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The price of wine

[digg=http://digg.com/food_drink/The_price_of_wine]Saturday’s Times included an interesting article by Jane MacQuitty discussing the current pressures on wine prices: the strength of the euro, drought in Australia and, of course, next month’s budget.

Britain has one of the highest levels of tax on wine in Europe and since you are likely to hear a lot about duty and the price of wine over the coming months it’s worth explaining how the different charges work.

Firstly, excise duty is currently £1.33 per bottle (or £1.71 for sparkling wine). On wines from outside the EU, a further tariff (the Common Customs Tariff) is also payable, which varies between 7p and 10p depending on alcoholic strength (17p for sparkling wine). As retailers, we pay these charges at a flat rate for every bottle we buy, meaning they form a far more significant part of the cost price of cheaper bottles than more expensive bottles.

The next significant tax element is VAT, which works out at about 15% of the retail price. We price wines based on their cost to us, and so effectively VAT is charged on the duty as well!

The effect of this tax regime is that the more you pay for a wine, proportionally less goes to the tax man. When you pay £2.99 for a wine (from Europe), 45p is VAT and £1.33 is duty, a total of £1.78 in taxes – very nearly 60% of the total. Trade up to a £3.99 wine and the taxes total £1.92, or 48% of the total. At £4.99 you’re paying 41% in taxes, at £9.99 it’s 28% and if you splash out on a £19.99 wine “only” 22% is tax.

I’ll hold up my hands here, you’d expect a wine retailer to suggest you pay more for your wine! But remember, the less that goes on tax, the more goes in to the production of the wine itself – very very roughly, the actual cost of the wine in a £3.49 bottle is half that of a £4.99 bottle. Spending just 50p or £1 more can make a significant difference to the quality of the wine you get.

  • John Howson

    When we joined the Common Market as it was then, we were told that duty would be harmonised. We all looked forward to the cost of wine comming down. I wonder what happened.

  • Nick Comley

    Here’s an interesting thought, as wine is taxed according to percentage volume of alcohol, what would happen if it were taxed at volume of production? The higher volume, the greater the tax. This would promote lower yields, higher quality, encourage smaller producers and act to mitigate poor harvests and when a producer wants to increase production they know how much tax they will be liable for for every hectalitre. Sound fanciful?

  • Phil Brown

    I certainly follow Richard Weaver’s logic for wines in a particular price segment (up to say £10), but beyond that ? I doubt that wine producers actually pursue cost based pricing policies, such that increasing retail prices always reflect increasing production costs implying quality. There must be a point at which production costs top out and market pricing starts to reflect other factors such as fashion, scarcity etc. Leaving aside any geographical variation in production costs, there is also the implicit assumption that all wine makers are equally efficient in the production process ! It would be very interesting to explore the financials of the business at wine producer level across the different geographies.

  • http://www.majestic.co.uk Richard Weaver

    Phil – you’re right that once you move up into the realm of fine wines, production cost is a less important “direct” element of cost.

    However, it is also true that only the very top producers can afford some of the most expensive production equipment and methods. I’m thinking in particular about the number of ‘tries’ taken through the vineyard and the manual selection of individual berries at Château d’Yquem for example, or the famous story of the Château Pétrus vineyards being air-dried by a hovering a helicopter them!

  • esther

    does majestic wine produce their own wine or buy themm from suppliers?

    • http://www.majestic.co.uk Richard Weaver

      Esther, we don’t make any wine, we leave it to the experts! (Although I’d love to have a go!)