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WSET L4 D2 2024 > 1. Supply And Demand > Flashcards

1. Supply And Demand Flashcards

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1
Q

Define “supply”

A

The amount of a good or service that is available for sale

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2
Q

Define “demand”

A

The willingness of consumers to buy a good or service

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3
Q

Define “supply and demand” in terms of wine bussiness

A

The amount of wine that is available compared to the amount that people want to buy

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4
Q

Wine production is subject to weather. Give an example

A
  • 2013:
    Increased volume produced in Spain due to high spring and summer rain in Castilla-La Mancha (45m hectoliter)
  • 2017:
    Lowest volume in 50 years in Spain due to spring frost in Europe (32m hectoliter)
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5
Q

Explain what happens when supply exceeds demand

A
  • consumers have a greater choice of cheaper alternatives
  • producers need to lower their prices to remain competitive
  • profits will be reduced
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6
Q

Explain what happens when demand exceeds supply

A
  • Prices are likely to increase
  • When no alternative is available, consumers may be willing to pay higher prices
  • Some consumers may switch to another option
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7
Q

Which factors influence demand

A
  • Social
  • Economic
  • Legislative
  • Political
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8
Q

In which countries is wine consumption falling

A

Traditional wine-drinking countries, such as France and Italy. In Germany it is static

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9
Q

In which countries is wine consumption rising

A

In countries where wine drinking is no part of historical culture, such as USA and China

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10
Q

What is the country with largest wine consumption worldwide, and since when

A

In 2011, USA overtook France and Italy

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11
Q

What are the reasons for the more recent popularity of wine in USA

A
  • Globalisation of food and drink industry
  • Growth of multi-nationals
  • Increased ability for export
  • Willingness for new tastes
  • Improved wine production in domestic market
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12
Q

What are the reasons for the more recent popularity of wine consumption in China

A
  • Growing middle class shows wealth and status by moving from local drinks to wine
  • Moving from French wine to Australian and Chilean wine (due to bilateral trade agreement)
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13
Q

Give examples of changes in consumption habits that influence demand

A
  • Younger people drink less wine
  • Health concerns
  • Changes in lifestyle
  • Reduced availability of cheap wine
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14
Q

Give examples of changing consumer preferences

A
  • Rosé has become popular in USA
  • Prosecco has become popular in UK and USA with limited price rise
  • Lower alcohol wines due to health concerns
  • Less fortified wines due to health concerns
  • Medium- sweet German wine such as Liebfraumilch are out of fashion, after being popular in USA and UK in 50s 60s and 70s such as Blue Nun
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15
Q

Give examples of changes in reputation that justify higher prices

A
  • Good reviews from leading wine publications such as Wine Spectator in USA, and Jancis Robinson in UK
  • Online influencers
  • Presence of a wine in films, series, music lyrics, celebrity lifestyle news
  • Peer opinions and behaviour
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16
Q

Define a “price-sensitive market”

A

A country where consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy, such as Germany and UK

In contrast, in USA, many consumers are willing to pay more to buy wine of better quality

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17
Q

What are the social factors that influence demand

A
  • Changes in consumer behaviour
  • Changes in consumer preferences
  • Changes in reputation
  • Changes in spending patterns
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18
Q

Give an example of changes in spending patterns

A
  • Premiumisation in USA and even UK, which means that consumers are willing to pay more for an individual bottle of wine, often because they buy less wine by volume
19
Q

What are the economic factors that influence demand

A
  • Strength of the economy
  • Fluctuations in currency exchange
  • Changes to the market
20
Q

Define “disposable income”

A

The amount of money a person has after paying taxes

21
Q

Give examples of demand influenced by the strength of the economy

A
  • The recession following the 2008 financial crash resulted in a decrease in demand for Champagne, and an increase in demand for cheaper sparkling wine
  • In a growing economy such as China, increased disposable income increases demand for aspirational wines such as those from Bordeaux and Burgundy
22
Q

Give examples of demand influenced by fluctuations in currency exchange

A
  • When an exporting countries currency has weak value against that of the importing currency, a producer can either keep the price stable (and boost sales), or increase price (and boost profits). The downside is the cost for importing supplies such as barrels, corks and yeast.
  • Argentinian wines were competitively priced due to a weak peso in de early 21st century
23
Q

Give examples of changes to the market that influence demand

A
  • If a supermarket has run out of Echo Falls White Zinfandel, demand for Blossom Hill White Zinfandel may increase
  • It may also be possible to raise prices if supply is limited
  • Introduction of a new lower priced wine may cause a fall in demand
24
Q

What are the legislative and political factors that influence demand

A
  • Laws prohibiting the sale of alcohol
  • Government policies to reduce alcohol consumption
  • Taxation
  • International trade
  • Wine laws
25
Q

Give examples of laws prohibiting/limiting the sale of alcohol

A
  • State-owned monopolies in Sweden, Norway, Canada,..
  • Three-tier system in USA
  • Minimum legal drinking age
  • Limiting alcohol sale to particular hours of the day
26
Q

Give examples of government policies to reduce alcohol consumption

A
  • In France, the Loi Evin (1991) restricts advertising of alcoholic drinks
  • In Scotland, minimum unit pricing reduces availability of cheap alcohol. The minimum price is GBP 0,50 per unit (75cl with 12% abv must cost at least GBP 4,50 instead of 3 GBP as before)
  • New Zealand and Scotland have reduced BAC (blood alcohol concentration) from 80mg/100mL to 50mg/100mL when driving. In Norway and Sweden the maximum BAC when driving is 20 mg/100mL
27
Q

Give examples of influence of taxes on demand

A
  • In the Republic of Ireland, excise duty on still wine is €3,19 per bottle, while excise duty on sparkling wine is €6,37 per bottle. This has reduced demand for sparkling wine
  • In 2008, the government of Hong Kong in China abolished excise duty on wine, to become the ‘wine trading hub’ of East Asia. This has increased auction sales of fine wines through Hong Kong
28
Q

Give examples of international trade influence on demand

A
  • Member states of EU can import and export goods between themselves tariff-free. Goods from non-members will be relatively more expensive, such as Australia. Some non-members have trade agreements with reduced or lower tariff, such as Africa and Chile
  • Since the UK has left the EU, they can negotiate free-trade with Australia. This would make Australian wine cheaper than EU wine, and change buying habits of British public
  • US/China trade war: China has imposed tarrifs on US products in response to US tarrifs on Chinese products
  • Trade embargos on and by Russia due to political reasons (when a country bans import from- and/or export to a particular country)
  • Even when restrictions are lifted, negative feelings of consumers can keep on influencing behavior out of principle
29
Q

Give examples on how wine laws influence demand

A
  • Creation of a GI can increase recognition, which increases demand
  • In Europe, PDO rules can be very strict regarding varieties, production methods, etc. Producers outside EU are not so limited, and more flexible to react and maintain demand, when consumer behavior changes
  • in China in 2012, the new leader prohibited the gifting of luxury items to and from government officials, which decreased demand for Bordeaux Premier Grand Cru Classé and Bourgogne Grand Cru
30
Q

What are the factors that influence supply

A
  • Production levels
  • Legislation
31
Q

What are the factors that influence production levels

A
  • Area under vine
  • Human factors
  • Natural factors
32
Q

What are factors decreasing vineyard land in the EU

A
  • Vine pull schemes
  • Restrictions on planting new vineyards
  • Conversion of vineyard land to other uses
  • Abandonment of rural areas
33
Q

Give an example of vine pull schemes

A
  • By the mid-80s, EU wine production was greater than demand, creating a surplus known as ‘wine lake’. National governments and the EU paid growers to pull up poor quality vines, especially in southern France, Italy and Spain
34
Q

Give an example of EU restrictions on planting new vineyards

A
  • Together with vine pull schemes, a broader policy was used to reduce wine production in the 1980s
  • Since 2016, annual vine area growth of 1% is allowed. France and Italy plantings have started to rise again
35
Q

Give examples of vineyard land conversion for other uses

A
  • In Elgin: apples give greater financial return
  • In USA: combat over-supply by converting vineyards to grow almonds and pistachios
  • In Madeira: converted to tourist properties
  • In Santa Clara Valley California: converted to bussines properties
36
Q

Give examples of abandonment of rural areas

A
  • Young people go live in urban areas, reducing workforce
  • Family-run estates have no one to take them over
37
Q

Give examples of human factors that influence supply

A
  • Average production in Spain has increased, while area under vine has decreased. This is a result of relaxation of laws banning irrigation, and higher density planting.
  • A greater amount of healthy grapes can be produced due to modern techniques such as site selection, clonal selection, canopy management, pest and disease control, machine harvest, etc.
38
Q

Give examples of natural factors influencing supply

A
  • In Europe in 2017, spring frost, hailstorms and heat waves resulted in 14% fall in production compared to 2016
  • In South Africa from 2015-2019, wine production was threatened by droughts
  • In Chile by 2050, 95% of vineyard area will have a shortage of irrigation water

Reduced yield will lead to lower production, will lead to higher prices. Sometimes also a drop in quality. Consumers will not always be willing to pay higher prices.

39
Q

Give examples of legislation influence on supply

A
  • Prosecco DOC reformation, extending the area. Extending an area often involves less suitable sites and a drop in quality
  • Comité Champagne limits the amount of wine that may be released in a year, reducing oversupply
  • In 1970s Vin De Pays was introduced to offer greater freedom: 85% of grapes from a particular area, but wider range of varieties and no rules of winemaking and viticulture
40
Q

Give examples of producer solutions for over-supply

A
  • Limitations on wine production
  • Sell at a lower cost, sometimes below production cost (this can damage brand image)
  • Find new markets, but this takes time and connections (e.g. consumption in USA and China grew in recent years)
  • Bottle under a different label
41
Q

Give examples of under-supply

A
  • Globally: bad harvests in Europe in 2017
  • Particular producers not having enough wine to sell (possibly leads to higher prices, but more often leads to strained business relationships)
42
Q

Give examples of large companies selling wine

A

Accolade Wines, Treasury Wine Estates

43
Q

Explain how PDO legislation influences supply

A
  • European PDO dictate what grapes can be grown, maximum yields and techniques used. These restrictions can limit volume of wine produced
  • A result is a better balanced supply and demand, reducing risk of downward price pressure

WSET L4 D2 2024 (14 decks)

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