Economics and Marketing
Wines From Small
Wineries
By William Gorman, NMSU
• The number of wineries nationwide has Quadrupled in
the past ten years to about 10,000 in 2010
• Only 2 percent of these wineries produce more than
100,000 cases per year (considered a medium size
winery)
• More than half produce less than 2,000 cases per year
• Three firms control 50% of all wine sales…these firms
own collectively more than 1,000 wineries.
Wine Market is Highly
Concentrated
• New wineries have no name recognition and no
established customer base
• Wholesale wine distributors focus on selling wine from
the large national companies. New small wineries can’t
easily compete in sales to restaurants and retail stores.
• Not sufficient year around volume, not profitable
• The only markets where new wineries can have a
competitive advantage is in their tasting rooms and wine
festivals where the national companies are not invited
Problems--New Wineries
Entering the Market?
• University of Missouri Study
• Only 2 % entered the wine business expecting to make a
profit
• 30% entered because of their love of wine
• 22% wanted to improve their quality of life
• 10% wanted to be in agriculture
• 10% because of a sense of community
Motives for Entering the
Wine Business
• If your goal is primarily a hobby winery, stay small—500
cases to 750 cases annually, possibly only a tasting room
• If your goal is to build a profitable wine business start
small and grow your market before making major
investments in winery equipment….10 year plan
• Outsource the wine making or a few years
• Focus on being a marketing company
• Make sure you have the technical skills before making
and selling your own wine
Things to Consider while
Sipping your Wine
• The lower the price of a product the greater the quantity
demanded by consumers
• If you increase the price less will be demanded
• This is true for most products but not necessarily true for
all products in all situations
• Wine can be one of those products in certain
circumstances
Economic Concept: Law of
Supply and Demand
• You are selling oaked Cabernet Sauvignon at $14 per bottle
and are selling 5 cases per week
• You re-label the wine to Proprietor's Reserve and price it at
$18 per bottle and sales stay at 5 cases per week or possible
increase
• How might this happen?
• People associate price with quality
• Difficult to determine quality…each consumer is different
• You have sufficient higher income customers
• Proper pricing strategy is important
• In general have to stay in line with the competition
Consider This Situation
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The number of potential consumers in your market
Income of consumers
Taste and preferences of consumers
Price and availability of substitute products, wine from
other wineries in the area and prices in retail stores
Factors Influencing
Demand of Branded
Products
• There are many ways to segment your potential wine
customers in your market
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Income
Age
Situation (holiday seasons, weddings)
Hobbies, ie dog lovers, wine and cheese parties
Ethnicity
Tourists verses locals
• You need to consider these factors in determine which
wines to sell, advertising, promotion and in pricing
Segmentation of Markets
• Can the winery name affect sales?
• What factors should be considered in choosing a name?
• Regional Affiliation
• Unique favorable characteristics…….Santa Fe vs. Deming
• Referencing the industry—winery or vineyard
• Easy to remember & pronounce
• Association with wine names in famous regions
Impact of Winery Name
• The location will impact the number of customers as well
as the demographics of the customers
• Which is preferable?
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Street with a high volume of traffic or a low volume?
Higher income location or lower income location?
Close to an Interstate?
Close to a major tourist attraction?
Close to many potential consumers?
Adjacent to a vineyard? Rural Setting
Impact of Winery
Location
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Your label is one of your primary sales tool
Labels brand and describe your wines
A variety of labels can be useful
Can have more than one brand
Varietal Name– identify the grape/type of the wine
Different demographics—particular labels appeal to
different segments
• Labels for tourists—green chile
Impact of Labels
Impact of labels: Example Millennial
Generation
Labeling
• Cater to the restaurants by
providing wines labeled
exclusively for restaurant
sales
• Green stickers
Special
Reserve
Packaging
• Tasting room (can be more than one) should be attractive
• Festivals
• Participate in the 5 or 6 major state festivals
• Have your own festivals
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Wine clubs and Internet sales
Direct to retail stores and restaurants
Sales to wholesale distributors
Winery owned restaurants with a tasting room
Adjacent event center
Market Outlets
Boutique Winery sales
by type of outlet NM
2007
Festivals
14%
Wine
Clubs/Internet
9%
Retail Stores
Restaurants
9%
4%
Tasting Rooms
64%
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Cost to produce a bottle of wine…assume $7.00
Price sold directly to a retailer $10.00 ($3.00 margin)
Retail shelf price…$13 to $14.00
Restaurant menu price…$20 to $35 per bottle
Suggested price in winery tasting room..$13 to 14 per
bottle…competitive with retail store prices
Structure of Wine Pricing
Sales Directly to Retailers
• Cost to produce a bottle of wine…assume $7.00
• Price to a wholesaler….$7.25
• Price wholesalers sells to restaurants and retail
stores..$11.00
• Price on the retail shelf…$13.50 to $15.00
• See why small wineries don’t’ generally sell much wine
thought wholesalers even when they agree to handle their
wine?
Structure of selling
Through a Wholesaler
Pricing Strategy Called
Contribution to Profit and
Overhead Method
• Accurate direct production cost
• Variable expenses –expenses that change with the
quantity sold
• Difference is funds available to cover fixed expenses is
the funds to pay overhead expenses and profit– referred
to as Contribution
• Subtract overhead expenses and what’s left is profit
Information Needed
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You need to have a reasonably accurate estimate of your direct production costs and
variable expenses to have accurate profit contribution estimates.
The cost items that go into the production cost include: 1). Cost of growing or
buying grapes, 2). All costs associated with getting the wine in the bottle, and 3).
Deprecation expenses on selected winery equipment including oak barrels used for
some of the wines.
The variable expenses will depend on the type of outlet you are selling into. The
example is for Tasting room sales the expenses being tasting room labor, state and
federal wine taxes, advertising, promotion expenses, loss of wine from pouring
samples, utilities, supplies, and special entertainment.
Overhead expenses usually include depreciation and maintenance of the buildings,
payments to management, insurance, interest, accounting, and repairs.
The contribution to profit and overhead method will not provide an exact procedure
for maximizing profit but can give insight on possible combinations of prices and
resulting quantities sold that will result in potentially increasing profits. It will also
prevent you from selling below variable costs unless you choose a wine as a loss
leader which may not work for a tasting room sales like it does for a grocery store.
Pricing Strategy For
Achieving Profits