High cost of wine has consumers whining

Posted on : 2007-03-08 14:31 KST Modified on : 2019-10-19 20:29 KST
Korea’s distribution structure, high profit margins keep prices sky-high

Kim Seong-su and his wife have enjoyed winding down with a glass of wine every weekend. However, Kim was shocked when he recently visited a wine shop in Japan: the same wine he and his wife liked to drink - France’s Mascaron Medoc Red - was selling for US$13; Kim had been buying it at a large discount mart in Korea for $32.

With large discount marts playing a driving force in the growth of the domestic wine market, wine imports have shown an upward curve. Imports of premium wine, in particular, have been rapidly increasing. As Korea’s wine culture expands, industry observers say fledgling wine connoisseurs look for a high price tag on a bottle rather than its quality. This, combined with high taxes and tariffs and the nation’s unique distributional structure, has created a ‘bubble’ in wine prices, observers say.

Data from the Korean Agricultural Trade Information shows that Korea last year imported about 22,000 tons of wine worth 84 billion won (about $88.6 million), an increase of 17 percent in quantity and 31 percent in value from the previous year. The disparity in figures is due to the increase in premium wine imports. The total import value can be compared with Korea’s US$19.8 million in wine imports in 2000.

Then why has the price of wine not dropped, despite an increasing supply? According to the wine industry, the biggest reason is taxes. The price of wine includes the CIF (cost, insurance and freight) tariff of 15 percent. Then a bottle of wine faces a 30 percent alcohol tax based on the post-tariff cost, and a 10 percent educational tax levied on the alcohol tax amount. A 10,000 won bottle of wine would thus already be 15,295 won. But it still is not ready to be sold. The importer now adds his profit margin, an average of 30 percent, bringing the cost to about 19,880 won. Then, a 10 percent value-added tax is levied on the new cost of the bottle of wine, and the wholesaler and retailer add their average profit margins of 25 and 20 percent, respectively. The consumer is finally set to plunk down about 30,000 to 40,000 won for the well-traveled bottle of 10,000 won wine.

In the U.S., wine costs are kept low because that nation produces its own wine and exempts it from alcohol taxes. Japan imposes taxes based on quantity rather than price, according to an official at a wine importing company.

Korea’s unique distribution structure is another factor contributing to the high cost of wine.

Under such a distribution structure, the profit margin of wine importers and wholesalers is 30 percent and 20-30 percent, respectively. Moreover, the profit margin of large discount marts is around 20 percent. With these large profit margins stacking up, the cost is transferred entirely to consumers. In addition, hotels and wine bars add their own 200 percent profit margin on top of this. In this case, the price of a 10,000 won bottle of wine jumps to 90,000 or 100,000 won.

Song Dong-hyeon, an official of Doosan Liquor BG, a wine importer, said, "People can buy good wine for less than 10,000 won, but many consumers want expensive wine due to a relatively immature wine culture here. Retailers are encouraging the price bubble through the vanity of these consumers."

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