When uncorking a $100 wine bottle for your guests, have you ever found yourself wondering how profitable the wine industry really is? How much does this bottle really cost, and is it really worth ten times more than the $10 one? And what does that say about the wine industry as a whole?
Well, the cork has already been pulled, but we still can help you with the answer and teach you how to make profit and how to sell wine.
The Wine Industry Growth Rate
In 2018, the total U.S. wine market value was $70.5 billion. 67% of that was domestic wine, and 33% imported.
According to the 2019 SVB Wine Industry Report, U.S. wine consumption has gone steadily up from around 370 million gallons in 1994 to just under 800 million gallons in 2018. That's about a 116% increase in volume. Of course the U.S. population increased 22% over the same span. Nevertheless, an impressive overall growth in gallons consumed.
The overall wine industry growth rate is predicted to be between 4% to 8% in 2020 and beyond. Premium wine sales went through the roof and restaurant sales of wine have been consistently higher compared to the years before.Those who earn one of the levels of sommelier certification and other trained wine professionals are expecting a 9% growth outlook through 2026, according to the U.S. Bureau of Labor Statistics. That's even higher when you become a master sommelier. You can even watch a sommelier documentary if you're so inclined.
To fully understand why the wine industry is so profitable, let's look at wine profit margins and markups.
What Is the Profit Margin on Wine?
Wine price (and wine by the glass pricing) and profit margin depends on where it's sold. Restaurants and bars have around a 70% profit margin on wine, their most important restaurant KPI, while retailers are typically between 30–50%. Distributors and wholesalers tend have a wine profit margin of around 28–30%, and producers and vineyards will make about 50% gross margin. Psychological pricing often has a lot to do with it and can really help your p&l restaurant statement.
The U.S. wine industry has a three-tier sales structure. Each tier imposes its own markups and retains a certain profit margin upon selling a wine bottle to the next tier. The system consists of the following:
They are mostly wineries, but can sometimes be importers as well. Let's use a winery that operates on a 50% gross margin as an example. That winery sells a case of wine for $100, which is around $8 or more per bottle. They make $50. That covers overhead expenses, taxes, and profits.
As the middle person in the three-tier structure, distributors make profits by obtaining the wines from the producers. They then sell them to retailers and other buyers. Most distributors work on a 28 to 30% profit margin. But the actual number depends on the retailers’ buying power and their relationships with the producers as well as any discounts via an LTO (see LTO meaning). Distributors may also employ a wine negociant to source high-quality wines.
At this tier, you will notice a significant increase in profit margins. While many retailers generally aim for their margins to be between 30 to 35%, the range can sometimes go up to 50%. At this tier, wine can be sold on premise and off premise and increase restaurant sales.
On-premise and Off-premise Sales
On-premise establishments are usually restaurants and bars, whereas off-premise vendors include wine shops and merchants. The industry standard for profit margins of wine at restaurants and bars is around 70%. That makes wine the most profitable item on the menu for these establishments. Beer pricing and alcohol pricing are not high enough to match wine. Here's some more info about how to price a menu.
In this sales cycle, there is also the option of selling directly to consumers. For wineries, this is often one of the best ways to make profits. When a consumer purchases a wine bottle directly at a winery, they typically pay the full retail price for it. All of which go straight to the winery. However, the winery still needs to account for other expenses on that bottle, such as staffing, inventory management, and credit card processing.
For wholesale suppliers, they typically sell wine directly to consumers through tasting rooms, wine clubs, and wine subscriptions. This type of selling, however, has a suggested retail price (SRP) regulated by the state where the consumer purchases the wine. Due to the variability of in-state sales regulations and taxes, it is quite difficult to quote a profit margin for direct-to-consumer sales.
What Is the Average Markup on Wine?
For on-premise and off-premise establishments, the industry-wide markup on wine is at least 2.5 to 3 times the wholesale cost. A wine bottle bought at $10 from the distributor might sell for $20 in retail. But it can also be priced at $30 or more at a restaurant or bar. Wine sales lead to high bar profitability so try to menu engineer your drink menu to get the most profit.
Generally, the cheapest wines will have the highest markups and higher-end ones will have lower markups. This means that a $10 wholesale wine might be marked up to $30, but a $50 wine might be only $80. This is the rare instance where upselling doesn't produce as much profit.
Referring back to the three-tier sales structure earlier, each tier has its own markups. Let's use the Napa Cabernet as an example. It should be priced at $100 on the wine list, but the winery might sell the bottle for only $20 to the distributor. The distributor then sells it to retailers, restaurants, and bars for 30 bucks. Depending on the states, the retailer will typically sell it for at least two, if not three, times more than the wholesale price. Restaurants and bars will buy it for the same wholesale price of $30 and put it on their wine menus or digital wine lists for $100, which is typical of restaurant wine markup.
For wineries, they have to account for all the production costs. That includes vineyards and winery, sales, a restaurant marketing plan, loans, real estate, building maintenance, and administration. Distributors need to take shipping and delivering fees into consideration. On top of that, their profit margins depend largely on whether the wine is in high demand or not. Whereas, retailers, restaurants, and bars have a higher prime cost to cover. The significant difference in prices at restaurants and bars is because they have to account for their staff’s payroll, rent, and other expenses. However, the restaurant wine markup rate still varies considerably from one establishment to another. A bottle can be $25 at a casual diner and goes up to $40 or more on the best wine list at a high-scale restaurant. At the same time, it can also only be around $15 at a local bar.
Is The Wine Industry Profitable?
In general, the wine industry as a whole is very profitable, as the wine industry growth rate suggests. For restaurants and bars, wine is easily the most profitable item on the menu. And wine, in large part, drives a lot of the profitability of bars. Compared to food, it has the same cost of goods sold but doesn’t require as much on labor cost and operating expenses. That's why limiting food cost and pour cost are so important. You also need to understand how to manage a restaurant balance sheet.
However, one item alone cannot generate all the revenues. Your business’s profit is always dictated by the quality of the services and products that you offer. In addition to that, you also need to watch out for your average restaurant liquor cost (see liquor cost calculator), variance, and other inefficiencies that affect your bar’s profitability. You may also want to invest in a wine aerator decanter to get the most out of your wine or look into gluten free wine brands for even more market coverage.
Increasing your bar's profits doesn't stop at wine, though! Lots of money can be made streamlining inventory and ordering. Which is what a liquor inventory system like BinWise Pro do. From saving time taking inventory to automatically updating your restaurant accounting software to calculating pars and variance, BinWise saves people time and money and it's important to learn how to manage cost for restaurant business.
Book a demo and we'll show you exactly how.