As I walk into the liquor store, my eyes immediately focus on a shiny sign hanging above—“25% off”—then move away as soon as I see the word “vodka.” There’s a stack of cheap beer, a discounted bin of wine, and promotions for tobacco goods. All the pricing, all the point-of-purchase material, and all the signage suggest this liquor store is about affordable goods for a frugal consumer. Sounds like a deal, right?
Well, that may be the case if you desire Skinnygirl margarita mix or $5 gin. But when I walk down the small bourbon aisle, I see brands marked up. Every brand is just a few dollars more than I’m accustomed to paying. I travel to another store, with “discounted liquors” in the signage, and it’s selling basic Elmer T. Lee for more than $200 and the limited editions for more than $300. This must be a Kentucky trend, I surmise, and look for national online liquor stores selling bourbon, only to find everyday products far above the manufacturer’s suggested retail price (MSRP). In Los Angeles, the liquor store Twenty Twenty sells Weller 12 year old on its website for $155.
If you’re a new bourbon consumer, you might not know that this isn’t how bourbon used to be priced. Back in the good old days, Weller 12 year old might have been discounted to $12. With the bourbon boom, however, pricing has become a crapshoot as you roll from liquor store to liquor store.
Let’s take our “discounted” liquor store, for example. About 150 miles from its location is Louisville’s Westport Whiskey & Wine, which rarely marks up above the MSRP. Store owner Chris Zaborowski, a former wholesaler, does not consider this trend price gouging. To him, the varied pricing is the essential law of supply and demand. “At $300, there has to be a buyer for it,” Zaborowski says.
Of course, it’s much more complicated than simple economics. The United States operates its alcohol sales under a three-tier system that requires distilleries to sell to a wholesaler, who sells to the liquor store, who sells to you. This complicated system varies by state and is one of the many Prohibition hangovers that allows government-controlled states like Pennsylvania and dry counties within alcohol-producing states like Kentucky.
From a bourbon perspective, this system is often targeted as a major reason we see these gaudy prices on social media. Distillers are quick to separate themselves from the pricing game, while retailers often blame the distilleries for allocations, and everyone blames the ‘flippers,’ the people who buy bottles and then resell them (usually online). Who do the flippers blame? Well, it’s not exactly a legal activity, so they remain quiet.
Nonetheless, this pricing paradigm deserves some examination. How does each tier in the system affect the price of the bourbon sitting on your local liquor store shelf?
To understand the distillery’s pricing strategy, it’s best to start with the cost.
Upstart Kentucky Artisan distillery’s founder Steve Thompson, the former president of Brown-Forman, says all bourbon producers operate under the same cost structures. They roughly pay the same amount for grain, water, energy, and wood. And every distiller has the same level of depreciation and gets about five proof gallons per bushel.
“When [the spirit] comes off the still, it all comes off at the same price. The formula might vary. Rye is expensive. It costs you about a dollar [more] of ingredients to make rye versus bourbon on a proof gallon,” Thompson says. “Everybody in this business has the same cost structure. They all pay the same amount for grain. They all pay the same amount for energy. They’re all automated. They all have about the same level of depreciation. They all get five proof gallons, or more, a bushel. You all know what they paid for grain, and so you convert that into their yields, and the energy cost. When it comes off the still, they don’t designate what brand it’s going to, it just comes off the still.”
After the still, the costs stack up. The average barrel costs $190, glass bottles range from $1 to $2, corks are 35 cents, and labels are upward of $1 per bottle. The more labels, the more you can charge, Thompson says. And of course, nobody can escape the largest expense of all—taxes. According to the Kentucky Distillers Association, 60 percent of the average bourbon cost is tax.
These costs vary per market and per season, for sure, but do not factor in Thompson’s initial pricing method. His first step is to analyze what brands are selling and at what price points. “I find a pricing hole,” Thompson says. “Once I’ve identified that spot, let’s say it’s $30, I work backwards to see how much money I can make.”
Thompson is looking for roughly a 50 percent margin. In this scenario, he says, the liquid costs about $6 per bottle with glass, marketing, and taxes putting the total cost roughly at $15 per bottle. Given that distillers sell to distributors at about half of the MSRP, he’ll only break even if he pursues the $30 price. Thus, he increases the price to $45. And the further a brand is from the actual distillery, the more money is tacked onto the price. “For people just establishing a brand, it costs $28 per bottle,” Thompson says. “In two years, their cost will go down, so they’re willing to sell it at cost with the anticipation they’re making their own juice. It’s all about where you want to be on a shelf in pricing. This is the most important strategy.”
Of course, Thompson’s hypothetical is for a new brand. For an existing brand, distillers must slowly increase price or it will frustrate existing consumers. For example, five years ago, Jim Beam Black 8 year old was roughly $16 at retail. Today, Jim Beam Black with no age statement runs $22. The $6 increase would seem excessive if done overnight vs. over five years. Plus, Beam now has to pay Mila Kunis for those TV commercials; she can’t be cheap.
With that said, some bourbons are exceptions to this rule, and there’s no better example than Elijah Craig 18 year old, a line extension established in 1994 that sold for $38 as recently as 2011. The beautiful 18 year old expression took a hiatus, as its parent company, Heaven Hill Brands, refocused Elijah Craig efforts elsewhere. The 18 year old returned in late 2015, and it wasn’t at the $38 price point. The MSRP is now $120.
“It would be foolishness, marketing idiocy, to bring back Elijah Craig 18 year old at the $38 price point,” says Larry Kass, spokesperson for Heaven Hill. “We watched brands come into the market that were priced so much higher than any of our single barrels with attributes that didn’t come close to ours. Once the boom started going and we ran out of our older stocks, we are doing what any marketer would do: [increasing the price]. Nobody in their right mind could blame us.”
Aside from the three-tier system, the often-maligned distributor exists to collect state excise taxes, prevent fraudulent sales to criminal and unlicensed accounts, and to deter underage consumption. They also provide the distillers with boots-on-the-ground salespeople that manufacturers simply cannot. For example, Wirtz Beverage Group, one of the premier distributors that manages products of the Brown-Forman, Beam Suntory, and Sazerac portfolios, among others, employs 500 sales representatives in Las Vegas and 1,200 in Chicago.
Add these human resources costs to refrigeration, trucks, marketing, and storage facilities, and that amounts to significant overhead that can only be paid for by marking up the products before they sell to the retailer or bar. “The pricing is not as exaggerated as you think,” says Drew Levinson, director of strategic activation for Wirtz Beverage Nevada. “Distributors typically mark up to high teens—18 to 19 percent—to peaking out at high twenties markup. If you were to look at our margins vs. the bar markup, the bar markup is running 300 to 400 percent. [Our] margins are thin.”
Wirtz prices all spirits in the same percentage ranges with a break-even point of about 15 to 17 percent markup and have realized as little as 50 cents per bottle profit on lower-end well products. However, rare bourbons offer more potential for profit. Wirtz paid around $135 per bottle for the Jim Beam Distiller’s Masterpiece PX sherry cask finish, then sold it to the retailer or bar at $170.
“Distribution’s goal is to drive volume of cases,” Levinson says. “When you go backwards, for the $50 bottle on shelf, the supplier and the liquor store are making a larger chunk than distributor.”
In studying the bourbon pricing game, it’s easy to determine that the retailer has the most power in the final price you pay. Some cities and states have laws that stores cannot sell below the purchased wholesale amount, but most offer no restrictions on price increases. As states like Pennsylvania fight for privatization of liquor stores and Oklahoma just now receives the go-ahead for refrigerated beer in grocery stores, bourbon pricing is low on the political agenda for beverage lobby groups.
But there is no denying the incredible markups. One could possibly defend the 300-percent increase over MSRP for the one bottle a year a retailer might receive of Pappy Van Winkle or the Four Roses Limited Edition Small Batch, but then you see Financial District Wine & Liquor’s rare selections of $1,500 William Heavenhill Barrel Strength or the $175,000 for the full four-bottle set of the rare LeNell’s Red Hook rye, and you cannot help but wonder if some pricing is just a little over the top.
But Zaborowski defends his retailer colleagues, saying that the only way to control the demand is to increase the price. If anything, he says, the distillers have spread whiskey too thin in too many markets. “Suppliers are creating their own scarcity because they are trying to open up too many new markets at once,” he says. “We have people looking for products in Kentucky stores and wonder why they can’t find it—it’s because distillers are trying to establish elsewhere.”
Zaborowski says most retailers are marking up bourbon about 33 percent over their cost, which is normally in line with the MSRP. He might hold rare products for select customers or tack on $2 per bottle for the rare gems, such as the Van Winkles, but he’s competitively pricing his store against the big chains in Louisville and popular independent stores.
In addition to their legal competition, liquor stores face a new competitor that’s risen up the social media ranks and become a serious thorn in the liquor store’s side. Before bourbon’s popularity, the flipper did not exist. Now, with the mainstream media covering bourbon as if it’s a sports team or a rock band, bourbon buzzwords draw profit-minded flippers to stores. They buy as much product as they can and resell it almost immediately.
All major liquor stores are seemingly working on their own strategies to keep the products out of the hands of flippers. In Chicago, a major liquor store maintains a list of known customers who resell products online. They will not sell to these people. Some Louisville stores limit popular bottles to one or two per person, while much of the country seems to use pricing as a flipper defense. In the end, that’s why Zaborowski and other retailers do not fault stores for selling bourbon for as much as they can get: “Flippers have artificially inflated prices,” he says.
Perhaps that’s the definitive lesson in this bourbon-pricing examination. It’s far more complicated than the three-tier system, and no single tier or even the flipper is the chief reason for bourbon’s high pricing. In fact, we probably all share a little blame for $155 Weller 12 year old.
After all, we created the demand.