R350 for a bottle of wine: ridiculous or realistic?

This has definitely been the most challenging newsletter to write ever. In the past I’ve explained the production cost of wine in general. But the question I left unanswered: Are you being ripped off by paying, let’s say, R350 for a bottle of fine wine? (And NO, I am not going to release a super expensive wine at the end of this mail. This is purely educational. I am providing you with free information with the aim of enriching your wine life). Not only is it a very controversial subject, but also requires a (complicated) comparison, which in turn requires immense generalization, which is dangerous, if not impossible to do in wine! So please bear with me, try and focus on the principles and don’t allow yourself to get lost in the details.
Lets take two real life scenarios as our comparison. Farmer 1 is this friend of mine who farms mechanically (making use of machines to prune and harvest) in a fertile environment. He therefore has a relatively high production, averaging on 35 tons per hectare for Sauvignon blanc and gets R2 600 a ton at his local winery (producing mid to low price point wines). My friend therefore gets R91 000 per hectare. According to SAWIS the running costs of a vineyard in his area is R27 000 (manual labour and provision for renewal of vineyards included). The manual labour bill is R6700. He however farms mechanically with only one person on 20 hectares. A small labour bill, but he then needs a machine. So let’s keep the running cost per hectare at R27 000. He therefore makes a minimum of R64 000 profit per hectare on average for all his Sauvignon Blanc…. hectares of it!! The winery buys for a good price and has the ability to make wine and sell, their margin included.
Farmer 2 is my other friend who farms in Stellenbosch. His goal is to make the best wine he possibly can. To ensure consistent superior quality, everything is done on a manual basis. According to SAWIS, production costs on a Stellenbosch estate are R33 000 per hectare on average. Let’s use a block of Cabernet Sauvignon he nurtures as our example. Due to extra quality enhancing practices to this specific block, inset costs rise with R5 000 per hectare to R38 000 and the yield decreases to 6 tons per hectare. Now if Farmer 2 wants to make the same money as Farmer 1, he needs to charge R17 000 per ton. On R6 333 a ton he breaks even, but who wants to only break even, especially with all the extra effort in the vineyard? The older the vineyard, the better the quality of the grapes but the lower the yield. The farmer will therefore need to charge more and more as the production per hectare decreases and the quality increases with the ageing of the vine. But let’s ignore this for now. The other factor is that Farmer 2 only has one hectare of this spectacular block, whilst Farmer 1 has many hectares of Sauvignon blanc. Yet again, let’s ignore this for now.
Farmer 2 in Stellenbosch gets 600 liters of wine from each ton of grapes. It costs R3500 per ton to process the grapes. To ensure the best possible end result (which is his goal), this wine will then go into the best barrels he can lay his hands on which he will be using for 3 vintages. R12 000 a barrel over 3 vintages. He gets 300 bottles from one barrel and the wine will age, let’s say, 2 years in barrel. Storage per liter per month will add up to R7.20 a liter. You then have a special product and special products need to be packaged extremely well. By looking at the outside of the bottle, the consumer needs to get a glimpse of what’s inside the bottle. So his next cost factor is packaging.
Label designing fees could be anything from R15 000 to R80 000 for one label (believe it or not!) As this is a once-off fee, let’s again ignore this for the time being. Special printing in small volumes is very expensive. See below for estimate cost. He then needs to make use of a special bottle. He needs to buy excellent corks. Capsules need to be printed and the material needs to be either tin or Poly-laminated. Anyhow, these could be really expensive depending on what you want/printed or not… Box? My one friend just paid R125 for a 6-bottle box… but I agree, that’s a bit crazy! Now we add tax and Farmer 2 is on R82.90 a bottle (see costing table below). Another friend of mine spends R100 a bottle only on production costs for his top wine. But these inset costs are relatively easy to quantify. It’s the following factors that people tend to forget.
Farmer 2 now needs to allocate wine for samples. You see, everyone who buys would like to taste… and then he needs to add the marketing budget, travel and administration overheads.
After bottling, the wine needs to lie in bottle for another 6 months to settle and he is now ready to launch. Let’s say the wine will then take a year to sell. We now have to add the cost of capital invested for the production of the grapes (1 year), making of the wine (2 years), ageing of the bottled product (6 months) and the time to sell the vintage (1 year)… total of 4.5 years.
Now let’s assume that year one was a massive success and he ends up with an awesome product (almost never the case – it takes years to develop a wine like this). The problem that he now faces is that only a small percentage of his market has the experienced and developed palate to be able to really taste, determine, appreciate and quantify the quality difference between his and other wines. So suddenly his market shrinks significantly. He therefore cannot produce many bottles. This now influences his cost of production as well as the number of chances (bottles) he has to generate profit. The immediate effect of this is much higher margins per bottle. Very difficult to quantify. The main markets for wines like these are possibly boutique wine shops, but mainly restaurants. They would then add between 100 – 350% as their margin. I am not sure where we are at with pricing at this stage but that is not the point.
Lastly, but in my opinion one of the things most often overlooked: We all want South Africa to be the best in, let’s say rugby, so let’s assume, in the same way as with the rugby, we as a nation also want South African wines to compete with the best in the world. The intellectual capital that it takes to produce wines that could compete with the best in the world is enormous. It demands super intellectual, highly gifted individuals who are willing to sacrifice anything in order to reach their goals. Now how do you compensate people like these? I sometimes listen to what the top 10 actuaries earn in SA, the top 10 accountants, politicians etc.. Now pay these viticulturists and winemakers the equivalent of their intellectual capacity and creativity and (I feel) R600 a bottle is a bargain…
PS: All the facts stated above are NOT the opinion of the wine industry but MY opinion, researched and paid for by MYSELF.
Warm regards
Pieter
Breakdown of estimate production costs: