Wine economics 101

People often ask me: "Why are wines so expensive?" That's a valid question - after all, if "Two Buck Chuck" (a mass-produced, but drinkable wine) could be sold in the US for $2 per bottle, why can't half-way decent wines be priced at, say, Rs 250 per bottle in India?

The reason, of course, is the high cost of both producing and marketing wines in India and it's worth taking a little time to go into why this is so.

Let's start with the market end where trade margins and marketing costs for wines are about 40 per cent of the end-price - so at an MRP of Rs 250 per bottle, the producer realises only Rs 150 to cover taxes and to cover fixed and variable costs as well as overheads and profits.

The raw material for wine is wine grapes, which are expensive to grow - a new vineyard takes three years to start producing a usable crop, so the return on investment for wine grapes is lower than for table grapes, which have a wider market, both domestically and abroad. Operations are manual as most holdings are too small to mechanise - in any case, the way a vineyard is planted would have to change fundamentally to allow for mechanisation. Consequently wine grapes cost at least Rs 25 per kilogram, implying a raw material cost of Rs 30 per bottle.

Packaging costs add another Rs 55 per bottle to the production costs as wine bottles and corks (if being used) have to be imported from overseas.

Add production costs of at least Rs 45 per bottle and we're left with only Rs 25 per bottle to cover overheads, interest, profits, and taxes.

This somewhat simplistic costing seems to show that one cannot produce wines from wine grapes and sell for below Rs 250/bottle and also be commercially viable.

So how are some companies doing this? Fortified wines are available in Goa and Karnataka for Rs 100-150 per bottle - their producers ruthlessly squeeze both production as well as marketing costs: table grapes cost Rs 8 per kilogram, recycling bottles reduces packaging costs, and local taxes are only Rs 17 per bottle. Of course, such wines can be sold at these prices only within the state where they are produced, as exporting them to other states attracts a horde of taxes that throws the costing out of gear.

If the wine market in India has to grow, it is imperative that drinkable wines are made available at affordable prices - at present, this seems possible only for fortified wines, so perhaps that's the way to go.

Wines I've been drinking: It's not widely known that industry leader Sula has been importing and marketing a wide range of wines from around the world for some years - among the first such wines were Hardy's 'Stamp of Australia'. The company's Commercial Director Nick Pringle (a former cricket player) was in India doing a road show for the brand. The Sparkling Chardonnay Pinot Noir (Rs 1,350) is very drinkable, with citrus notes and a creamy mousse, the Riesling Gewurztraminer (Rs 1,062) is aromatic and light-bodied while the Cabernet Merlot (also Rs 1,062) has nice notes of red fruit and berries and a bit of spice and a medium-plus body.

Sula is expanding, and it will be interesting to see which other wines from the parent company's wide portfolio they bring into India.

Here's mud in yer eye, Mate (Aussie for "drink till you drop")

Alok Chandra is a Bangalore-based wine consultant