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Stuart Cellars: Price Is a Matter of Taste Stuart Cellars is a family-owned winery located in Temecula, California. The winery marked its first harvest in 1999. Forty acres are available for cultivation, giving Stuart Cellars a capacity of some 150 tons of grapes and yielding about 16,000 cases of wine per year. Stuart Cellars offers its Chardonnay, Merlot, Cabernet Sauvi- gnon, Cabernet Franc, Zinfandel, Viognier, and other wines for sale through its tasting room, its website (www.stuartcellars.com), and retailers in California. Retail prices for Stuart Cellars products range from $13 per bottle for a Chardonnay, Viognier, Sauvignon Blanc, and White Merlot blend, to $46 per bottle for a 2002 Zinfandel Vintage Port. The average retail price for a Stuart Cellar wine is about $28 per bottle. Stuart Cellar Wine Club members enjoy a 20 percent discount and receive additional benefits such as complimentary tasting at the winery, special "member only" wines, additional discounts for reorders of the monthly wine selection, and quantity discounts Because it can be a three-year wait to harvest grapes from new plantings, followed by barrel and bottle aging, wineries can easily have five and a half years of capital and cash flow for red wines-less for white wines that require less aging. Packaging is also important and a reflection of the wine's image. Will the winery use flat- bottomed, Burgundy-style bottles at $.50 each, or thick- glass, thick-neck, deep-punt bottles at $3? Corks can range in price from pennies to dollars a piece. Advertising, public relations, point-of-sale materials, promotions, salesforce, wine tastings, samples for the wine press, warehousing, shipping, distribution, and ex- cise taxes all mount up and can be about 15 percent of the retail price. Warehousing and shipping are significant because wine is a heavy product. Many states have regulated distribution systems such as California's three-tier system of wineries, whole- salers, and retailers. Wholesaler markups range from 20-35 percent of what the distributor pays for the wine, with high-volume wines having lower margins as this means less inventory. Retailer markups can vary from 10-50 percent, depending on the type of outlet. Some states have mandated minimum markup to prevent predatory pricing. The wine business is not known as a highly profitable business. Success comes over the long term as initial investments and expenses are spread out over a number of years and over increasing unit volume. PRICING WINE: CONSIDERING COSTS AND PROFITS How does Stuart Cellars arrive at its pricing? What fac- tors enter into the pricing decision? The price floor is usually set by costs. Costs vary widely depending on winery location and number of years in business. There are tremendous economies of scale for larger producers versus smaller boutique wineries such as Stuart Cellars. Grapes, including labor to grow and harvest, can represent up to 60 per- cent of production expenses. One rule of thumb is that a bottle of wine should be priced at 1/1000 the cost of CONSUMER DEMAND AND COMPETITION Costs and profit objectives are only part of the pric- a ton of grapes. Paying $40,000 for a ton of Cabernet grapes would yield a bottle price of $40. Napa Valley growers' costs range from $2,800 per ton to $10,000 per ton. Buying land adds to winery costs but provides more operational control. Even wineries that do grow grapes may need to buy grapes on the market to meet their pro- duction needs. The impact of land ownership depends on the size of the mortgage and the interest rate to finance the property. Planting costs can be as much as $30,000 per acre, depending on such factors as density of plantings, trellising, and irrigation methods. Winery facilities and equipment--grape press, tanks, barrel rackscan be sig- nificant. Winemaking barrels are the second-highest pro- duction cost for many wineries. American oak barrels ($300 per barrel) or French oak ($700 per barrel) may have a useful life of two to three years. On the other hand, a stainless tank may last 20 years. And of course, repair and maintenance costs for equipment and facilities can add up. ing formula. Wineries also have to consider buyer characteristicsretailers and consumers. According to Steven Bombola, consulting general manager, Stuart Cellars is targeting the "upper end of wine connoisseurs, people who can afford a premium product at a premium price and represents perhaps the top 1015 percent of the wine purchasing public." These are savvy consumers; they read and follow wine reviews. Wineries also need to consider and compare pricing from competitive wineries. Wine buyers certainly will make these comparisons. And while price is often a cue for quality, there are many great-tasting wines at reasonable prices. If a wine is priced too low, it will affect consumers' perceptions of quality. However, charging a price signif- icantly higher than competitor prices can drive con- sumers away to lower-priced competitor products. People's perceptions are driven by wine pricing," states Robert Mondavi's senior vice president, Gayle Dargan. "If all consumer decisions were driven by 1 blind-tasting, it would be a very different world. That's not reality. Price is a signal to people of our commitment and the efforts we are taking through out vineyards and our winemaking to put out the best wines." The average bottle price for wine has been dropping, in large part due to the popularity of Australian and New The average bottle price for wine has been dropping, in large part due to the popularity of Australian and New Zealand wines. Most popular wine brands retail for less than $10 per bottle. Image is very important in wine marketing. Fancy bottles, elegant and artistic labels, advertising, celebrity endorsements, and wine reviews can all impact con- sumers' perceptions of the value of a wine. There is often greater prestige from small-production, boutique winer- ies than larger-volume operations. Scarcity, the real or perceived rarity of a wine, can drive up prices. Demand can be influenced by global supply, those all-important ratings from publications such as the Wine Spectator, and the quality of the vintage. All the marketing efforts in the world can't make a poor wine taste good. 6. Prepare their Proforma Income Statement based on the financial parameters of their production & marketing operations thus far