The true costs of business

Hidden externalities subsidize our industry

Many years ago I visited a modest winery in New Jersey. The owner was looking to sell his family’s estate. He was convinced that years of riding around on his tractor spraying antifungals on his vines had ravaged his health. As such, I remember being mightily impressed by his Seyval Blanc. By any conventional measures of taste, the wine was lackluster. However, when I considered this person’s health weighed against the $16 price of a bottle, the tragic totality of the circumstances left me in awe.

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It was the first time I was forced to reckon with the notion that ours is a business of negative externalities. In this case, someone paid with their health to produce an affordable wine in an area that’s generally recognized as too humid for viticulture. Such examples aren’t limited to the Garden State; our industry is increasingly confronting the true costs of doing business when:

  • Farm laborers can’t afford to live in the places they work.

  • Working in agriculture, hospitality, or retail means having to live without affordable access to healthcare.

  • The systemic disenfranchisement of those who aren’t white males is evidenced by the demographics of who owns and runs wine and spirit importers and distributors.

  • Ideas about sustainability ignore the humans tasked with improving the environment.

When prices fail to reflect the above realities of the wine and spirit trade, we must concede that our industry values consumer convenience and affordability over a fair and equitable system for stakeholders.

A pandemic-adjacent story in The New York Times relates:

“The real question is, ‘Are we going to stop chasing low cost as the sole criteria for business judgment?’” said Mr. Shih, from Harvard Business School. “I’m skeptical of that. Consumers won’t pay for resilience when they are not in crisis.”

Consumers won’t pay for what they aren’t asked, but someone always pays.

The current system foists the burdens of maintaining low costs on employees, usually the stakeholders who are least able to do the heavy lifting.

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Notwithstanding some logistical hurdles, the alcohol industry continues to grow while becoming ever more efficient and consolidated. Consider the following:

  • Americans only spend about 1% of their income on alcohol; this has been relatively constant for the past decade. However, real disposable income per capita has increased roughly 21% from June 2011 to June 2021. On a relative basis, individuals don’t sense any change, but the total money spent on booze has grown.

  • The pandemic caused demand for alcohol to spike, but prices paid by consumers only climbed moderately.

  • In 2020, “Labor productivity for retail trade: beer, wine, and liquor stores” increased a whopping 18.3%.

  • Between 1995 and 2017, the number of active distributors plummeted by 60%.

  • The CBMTRA significantly reduced the burden of excise taxes on producers and importers.

With these developments, we can’t continue to afford to subsidize the way we do business through externalities. The figurative smokestacks can only be ignored for so long. Yes, this means the cost of doing business will increase. So will employee retention and motivation. The assumption of responsibility is worth the price.