1. Supply and Demand

Question 1

Using a specific example, illustrate how weather can greatly affect wine production levels (2):

Answer 1

2013: high spring and summer rainfall in (usually dry) Castilla-La Mancha bloated wine production in Spain to 45.3m hl.

vs.

2017: spring frosts in much of Europe depressed global wine production to its lowest in 50 years. In Castilla-La Mancha, production fel to 32.5m hl.

Question 2

Broadly explain the concept of supply and demand, as it pertains to wine consumption (4):

Answer 2

• If demand exceeds supply, prices likely to rise.
• Thus, some consumers will be willing to pay more for certain wines (if thought that no alternatives are available), while others will be unwilling, seeking out cheaper options.
• If supply exceeds demand, prices likely to fall.
• Consumers have greater choice of cheap wines. Producers may choose to lower prices in order to remain competitive.

Question 3

Identify the different categories in which demand for wine can exist (4):

Identify the factors that can influence demand (4):

Answer 3

• Country of origin
• Grape variety
• Style
• Price

FACTORS: social / political / legislative / economic

Question 4

Identify the categories of SOCIAL FACTORS that influence the demand for wine (4):

Answer 4

SHaRP

• Changes in Spending Patterns
• Changes in Consumption Habits.
• Changes in Reputation.
• Changing Consumer Preferences.

Question 5

Identify the categories of ECONOMIC FACTORS that influence the demand for wine (3):

Answer 5

• Strength of the Economy
• Fluctuations in Currency Exchange
• Changes to the Market

Question 6

Identify the categories of LEGISLATIVE AND POLITICAL FACTORS that influence the demand for wine (5):

WILTinG

Answer 6

• Laws Prohibiting or Limiting the Sale of Alcohol
• Gov’t Policies to Reduce Alcohol Consumption
• Taxation
• Int’l Trade

- Wine Laws

Question 7

Describe the fluctuations of global wine consumption from 2003 to the present (5):

Answer 7

• Steady increase in wine consumption from 2005-08, mainly due to increased consumption in USA and China.
• Sharp decline in 2008 (global economic crisis) due to less spending on non-essentials.
• Gradual increase as economy recovered from 2010-12.
• Decline in 2013-14, due to less wine consumption in EU, particularly France and Italy.
• Consumption gradually rising from 2015-present, starting to plateau; US consumption rising, China beginning to decline slightly (end of rapid growth).

Question 8

Though wine consumption worldwide has not reached pre-2008 recession levels, which categories of wine have gained in popularity/consumption (2)?

Answer 8

Rosé and sparkling wine consumption has increased significantly.

e.g. sparkling wine consumption has increased annually by an average of 3% between 2002-2018.

Question 9

Describe the general trends of wine consumption over the last 2 decades for the following countries:

• USA
• France
• Italy
• Germany
• China

Answer 9

Generally, consumption levels have fallen or become “static” in traditional wine-drinking countries (France, Italy, Germany), while consumption in “non-traditional” countries has risen significantly.

USA: steady rise to over 30m hl in 2019, overtaking France as the world’s largest consumer by volume in 2011.

FRANCE: gradual decline from over 30m hl to ~25m hl.

ITALY: sharp decline until 2015, when consumption levels began to rise again.

GERMANY: remained static, ~20m hl.

CHINA: experienced rapid growth till 2013, eventually leveling out.

Question 10

Identify some reasons behind the USA’s increased wine consumption from 2003-2019 (3):

Answer 10

• wine drinkng has increasingly become part of the mainstream culture, increased willingness to try new wine types.
• globalization of the food and bev industries (growth of MNC’s increased availability of wine from different regions, countries).
• increases and improvements in wine production domestically.

Question 11

Identify some reasons behind CHINA’s increased wine consumption from 2003-2019 (2):

Answer 11

• growing middle class, desire to show wealth and status by shifting from local drinks to wine.
• desire to consume imported wines (at first, primarily French, but more recently Australian and Chilean wines: less expensive due to bilateral trade agreement).

Question 12

Identify and explain different factors that have possibly led to declines in wine consumption (4):

Answer 12

Younger people drinking less wine: wine seen as old-fashioned; popularity of other drinks (e.g. gin in Spain); less time spent in bars/pubs due to more social media interaction.

Health concerns: increased awareness of alcohol’s negative effects on health, e.g. the “Loi Evin” in France, discouraging excessive drinking and depressing wine consumption.

Changes in lifestyle: busy lifestyles = shorter meals and less time spent drinking; tradition of drinking wine at lunchtime (prevalent in EU) disappearing as employers are forbidding the practice, or it being regarded as socially unacceptable.

Reduced availability of cheap wine: lower volumes of inexpensive, bulk wine being produced/sold/consumed, e.g. due to vine pull schemes intended to reduce over-production; drinkers switching to other, cheaper alcoholic/non-alcoholic drinks.

Question 13

Explain how Changing Consumer Preferences have affected wine consumption habits (4):

How has the wine industry reacted to these changes?

Answer 13

• rise in popularity of rosé (esp. in USA)
• rise in Prosecco sales (esp. UK / USA); expansion of Prosecco DOC boundaries in order to increase production and meet demand.
• increased demand for lower-alcohol wines (health concerns); less demand for fortified wines (15-22% abv).
• decline in popularity of med. sweet German wines, e.g. Liebfraumilch (used to be popular in ‘50’s, 60’s, 70’s) = some brands have completely disappeared, while others, e.g. Blue Nun, have reinvented themselves in order to survive.

Question 14

Explain how Changes In Reputation have affected wine consumption habits (5):

How has the wine industry reacted to these changes?

Answer 14

• the reputation of a region, producer, individual wine or grape can fluctuate, leading to rises and falls of demand.
• favorable reviews from reputable publications / critics (e.g. Jancis Robinson in the UK, Wine Spectator in the USA) can encourage producers to raise their prices in subsequent vintages.
• online influencers / Key Opinion Leaders (KOLs) can impact the desirability of specific wines/producers.
• presence/exposure in pop culture, e.g. films, TV, music lyrics, celebrity endorsements, can increase exposure and popularity.
• loss of reputation has the opposite effect, though it usually takes years for prices to be affected, if they ever are at all.

Question 15

Explain how Changes In Spending Patterns have affected wine consumption habits (5):

How has the wine industry reacted to these changes?

Answer 15

• in some markets, e.g. Germany and the UK, most consumers are unwilling to pay more than the lowest price possible for the desired style of wine = PRICE-SENSITIVE MARKETS.
• in others, e.g. USA, consumers are more willing to pay above the min. price for a wine they perceive to be higher in quality than the cheapest option.
• fierce competition in ‘price-sensitive markets’ = lower prices for consumers, but fewer options as selling wine at this pricepoint would be unprofitable for many producers.
• producers hope to build up ‘brand loyalty’ over time as part of marketing campaigns, thereby avoiding the problem of passing on production costs to the consumer.
• the rise of ‘premiumization’; the willingness to spend more on individual bottles of wine because fewer bottles are being purchased.

Question 16

What is a PRICE-SENSITIVE MARKET?

Answer 16

A market in which many consumers are unwilling to spend more than the lowest price possible for a certain product, regardless of affluence, e.g. Germany and the UK.

Question 17

Explain how the Strength of the Economy can affect wine consumption habits (5):

Answer 17

• Wine sales will change in accordance with level of disposable income.
• Disposable income = money left over after paying taxes.
• As DI falls, wine consumers likely to purchase cheaper wines/alcoholic beverages e.g. beer/cider.
  e. g. during the ‘08 recession, demand for Champagne fell while that for cheaper sparkling wine, e.g. Prosecco, grew.
• opposite: growing middle-class in China has caused an increase in wine sales and demand for aspirational wines eg. Burgundy and Bordeaux.

Question 18

Explain how Fluctuations in Currency Exchange can affect wine consumption habits (3):

What are the PROS and CONS of having a weak currency?

Answer 18

• particularly significant in PRICE-SENSITIVE MARKETS.
• If wine-exporting country’s currency strengthens, they have 2 options: 1. Keep prices stable, risk losing sales; 2. Lower price to remain competitive but lose profit.
• If the opposite: 1. Keep price stable which would boost sales or 2. Increase price to improve profits for future.

PRO: weak currency can make wines appear to be better value for money in importing country, e.g. 21st C. boom in Argentinian wine exports due to weak Peso.

CON: costs of importing equipment and supplies (barrels, corks, yeast) for producer may offset any additional profits.

Question 19

Explain how Changes to the Market can affect wine consumption habits (3):

Answer 19

• When products disappear from the market, this creates opportunities for competition.
  e. g. if supply of Brand A Zinfandel decreases, demand for Brand B may increase.
• Limited quantities also create the opportunity to raise prices (real/perceived scarcity).
• Introduction of a new, lower-priced or better value wine may eat into demand for other similar wines, causing producers to lower prices or search for alternative markets.

Question 20

Explain how Laws Prohibiting or Limiting the Sale of Alcohol can affect wine consumption habits (4):

Answer 20

• some countries completely prohibit the sale of alcohol, e.g. Indonesia.
• in others, alcohol is available but tightly controlled, e.g. state-owned monopolies in Sweden, Norway, Canada, or the 3-Tier system in the USA.
• these controls usually limit supply and increase prices.
• Even when freely available, alcohol is usually only available to those who meet a minimum age requirement, and during certain hours of the day.

Question 21

Explain how Gov’t Policies to Reduce Alcohol Consumption can affect wine consumption habits:

Name 3 specific policies:

Answer 21

• many countries desire to curtail excessive alcohol consumption; illness, injuries, strain on health services, crimes caused by drunkenness.
  1. The “Loi Evin”; introduced by France in ‘91, restricted advertising of alcoholic drinks = significant reduction in wine consumption in France.
  2. “Minimum Unit Pricing”; introduced by Scotland to reduce availability of cheap alcohol, min. price of an alcoholic drink is GBP 0.50 = a 750ml bottle of wine (9 drinks) must be at least GBP 4.50 (previously could be GBP 3)
  3. Lowering the Blood Alcohol Concentration (BAC) limit for drivers in order to prevents accidents caused by drunk drivers:

NZ: 80mg/100ml

Scotland: 50mg/100ml

Norway / Sweden: 20mg/100ml

Question 22

Explain how Taxation can affect wine consumption habits (2):

Identify an example of both INCREASED and DECREASED consumption:

Answer 22

• Gov’ts impose taxes and duty on alcoholic bevs, which can reduce consumption due to higher prices, but gov’ts also gain revenue from taxes. Therefore, it must be handled strategically.
• Sales tax / Value-Added Tax (VAT) is added to alcoholic drinks at the POS like any other product. However, extra duty may be imposed on them as well, payable at the point of manufacture:

IRELAND: major difference between tax on still (€3.19/bottle) and sparkling (€6.37/bottle) has greatly reduced the demand for the latter.

HONG KONG: Excise duty on wine abolished in 2008, intended to make HK the “wine trading hub” of East Asia. Caused a massive increase in auction sales of fine wine there.

Question 23

Describe the changes in global wine trade/exports from 2003 to the present:

Answer 23

Global wine exports have more than doubled since 2003, from around €15 billion to over €30 billion, despite minor dips here and there, e.g. 2008 global recession.

Question 24

Using the EU as an example, explain how trade agreements/relations can affect the price of wine (4):

Answer 24

• Customs duties are applied to imported goods, usually as a source of revenue for the gov’t, but sometimes as a form of protectionism, to encourage the consumption of local products.
• EU members enjoy tarrif-free trading between member states, meaning that products can be affordable even if imported from another country in the EU.
• Tariffs are still applied to products imported from most (e.g. Australia), but not all (e.g. South Africa/Chile), non-member states.
• This means that, within the EU, wines from S Africa and Chile enjoy a competitive edge price-wise over those from Australia.

Question 25

Explain the potential effects that ‘Brexit’ (the UK’s exit from the EU) could have on wine consumption in the UK (3):

Answer 25

• unlear whether the UK will still benefit from free-trade agreements from the EU.
• If not, UK could negotiate its own free-trade arrangements with any country it wants, e.g. Australia, which could make Australian wines cheaper than EU wines.
• Given that the UK is generally a Price-Sensitive Market, this could greatly alter wine-buying habits of the British public.

Question 26

Using Argentina as an example, explain how trade restrictions can hinder wine production (2):

Answer 26

• early 2010’s, restrictions imposed that increased costs of wine imports, winery equipment, barrels, cork and yeast = significant increases in wine production costs.
• as part of the same policy, gov’t also imposed restriction on foreign ownership of land = curtailing foreign investment which had aided in rapd growth of wine production.

Question 27

Identify some examples of purposely imposed/politically motivated restrictions on wine imports (3).

How do these restrictions affect trade relations?

Answer 27

• US/China Trade war; China has imposed tariffs on US wine in response to US tarrifs on Chinese products.
• US-imposed tariffs on Spanish/French/UK/German wines in retaliation to subsidized loans to Airbus.
• Embargo (complete ban on imports/exports to/from a particular country); e.g. Russia wine imports have fallen considerably due to trade embargos imposed both ON Russia and BY Russia.

Trade wars create negative feelings among consumers, leading to a reduction of purchasing those products based on principle alone, even if restrictions are lifted.

Question 28

Explain how the creation/existence of Geographic Indications and Protected Denominations of Origin can affect supply/demand of wine (4):

Answer 28

• consumers may be drawn to certain GIs or PDOs based on prior enjoyment of those wines or the strength of their reputations.
• creation of a GI may increase recognition/demand for wines from that region and result in increased prices.
• European PDO rules can be very strict, limiting options for grape varieties, production methods, maturation periods, etc… which can increase costs and make responding to shifts in stylistic popularity difficult.
• in contrast, GIs outside the EU are relatively free to react more quickly to changes in preferences, whether to certain grapes or styles.

Question 29

Using China as an example, explain how sudden changes in legislation can have significant effects on wine consumption/purchasing (4):

Answer 29

• in 2012, China’s new president Xi Jinping, moved to stop ‘lavish gifting’, the custom of showing respect to business colleagues / customers / suppliers by giving gifts paid for by gov’t money.
• Traditionally, the more expensive the gift, the better, with super-premium wines, e.g. First-Growth Bordeaux and Grand Cru Burgundy wines, being the norm.
• This “Anti-Extravagance” campaign sought to prohibit the gifting to/from gov’t officials of luxury wines/spirits such as these.
• demand for these wines dropped almost immediately, while demand for less expensive wines has increased, particularly amongst the growing middle class. These wines are typically intended for enjoyment or showing status, rather than lavish gifting.

Question 30

Who are currently the top 5 wine-producing countries in the world?

Answer 30

1. Italy
2. France
3. Spain
4. USA
5. Argentina

Question 31

Which 5 countries have the greatest area under vine?

What consideration may be taken when comparing a country’s land area under vine and its level of wine production?

Answer 31

1. Spain
2. China
3. France
4. Italy
5. USA

Statistics regarding land under vine include not only grape plantings intended for wine production, but also table grapes. e.g. the majority of China’s vineyards are intended for table grape production (#2 in land under vine), while its wine production is comparatively small (7th-10th worldwide, varying from year to year).

Question 32

What has the general trend been in terms of area under vine worldwide?

What are some factors that have caused this trend (4)?

Answer 32

Total area under vine has dropped significantly, from ~7.8 million hectares in 2003 to ~7.4 million hectares in 2019.

Vine pull schemes / EU restrictions on planting new vineyards / Conversion of vineyard land to other uses / Abandonment of rural areas.

Question 33

How have Vine Pull Schemes affected vineyard land acreage (4)?

Answer 33

• by mid ’80s, EU wine production was much greater than demand, became known as the “wine lake”.
• nat’l gov’ts and EU itself paid growers to pull up poor quality vines, especially in S. France, Italy and Spain.
• several hundred thousand acres of European vines were pulled up.
• this concept has also been used in Australia, NZ and Argentina.

Question 34

In which year did the USA overtake France to become the world’s largest consumer of wine?

Answer 34

2011

Question 35

What defines the category of “younger people”?

Answer 35

Drinking age to mid-30’s

Question 36

Why does vintage variation in the EU have such a significant impact on global wine production (2)?

Example?

Answer 36

• Europe is particularly vulnerable to vintage variation.
• the EU contains over half of the world’s vineyards, so bad vintages mave a major impact.
• e.g. 2017 saw severe frosts, hailstorms and heat waves across Europe, which lowered their wine production by 14%.

Question 37

How has Climate Change affected / threaten to affect wine production capabilities on a global scale (3)?

How can these effects influence the market?

Answer 37

SCC (see…?)

• serious droughts have recently affected South Africa.
• similarly in California, low rainfall has reduced the state’s underground aquifer to nearly zero.
• Chile’s gov’t predicts that 95% of the country’s vineyard’s will experience water shortages by 2050.

Reduced yields => lower volume => shortage of supply => higher prices (which customers may be unwilling to pay).

Question 38

Identify the factors that have resulted in the gradual reduction of vineyard land (particularly in the EU):

CHAVEN

Answer 38

Conversion of vineyard land to other uses.

Human factors.

Abandonment of rural areas.

Vine-pull schemes.

EU restrictions on planting new vineyards.

Natural factors.

Question 39

How have EU restrictions on planting new vineyards affected vineyard land acreage (3)?

Answer 39

• Vine Pull schemes + restrictions on new plantings part of broader policy to limit wine production.
• Since 2016, rules have been slightly relaxed, allowing up to 1% annual growth of vineyard area already planted.
• Plantings in France/Italy have already begun to rise again.

Question 40

How have conversions of vineyard land to other uses affected vineyard land acreage (5)?

Answer 40

In many areas, wine grapes are of lower agriculture value than other crops, causing farmers to switch gears:

e. g. Elgin, S. Africa: farmers replacing grapes with apples = much greater financial return.
e. g. Madeira: land bought for property development for tourists
e. g. Santa Clara Valley (Silicon Valley): area bought for business
e. g. USA: strategy to counter oversupply by converting grape crops to pistachios and almonds.

Question 41

How has abandonment of rural areas affected vineyard land acreage (3)?

Answer 41

• Trend of younger people leaving rural areas to live/work in urban areas.
• Reduces workforce and leaves family rural estates w/ no one to take over.
• rural economies suffering from lack of labor and investment; difficult to work vineyards are being abandoned, even in prestigious GIs.

Question 42

How have human factors affected global wine production (3)?

Answer 42

Modern techniques have resulted in higher production volumes:

• better site selection / clonal selection / improved canopy mgt / pest and disease control / mechanization have all contributed to more consistent and greater levels of production.
• modern winemaking tech = higher quality wine can be produced at prices consumers are willing to pay.

Question 43

Using Spain as a case study, explain how reduction in acreage under vine does not necessarily equate to lower production levels (3):

Answer 43

• Traditionally, average yields in Spain have been lower than those in France or Italy.
• This is due to its very dry climate and traditional low-density planting systems.
• Relaxation of laws banning irrigation and conversion to higher-density plantings have increased production in certain areas = offsetting the loss of vineyard land.

Question 44

What is the main legislative influence on the supply of wine (2)?

Answer 44

• the increasing number of GIs around the world.
• GIs limit the amount of wine produced by defining the geographical areas in which grapes can be grown (the sizes of which can vary enormously).

Question 45

How do legislative regulations differ between inside and outside the EU?

Answer 45

INSIDE:

AOPs / DOC(G)s of France / Italy define much more than just the geographic areas of the GIs: which varieties may be grown, yield levels, winemaking and maturation techniques all limit the volume of wine produced.

OUTSIDE:

GIs simply define geographical areas and lack the restrictions found within EU’s PDO system, e.g. AVAs in the USA, Wines of Origin in S. Africa or GIs of Australia

Question 46

What are the 2 main aims of creating GIs?

Answer 46

1. To define the style of wine produced in a particular region (especially in the EU).
2. To bring supply and demand more in line and reduce the risk of downward price pressure.

Question 47

Explain how creating GIs can reduce the risk of downward price pressure (3):

Answer 47

• e.g. if a retailer is seeing high demand for inexpensive Sauvignon Blanc, they are able to select SB’s from around the world, switching regions/countries from year to year in order to sell the cheapest options.
• however, if retailer is seeing high demand for SB from a specific area, e.g. Marlborough, they must buy from there.
• this gives the producer more control over the price, as the retailer cannot source wine from elsewhere in the world.

Question 48

Explain how GIs can fail to properly guarantee the quality of wine produced in that area (3):

Answer 48

• If demand for a certain wine increases significantly, there may be pressure on the GI’s legislation to expand the geographical boundaries in order to meet that supply.
  e. g. increased demand for Prosecco led the DOC to expand the geographical limitations for grape-growing across multiple regions, allowing new vineyards to be planted in order to increase supply.
• however, this expansion has allowed the inclusion of less favorable sites, which leads to a dilution of overall quality, even though demand is met.

Question 49

What are the aims of PDO governing bodies in the EU (2)?

2 examples?

Answer 49

To set and enforce rules, e.g. actively limiting the amount of wine released per year, ensuring the market is not oversupplied in order to maintain price levels.

Also to assist with marketing.

2 e.g.s: Comité Champagne, Sherry Consejo Regulador.

Question 50

What is the main criticism of the European PDO system?

What was the response to this criticism (3)?

Answer 50

Strict rules rendered EU producers unable to compete with their counterparts in less heavily-regulated regions.

1970’s: creation of the French Vin de Pays category (basis for the European PGI system) to allow greater freedom.

85% of grapes still have to come from defined geographical area, but producers have more freedom in terms of which grapes are used, and viticultural / winemaking practices.

For certain areas, e.g. South of France, PGI wines = extremely important, production and quality have both increased significantly since VdP’s introduction.

Question 51

What are the challenges to a producer if there is an OVERSUPPLY of wine (2)?

What are some options available to producers who face these challenges (2)?

Answer 51

• oversupply leads to producers being unable to sell off stock, unable to free up winery equipment/tanks, may be forced to sell at much lower price than desired.
• selling at a lower price can lead to devaluation of the “brand” (ie. how the brand is seen) and cause lasting damage.
• option to find new markets/outlets, but this takes time, may only be an option for producers that already have contacts/distribution in those markets.
• option to sell the wine to retailers, deep discounter, restaurants or bars who will bottle the wine under a different / private label.

Question 52

Is there an over- or under-supply of global wine prodcuction (2)?

Answer 52

OVERSUPPLY of wine.

However, this has been reduced in recent years to due rising consumption levels in the US and China.

Question 53

How often is there an UNDERsupply of wine (2)?

Answer 53

Quite rare, though it can happen e.g. in 2017 (bad harvests across EU).

More common to see an undersupply of PARTICULAR wines.

Question 54

What is the most obvious problem of having an UNDERSUPPLY of wine (4)?

Answer 54

Not having enough wine to sell, disappointing clients and consumers.

Can lead to strained business relationships.

Retailer may choose to impose financial penalty or cancel contract with producer if required volume is not available.

They may also seek out cheaper alternatives if undersupply leads to increased prices, especially in Price-Sensitive Markets.

Question 55

What advantages do large companies (wine conglomerates) have in terms or coping with undersupply (3)?

3 examples?

Answer 55

Large companies have a wide range of wines at different price points, of different styles and regions of origin.

• e.g. if there is an undersupply of a specific wine in the portfolio, an alternative may be selected.
• they are also able to sell to many different markets, meaning that if undersupply causes the price of a wine to rise and sales to drop, they may shift their focus to less price-sensitive markets instead.
  e. g. Treasury Wine Estates, E&J Gallo, Accolade Wines.