that this is an average, and there are plenty of appellations that are very much not in demand like Langudoc and even Bordeaux where prices have been going down, so when you calculate the geometric mean of the whole segment, the overall price increase is very small.
beetbanshee
In a few days in Canada we will no longer be selling any U.S wines on our shelves in Ontario,(no.u.s booze at all) and in other provinces there’s a movement to buy local. I wonder how much of an impact that will make on this situation?
IfNotBackAvengeDeath
This is obviously intended to make it feel like the producers are getting destroyed, but the math can be very misleading when presented this way.
If you’re in 2015 and it costs you $10 to make a bottle of wine you sell for $50, you’re pulling in $40 of gross margin per bottle, or 80%. Applying the above indices (+30% cost, +8% price) to get you to 2025, it now costs $13 to make that bottle, which you’re now selling for $54. New gross margin of $41 per bottle, or 76%.
Costs went up faster than price, but your profits actually increased.
robdwoods
This is a big reason I drink almost no US wine. Also I’m not a big cab fan and with other varietals the cost/quality ratio is way out of whack compared to other regions. I’m from Canada and frankly it’s the same reason I don’t buy Canadian wine either.
sonofawhatthe
As a consumer of *much* wine my household was sort of excited that the glut might drive down prices but 1) that hasn’t happened and 2) I worry for the industry.
It’s expensive to make wine, there’s no getting around it. Back when I was knowledgeable (30 years ago in California), a single French oak barrel was $375. That barrel could be used for ONE vintage. It could re-used for other purposes down the road but next year you needed another $375 barrel for your wine. Plus all the custom / stainless steel equipment. Add to that the cost of growing grapes on mature vines (newly planted acreage is useless for ??). Add to that the expense of sourcing grapes you don’t grow in an almost-always crowded seller’s market. Add to that the fact that today’s harvest won’t be sold for 1-3 years. Plus you had to set up shop on the most ridiculously priced land in the country. Plus the cost of marketing. Plus the cost of bottling and glass. Plus the cost of shipping. Plus the cost of bad vintages. Plus the cost of oh my god it never ends.
Disruption happens when an industry is in pain and perhaps some long-term innovative ideas will come from this period of funk. I would bet LOTS of consolidation is on the way. Pretty soon all wineries will be owned by MolsonCoors or InBev. <grimaces>
2003tide
I’m questioning this data. I know a bunch of bottles that have gone up 20% + since covid (both domestic and imports.)
Madeitup75
How much of the cost increase is due to land values? It’s kind of bad luck to have some of the very best agricultural land (Napa, Sonoma, and some central coast) very close to an urban center that creates new billionaires every day.
Sharp_Variation_5661
Welcome to France situation.
420d_ingus
THANK YOU, I’m glad someone posted this. Everyone is shitting on producers for price increases without understanding that the production increases are wayyy worse than the consumer cost increases.
10 Comments
Now show consumption vs. production through time…
While the cost of production has undoubtedly skyrocketed for American wine producers, one of the major problems is that wineries increased their production when COVID increased demand, but now consumption is on the decline, leaving producers with lots of expensive to make wine that they can’t sell
The guys at AAWE post some fascinating stuff every once in a while.
To explain his in more detail:
Jan 2015 (10 years ago) is indexed to 100 for both metrics. The green line (producer costs for US wineries) has gone up 30%+, while the red line (Wine prices calculated through the CPI metric) has gone up only 7%.
This suggests that wineries in the US are heavily squeezed, as they cannot effectively pass on their production cost increases to the end consumer. Although I would suggest that perhaps things don’t look as bad for US wineries as the graph suggests.
PS: The way CPI is calculated is that it takes a geometric mean of price changes. IE: If bottle A’s price changed X% last month, bottle B changed Y%, and bottle C changed Z%, the geometric mean of X, Y, Z is the change in price for the price category including produces A, B and C.
Thus, it is likely that for wine consumers, the actual price change is lower than you intuitively think, since the wine category is massive with tens of thousands of bottles on the market. When you calculate a geometric mean, hot producers in in-demand appellations are dragging up the average, and these are the producers you are paying attention to, while garbage producers in poor appellations are lowering their prices, but you don’t care for that!
IE: You look at hot appellations like Napa, Barolo, Burgundy, etc, and see spiking prices skyrocketing, and you might think “No way prices only went up 7% in a decade”, but don’t forget that this is an average, and there are plenty of appellations that are very much not in demand like Langudoc and even Bordeaux where prices have been going down, so when you calculate the geometric mean of the whole segment, the overall price increase is very small.
In a few days in Canada we will no longer be selling any U.S wines on our shelves in Ontario,(no.u.s booze at all) and in other provinces there’s a movement to buy local. I wonder how much of an impact that will make on this situation?
This is obviously intended to make it feel like the producers are getting destroyed, but the math can be very misleading when presented this way.
If you’re in 2015 and it costs you $10 to make a bottle of wine you sell for $50, you’re pulling in $40 of gross margin per bottle, or 80%. Applying the above indices (+30% cost, +8% price) to get you to 2025, it now costs $13 to make that bottle, which you’re now selling for $54. New gross margin of $41 per bottle, or 76%.
Costs went up faster than price, but your profits actually increased.
This is a big reason I drink almost no US wine. Also I’m not a big cab fan and with other varietals the cost/quality ratio is way out of whack compared to other regions. I’m from Canada and frankly it’s the same reason I don’t buy Canadian wine either.
As a consumer of *much* wine my household was sort of excited that the glut might drive down prices but 1) that hasn’t happened and 2) I worry for the industry.
It’s expensive to make wine, there’s no getting around it. Back when I was knowledgeable (30 years ago in California), a single French oak barrel was $375. That barrel could be used for ONE vintage. It could re-used for other purposes down the road but next year you needed another $375 barrel for your wine. Plus all the custom / stainless steel equipment. Add to that the cost of growing grapes on mature vines (newly planted acreage is useless for ??). Add to that the expense of sourcing grapes you don’t grow in an almost-always crowded seller’s market. Add to that the fact that today’s harvest won’t be sold for 1-3 years. Plus you had to set up shop on the most ridiculously priced land in the country. Plus the cost of marketing. Plus the cost of bottling and glass. Plus the cost of shipping. Plus the cost of bad vintages. Plus the cost of oh my god it never ends.
Disruption happens when an industry is in pain and perhaps some long-term innovative ideas will come from this period of funk. I would bet LOTS of consolidation is on the way. Pretty soon all wineries will be owned by MolsonCoors or InBev. <grimaces>
I’m questioning this data. I know a bunch of bottles that have gone up 20% + since covid (both domestic and imports.)
How much of the cost increase is due to land values? It’s kind of bad luck to have some of the very best agricultural land (Napa, Sonoma, and some central coast) very close to an urban center that creates new billionaires every day.
Welcome to France situation.
THANK YOU, I’m glad someone posted this. Everyone is shitting on producers for price increases without understanding that the production increases are wayyy worse than the consumer cost increases.