Most consumer goods are not sold by the manufacturer. Instead, they are produced by the manufacturer, who sells to a wholesaler, who in turn sells to a retailer, who sells to the public. Such is the case with most wine.
There has been an outcry in recent years over increases in wine prices. Although prices have risen sharply, the multilevel market structure and the markup that occurs at the wholesale and retail levels have a much larger role in the price increases than the production of the wine itself. Total production costs for a typical $24 bottle of wine are just $4.92, or about 20.4% of the final price, whereas wholesale and retail markups together make up 40% of the final price. Not surprisingly, raw materials (grapes) are the single biggest cost. The cost of the grapes may be as much as 60% of total production costs, but varies greatly from lower-quality inexpensive wines to the highest quality wines. The second-highest cost for many vintners is the barrels used to ferment the wine. French oak barrels cost as much as $700 apiece and last only a few years. The other major production cost, other than the actual physical plant where the winemaking occurs, is time. Quality wines spend 2-2 ½ years aging in barrels and then an additional8 months in bottles before being ready for sale.
John Conover explains that "(Y)ou've got 5 1/2 years of capital and cash flow tied up into running the operation." Although production costs vary widely from low-end to high end wine, it is still the case that wholesale and retail markups make up a greater percentage of the price than do production costs.
1.) How much substitutability do you suppose exists between inputs in winemaking? How might this factor affect efforts to cut costs?
2.) If a firm were to find a new technology that cut the required aging time in half, how would it affect the demand for other inputs?