A champagne bottle just got sold for Rs 20 crore. Why is it so expensive?

What is the one common thing between wines and NFTs? Well, they both can individually cost you more than your home mortgage. Also, both are primed to grow in value.

In July 2022, a 2017 magnum bottle of champagne was sold by Champagne Avenue Foch to 2 Italian entrepreneurs for $2.5 million (ie Rs 20 crore). Why? Well, the world is a crazy place.

Though the rich treat 'art' as an ever-growing investment, the common man considers the same piece of art in an art gallery as 'ridiculously expensive'. The same logic goes for NFTs. NFTs are digital tokens that represent digital or real-life art collectibles that is increasingly becoming the trending word of 2022. Since NFTs and cryptocurrency is not as regulated as say, art or real estate, they are being used by millionaires as a form of investment that will hold the value of money.    

So, why are we talking about NFTs and wines in the same sentence? Well, a recent wine auction has shocked both kinds of rich crowds - the ones in the wine market and the ones in the NFT market. 

In July 2022, a 2017 magnum bottle of champagne was sold by Champagne Avenue Foch to 2 Italian entrepreneurs for $2.5 million (ie Rs 20 crore). The Italian brothers have been investing in crypto since 2014 and don't have any intentions of opening their bottle of investment. 

A bit about the expensive bottle

• The bottle of champagne is made from a blend of multi-variety grapes like Premier Cru, Pinot Noir, Meunier, and Chardonnay. 
• The sale includes the bottle and the five NFTs that cover the bottle. This means that along with the bottle which has the art on the cover, the buyers have also received the digital ownership of the NFTs.
• What's so special about the cover, you might wonder? Well, the NFTs represent cartoon creatures which include a bored ape, a bat, and a vampire. 

So, what exactly makes wines so expensive? 

1. Buying and maintaining a vineyard

Buying or leasing a vineyard needs huge initial capital investment. Along with the initial investment, maintaining a vineyard is a magnanimous task. One has to fence the land, maintain the soil structure by installing irrigation facilities, fit metal or wooden trellis posts into the soil, hire expert workmen to maintain the crops, use tools and equipment to ensure quality and keep an eye on pests and diseases. 

The cost of buying one hectare of land (about 1.07 lakh square feet) of vineyard in 2019 was 30,000 euros (Rs 24 lakh). As on 2015, on average, a family in Italy had about 10.3 hectares of land for a vineyard, about 11.08 lakh square feet, which would have then cost more than Rs 2.4 crore. 

Also, some vineyards are better than others because of some advantages like soil composition, a unique microclimate, etc. Some geographical areas also have acronyms like DOC, DOCG, etc to certify the quality of the product to the customer. Since production techniques and procedures are followed strictly, this also raises the production cost. 

2. Production quantity 

Though entrepreneurs spend crazy amounts of money on investing, the return on investment is not always guaranteed. This is because events like temperature, local weather, climate change, post infections, changes in soil fertility, irregular rains, too many fertilizers or some other unknown factors could reduce productivity. If productivity falls, the farmers have to recover their initial cost by charging a higher price for the crops. This means if something goes wrong, you have to pay more. 

3. Winemaking techniques

The process of turning grapes into wine can be done with two intentions: either to produce more wine or create better quality wine. If an entrepreneur wants to create better quality wine, they have to hire wine artisans, specialized winemakers, and even chemical engineers. They also need large oak barrels for the flavor, which are super expensive since only 2 barrels can be made from an 80-year-old tree.

There is also a practice: the older the wine, the finer the taste and the costlier it is. This means entrepreneurs have to invest money in buying or leasing more real estate (warehouses and godowns) to store these wines. They also need big barrels, automated machines, trucks and electronic equipment to maintain and access these barrels at regular intervals to check on them. Plus, these barrels need to be stored at certain temperatures, which makes the process even more expensive. 

Usually, companies have to borrow money from banks and financial institutions to set up these investment-heavy businesses. This obviously means that they have to raise the prices of produced wines if prices are expected to fall in the future.    

4. Bottling

The winemaker cannot hold back on spending on the wine bottle because it is an investment. The bottle, the cork and the branding will hold the luxurious drink for years and will be the physical representation of luxury. One will not even think of a cheap bottle. 

5. Marketing

If the wine is marketed by a celebrity or the labels are designed by an artist, that too needs a heavy flow of money since artists usually take a percentage cut of revenues.  

6. Taxes

As of 2021, import taxes on wine and liquor in India was 150%. The average tax on alcohol is 16% but European countries end up paying somewhere between 25-27% tax.    

7. Pricing

Wine is often perceived as ''a luxury item'' and since producers know that customers are willing to pay anything for these products, entrepreneurs are quite liberal with pricing policy and profit margins. 

As the NFT cost gets added to wine bottles now, it looks like it is a great time to be an artist. Or a winemaker.