Below please find a detailed analysis of the Trump wine tariffs and a proposal to mitigate their effects. If you are interested in writing about this and wish to talk to me, please let me know.
As we all know, the US Federal Government has passed a 25% tariff on most French and German wines (and Italian spirits?Aperol etc). These will go into effect by October 18 if the US and the EU do not settle this matter beforehand. This issue will potentially have a significantly adverse effect on the US wine industry and an even more significant impact on the affected winemakers. This thought piece is intended to 1) explain the economics of wine retail and how the price impact to consumers can be much less than 25%, 2) propose an industry-wide solution to minimize price increases and mitigate the impact of the tariffs.
First, I need to reiterate that the real victims here are the winemakers. They are now harvesting and many are expected to pay for their grapes. Many of them have bank loans to pay on top of their operating and living expenses. This tariff could be a life or death situation for their businesses.
Pricing in the Wine Industry
Next, I’d like to give some background on wine industry pricing. Through standard 3 tier, a wine purchased at the winery that costs $10 will cost $30 at retail. If the price of the wine increases by $2.50, the retail price increases by $7.50. In this case, a $2.50 increase in price causes a $7.50 increase in price to the consumer, so the pass through is 3:1, even though the cost of the wine paid to the winery is only 33% of the cost of the wine paid by the consumer. The rest is shipping, sales costs and miscellaneous costs.
A Proposed Solution
In order to minimize the pass through of these tariff costs, we as an industry must have a concerted and coordinated effort to minimize their impact. I am suggesting that we all agree to pass through only the tariff cost itself (a 1 to 1 pass through on a dollar basis). In the above example, the wine cost would increase only by $2.50 to $32.50 or 8.33%. This is a small enough increase in costs that it should not cause a major disruption. After all, we have exchange rate changes of that much with some frequency over a 5-10 year period.
One can see the difference in the sample pricing below (some of the markups may be off by a bit at certain levels and will certainly differ by wine, importer, distributor and retailer).
As you can see, the percentage markups at each level of the distribution system fall but the per bottle markups remain the same.
So each level of the distribution system would make the same profit per bottle under my proposal.
This will not be easy.
Importers will have to agree to this.
Distributors will have to agree to this.
Retail stores will have to agree to this.
And salespeople at importers and distributors will have to agree to this. They are typically paid 10-15% on the value of the wine that they sell. They will have to agree to take a commission on the price less the tariff amount. So if they were selling a wine that sold for $20 and the price increased to $22.50 because of the tariff, they would agree only to take a commission on the original price of $20. If the salespeople don’t agree to this, the importers and distributors will have to increase their prices more than the tariff amounts in order to pay their salespeople.
Fass Selections Policy
At Fass Selections, I am committing to 1) only pass through the dollar amount of any tariffs. My prices will increase only by the dollar amount of the tariffs (8-12% depending on the wine. 2) Credit my customers the amount of the tariff if this issue is resolved before I bring the wines into the country (at which time the tariffs would be due).
I know that this will entail some sacrifices in our industry. But I know that people in our industry are not only in it for the money but also because they love wine and wish to encourage and support the winemakers.
I think that if we work together, we can try to mitigate the effects of this situation in our small corner of the world.
About Fass Selections
Fass Selections is a California-based importer and retailer. Fass buys wines directly from wineries in France, Germany and Italy and sells to clients in the United States. Because Fass skips 2 layers of distribution, it can charge prices that are 35-40% lower than standard retail stores. Additionally, Fass targets lesser known smaller producers before they become famous. Several have seen their prices increase by 2 times or more since Fass started selling them. Fass Selections’ Founder, Lyle Fass, has been in the wine business for 20 years and was a wine buyer at several of New York City’s top retailers before he founded the company.