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D2: The Complicated and Chaotic American Wine Business

My story of D2 is basically that there wasn’t one. The end.


 

Just kidding!


My journey from D1 to D2, the Business of Wine was pretty fluid. I was only just beginning to turn over a new mental health leaf in life and my study habits didn’t change much from one course to the next, however, even though there was only a few weeks in between my D1 exam and the beginning of my D2 coursework, I was already embracing the next leg of my Diploma journey. I’ve been working in On Premise wine sales for 6 ½ years and the wine industry is a database of knowledge that updates daily. In America, we don’t cast a very wide net in terms of our global understanding of the wine business, therefore, there was lots of knowledge to be gained for the coursework. I still enjoy the application of a global wine industry perspective in the market daily.



In my work curating wine lists, predominantly for fine wine restaurants, I look at the functionality of every placement. What does a varietal or brand accomplish by appearing on this list? How does it tell the story of the restaurant? How do you create a balance between price points, varietals, regions, and oftentimes the most challenging, brands that carry more retail presence than others? How can you reach primary, secondary and tertiary demographics in 15 listings? It’s a puzzle! The challenges of climate change, low inventory and exponential price increases have taken the wine sudoku to new levels in recent years. Despite my best attempts to create wine lists that are easy for consumers to understand, there is still one concept the general public grapples with….


Why Are Wines in Restaurants SO Expensive?



The answer is not so simple. It’s actually shrouded in the complicated relationship America has with alcohol (for my international readers, please enjoy this convoluted case study of American liquor laws)! After a decade of bootlegging, organized crime and increased alcohol consumption, the American government finally conceded Prohibition was a colossal failure. As it turns out, just because you tell people they aren’t allowed to consume alcohol, won’t stop them from doing it, however, Americans were not about to get off with a simple apology. Instead, the government created the Three Tier System, beginning with retailers (supermarkets, restaurants, bars, etc), distributors (that’s me!) and followed by suppliers (producers, importers). The federal government had come to its senses, and finally recognized the business opportunity laying at their feet. Although the federal government sold the Three Tier System to the economically depressed and unemployed American public as an ingenious method of job creation and prevented the installation of monopolies, they really were just getting into the proverbial bed with the booze business, taxing the living hell out of alcohol sales. Major bonus for the feds! All regulatory responsibility was being handed down to the states…which wasn’t a recipe for chaos at ALL.



Thanks to Prohibition, no two states have the same liquor laws. In fact, they are divided into three categories. First, the “Open” states, the life of the party, so to speak, takes a hands off approach to the industry, allowing distributors and suppliers to enter and exit contracts at will. The second category is “Franchise” states, which can be a nightmare for suppliers. In these states, once a supplier becomes contractually obligated to a distributor, it’s basically a lifetime appointment, as they have very little recourse if their business needs are not being met by distributors. Lastly, the “Control” states and boy, do they use it. My home state of Iowa is one of 17 control states, where the state holds a monopoly over at least one of the 3 Tiers. Waaaaiiiit…didn’t we start this whole thing to PROTECT Americans from monopolies in the booze business?


Here in Iowa, the state has complete control of what alcohol can and can’t be sold and they hold the monopoly over liquor sales. The state ranks 4th in the country for excise tax on wine, taking $1.75 for every gallon of wine sold, generating $21.7 million in beer and wine revenue in 2022. This means that before the distributor even gets to price out that case of wine they plan to sell to your favorite restaurant, they have already paid $4.16 in taxes. A distributor usually takes about 25% profit margin on the cost of goods and legally, you cannot cut us out of the deal…despite the best attempts of retailers.


Here's to alcohol, the cause of, and answer to, all life's problems. - Matt Groening


Now that we’ve established that no one gets any wine unless the government gets paid…what about the product itself? I’m frequently asked at consumer tastings what the difference is between the most expensive wine on the table vs the least expensive. So, let's examine the 2 wines. Wine A is a $10 to $15 Cabernet Sauvignon, carrying the generic appellation of California. Wine B is a single vineyard Cabernet Sauvignon from a sub AVA of Napa Valley, made by a prestigious producer. The biggest economical difference between the two is the cost of labor. Since Wine B is likely made from vines planted on slopes or higher elevation, mechanization of vineyard maintenance and harvest are not possible, exponentially increasing the cost by up to 21 times that of Wine A. These costs will include vine pruning, trellising, sustainable, organic or biodynamic farming practices and hand harvesting, all requiring a skilled workforce. On the contrary, wine A is likely planted at higher planting densities, leading to lower concentration of fruit aromas and flavors, on flatter land where mechanization is easily accomplished, decreasing the cost of labor. The second biggest is the cost of grape growing or purchasing of fruit. The smaller production and higher quality fruit of Wine A means the price per grape increases due to the scarcity and attention paid in the vineyard. Other significant costs include maturation, especially when oak barrels are involved, which can cost up to $3600/barrel. Wine A is likely made using stainless steel tanks, with a possible addition of wood chips to add subtle flavors of oak and released from the winery the year immediately following harvest, requiring little investment in maturation materials or warehouse space.

Now we enter your favorite treatyoself restaurant. You’ve likely noticed the significant mark up on products on a wine list. Can you buy them in a retail setting for 2-3x less? I’m sure you can, however, supermarkets and wine shops are a vastly different business model than restaurants, even requiring different liquor licenses. When you’re dining in a restaurant, that annoyingly high mark up on bottles of wine is helping to pay the salaries of chefs, kitchen staff, management, sommeliers, servers, bartenders, bussers, etc. Just think about all the different faces you see on a restaurant floor…they are not volunteers and your favorite restaurant is not a nonprofit. Lastly, when you are dining in, you are renting real estate, not only just your table, but the glassware, plates, silverware, everything that is needed to make your dining experience the best it can be. You are occupying space that could be taken by another customer that will spend as much or more than you. If you’re done spending money, say thank you to your restaurant by paying the bill and giving them another opportunity to make money on the next customer. Was your experience spendy? I hope so! Was it worth it? In my opinion, ALWAYS. Enjoy that bottle of wine and your favorite cuisine. Nothing in this world comes for free, amirite?


I’ll see you back here soon for more Wine Story Wednesday! Next week…the story about how I took two Diploma exams on the same day, with Covid and passed….mostly.


Have a great week!


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