Viggio Wines Louis Viggio was struggling to determine how to price his new offering of cabernet sauvignon wine (commonly called simply cab) from his winery. He knew that even though he was setting a price for the wine that came from grapes harvested in 2015, it was going to be a reference price for distributors, retailers, and consumers for all the cab he would be producing in the future. Louis also knew he could use some cash flow since he had been holding on to this wine for over two years now aging it and the only wines his winery had been able to sell up to this point were wines which could be consumed at an earlier age, such as the chardonnay, pinot noir, and sauvignon blanc. Those wines had sold fairly well for coming from a new winery, such as his, but the cabernet sauvignon was the king of wines and it would help make, or break, his reputation as a winery. Production of the Wine Pricing any product is not an easy task, and wine is no different. There are a large number of products needed to produce a bottle of wine. First the winery has to buy the grapes. A ton of grapes will produce enough juice for about 700 bottles of wine. The cost for a ton of grapes can vary from $1,000 to $12,000 a ton. Louis bought his grapes from a respected grower and paid $7,000 per ton for eight tons of grapes. Once the winery has extracted the grape juice it will begin the fermenting process. This process will generally begin by putting the juice in large stainless steel tanks and adding some yeast which will turn the sugar into alcohol. The tanks need to be thoroughly cleaned between each use, but that is fairly easy and any costs become part of overhead costs. After the wine has been in the stainless tank to begin fermenting, most wines are placed in oak barrels to begin the aging process. The barrels can cost anywhere from $300 for a barrel made of American oak to $750 for French oak. Each barrel can hold enough wine for 280 bottles (if there is not enough of a specific wine to fill a barrel, it will usually be set aside for blending into other wines). Louis purchased a new set of 20 barrels for his cab, paying $600 a barrel. After the wine has been aged, it is then bottled. Bottles for wine can be purchased at any price from 50 cents to $2.00 a bottle. The bottle that Louis chose for his cab cost $1.10 a piece. To seal in the wine Louis uses a natural cork stopper. As with everything else associated with wine, the better corks cost more. Entry level corks are available at ten cents a piece, but premium corks can be 75 cents to a dollar a piece. Louis used corks that cost him 90 cents per cork. After the wine is bottled and corked, a label is placed on the bottle. The cost to produce the label was 25 cents each. After the wine has been bottled, corked, and labeled, it sits - actually it lies on its side - for up to a year before it is ready to be sold. Then when an order comes in it is placed in a box which holds twelve bottles (a case) and costs another $6.00. Distribution Most wines are sold through distributors because few wineries have sufficient sales to justify an independent sales force. The distributors want to make a profit, so they will frequently want a 25% margin for representing the wine. Thus if a winery sells a bottle of wine to a distributor for $10, the distributor will price it at $13.33 to sell it to the retailer. And of course the retailer wants to make a profit and generally they expect at least a margin 30% of the retail price (up to 35% for wines that retail for more than $30). For example, a bottle of wine the retailer paid the distributor $13.33 for will retail for $19.04. And the winery wants to make a profit also. For wines that retail under $20 a bottle, the margins can be as low as 30% because the winery is dealing with a volume product. For more expensive wines the margins need to be higher, typically around 40%. Part of this is because it is very hard to allocate some of the overhead costs to individual vintages or types of wine. So thi like electricity, staff costs, and rents have to be covered by the margin for the wine. Current Industry Louis also has to consider the conditions that he is facing now in the industry. The market is beginning to grow as both the Boomers and the Millennial generation are consuming more wine. The market for higher priced wine has always been a difficult one in which to be successful as the production volumes are necessarily low to keep quality high. Since price has a strong influence on the perception of quality you don't want to price it too low, but if the wine is priced higher than similar wines it will sit on the shelves and neither the retailers nor consumers will be anxious to buy it. The grape grower that Louis purchased his grapes from sold to a number of different wineries. Two of these wineries were Quintessa and Silver Axios. These wines frequently retailed from $95 to over $150 depending upon the particular vintage. However, they had also both in the business for a number of years and had built a reputation for putting out a great bottle of cabernet. Two other wineries purchasing from the same growers are Opus One and Silver Oak Cellars. These wineries also distributed a very good cabernet, but because their production was larger they sold for a lower price, from $65 to $100 a bottle. Your Task Louis Viggio has hired you to help him in making the pricing decision on his wine. He expects you to carefully consider all relevant costs, what the competition is priced at, how consumers would perceive the price, and provide him with both the price that the distributors will be paying for the wine and the retail price for the wine.