Alcohol math, you say?  ”Aw man, I thought alcohol was just about gettin’ buzzed and drinking some of the good stuff?”  To that I say, don’t be so naive, young boozer!

Kurt Charles of Kentfield Marketing Group, a California broker, dropped by the ADI Hands-On Workshop last week to give a presentation called “A Road Map to Selling Spirits in Today’s Markets.”  At the end of his presentation, Kurt took us through a pricing exercise to demonstrate who takes chunks out of the pie on the way to the consumers’ hands when a distiller produces a spirit.  I thought I’d share it with you here.  

It goes a little something like this:

Let’s say you’re a new distiller in Idaho, and you’re ready to launch your first product, a beautiful new American gin.  You’ve gotten a decent foothold in your home market (Idaho, baby!) and now you want to expand into California.  You sell your gin in cases of 12 750 mL bottles each.  You crunch some numbers and calculate that your product would have to sell for approximately $33.99 on shelf.  How do you come to that conclusion?

First of all, you know that your cost of goods (neutral grain spirits, juniper berries and other botanicals, bottles, labels and carton) is $54/case.  You also have to pay $25.68/case in federal excise tax to the federal government.  That’s $80 in costs.  You figure you want to make that same $80 in gross profit, so you offer an FOB (freight on board, or the price to leave your warehouse) price of $160/case to the CA distributor.

The distributor pays you the $160/case to take your product, then he also pays $5/case in freight to ship the product out to California.  He also pays $7.85/case in California state taxes.  This results in a “laid-in” cost of $173/case.

Since you’re a new, artisanal distiller, the distributor will have to invest a little bit more in marketing/sales to sell your product to retailers.  He’ll likely want to take at least 30% gross profit on the sell price to the retailer.  $173 / 0.7 = $248/case.  That’s $20.67/bottle.  That’s the price he’ll charge the retailer.

The retailer will buy the product for $20.67/bottle plus an additional $1.60 broken case charge.  The broken case charge, in a way, also serves as a “small order” charge: the retailer won’t be willing to buy a full 12-bottle case for an unproven product, so the distributor wants this fee to cover the annoyance of having to deliver 3-4 bottles to the retailer.  The retailer will then typically take a gross profit on sell of 33% (50% markup on cost*) and price your gin at $32.99 to $33.99 on shelf.

*Side-note: There are two ways to get to do this calculation.  ”Gross profit on sell”: $X shelf price - 33% = $22.27 in costs (taking the sell price and docking 33% for the retailer’s cut).  ”Markup on cost” = $22.27 costs * 1.5 = $33.40 (taking your costs and adding 50%).  Both result in the retailer taking about $11 as a cut.

A bar or restaurant will figure that they can get about 15 1.5 oz. shots from each 750 mL (25.4 oz.) bottle.  If they buy a few bottles at $22.27 each, that comes out to a cost of $1.50/shot for your gin ($22.27 / 15 shots).  They figure that they can add $0.50 in additional ingredients and sell cocktails for $2.00/cocktail in costs.  If they charge $6.75 per cocktail, they can achieve a pouring cost of 30%.  If they charge $8.00 (c’mon, it’s California), they can achieve a pouring cost of 25%.  That’s a healthy mark-up of 70-75%.

So at the end of the day, here’s how everyone makes their money from the $33.99 shelf price:

Federal government: 6.4% or $2.17

CA state government: 2.0% or $0.67

Suppliers (Cost of goods): 13.2% or $4.50

Distiller (you): 19.6% or $6.66 (this needs to go towards paying your overhead, including staff, rent, marketing costs)

Distributor: 18.4% or $6.25

Retailer: 34.3% or $11.67

The rest goes to freight and broken case fees.

Some observations:

* Wow, the retailer really makes out like bandits here.  The bar definitely makes out even more.  I’d say that if you’re in and out of a liquor store or bar without getting personalized customer service from the owner or bartenders, you’re really letting them get off easy.  Demand their expertise and make them earn their cut!  Vote with your $$$s and spend it at places like Cask or The Wilson where they will spend time with you and pass on their knowledge.

* The distributor is still taking a really healthy cut after freight charges, and probably makes more money than the distiller after subtracting overhead costs

* The big loser is the consumer because they’re paying $33.99 to enjoy a product that only costs $4.50 in ingredients.  Assuming the distiller breaks even, that’s a max cost to produce of $11.16, meaning the other $22.83 is being soaked up by the distributor and retailer.

That’s the 3-tier system for you.  Like my friends from St. George say, if it ever comes down to a vote, “vote no on stupid”!

  1. bayareaspirits posted this