Editor's Note: You may know wine importer Terry Theise from his excellent book, Reading Between the Wines. Or you may know him from seeing his name on the back of a bottle. Or you may not know him yet, in which case you're in for a treat. This week, we asked Terry if he would address a few practical considerations that have come up among Serious Eaters when discussing wine. The questions: Why does wine cost what it does? When I buy wine, where does the money go? How do I spend my wine dollars wisely? Take it away, Terry.

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[Photos: Theise portrait, Daniel Lerner. Wine glass, Vestman on Flickr]

The price of a wine is determined by five things:

  1. The cost to produce it and bottle it, both tangible (labor, quantity per unit of land, supplies and equipment, bottles, closures, capsules and cases, among other things) and intangible (e.g., debt service),
  2. The laws of supply and demand, along with the grower's willingness to price based on what the market will bear,
  3. Logistical and distribution costs to get the wine from the producer to you,
  4. Costs to comply with all federal, state and local regulations, and
  5. for imported wines, the prevailing value of the dollar.

Let's start with numbers 3, 4, and 5.

With imported wines, the costs of transportation and taxes are more or less fixed. Only state and local fees differ, sometimes markedly. A case of big-brand Cava, let's say, costs about $18-20 to ship from Spain to an east-coast port; the higher amount is for a temperature controlled container (the so-called "reefer"), and so it stands to reason that if the case sells for $56 wholesale, which includes its price from the winery, there's very little "value" in the bottle. Just a couple dollars' worth of wine; the rest is cost and the wholesaler's margin. Those $6.99 bottles actually represent poor value, whereas a trade-up to $9-10 gives you twice the wine, because the fixed costs of freight and duties are the same.

One hears of the so-called "3-tier system" set in place after Repeal. This refers to three entities handling the wine and taking a markup. One, the producer (or "supplier," i.e., the guys with the rights to sell the wine to wholesalers in different states), the wholesaler (a.k.a. the distributor), and finally the retailer. This system is said to be cumbersome and even unnecessary. No one likes the "middleman." This is an echo of the Aquarian Age, when all of us learned to assume that capitalism was inherently corrupt and based solely on greed. Sometimes these things are true.

But even if the wholesaler could somehow be eliminated, any system to take its place would have to allow wineries (or the marketing agencies who have sales rights for them) to do the legwork of cultivating thousands of individual accounts in every state—all those wine shops and restaurants—not to mention set up a freight entity to ship their orders next-day, as buyers have come to expect. Believe me, there are plenty of resourceful and creative people in the wine industry, and if it were possible to do away with wholesalers, it would long since have been done. Provided the individual state permitted it. (Some would, many would not.) Nor can you presume that a state where wholesalers weren't required, would actually do away with them. Example: I once wrote a 1,000 case German wine order for a big retailer in a state where he could own an import license AND a retail license. Theoretically he could have bought the wines directly from producers in Germany, if he wanted to pay for the staff to do the sourcing. After confirming the order, I asked him if he'd like to ship using his license, which would have saved him the wholesaler's handling and delivery fees, plus we'd have given him a discount. The drawback was, he'd have to do all his own freight-forwarding and U.S. Customs work, plus take delivery of the entire order in one chunk. He opted not to. For him, the service provided by the wholesaler, and most saliently the ability to draw the order in staggered smaller units was worth paying more for. I often think of this when the wholesaler's very right to exist is questioned.

I realize each of these statements prompts additional questions. Let me try to simplify it.

Say a hypothetical French wine costs 9 Euro per bottle, or about $12.87 at today's exchange rate. As we reckon in cases of 12, that's a cost of $154.44 for the case to leave the property that produced it.

It has to be picked up by a trucker, consolidated with other wines so that, ideally, a container is filled (which saves shipping costs), put on a boat to the U.S. port, cleared through Customs, and trucked to the distributor's facility. A typical cost for this, assuming an east coast destination and a "reefer" container, is about $11 per case, give or take. So: the distributor's cost to "lay-in" the wine is $165.44.

He has to warehouse it, pay for a sales force to sell it, drivers and vehicles to deliver it, and finance it. It's unlikely he'll have sold it all before the producer must be paid. The profit margin he takes is based on his size. If he's large enough to have economies of scale, and if he has a few cash-cow brands he sells easily and in large units, he can work for a few points less, but if he's a small fine-wine house his business is far riskier and more labor-intensive, and he marks up higher. This assumes he's at liberty to decide this for himself; there are, astonishingly, states which mandate his markup. But let's choose a figure somewhere in the middle—say he'll sell the wine that cost him $165.44 for about $220. That's a profit margin of 25%, which is a reasonable median figure. His actual net will range from 4-7% depending on his operational costs. These are not huge profits.

Your local wine shop pays $220 per case, or $18.33 per bottle. His standard markup is 50% (because he's smaller than the distributor) and so he puts the wine on the shelf for $27.49, though he might go up to $27.99. Retailers are always looking for "long-margin" wines they can go above their standard markups on. Often they buy these wines in multiple cases, and often the price looks attractively low. But in fact the retailer is making extra profit—for which I don't remotely blame him! Very very few people get rich in the wine business.

Sometimes someone will return from a trip to France where he has visited the producer of the wine he's been paying $27.99 for, and he's shocked to see he can buy it at the winery for 9 Euro. He assumes a retinue of greedy capitalists have squeezed every shekel they could eke out of the wine.

Read Part 2 »

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