August 2015 Issue of Wines & Vines
 
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The Economics of Wine Barrels

How to determine the effect of barrel choices on profits

 
by Chris Stamp
 
 
Stamp Barrel Room
 
Chris Stamp takes a barrel sample at Lakewood Vineyards.

In Bronze Age Europe, amphorae were state-of-the-art wine vessels, and their primary function was to hold wine while it was transported from winemaker to wine drinker. The amphora—essentially a clay jug with handles—was a fragile entity, and many a drink was lost in the holds of ships as they tossed about on the high seas. Can you imagine an amphora of wine in the hands of our modern-day baggage handlers? Obviously, improved technology was in order.

The advent of the wooden barrel represented a quantum leap forward for wine commerce, as barrels provided a much more durable shipping container. Unfortunately, the wooden barrel was also considerably more expensive, a reality that remains unchanged more than two millennia after the barrel’s invention. New American oak barrels are priced at approximately $380 apiece, and French oak can cost more than twice that amount, which means populating your barrel room can eat up a significant portion of your winemaking budget.

    KEY POINTS
     

     
  • The author presents a method and a calculator for determining the true cost of barrels.
     
  • Evaporative loss, labor involved in cleaning, duration of fill and the cost of space all add to a barrel’s true cost.
     
  • One finding is that upgrading from American oak to French oak—or from used to new barrels—is not as expensive as many assume.

Today wine is not usually transported in wooden barrels. Their purchase is driven instead by the contributions barrels can make to our winemaking efforts. Just as it behooves us as winemakers to understand the impact oak has on our wines, it’s equally important to understand the contribution oak barrels have on our costs of production. Why would anyone go to all the trouble of dealing with these heavy, awkward, space-consuming and primitive wine containers if there’s no real profit in using them? In order to know if there’s profit in barrels, you have to be fully informed as to their true cost, which, we will see, goes well beyond the original cash outlay for the barrel itself.

There are a number of variables that come into play when calculating the true costs of oak barrels used in wine production. Knowing these variables and being able to calculate their impact on the cost of a bottle of wine will make you a better steward of your company’s gold.

As wineries’ barrel practices differ broadly, so will the costs associated with barrel use. For this analysis we will apply some realistic values to our variables to produce an accurate estimate of the true costs of using oak barrels in our model winery, Chateau Bigteaux. We will walk through the process in such a way that it will be no great feat to swap in numbers unique to your own operation to yield numbers fine-tuned to your reality. Equally, it will be possible to play with different scenarios to judge the impact they will have on your return on investment.

Assessing the variables
Let’s take a closer look at the 12 variables (see “Barrel Cost Calculator for Oak”) before plugging them into our final spreadsheet. Chateau Bigteaux’s owners, who are carefully considering producing a reserve version of their current Chardonnay, would like to know the per-bottle cost differential if they use French oak instead of less expensive American oak. This knowledge will aid them in determining the viability of their “Reserve” wine proposal.

Of course, your costs at “Chateau Your Winery” will differ according to local economics and a host of management and winemaking decisions. The author is an eastern winemaker, and the numbers used in generating this article are pulled from actual practices that are not universal, but widely practiced in his region.

1. Cost of barrels
Bigteaux’s owners sifted through some recent invoices to arrive at a reasonable dollar figure for both French and American oak barrels. After adding in the cost of trucking the barrels to their winery, the delivered cost per barrel was:

60-gallon American oak $395
Shipping per barrel $45
TOTAL $440
   
60-gallon French oak $900
Shipping per barrel $50
TOTAL $950

2. Barrel size
The size of the barrel is important not only because it dictates how many finished bottles of wine the barrel’s cost is amortized over, but also the amount of evaporative loss to expect. Bigteaux’s winemaker prefers the standard 60-gallon (228-liter) size. This size yields 304 standard-size (750ml) bottles.

3. Number of fills
Obviously a winery that uses 100% new oak every vintage is going to have greater per-bottle barrel costs than a winery using the same barrels for eight fills. Bigteaux’s winemaker plans to use his barrels for seven fills before turning them out to pasture. In this case, one barrel will contain 420 gallons (2,120 bottles) of wine during its life span.

4. Duration of each fill
The duration of each fill impacts a number of important cost factors—namely, the amount of evaporative loss, the labor costs associated with barrel topping and the cost associated with the depreciation of space within your facility. Bigteaux uses an 11-month barrel-aging regimen.

5. Interval between emptying and filling
The interval between fills as a cost factor may not be immediately obvious. Barrel space within a winery, like any other building space, costs money. The content of the barrels, whether air or wine, doesn’t matter, as the barrel still needs shelter, and that contributes to cost. Filled time and empty time together make up one full cycle of the barrel. At Chateau Bigteaux, the barrels are idle for 1 month between emptying and filling.

6. Annual evaporative loss
The amount of loss due to evaporation should be accounted for as a contributor to the cost of barrel aging. If the same wine was aged in stainless steel tanks rather than wooden barrels, at least in Chateau Bigteaux’s experience, the volume drawn out is pretty close to what was put in. The same cannot be said of barrels. The amount of topping wine a barrel requires during aging depends on the size of the barrel, humidity of the barrel room and the length of aging.

Because Chateau Bigteaux is blessed with very cold winters, the air in their barrel room is extremely dry for a significant portion of the year. This creates a fairly evaporative environment. Humidification would cut their topping wine volumes, but Bigteaux’s winemaker believes that the concentration effect they experience is important to the development of their wines. At Bigteaux, they experience a loss of about 10%, (6 gallons per barrel) per year.

More moderate climates or humidified barrel rooms should reduce evaporative losses to perhaps 2%-5%.

7. Labor per fill cycle
There is significant labor involved with maintaining wine in barrels. Maintenance tasks include filling, topping, sulfuring, emptying and cleaning. Chateau Bigteaux estimates the time spent maintaining each barrel at about one hour per year. Combined with hourly labor costs, wineries can calculate manpower costs of their barrel program and enter that as a part of their analysis.

8. Labor costs per hour
Chateau Bigteaux’s cellar labor costs, including benefits, are about $25 per hour. Combined with “labor fill cycle” above, they have a reasonable idea what maintaining each barrel costs.

9. Space cost
This piece of the puzzle calculates the cost of barrel aging space on a yearly basis, incorporating both the cost of the building and the cost of the energy required to heat and/or cool the area.

The owners of Bigteaux plan to stack their barrels four high in barrel racks that hold two barrels each. This arrangement utilizes about 17.5 square feet per stack of eight barrels, or about 2.2 square feet of floor space per barrel. This gives a little room between stacks. But after allowing for room to access the barrels for topping, they find they need about 5.5 square feet per barrel. This also provided a little room for expansion. In all, they decided on a barrel room measuring 22 feet x 50 feet.

The annual costs of the actual barrel room building (depreciated over a 20-year period) plus annual energy costs to maintain the proper aging temperatures throughout the year provide an accurate estimate for our fictitious Chateau Bigteaux; the yearly depreciation on a 20-year depreciation schedule is $4,200, and heating/cooling is $800.

10. Number of barrels in space
The total number of barrels in the barrel room is used to calculate the “space costs” on a per-barrel basis. Chateau Bigteaux houses 200 barrels in its barrel room.

11. Finished bulk wine costs
We need to assign a value to the wine lost through evaporation, as this is a cost uniquely identified with barrel aging. The bulk wine cost, if aged exclusively in stainless steel, should be used here. Chateau Bigteaux’s bulk wines are worth $18 per gallon.

12. Barrel resale price at end of life
Used barrels can usually be sold even though they have exhausted their utility in the barrel room. Subtracting a barrel’s end-of-life salvage price from its original purchase price provides an adjustment for the original outlay. Chateau Bigteaux easily dispatches its spent barrels for $50 each to local home winemakers and flowerpot makers.

BARREL COST CALCULATOR FOR OAK
Category  American Oak  French Oak
Cost of barrel (incl. shipping)    $440.00    $950.00  
Barrel Size (gallons)     60    60  
Number of fills over lifetime of barrel    7    7  
Duration of fill (months)    11    11  
Interval between emptying and filling (months)    1    1  
Annual evaporative loss rate    10%    10%  
Labor hours per fill cycle    1    1  
Labor costs per hour    $25.00    $25.00  
Space cost          
     Depreciation per year    $4,200.00    $4,200.00  
     Heating/cooling per year    $800.00    $800.00  
Number of barrels in space    200    200  
Finished bulk wine cost per gallon    $18.00    $18.00  
Barrel resale price at end of life    $50.00    $50.00  
Barrel depreciation cost/bottle    $0.18  27.18% $0.43   46.30%
Barrel labor cost/bottle    $0.08 12.26%  $0.08  9.04%
Barrel space cost/bottle    $0.08  12.26%  $0.08  9.04%
Topping wine cost/bottle    $0.33  48.30%  $0.33 35.62%
Total barrel cost per 750ml bottle    $0.68  100%  $0.92  100%
Go to winesandvines.com/barrelcalculator for a working version of this spreadsheet.

With all this data in hand, the accountants—and you—can now calculate the cost of barrel aging/bottle. The numbers as discussed above are derived from real-life experience, and as far as Chateau Bigteaux is concerned, are fairly accurate. The barrel cost calculator tables summarize the results of Bigteaux’s analysis performed for American oak and French oak barrels. Bigteaux’s curious proprietors can now generate some hard numbers regarding the relative costs per bottle of their barrel options.

As stated earlier, Chateau Bigteaux was considering the impact on bottle cost if they were to age their reserve Chardonnay in 100% French oak rather than American oak. Here we can see that American oak will cost them 68 cents per bottle versus 92 cents per bottle for French, an increase of 24 cents per bottle. If all other costs of production are equal, they would have to charge 24 cents per bottle more to net the same return. In all likelihood, their reserve wine will sell for significantly more than their standard offering. Even if they captured a mere $1 more for their reserve, there is still a greater margin using a more expensive barrel if that creates value in the consumer’s mind commensurate with the higher price tag.

Interestingly, while the French oak barrel itself requires 116% greater cash outlay, in the final analysis it only increases barreling cost slightly more than 35%. We can see here that the cost of the barrel itself ranges from about 27% for the cheaper barrel to 46.3% for the more expensive barrel as a percentage of overall barreling costs. It is interesting to note that in this scenario, the cost of the barrel doesn’t reach 50% of barreling costs until it passes $1,094 per barrel. Before doing this in-depth analysis, the owners of Chateau Bigteaux, like most of the rest of us, routinely attributed the majority of their barreled wine costs to the up-front price of their barrels.

It is also worth noting the effect that increased bulk wine cost per gallon has on the overall cost of oak aging. As seen above, the cost of bulk wine used in topping is normally the first- or second-largest component in the cost of oak aging. In our examples above, this cost ranges from 36% to 48% of the total cost of barrel aging.

Chateau Bigteaux’s accountants have noted the significant impact the number of fills over the life of the barrel and evaporative loss combined with bulk wine costs have on their analysis. Any person wishing to conduct their own analysis using data specific to their unique situation can easily do so.

A copy of the spreadsheet containing the calculator used in this article is available at winesandvines.com/barrelcalculator. The reader can use the spreadsheet to verify that if the bulk wine cost is increased to $27 per gallon, the cost of bulk wine for topping becomes 45% of the cost of oak aging using French oak barrels and 58% of the cost of oak aging using American oak barrels. In both cases, topping costs dominate the cost of the barrel itself.


Chris Stamp is president and winemaker at Lakewood Vineyards in Watkins Glen, N.Y. He started his wine career as winemaker at Cayuga Vineyards in the Finger Lakes and in 1986 took a position as enology research and extension associate at the Ohio Agricultural Research Development Center in Wooster, Ohio. When his family opened Lakewood Vineyards winery in 1988, he returned to New York to become the winemaker there. He would like to thank Mark Rondinaro for his help in generating real-life data for this analysis.

 

 
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