Alok Chandra: Why wines are so expensive

Actually, one should ask, “Why are good wines so expensive?” As in any business, there are four components to the price consumers pay for a product: the cost of production, marketing costs & overheads, duties & taxes, and trade margins/ markups. 

Making  good wine requires both good grapes and good production facilities as well as the time and expense of maturing reds in oak barrels. The best way of ensuring grape quality is to set up your own vineyards — but buying agricultural land is difficult and expensive in both Karnataka and Maharashtra, and it will take at least Rs 5 lakh per acre and three years for the first usable grapes to come to harvest. The alternative: buy grapes from grape growers — but be ready to pay through your nose for good grapes (this year prices for red wine grapes have gone to Rs 65 a kg). Together with dry goods (bottles/ caps/ labels), variable costs of wine come to at least Rs 200 per bottle.

Do you want to mature the wine in oak casks and improve quality? A 250-litre French oak barrel will set you back by anything from Rs 50,000 upwards — and it’s good for only three to four refills of six months each. That adds Rs 50 per bottle to costs, not including finance costs for the time spent in cask and bottle.

A winery will cost at least Rs 5 crore for a capacity of about 100,000 litres per year. But, sales increase only slowly (if at all), while costs are incurred up front, so figure on production costs of at least Rs 100 per bottle.

Then there are operating overheads for personnel, and sales & marketing costs for putting your wines onto retail shelves and on the winelists of restaurants and hotels. 

It takes as much time and money to establish a wine portfolio as it takes to produce the wine. So if you’ve taken three years and Rs 10 crore to set up a winery and produce a wine, please budget for a similar time and cost to establish your wine in the domestic market. This is the area where most wine producers founder: one can get bank financing for fixed assets and working capital, but marketing costs, overheads and finance costs have to be met from equity.

Lastly, there are duties and taxes and trade margins, neither of which is controllable by the wine producer. Both Karnataka and Maharashtra have imposed punitive taxes on wines from outside their respective states — fiscal protectionism for their local industries. Taxes on domestic wines range from nil to about Rs 265 per bottle in these two states.

However, since trade margins are mandated at 10 per cent in each state, all retailers demand and receive additional discounts ranging from 10 per cent to 50 per cent from producers desperate to sell their stocks before the next harvest. Retail chains and some restaurants may demand listing fees that could be as high as Rs 1 lakh per label, and also have additional charges to display branding material in-shop or in-house.

All this results in domestic wine prices at upwards of Rs 650 per bottle for “regular” wines and Rs 800-plus for reserves — actually a small price to pay for a lot of work that has gone into getting these wines to the consumer.

Wines I’ve been drinking: A lot of The Daily Dose Cabernet Sauvignon 2015, currently being rolled out in Bengaluru by Wine Park. Priced at Rs 850, this Maharashtra-produced wine has an interesting and attention-grabbing label, is complex and fruit-forward, with just a touch of oak, and opens up beautifully in the glass. Worth a try.

Alok Chandra is a Bengaluru-based wine consultant