PRICING

November 16, 2023.

Many people perceive, with good reason, that Virginia wine is overpriced compared to larger volume wine producers from places like California or Australia - that Virginia has a poor Quality-to-Price Ratio (QPR). Virginia wines compare favorably against wines of similar price on quality, but not favorably on price by itself which is driven by operating cost and size or scale. 

An article in 2017 noted that the cost to establish a vineyard is approximately $18,000 to $20,000 per acre over three years, when it reaches full production.  Annette Boyd of the Virginia Wine Marketing Board said: “The average winery expenditure is approximately $5 million, including the building, equipment and staff.  Average break even for successful wineries is 10 years.”  Consider that in the ten years to break-even, the vineyard has continuing expenses like labor, sprays, equipment, plant material, trellising, infrastructure, salaries, equipment, bottles, corks, wine labels, state and federal taxes.  As Boyd said: “And if you have a frost, hail, wind storm or hurricane, it can wipe out your crop that [first] year, and the following year, you start over.”  Put the Squeeze on Sour Grapes over Virginia Wine Prices, By Jack Berninger Richmond Times-Dispatch, Oct 4, 2017  https://roanoke.com/lifestyles/put-the-squeeze-on-sour-grapes-over-virginia-wine-prices/article_ef07e8a6-b16f-5dd2-a057-c34b61f50dda.html

Add to these considerations the fact that most Virginia wineries are smaller, family-run operations.  In philosophy, many Virginia vineyards choose to process – tend, pick and bottle wine - manually, following the path of the traditional European winemakers.  Higher prices result in part from this more labor-intensive approach.  See, The Price of Wine: Too Much or Just Enough? Beliveaue Farm, https://www.beliveaufarm.com/blog/2019/8/8/the-price-of-wine-too-much-or-just-enough  accessed May 7, 2021.  Further, according to the 2019 Virginia Commercial Grape Production Report, (April 2020), 59% of Virginia vineyards are 10 acres or less.  The average Virginia vineyard is only around 15 acres. (I believe that the largest Virginia winery by acreage as of this writing is Trump Winery at 227 acres.)  The smaller scale of most Virginia wineries with only 10-15 acres of grapes, means production of only tens of thousands of cases of wine per year.  The 2022 Virginia Wine Vision strategic report notes that 47% of Virginia wineries produce between 1,000 and 5,000 cases a year.  Even the largest production winery in Virginia, Williamsburg Winery at around 65,000 cases per year, is comparatively small in the wine market.  Compare this to hundreds of thousands of cases for the bigger producers, and millions of cases per year for the really big producers like Barefoot (Gallo) or Sutter Home.  A thousand of anything sounds like a lot, but 25,000 cases compared to 250,000 cases makes an enormous difference in income and allows a significant price drop for scale. The small size makes it hard to produce wine competitively below $15/bottle.  See, Virginia Wine Vision, page 4 (March 2022), accessed at: https://vaw-public-prod.s3.amazonaws.com/6ce1d5929155bb45b3c80bb8560a9b35.pdf. 

Over a number of years, there were not enough grapes grown in Virginia to support the number of wineries.  In 2021, with roughly 4,000 acres bearing grapes to supply more than 300 wineries, there was a situation of more demand than supply – contributing to higher prices for Virginia wine.  See, Kate Masters, Virginia’s Wine Industry is Expanding. Grape-Growing Hasn’t Caught up, Virginia Mercury, January 3, 2022, accessed on April 16, 2022 at https://www.virginiamercury.com/2022/01/03/virginias-wine-industry-is-expanding-grape-growing-hasnt-caught-up/  But the harvests for 2022 and 2023 have produced a glut of Virginia fruit, for the first time since the 2008-2009 harvests when the Great Recession lowered demand for wine.  Then drought and rain in 2010 and 2011, respectively lowered yields and prompted growers to plant more to keep up with demand.  In fact, more than 200 new acres have been planted in the past 4 years, meaning an additional 500 tons of fruit each year and a 90% increase in tonnage projected for the next decade.   Normally, this would help reduce prices, but what has happened instead is significant fruit being sold out-of-state, like to New York wineries, or just going to waste.  Some wineries have not adjusted their growth projections and some wineries have in fact had lower sales (perhaps part of a national trend).  See, Skip Causey, Industry Tackles Va Grape Glut, 39 Grape Press 1 (Winter 2023), accessed at  https://virginiavineyardsassociation.org/wp-content/uploads/2023/11/WINTER-GRAPE-PRESS-2023.pdf  accessed on November 16, 2023. 

Finally, there are taxes and fees.  Virginia has relatively high taxes on alcohol compared to other states, ranking sixth highest in the country.  See, Sales Tax Handbook, https://www.salestaxhandbook.com/virginia/alcohol, accessed November 16, 2021.  We have a sales tax of 4.3%, Va Code 58.1-603, and local jurisdictions generally tack on an additional tax for wine.  According to VABC, for example, additional sales tax on wine in the Historic Triangle is 7%. https://www.abc.virginia.gov/products/products-faqs/pricing-information, accessed November 16, 2021.  Then there are excise taxes which are charged to the manufacturer or producer but virtually always are passed on directly to the consumer in the pricing of the product.  There is a Federal excise tax on wine from $1.07 - $3.40 per gallon, or $0.21 - $0.67 per 750 ml bottle, depending on alcohol content.  Virginia has its own excise tax on wine of $.40 per liter of wine, Va Code 4.1-234, which normalizes to $1.51 per gallon. (Virginia’s excise tax on distilled spirits is third highest in the country.)  A portion of this per liter wine tax goes to the Virginia Wine Promotion Fund discussed in the Bureaucracy page.  The Virginia Wine Board receives 12% of the excise tax for its operations and to distribute to localities. Va Code 4.1-235.

The Custom Crush Alternative.  May 11, 2023

Considering the high up-front costs for material, equipment, and labor and the risk that goes with farming grapes in Virginia, why has there been an expanding number of wineries in the Commonwealth?  One major answer is the use of custom crush facilities. 

According to the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB), “in a typical custom crush arrangement, a grape grower or any person with winemaking materials (the “client”) enters into a contract with a bonded winery proprietor to have the grapes processed into wine. The client retains title to the grapes, and the wine is made to the client’s specifications. The finished wine is returned to the client for sale to other dealers, or the winery sometimes sells the wine on behalf of the client.”  See W11 from TTB FAQs  https://www.ttb.gov/wine/wine-faqs  In Virginia, custom crush operations are referred to a "contract winemaking facilities" and are defined in Va Code §4.1-100 as follows:

 "Contract winemaking facility" means the premises of a licensed winery or farm winery that obtains grapes, fruits, and other agricultural products from a person holding a farm winery license and crushes, processes, ferments, bottles, or provides any combination of such services pursuant to an agreement with the farm winery licensee. For all purposes of this subtitle, wine produced by a contract winemaking facility for a farm winery shall be considered to be wine owned and produced by the farm winery that supplied the grapes, fruits, or other agricultural products used in the production of the wine. The contract winemaking facility shall have no right to sell the wine so produced, unless the terms of payment have not been fulfilled in accordance with the contract. The contract winemaking facility may charge the farm winery for its services.

Any custom crush facility has to have submitted complex regulatory paperwork that allows them to make wine, transfer wine, and to transfer ownership of that wine to the client.  The producer who bottles the wine is also responsible for labeling even if the wine is in someone else’s name and sold by them.  (TTB FAQs W22).  The client winery using the custom crush facility must have their own license in order to market and sell the resulting wine.  The range of services offered by custom crush facilities can include processing, storage, grape sourcing, bottling, labeling approvals, sourcing barrels, and warehousing.  A client winery can buy grapes from another winery or vineyard and then use the custom crush facility to process the grapes, ferment, age and bottle the wine.  The client winery can also hire the services of the custom crush facility to source the juice and arrange payments.  The client winery can also buy grape juice and use the facility to ferment the juice into wine. Another option is for a winery to buy already bottled bulk wine, and have the producing facility label it for them.  The client winery can arrange for consultation, troubleshooting, and collaboration with winemakers at the custom crush facility. 

By using a custom crush producer, a client winery can out-source many of the headaches and risks attendant with starting a new wine business.  A 2019 article about custom crush operations in California quoted per case costs at between $18 and $60 per case depending on the level of services and the quality of the raw materials.  But this is still a savings over up-front machinery costs, the continued sustainment costs of the operation (in labor, equipment, and supplies), and the long wait for crops that might not make it.  See, https://www.spiritedbiz.com/crushing-it-custom-crush-facilities-let-winemakers-and-craft-distillers-share-resources-and-expertise/, accessed April 15, 2022.  Using custom crush arrangements, a new winery might get operational within six months of applying for its permits and licenses.  See blurb from Altillo Vineyards at http://www.altillovineyards.com/custom-winemaking.php  See also our post on Firefly Cellars. 

The first custom crush facility in Virginia and probably the largest is Michael Shaps Wineworks in the Charlottesville area.  Their website lists 14 wineries with which it has custom crush arrangements.  See, https://www.virginiawineworks.com/index.cfm?method=pages.showpage&pageID=F5290F70-CFF2-F838-B9AD-991A0C1FC2AC, accessed April 15, 2022.  Also according to their website, they produce around 30,000 cases of wine for those clients, while under its own labels, Michael Shaps produces around 3,000 cases per year.  My informal survey shows at least seven other wineries in Virginia that advertise or provide custom crush services.  This is by no means complete and needs to recognize that these private commercial arrangements are often undisclosed.

There is some debate about whether a business that out-sources the entire process and in fact makes no wine itself can be called a “winery.”  Should a business be called a “winery” where the owner’s investment is in building or renovating a tasting room for retail sales rather than in the physical plant and expertise to grow and/or produce wine?  At least, one should insist on local fruit, grown and processed in Virginia, so that buying at the tasting room supports a local business.  (I plan to discuss mobile bottling in another post, but that also saves a winery money in avoid the cost of acquiring and maintaining expensive bottling equipment for wineries that otherwise have production equipment.)

Virginia in the Larger Wine Market.  November 3, 2022

Wine is not only an agricultural product but a luxury product as well.  Therefore, pricing for a wine must reflect not only the cost of production (the agricultural production and regulatory expenes) but what the market will bear for that and similar items. 

According to the World Population Review, the annual global production of wine averages between 260 and 270 mha, with the United States producing around 24.1 million hectoliters in 2021.  See, https://worldpopulationreview.com/country-rankings/wine-producing-countries, accessed October 26, 2022.  [1 million hectoliters (Mhl) = 100,000,000 liters, or 26,400,000 gallons, or 133 million bottles.]  The World Population Review also reflects wine production by State, showing that Virginia produced 2,157,395 gallons of wine in 2021, which translates to 0.27% of U.S. production.  See, https://worldpopulationreview.com/state-rankings/wine-production-by-state, accessed October 26, 2022.  While statistics from the 2022 Mission Statement from VirginiaWine.org, Virginia offer higher production numbers in terms of cases, Virginia production remains a tiny share of total U.S. production and barely a whisper on world production.  [The Mission Statement shows production of around 560,000 cases of wine annually, equating to 5,040,000 liters of wine or 5 Mhl.]  While it is true that Virginia is in the top ten states in terms of U.S. production [The World Population review shows Virginia in 10^th position], consider that California produces over 680 Million gallons of wine.  The second place state, Washington State, is a distant second at only around 40 Million gallons. 

Even if we define the market as only the Mid-Atlantic states, Virginia is not the big daddy rabbit here either.  Statistically, that distinction belongs to 4^th Place Pennsylvania with production around 12 Million gallons. [I am not commenting on the quality of Pennsylvania wine.]  Fact is that it is far easier to find California wine in Virginia than to find a native bottle.  Some wine stores said that they stocked few or no Virginia wines as they weren’t often requested.  Virginiawine.org helpfully lists retail outlets for Virginia wine by region.  Our informal survey of retailers in our home area of Northern Virginia, conducted in the Summer of 2022, showed 52 different wineries represented with 24 wineries appearing in multiple locations.  In very few places is Virginia wine in any prominent display.  Some might say that low volume means that Virginia wine is rare and that justifies the price.  But compared to similarly priced Burgundies or Bordeaux wines, a $65.00 Octagon or a $65.00 Cana Unite Reserve (if you can get it) may seem somewhat extravagant.  Education is the key - people won't ask for or demand stocking Virginia wine if they are not aware of it or favorably exposed to it. 

Even with all of these considerations, I have found Virginia wine great quality overall and esteemed on my table.  Consider that when you buy a local bottle, you are supporting local businesses and local business owners even understanding that their commitment may involve production by a third party. And if you visit a tasting room on-site at a winery or vineyard, you will have direct expertise in choosing the right bottle for any occasion.