2. Factors That Affect Price of a Bottle - Costs Via Supply Chain Flashcards
What is the Supply Chain?
The network of organizations and activities involved from product creation to distribution and sale to the consumer.
What are capital costs vs operating costs?
Capital: Money spent by a business in acquiring, improving or maintaining LT assets like land, buildings, equipment.
Operationg: day-to-day costs relating to producing and packaging wines
What are the 2 major grape growing costs, and what type of cost are they?
Vineyard establishment (capital) & vineyard management (operating)
What 3 features can factor into the cost of renting or buying land?
- Fruit quality
- Appellation reputation
- Scarcity
What are 10 capital costs of preparing a vineyard?
1) Surveying (for suitability and varietal selection)
2) Site clearance
3) Access road construction
4) Acquiring & planting vines
5) Trellising
6) Drainage system (if needed)
7) Irrigation system (boreholes, reservoirs, pipes, pumps)
8) Weather hazard protection (windbreaks, mesh, frost protection)
9) Pest prevention (fences, netting)
10) Machinery & equipment acquisition
What are 4 means of funding a new vineyard or winery?
1) Out of pocket
2) A loan, with interest and scheduled repayments
3) An investor, who profit shares, and may have mgmt involvement
4) Government lump-sum or tax incentive subsidies
What are 8 operating costs of vineyard management?
1) Labour
2) Machinery maintenance & fuel
3) Supplies (trellising, pruning shears, gloves)
4) Treatments (agro-chemicals, natural, or access to weather stations for pest mgmt)
5) Water (rights to extract for irrigation or outright purchase)
6) Electricity (for irrigation, bird scarers, frost protection)
7) Insurance (against flood or fire)
8) Capital Asset Depreciation
What are some factors that impact labour cost in the vineyard?
- Size and topography
- Philosophy - ie. Organic and Biodynamic are more labour intensive
- Rate of pay and availability - expensive labour or shortages may lead to more investment in machinery
- Nature of work: harvest is unskilled/cheaper; rest of year more skilled labour is required/higher rate
What are the 2 major winemaking costs, and what type of costs are they?
Winery establishment (capital) and winemaking (operating)
What are the main capital costs of winery establishment?
1) Land cost
2) Construction
3) Equipment (tanks, bottling line, etc.)
What are the 9 main operating costs of winemaking?
1) Growing or purchasing Fruit
2) Labour (FT staff and harvest contractors)
3) Machinery and equipment running costs (fuel, electricity, maintenance)
4) Additives/Gasses
5) Water (for cleaning)
6) Electricity (for refrigeration, pumps, ventilation, lighting)
7) Maturation (storage, vessels, staves, labour, foregone cash flow)
8) Development and Acquisition of Packaging (includes renting a bottling line if applicable)
9) Depreciation of capital assets
What is the effect of scale on a high-volume, inexpensive wine?
The aim is to sell more product to achieve profitability. It may sell at a low margin to remain competitive.
As such A large initial investment in machinery that provides efficiency may be justified
What is the effect of scale on a low-volume, premium wine?
It may sell fewer units and hence the margin must be larger to turn a profit.
Especially necessary since equipment and storage may have a higher cost.
What is the role of a freight forwarder in transportation?
They move wine globally. Some specialize in moving wine (temp control containers and special anti-breakage care), but they are more expensive (ie. JF Hillebrand).
They may also offer insurance at a cost.
What are the 4 methods of transportation, from least to most expensive?
Sea –> Rail –> Road –> Air
When is air transportation used and why?
To send wine to buyers, competitions, events; or to send time sensitive high value wines (ie. Beaujolais Nouveau for Japan)
Expensive due to high weight of wine and added fuel required
When is road transportation used and why?
For short journeys or at the start or end of a journey. Ferries may be taken at an added cost
Highly efficient, but long journeys are expensive
When is rail transportation used and why?
Longer journeys. Containerized is cheaper; individual pallets more expensive.
Rates depend on route, length, and how wine is loaded
When is sea transportation used and why?
Long journey. For containerized product only.
Cheapest in terms of cost per km. But extremely slow (ie. Aus»_space; UK = 40 days)
What are some global stats surrounding bulk transportation?
- 2001 to 2010 - 23 –> 43% of exports from New World are in bulk
- 2018 - 34% of total world exports are in bulk
- Spain (55%), US, South Africa, Australia, Chile transport 40%+ exports in bulk
- 34% of exports in bulk only account for 8% in value
What are the options for transporting wine in bulk, and what are the capacities?
a) Flexitank in a steel shipping container (24,000L)
b) Non-flexible ISO Tank (26,000L)
What are the advantages of shipping in bulk?
Lighter weight and take less space than bottles (ie. 24-26,000L vs 9-10,000L)
What is the disadvantage of shipping in bulk?
Only holds a large amt of one type of wine.
Not suitable for small producers
Why would a producer obtain insurance for transportation?
To protect against loss, spoilage, or damage, and because producers are usually responsible for transit to the importer.
What are the 3 main costs associated with importation?
1) Customs, duties, and taxes
2) Labelling laws/requirements (ie. US can be within 1.5% ABV; EU within 0.5-1%; US requires health warning)
3) Distributor costs
What are the advantages (3) of working with a distributor?
a) Advises on market requirements and regulations
b) Has established clients and buyers
c) Deals with much of the logistics
What is a “margin” and how is it calculated? What is the typical range?
A fee charged by a distributor expressed as (Fee/Revenue) x 100
Typically 5-25% in hospitality (lower in retail)
What are the 6 main sales costs for a retailer that impacts the cost of a bottle? (Hosp or retail)
1) Property
2) Labour (incl. training)
3) Equipment and materials
4) Storage, onsite or offsite (incl. transport)
5) Delivery
6) Margin at POS (30-50% for specialist retailer; 66% restaurants)
What are typical property costs for a retailer?
- Buying or leasing (lower for online retailer)
- Decor and furnishing
- Maintenance, security, water, energy, insurance
- Commercial property tax or waste disposable (varies by country)
What are typical equipment and material costs for a hospitality or retail retailer?
Specialist retailer: till, fridge, shelving, display materials, cleaning equip
Restaurant: kitchen & bar equip, tableware, glassware, wine preservation system
What are 3 main marketing costs for a producer that impact the cost of a bottle?
1) Labour (internal or external, incl trade bodies)
2) Design and production of labels/bottles
3) Marketing campaigns
Give 2 examples each of industry associations and trade bodies
Industry assoc - Consorzio in Italy, VDP in Germany
Trade bodies - Wine of Aus, South Africa
What are 4 common Marketing Campaign costs that affect the price of a bottle?
- Advertising
- Sample bottles for tastings/competitions
- Price promotions
- promo materials
What are 6 matters of legislation that impact the cost of a bottle?
Taxes Duties Trade barriers Subsidies Min. pricing Labelling laws
What is a bonded warehouse, and what is the advantage? (UK)
Allows wine to be stored in the country without paying excise duty. Otherwise, as soon as it enters the country, and is destined for a distributor’s facility, excise is payable by the producer.
It allows a producer to store product until someone wants to buy it, then excise is paid upon release. Better for cash flow as the buyer’s funds cover the cost.
Give an example of import duty affecting competitiveness in a market.
There are few mid-priced USA wines in the EU because tariffs are much higher than they are for Chile or South Africa
Calculate the EUR price of a 2.00 AUD bottle of wine (ex cellar) if the exchange rate is 1.50 AUD/1.00 EUR
2.00 AUD/1.5 AUD = 1.33 EUR
Exchange rates can change quickly, even while wine is in transit. 7 Options to mitigate and hedge currency fluctuations:
1) Option
2) Fixing Price
3) Buying currency
4) Fixed exchange rate contracts
5) Trading in USD/EUR
6) Foreign currency account at local bank
7) Overseas bank
What is an “option” in referring to currency management? How might a producer approach this?
The importer takes one on a certain amt of wine or currency at an agreed price. At an agreed time, the importer may decide whether they want it. Large importer have the buying power for these.
The producer may wish to charge a premium since they risk losing the sale.
What is involved in fixing price, in relation to currency management? What is the advantage/disadvantage?
Fixing prices in the currency of the importer at the date of order
Offers certainty to the importer, and risk to the producer. As such the producer may charge a premium.
What is involved in buying currency when managing exchange rate fluctuations?
Proactively buying foreign currency to cover specific orders. Usually only undertaken by large, proactive companies
What is a fixed exchange rate contract?
Entered into by an importer with a bank or other supplier of foreign currency, which specifies the amount and date, and forces a legal obligation to purchase currency at the given rate
Why would a producer/importer chose to trade in USD/EUR?
It’s more stable and predictable than many currencies. Can also be used for vineyard and winery supplies, which makes it efficient as fewer exchanges are made.
What are the advantages and disadvantages of an importer opening a foreign currency account at a local bank, or opening an overseas bank?
A buyer can pay the producer directly in their own currency.
But currency still needs to be bought; and it may not be efficient to have funds sitting until purchased.
Foreign banking regulations may also need to be contended with
(Not suitable where goods are bought in one currency and sold in another; moreso for when components need to be purchased, then assembly and sales occur in various countries. )
