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Wine Pricing

What determines the price of a bottle of wine? In this series we look at the factors that influence the price you pay for a bottle of your favourite plonk

The four parts are:

Give me the BIG picture please

Wine to different people means different things. To some it is an occasional luxury, to others it is part of everyday life - a day is not complete until they have had their glass of wine at the finish. Both approaches are as good as the other. In fact two people can approach the same wine with the two different attitudes. What is a luxury wine for some is run of the mill for others. That said there appears to be two very different pricing mechanisms operating in the UK, Quality vs Price and Supply vs Demand.

  • Quality vs Price - As you would expect as the quality of the wine improves the price increases.
  • Supply vs Demand - What are the UK tax rates.

In any wine there is a mixture of the two. For example some very cheap wines may be even cheaper than the quality might normally suggest if they are from unpopular regions or an unpopular style. For example a Hungarian oaky chardonnay, may be sold at a discount irrespective of the quality because Hungary is not well known region, and oaky chardonnays are no longer as fashionable. While a top end Bordeaux will have a price that has less to do about the quality of the wine and more to do with the Chateau producing the wine.

In both these cases there is a price set by the Quality vs Price which is then adjusted up or down by Supply & Demand.

Generally speaking wines in the £5 to £10 (off trade) price bracket are dominated by the price quality relationship. While wines over £25 are dominated by the supply demand relationship, between the two you get a mixture of prices.

Quality Vs Price - what are the main factors determining price While Quality wine is often referred to, it is rarely defined. There is an argument that claims there is no way to determine quality, other than examining the purpose for which the wine is to be put and its value for money. Experienced tasters have their own varying ways of analysing the excellence of what they drink, but the following is a good rule of thumb.

Intensity of flavour Ideally wine should have a good hit of fruit flavour on the palate, and that should be balanced by concentrated aromas. Most winemakers achieve this by not allowing their vines to produce too much fruit, this concentrates the flavour in a small number of grapes producing concentrated flavours.

Balance The structure elements of the wine should be in balance. This often especially where the balance is particularly pleasing referred to as harmony. Balance is achieved in the winery by matching the style of the wine with the grapes that the winemaker has to work with. Well balanced wines are more enjoyable and show good quality winemaking and grape growing skill.

Length How long the taste lasts in your mouth after you have swallowed it. Mediocre or commercial wines will fade very fast 2-5 seconds, but good quality wines will last for between 10 and 15 seconds or longer. Length is again linked to concentration and intensity of flavour.

Complexity Refers to the layers of flavour in a wine. A simple syrah will only have one to two flavours, black fruit, while a complex wine may have spice, coffee or tar. There are three sources flavours in wine can come from, these are; the fruit, the wine making process and aging. Simple wines are fruit driven and the flavours come from the grapes. During the wine making process the wine can pick up other flavours. For example by keeping the wine in barrels during wine making, the wine will pick up other flavours, perhaps vanilla or toasty aromas. After the wine has been made and aged, it develops secondary aromas as the fruit and wine making aromas change, often developing earthy and animal like flavours.

For a wine to develop complexity aging or expensive wine making techniques are required. Both add a cost to the wine.

How does the price breakdown in a bottle of wine?

The costs associated with making a bottle of wine can vary enormously, and have a profound effect on how the wine will behave once bottled and ultimately drunk.

Let's start by looking at the typical costs of a bottle of wine from Australia to see where the money is spent.

Retail Price £4.00 £5.00 £6.00 £7.00 £10.00 £20.00
Duty* + VAT £2.48 £2.64 £2.81 £2.98 £3.48 £5.14
Shipping Costs £0.20 £0.20 £0.20 £0.20 £0.20 £0.20
Retail mark-up £0.86 £1.08 £1.30 £1.51 £2.16 £4.32
Winemaking cost £0.46 £1.08 £1.69 £2.31 £4.16 £10.34

*Duty based on 28 March 2011 £1.81/bottle VAT rate 20%
Formulas
(WineMaking Cost+Transportation+Duty)*(1+Retail Markup)*(1+VAT)=Retail Price
VAT Amount = Final Price-(Final Price/(1+VAT Rate))
Retail Profit = Retail price - Duty and VAT - Wine Making Costs - Transportation

You can see that for a £4 a bottle, wine the winemaker makes £0.46 to grow the grapes, make and bottle the wine. To produce wines on the scale requires a total focus on costs and producing large volumes of cheap grapes.

At a retail price of £5 a bottle, wine the winemaker receives around £0.49. This is a huge increase over £4 a bottle. At around £5 the grower can afford to manage the grapes in the yard to a high standard. Generally the fruit concentration is the big improvement by growing fewer grapes on the vines (low yield). You can usually taste this by the flavours lingering for a while after swallowing the wine and some styles start to become weightier in the mouth. This is a great entry point to start drinking well-made wine.

Between £7 & £15 the wine's concentration continues to improve, but also more flavours start to appear. Either through the use of oak barrels (adding 50p / bottle in costs) to impart toasty vanilla flavours, or perhaps the soil where the grapes are grown has unusual minerals that give the wine a unique flavour. Wines at this price point can benefit by ageing, helping develop more unusual flavours. All these extra flavours are said to add complexity to the wine.

Between £15 & £25, greater complexity and concentration are added. The law of diminishing returns is starting to take hold. However the winery will be very well funded and as such in poor years they will have the equipment to help get the most out of the grapes. For example, top châteaux in Bordeaux have reverse osmosis filters that let you to concentrate the fruit even in wet years. They will also have the option to hand pick the grapes, giving careful handling and the ability to select only the best fruit. If poor weather comes at a critical time they will be able to mechanical harvest in a very short time. This means the wine will be of a consistently high standard.

Above £25 a bottle the winemaker is making at least £10 profit per bottle. This is normally more then they need to spend on equipment and labour in producing the wine. Some areas where the hype of the wine has forced land prices up so much that this has lead to the wine costing more. Champagne is a classic example, where the incredible cost of the land has pushed the cost of the grapes (that the Champagne houses buy) so high that a £20 bottle is considered a mid price. A similar price on the white scale would be around £7.

When a winemaker starts making a bottle of wine they will have a target price for the wine in mind. They will then use the techniques that will allow them to get the best wine made at a profit.

Super Premium wines - are they worth it?

Generally speaking, there are three price & quality tiers in the UK wine market. Entry-level at around £5. Premium at up to £20 and Super Premium at anything above. Pricing of Super Premium wines varies from country to country. In France you can pay well into the hundreds for a current vintage Premier Cru Chateau. The best Californian wines (usually Napa Valley) command around a hundred pounds. Australian Super Premium wines are much more affordable - many well below £100 - but still on a par in quality terms.

At the end of the day whether it is worth paying premium prices is down to you to decide. Only you know if a wine is worth the price you paid. And it's all relative...most people in the UK spend below £5 on the wine they purchase for everyday drinking. To my in-laws £6 is an expensive bottle of wine! Quantity wins out over quality! But they are more than happy with what they drink. For others £10 a bottle is considered about the right price. We tend to buy wine at certain prices based on our budget, how often we drink it, our wine knowledge & experience and our passion for it. The more knowledge you have the more you will be willing to pay. However, once we settle on a price range we tend to stick to it unless there is a special occasion, then that special bottle is produced and consumed with even greater pleasure than usual.

The occasion is one element that makes wine special. Anticipation adds to the enjoyment, especially if you have been patiently ageing the wine for a number of years. A connection with the wine also helps. You may have visited a winery on your honeymoon or holiday. Drinking the same wine back home allows you to relive the experience (remember not all wines travel well - Rose d'Anjou in South of France just isn't the same in England). Making it personal to you will make it worth it.

Some wines are iconic, take Cloudy Bay, Penfold Grange or Chateau Mouton Rothschild. They are often famous because of a place or a person or because they were the first to create a new style. Many hold New Zealand's Cloudy Bay Sauvignon Blanc in the highest regard because Cloudy Bay introduced a new style of Sauvignon Blanc to the world. You could consider Cloudy Bay in the same terms as Monet - both the first to show the world a new style. There are always people who follow, some making better wines, but we would all love to own a Monet.

However, wine is not like art, which, if well looked after, can be enjoyed forever. Wine does turn to vinegar eventually, and, with all wines, after consumption there is nothing left to enjoy. That said, a bottle from a great vintage and a famous producer that is 200 years old, is worth a small fortune. The wine may taste terrible if consumed, but scarcity and supply & demand mean the wine is valuable and will probably never be opened.

Expensive wines offer value to different people for different reasons. When you spend over £20 on a bottle, make sure you know why you are buying that wine. You can almost certainly find another bottle of equally good quality that's cheaper.

What are the UK duty rates.

The UK government calculates duties for a number of wine and wine-like drinks on a nominal 100L of the wine. But it is not one duty for all drinks. Presently there are four possible duties a wine could fit in. In theory wines up to 4% abv attract a duty of £74.32 per 100L or £0.56p per bottle as of the 28th March 2011. Wines exceeding 4% but below 5.5% are taxed at £0.77p per bottle. Both these products are for low alcohol wines, but I can’t think of any wine that is at this level. Still wines are £1.81 while sparkling wines receive a higher duty of £2.32. The highest duty of £2.41 per bottle goes to wines over 15% but less than 22%, these are mainly ports and fortified wines, after all alcohol is an intolerable poison around 15.5% or higher and most normal yeast die.