8. As a Stuart Cellars Wine Club member, you want to order Cabernet Sauvignon that normally retails for $45 per bottle. The following discount structure applies: 20 % discount for purchases of 11 bottles or less; 30 % discount for purchase of 12 bottles or more. What price, before shipping/handling, would you pay if: (a) you order 10 bottles? (b) you order 12 bottles? (c) What are the implications of this discounting structure?

Stuart Cellars: Price Is a Matter of Taste CD Stuart Cellars is a family-owned winery located in Because it can be a three-year wait to harvest grapes blind-tasting, it would be a very different world. That's Temecula, California. The winery marked its first har vest from new plantings, followed by barrel and bottle aging, not reality. Price is a signal to people of our commitment in 1999. Forty acres are available for cultivation, giving wineries can easily have five and a half years of capital and the efforts we are taking through out vineyards and Stuart Cellars a capacity of some 150 tons of grapes and and cash flow for red wines-less for white wines that our winemaking to put out the best wines." yielding about 16,000 cases of wine per year. Stuart require less aging. Packaging is also important and a The average bottle price for wine has been dropping Cellars offers its Chardonnay, Merlot, Cabernet Sauvi reflection of the wine's image. Will the winery use flat- in large part due to the popularity of Australian and New gnon, Cabernet Franc, Zinfandel, Viognier, and other bottomed, Burgundy-style bottles at $.50 each, or thick- Zealand wines. Most popular wine brands retail for less wines for sale through its tasting room, its website glass, thick-neck, deep-punt bottles at $3? Corks can than $10 per bottle. www.stuartcellars. com), and retailers in California. range in price from pennies to dollars a piece. Image is very important in wine marketing. Fancy Retail prices for Stuart Cellars products range from Advertising, public relations, point-of-sale materials, bottles, elegant and artistic labels, advertising, celebrity $13 per bottle for a Chardonnay, Viognier, Sauvignon promotions, salesforce, wine tastings, samples for the endorsements, and wine reviews can all impact con- Blanc, and White Merlot blend, to $46 per bottle for a wine press, warehousing, shipping, distribution, and ex- sumers' perceptions of the value of a wine. There is often 2002 Zinfandel Vintage Port. The average retail price for cise taxes all mount up and can be about 15 percent of the greater prestige from small-production, boutique winer- a Stuart Cellar wine is about $28 per bottle. Stuart Cellar retail price. Warehousing and shipping are significant ies than larger-volume operations. Scarcity, the real or Wine Club members enjoy a 20 percent discount and because wine is a heavy product. perceived rarity of a wine, can drive up prices. Demand receive additional benefits such as complimentary tasting Many states have regulated distribution systems such can be influenced by global supply, those all-important at the winery, special "member only" wines, additional as California's three-tier system of wineries, whole ratings from publications such as the Wine Spectator, and discounts forreorders of the monthly wine selection, and salers, and retailers. Wholesaler markups range from the quality of the vintage. All the marketing efforts in the quantity discounts. 20-35 percent of what the distributor pays for the wine, world can't make a poor wine taste good. with high-volume wines having lower margins as this PRICING WINE: means less inventory. Retailer markups can vary from 10-50 percent, depending on the type of outlet. Some CONSIDERING COSTS AND PROFITS states have mandated minimum markup to prevent How does Stuart Cellars arrive at its pricing? What fac- predatory pricing. tors enter into the pricing decision? The wine business is not known as a highly profitable The price floor is usually set by costs. Costs vary business. Success comes over the long term as initial widely depending on winery location and number of investments and expenses are spread out over a number years in business. There are tremendous economies of of years and over increasing unit volume. scale for larger producers versus smaller boutique wineries such as Stuart Cellars. Grapes, including CONSUMER DEMAND labor to grow and harvest, can represent up to 60 per- cent of production expenses. One rule of thumb is that AND COMPETITION a bottle of wine should be priced at 1/1000 the cost of Costs and profit objectives are only part of the price a ton of grapes. Paying $40,000 for a ton of Cabernet ing formula. Wineries also have to consider buyer grapes would yield a bottle price of $40. Napa Valley characteristics-retailers and consumers. According to growers' costs range from $2,800 per ton to $10,000 Steven Bombola, consulting general manager, Stuart per ton. Cellars is targeting the "upper end of wine connoisseurs, Buying land adds to winery costs but provides more people who can afford a premium product at a premium operational control. Even wineries that do grow grapes price" and represents perhaps "the top 10-15 percent of may need to buy grapes on the market to meet their pro- the wine purchasing public." These are savvy consumers; duction needs. The impact of land ownership depends on they read and follow wine reviews. Wineries also need to the size of the mortgage and the interest rate to finance the consider and compare pricing from competitive wineries. property. Planting costs can be as much as $30,000 per Wine buyers certainly will make these comparisons. And acre, depending on such factors as density of plantings, while price is often a cue for quality, there are many trellising, and irrigation methods. Winery facilities and great-tasting wines at reasonable prices. equipment-grape press, tanks, barrel racks-can be sig- If a wine is priced too low, it will affect consumers' ifcant. Winemaking barrels are the second-highest pro- perceptions of quality. However, charging a price signif- duction cost for many wineries. American oak barrels icantly higher than competitor prices can drive con- ($300 per barrel) or French oak ($700 per barrel) may have sumers away to lower-priced competitor products. a useful life of two to three years. On the other hand, a "People's perceptions are driven by wine pricing," stainless tank may last 20 years. And of course, repair and states Robert Mondavi's senior vice president, Gayle maintenance costs for equipment and facilities can add up. Dargan. "If all consumer decisions were driven by