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Vineyard to Wine Shelf - Who makes the money?

Ever wonder how grapes from a California vineyard wind up on the shelf of your local wine shop and how money is made along the way?

Well the United States has one of the most complex infrastructures for the production and distribution of wine imaginable.  The roots of the complexity can be traced to Prohibition, that time period from 1920 – 1933 when liquor production was banned in the United States.  Well mostly banned, with a major exception for wine made for personal consumption or for religious purposes. This exemption kept many a winery hanging on until the repeal of Prohibition in 1933.  It was the excesses of alcohol that led the Federal government to segregate the functions of production, distribution and retailing.  The goal was to tax alcohol along each step so that wine and spirits were not available at too low a price to the undereducated public.





The result is what is known as a “three tier” system.  The three tiers are producers, distributors or wholesalers, and retailers.  The figure below shows a simplified version of the system.



Producers

As the name implies, producers or suppliers as they are sometimes known, make the wine.  Importers are also considered producers as they represent a foreign winery in the United States.  Wineries grow (or buy) the grapes, ferment, age and bottle the wine for sale.  Winery costs, in addition to grapes include amortizing the winery costs, variable costs of wine making, bottles, corks, labels, boxes, marketing, on-site sales people, administrative costs and yes, taxes.

At present the Federal excise tax on wine is roughly $0.21 per 750ml bottle for wine with alcohol content less than 14% or $0.31 for wine between 14% and 21% alcohol.  State excise tax can add as much as $0.50 per bottle although most states are considerably less (California for example is $0.04).  The tax laws exempt tasting and marketing samples as well as provide a credit for wineries that have very limited production.

The finished product from the producer in the three tier system must be sold to a distributor, an importer if it is being sold outside the United States, or direct to the consumer if allowed by state law (more on this in a future article).

Distributors


Distributors are often called the “middle man” as they sit between the producers and the retailers in the supply chain.  Distributors purchase wine from producers, and “distribute” it to retail outlets.  Distributors provide a range of added value services including warehousing the wine, maintaining stock at retail facilities, providing training and education to retailers and hosting a variety of tastings and other promotional activities.  Wine shelf tags, those small explanatory wine descriptions that often show a wine rating (see photo) are also provided by the distributor.

Distributors have a field sales force whose mission is to place the wine that they represent on the shelves of wine shops, restaurants, wine bars, hotels and anyplace else wine is sold.  More often than not, the man or woman pouring wine at a wine tasting at your favorite wine shop is a sales rep from a distributor.

Distributors are licensed on a State by State basis and pay hefty fees to sell wine.  In Connecticut for example, a distributor must first be licensed and then pay a brand label fee of $200 for each wine sold in the state.  These fees mount quickly when you factor in that the brand label is tied to something called a Unimerc (universal numeric coding system) number which is unique for each combination of winery, variety and vintage!

In some states the government plays the role of distributor.  In Pennsylvania and Utah, for example, the entire distribution and retail process (other than on premise such as restaurants and bars) is run by the state.


Distributors mark up the cost of the wine they purchase from producers, usually in the 20% - 33% range.  Some of the largest wine distributors in the United States are Southern Spirits, Winebow Inc., Republic-National, Charmer-Sunbelt, and Glazers.

Retailers

Retailers are the establishments where wine is sold to the consumer.  Retailers include wine shops, restaurants, bars, liquor stores, supermarkets (in some states), large retail chains (Wal-Mart, Costco) again in some states, online retailers and wine clubs, any place you can buy or be served wine.  In the trade, retailers are divided into “on premise” – wine consumed on the premises such as restaurants and bars, and “off premise” meaning wine sold for consumption at another location.

The retailer further marks up the price of the wine purchased from the distributor.  These markups can vary widely depending on the store location, type of establishment, and volume.  It is not uncommon to pay twice the retail price of a bottle of wine in a restaurant.  Large volume retailers however, can purchase wine from distributors in large quantities and command the best prices.  And don't forget the final element (in most states) the tax you pay on the wine, going out the door!

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