The true cost of wine…

By April 21, 2008Wine Investment

… or why expensive wine is better value.

When you buy a bottle of wine, are you aware of exactly what you are paying for? Apart from all the ancillary costs, how much actual wine do you get for your money? The answer may come as something of a surprise.

If you are buying, say, a French wine in the UK, in addition to the wine and its container, you are also paying for it to get from France to this country, where, on arrival, it is burdened with government duty and VAT, and, of course, the merchant’s profit margin has to be added on.

So, how much do you have to pay for a bottle of wine before the price paid reflects more wine than all the other charges? Prepare for another shock!

The chart illustrates the cost structure of some bottles of wine from different price brackets. Let’s start with a bottle of wine retailing at £4.95: it has only 50p of wine in the price. The other £4.45 is made up as follows:

42p is the cost of the bottle, its cork and capsule (the bit that covers the cork), and the label. 25p is the freight charge for getting the wine over from France to the UK, plus insurance. Delivery costs within Britain are the bane of many businesses (they have doubled in the last four years) and our estimate of 20p is conservative. The merchants (there are often more than one in the chain) take a typical ex-VAT total mark-up of 33%. Before you hyperventilate, remember that that translates into a margin of 25% (the wine world is littered with the graves of merchants who confused mark-up with margin).

Then comes the big Godzilla grab: the Treasury, through Revenue & Customs, takes a massive flat-rate £1.46 per bottle in excise duty (it’s 41p more for sparkling wine – where’s the logic for that?!), and a further VAT charge of 17.5% on all of the above. So a £4.95 bottle of wine contains only 10% of its retail price in actual wine. The rest is costs, profits and tax.

Now move upscale and you see that an £8 bottle of wine nets you 25% of wine. An £11 bottle of wine contains 33% in wine by value, while you can assume that a bottle costing £16 is rewarding you with 40% in wine. The tipping point comes at a hefty retail price of £41. Pay more than that and the chances are that you are beating the odds: you are getting more wine for your money than all the other costs and charges put together.

The reason for this curious value curve is that while merchants’ charges and VAT are calculated ad-valorem (as a percentage of value), the other costs are flat-rate. Excise duty is the same on a £1,000 bottle of Chateau Mouton-Rothschild as it is on a £3.99 bottle of Domaine de Plonk.

You don’t have to pay the full UK price: a booze-cruise to Calais will save you about 20% on UK prices, taking into account the costs of travel and hiring a van (it’s hardly worth the bother just for a car-boot’s worth!). Otherwise take comfort in the fact that the more you pay for your wine in the UK, proportionately the more wine, and the less in taxes and costs, you are getting for your money.

(Thanks to Nigel Johnson-Hill, chairman of Liv-ex, for the words and workings)