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Aug 16, 201207:21 AM
Happy Hour

All there is to sip and savor in New Orleans

How Much Does It Really Cost?

A number of years ago, in what seems a surreal part of my life, I was hired by a major bank in this metropolitan area. Yes, I know what you are thinking, and eventually they too arrived at that conclusion.

While I had only a smattering of operational experience when it came to banking, I did have quite a bit of background in bank marketing. And that little bit of knowledge/dangerous thing condition kicked in rather quickly, like before lunch on the first day. I was asking a lot of questions that were more likely to be heard by the second grade tour during Spend-the-Day-With-Your-Parents-At-Work afternoon.

 

One of those questions which was so stupid as to be intelligent, I have come to the conclusion, was, “How much does it cost the bank to maintain and service a consumer checking account?”

 

Take all the raw costs of labor, computers, overhead, then determine whether the cost is sufficient for profits, or even if checking accounts were a money-making service. The bank, when pressed by little ole me, did not know how much it cost to maintain and serve a checking account.

 

I then asked, "How do you price a fee for a checking account? How do you know if the price the consumer pays covers the costs?" Again, no answer here that makes any sense. How does any bank price the monthly cost of a checking account?

 

Simple, I was told. “We look at what our competitors are charging and then price somewhere in that range.” But how do you know if your competitors are not following the same regimen, and, in truth, they don’t know any more than you do? “That’s probably exactly what happens, so we all just assume we are making money at the fee structure set by somebody at some time, and we all go from there.”

 

I was flabbergasted but believed that I was being told the truth. Try getting a loan from a bank, and when they ask you about your business pricing practices, give them that answer.

 

I bring all this up because the question is often asked, “How does a winery price the cost of a bottle of wine? Where does that number come from?”

 

Oh, we could talk about the investment in land and the long ramp-up time to even get to a first crop. Or the incredible expense of research, root stock, the vines themselves, and the personnel necessary for care, pruning, harvesting.

 

Then there’s the cost of what goes on in the winery. Lots of specialized equipment, loads of stainless steel, and the skyrocketing cost of a barrel, more than $950 each. Wineries need many, many barrels, into the hundreds, maybe even thousands. And then there’s the real cost of letting a product lay down. Nothing happens for a very long time, years in some cases. That’s money spent but not back in the bank.

 

Out of every $10 the consumer spends at the retail level, not the restaurant cost, on a bottle of wine, only $3 belongs to the winery. Other costs of getting the bottle to the consumer include transportation, the percentage earned by distributors and the percentage that goes to the retailer or restaurateur.

 

After all costs incurred by the winery are paid, left over from the $3, is 25 cents, pre-tax. Not really a princely sum, and not at all near what many folks believe contributes to the “outrageous” cost of a bottle of wine.

 

Given these thin margins, and keep in mind that we are dealing with an agricultural product subject to the whims of Nature, how does a winery owner price his wares? Why not just add a few bucks to every bottle and build in additional margin and/or profit?

 

Can’t be done for a variety of reasons, not the least of which is that adding to cost may mean you won’t buy. You’ll drop down a level or two in what you like to drink, and let the expensive juice linger on the shelves of your favorite retailer. Don’t think so? This is exactly what happened when the recent recession took hold in 2008/09. Consumers backed off the expensive wines in droves and settled in about the $20 a bottle level when they had been drinking $40 to $60 wines.

 

Also raising prices is not allowed by consumers for wines they know, made with grapes they know, in places that are familiar.

 

Wineries are trapped in pricing given the types of grapes they are working with, and where they are located. A great bottle of Napa Valley Oakville Cabernet Sauvignon may be perfectly acceptable to you in the $75 range, but move just a few miles north to Alexander Valley in Sonoma and that won’t fly. You are probably fine paying $40 for the Sonoma offering. The wines may be equal in pleasure but the address of origin drives pricing in a big way.

 

Even when Nature delivers a whack to a vintage, such as may be going on this year with three significant hailstorms in Burgundy, the winery can’t just raise prices on the resulting wines to make up for shortfall of product. Consumers will move on to another label, another area, another grape and never think twice about the decision.

 

Maybe a winery really can’t explain how it arrived at a bottle price, no more than a bank can quantify the price of their services, but people in the business can “feel” at what point consumers are resisting. Some wineries, like the great chateaux of Bordeaux, are not sensitive to the furrowing of brows in the marketplace, until it is too late, which is what is going now in that hallowed place.

 

Most wineries look to their neighbors and what they perceive to be their peers. Then they watch the market reaction. And that’s about as scientific as it gets when it comes to pricing the wine you buy.

 

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Happy Hour

All there is to sip and savor in New Orleans

about

In New Orleans, when the subject is wine and spirits, it is very difficult to leave Tim McNally out of the discussion. He is considered one of the “go to” resources in the Crescent City for counsel and information about adult beverages and their place in the fabric of life in this great city.

 

Tim is the Wine and Spirits Editor, columnist and feature writer for New Orleans Magazine; the Wine and Spirits Editor and weekly columnist, Happy Hour, for www.MyNewOrleans.com; the Executive Editor and monthly features writer for Gulf Coast Wine + Dine Online; creator and editor of his own website, www.winetalknola.com; all in addition to his daily hosting duties on the radio program, The Dine, Wine and Spirits Show, on the air at WGSO – 990AM, every weekday, 3- 5 p.m, and streamed live on www.wgso.com.

 

Over the years, Tim has proved to be an informed interviewer, putting his guests at ease, and covering tactile and technical information so that even a novice can understand difficult agricultural and production concepts. Tim speaks with winemakers, wine and spirit ambassadors, distillers, authors, people who stage events and festivals, and takes questions from listeners and readers, all seamlessly blended together in a program that is unique in America.

 

Tim’s love of wine actually came about many years ago from his then wife-to-be, Brenda Maitland, a noted journalist in her own right, and together they have traveled to the major wine producing areas in the US and Europe, seeking first-hand information about beverages that give us all so much pleasure.

 

They were instrumental in the founding of the New Orleans Wine and Food Experience, a major national and international well-regarded festival of its type. They both continue to be involved with the planning and staging of this multi-venue, five-day event now over twenty years old.

 

Tim is also considered one of the foremost professional wine judges in the US, being invited to judge more than 11 wine competitions each year, including the San Francisco Chronicle Wine Competition (the largest competition of American wines in the world, with more than 6,000 entries), the Riverside, CA International Wine Competition, San Francisco International Wine Competition, Atlantic Seaboard Wine Competition, Indiana International Wine Competition, Sandestin, Florida Wine Festival Competition, the State of Michigan Wine Competition, the U.S. National Wine Competition, and the National Wine Competition of Portugal.

 

Tim is a guest lecturer to many local wine and dine organizations, and speaks each year to the senior class in the School of Hotel and Restaurant Management at Auburn University, Auburn, Alabama.

 

Staying abreast of the news of the wine and spirits world is a passion for Tim, and he is committed to sharing what he knows with his listeners and readers. “Doing something I love, with products that I truly enjoy, created by interesting people, coupling the experience with culinary excellence, and doing it all in the greatest city in America,” are the words Tim lives by.

 

It’s a good gig. 

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