Why is my wine so much more expensive than in Europe?
While it is understood that wine prices around the world will vary what isn’t understood is why prices of European wine in parts of Canada are seemingly so much more expensive then the original cost at the winery. This blog piece will attempt to explain the various factors that contribute to the final retail price of a wine in Western Canada including currency, taxes, shipping, merchant costs and economy of scale.
Currency rates are the first factor to affect the price of wine in Western Canada. This is due to the fact that the wine importers must purchase using the country of origin’s currency such as USD for American wines or Euros for wines originating in the EU. Higher rates of currency compared to the Canadian dollar generally equal higher purchasing costs- for example, as of July 2011, the CDN $ -Euro ratio is 1 CAD = 0.741179 EUR. The importers can negotiate a better price from the wineries (known as ex-cellar cost) than what the wineries charge, therefore negating the difference in currency, but there are still many other factors that affect price.
A significant portion of the cost of bringing an imported bottle of wine to market in Western Canada is due to shipping. This paper will look at the factors involved in the cost of shipping for Alberta and British Columbia such as size of order, shipping route and fuel surcharges (which are steadily increasing). Airfreight is very costly, and is generally not used, except in emergency.
Wine is shipped in containers that hold approximately 1500 cases (12 bottles per case) of wine, either temperature controlled units called reefers or regular shipping containers. Reefers are a necessity to move product (such as wine or beer) that is affected by temperature as extreme temperatures can harm the wine. The temperature-controlled aspect of the containers costs the importer more money than a regular shipping container.
The containers are either all from one producer often loaded at the winery's warehouse or a consolidated load, which is a mix of wineries and importers loaded at the freight forwarder’s warehouse. Consolidated loads cost the importer more than a load from a single producer, as there is more manpower involved with the load. Consolidations are necessary to bring to market a variety of wine and producers as not all wineries produce enough wine for container purchases; smaller importers may not have the means to make large purchases from one producer. That funky cool indigenous wine from the little producer in a remote region may only be willing to allow the importer access to 56 cases (or 40, or 20). As well, wines are often released at different times of the year. An importer may buy twice a year from a winery, neither time enough to fill a container at source.
There are two main ports for wine shipped from Europe into Canada: Montreal and Vancouver. Shipments into Montreal from Europe are often faster; for product that can spoil there is seasonality to using Montreal. Product bound for Western Canada is then shipped by train. A container with product for multiple provinces goes to a large center, is de-stuffed, and the product is then shipped by truck to the agents’ warehouse.
Port Vancouver represents a longer time at sea as the ship goes through the Panama Canal to reach Western Canada, stopping at other West Coast North American Ports along the way (referred to as a gravy train route).
Product shipped from the United States to Western Canada comes by truck, and generally is product from Washington State, California, or Oregon. All 50 states have wineries, but only the three states mentioned produce wines in quantity large enough to ship north.
By law, wine must be stored in a bonded warehouse by the importer until the wine is sold to either the government distribution system or private stores and restaurants. The bonded warehouse is known as the agent’s warehouse, and incurs to the importer a variety of charges and fees. These include receiving charges, storage charges (short term and long term), handling charges, cartage charges, and depending on the warehouse a number of other charges and fees, such as labelling, bar coding and case picking. There is also Federal customs duty and excise tax due on the product when it arrives in the country.
All provinces in Canada have Government distribution systems except for Alberta which is a private system. BC does have approximately 750 private stores in addition to the 270 Government owned and operated stores.
Next, the importer has a margin that is factored in to the wholesale cost of the wine. Business models vary but common factors influencing an importer’s margins are payroll, marketing, rent, travel, and promotional costs.
After the importer has determined the wholesale price, provincial taxes must be added to the cost of the wines. This paper will focus on provincial taxes in Alberta and British Columbia.
Alberta is a flat tax set at $3.97/bottle, and added to that is the federal portion making the tax cost of $4.50/bottle in Alberta.
BC Provincial tax is 123% of the importers bonded price, which comes from all the factors listed above starting at the ex-cellar cost. The province also adds on a few other charges, depending on volume of bottle, % of alcohol and bottle fee. The price is then calculated for the BC Liquor Distribution Branch's display price.
Now the wine can go to the stores or restaurants. In British Columbia, private LRS are entitled to a 16% discount on imported product which they must purchase from the BCLDB. Private LRS are not allowed to import their own products.
Private stores add their mark-ups, creating the display price. Most private stores in BC are forced to mark-up product as the 16% margin is not enough on which to operate a business. The display price in BC includes HST, but excludes the bottle deposit of $0.10/per unit 1L or less.
Update: Britsih Columbians voted to scrap the HST on August 26, 2011.
In Alberta the display price does not include the GST.
Economies of Scale:
Frequent comparisons are made to the price of an imported bottle of wine in Western Canada versus the United States, but this is essentially comparing apples to oranges. The tax structure in Western Canada has already been discussed as a major contributing factor to the price, but another factor is ‘economy of scale’.
Economy of scale is the reduction of unit costs when fixed costs (shipping, warehouse, distribution, purchasing) are shared over an increased number of units.
The population base in the United States is 311,778,002 compared to Canada's population of 34,518,000, almost ten times more potential wine buyers! Metropolitan New York and metropolitan Los Angeles (18,897,109 and 12,828,837) together are almost as populous as Canada as a whole. Those are large markets in relatively small geographical areas, with easy access to ports to receive products, therefore the costs to bring wines to those markets are less as these numbers represent huge discrepancies in buying and transporting power. Producers tend to give larger discounts based on volume purchases; buying for a market with a potential of two million people compared to twelve million is far different as the larger the amount being of cases shipped the better cost per bottle.
There are various factors that contribute to the final retail price of a wine Western Canada including currency, taxes, shipping, merchant costs and economy of scale. By understanding the costs, consumers have a better knowledge of what makes up the retail price.
editing this piece for me.