2. Factors that Affect the Price of a Bottle of Wine

Question 1

What are the 2 categories of Grape Growing Costs?

Answer 1

1. Costs of establishing a new vineyard.
2. Ongoing costs of managing the vineyard and growing grapes.

Question 2

What are the stages of factors that affect the price of a bottle of wine, from vineyard to POS ?

Answer 2

Factors affecting the price of a bottle of wine :

• Grape growing costs
• Winemaking costs
• Transportation costs
• Importation costs
• Sales costs
• Marketing costs
• Taxes
• Currency fluctuation

Question 3

What does the price of land reflect, in terms of its characteristics ?

Answer 3

The price of a land reflects :

• The potential to produce high-quality fruit.
• The name/specificity of the appellation itself (e.g. Bordeaux AOP vs Pauillac AOP)
• The scarcity of the land

Question 4

What are the initial costs associated with Vineyard Establishment?

How can these costs vary?

2 eg.s?

Answer 4

Initial costs relate to buying or renting the vineyard land.

Price of land varies wildly from one site to another, even within the same region.

e.g. California; land prices in Napa Valley can be 10X higher than in the Central Valley.

Bordeaux; land prices in the most prestigious Médoc AOPs can be 100X higher than generic Bordeaux AOPs.

Question 5

How can a vineyard site’s reputation affect land prices?

Answer 5

Good reputation => More demand => Higher wine prices => Higher land price

e.g. California; Napa Valley (more $$$) more known for producing grapes from which premium-super premium wines are made vs Central Valley (less $$$) more associated with bulk wine.

Question 6

Using Champagne as an example, explain how scarcity of land can affect its price ?

Answer 6

Scarcity of land :

• Land in prestigious appellations, e.g. Champagne, rarely comes on the market.
• When it does = sold to the highest bidder.
• Land is finite : GI laws limit the geographic area in which wine can be produced under the Champagne AOP.

Question 7

What are the costs associated with establishing a new vineyards ?

Answer 7

Vineyard establishment costs :

• Surveying the land
• Site clearance
• Building access roads
• Buying and planting vines
• Buying trellising materials
• Installing a drainage system
• Installing an irrigation system
• Protection against weather hazards
• Protection from animal pests
• Buying/renting machinery and equipment

Question 8

What vineyard establishment costs are involved with Surveying Land?

Answer 8

Checking suitability for viticulture and appropriate grape varietal choices (satellite imaging and soil samples may be involved).

Question 9

What vineyard establishment costs are involved with Site Clearance?

Answer 9

Removing vegetation, large rocks, etc…

Question 10

What vineyard establishment costs are involved with Drainage Capabilities?

Answer 10

Installing deep drainage channels and pipework.

Question 11

What vineyard establishment costs are involved with establishing an Irrigation System?

Answer 11

Irrigation System :

• Buying reservoirs, pipes, pumps, sprinkler, dripper systems
• Drilling boreholes, laying pipes, installing pumps for underground water

Question 12

What vineyard establishment costs are involved with Weather Hazards?

Answer 12

Establishing windbreaks, anti-hail protective mesh, frost protection (sprinklers, smudge pots, wind machines).

Question 13

What vineyard establishment costs are involved with Animal/Pest/Fungus Prevention?

Answer 13

Pest Prevention :

• Animals : High fences, electric fences, netting
• Pests : Pesticides
• Fungus : Fungicides

Question 14

What vineyard establishment costs are involved with buying Machinery and Equipment?

Answer 14

Machinery and Equipment

• Tractors, spraying equipment, harvesting machines (plus garages/sheds for them).
• Rented by smaller producers who cannot justify the expense, especially if it’s only used once a year.

Question 15

What are Capital Costs ?

Where can the funding come from ?

Answer 15

Capital costs are those incurred in first establishing a business.

Funding :

• Personal wealth
• Loans (interest and repayments must be factored into LT biz plan)
• Investors (Which may want some form of managing involvement / profits)
• Some countries offer tax incentive or lump sum contributions to encourage the establishment of vineyards.

Question 16

Identify the types of costs associated with Vineyard Management (5):

Answer 16

Vineyard managment costs :

• Labor
• Machinery and Equipment running costs
• Vineyard Treatments
• Water
• Electricity

Question 17

Factors that affect Vineyard Management costs associated with Labor?

Answer 17

Labros costs factors :

• Depends on size/topographical features, e.g. much higher in steep Mosel Valley (hand-harvesting) vs flat Central Valley of Cali.
• Viticultural choices : Organic / Biodynamic are more expensive due to additional procedures which must be carried out.
• The country general labor cost : If labor costs are low and plentiful (e.g. Chile), less incentive to invest in equipment vs labor costs are high and scarce (e.g. Coonawarra), machinery is better option.

Question 18

How do labor needs / costs in the vineyard vary at different times of year ?

Answer 18

During harvest :

• If by hand, producer will hire a team of pickers, can be unskilled as harvesting procedure can be quickly taught.
• If machinery is used, number of staff can be reduced, but staff must be trained to operate equipment.
• Labor is cheap, but if scarce, workers can choose to work for highest bidder.

The rest of the year :

• Smaller staff of higher-paid, skilled workers working under a vineyard manager.

Question 19

What Vineyard Management costs are associated with Machinery / Equipment?

Answer 19

• Machinery Fuel
• Machinery Maintenance
• Vineyard materials (replacement vines / trellising).

Question 20

What Vineyard Management costs are associated with Vineyard Treatments (4)?

Answer 20

Conventional :

• Herbicides, pesticides, fungicides.
• Usage can be reduced using integrated pest management.

Organic / Biodynamic :

• Smaller amounts of traditional treatments (sulfur / Bordeaux mixture)

Question 21

What Vineyard Management costs are associated with Water Usage?

Answer 21

Irrigation : payment to authorities for right to extract water from river / purchased from elsewhere.

In dry years, price of water can rise, making irrigation too $$ and grape growing unprofitable.

Question 22

What Vineyard Management costs are associated with Electricity Usage?

Answer 22

Irrigation systems, bird scanners, frost protection equipment.

Question 23

What are the categories of Winemaking Costs?

Answer 23

Winemaking costs :

• Winery Establishment

Winemaking costs:

• Grapegrowing costs or the cost of bought-in fruit
• Labor
• Machinery / Equipment running costs
• Winery Materials
• Water
• Electricity
• Maturation
• Packaging

Question 24

What Winemaking Costs are associated with Winery Establishment?

Answer 24

Winery Establishment

• Purchase land to build the winery.
• Buying the equipment : Presses, tanks, pipes, pumps, refrigeration, bottling line

Question 25

What Winemaking Costs are associated with Labor?

Answer 25

• Usually a small number of skilled, full-time staff.
• Some casual labor may be needed during harvest time for unloading crates / moving equipment.

Question 26

What Winemaking Costs are associated with Winery Materials?

Answer 26

• Sugar (for enrichment)
• Deacidification agents (e.g. calcium carbonate), acid for acidification (tartaric acid),
• Cultured yeasts
• CO2, inert gases
• Fining / filtering agents.

Question 27

What Winemaking Costs are associated with Brought-in Fruit?

Answer 27

• Costs of buying the grapes
• Vary significantly according to the quality of the grapes, the grape variety and the vintage
• If a winery has to meet a low price-point, it could blend cheaper varieties (e.g. Airén, Ugni Blanc, Colombard or Semillon) with a more expensive variety (e.g. Chardonnay) to reduce the production costs.

Question 28

What Winemaking Costs are associated with Water Usage?

What can be done in order to conserve water usage?

Answer 28

• Mainly for cleaning (large volumes of water needed)
• If water is expensive/scarce, winery may invest in water treatment plants in order to re-use as much water as possible.

Question 29

What Winemaking Costs are associated with Electricity Usage?

What can be done in order to conserve electricity usage?

Answer 29

• significant amounts of electricity are needed for refrigeration, ventilation, presses, pumps, lighting.
• to save on these costs, some estates generate their own electricity (e.g. with solar panels).

Question 30

What Winemaking Costs are associated with Maturation?

Answer 30

Costs of maturation

• Storage if matured at the estate
• Vessels (new oak can be expensive, oak alternatives e.g. staves / chips can save significantly)
• Labor needed to monitor maturation.

Question 31

How can appellation laws regarding maturation affect a winery’s cash flow (3)?

Answer 31

• A large amount of money can be tied up in maturing stock.
• Though most wine is released 1-2 years after harvest, some appellation laws require greater aging requirements.
  e. g. Brunello di Montalcino DOCG = 5 years aging total (2 in oak).

Question 32

What Winemaking Costs are associated with Packaging?

Answer 32

Packaging associated costs :

• Bottling line purchase : might be more cost-effective to outsource bottling, as it is usually only used once a year.
• Materials : bottles, closures, labels, cartons, pallets
  
  • Heavy / unusually shaped bottles, elaborate labels (embossed/textured paper) costs more.
• Labor also required to run bottling line, package wine, design labels (and even bottles)

Question 33

What are the 4 ways of transporting wine around the world (in order from most to least expensive)?

Answer 33

Air

Road

Rail

Sea (aka ‘Deep-Sea’)

Question 34

In what form is the most common way transport wine?

Answer 34

Bottle => Boxes => Crates => Pallets

Question 35

What are the risks involved with long-distance transportation of wine?

What do most wineries do to combat these risks ?

Answer 35

Risks :

• Broken bottles
• Spoiled wine due to fluctuating temperatures, direct sunlight, excessive vibrations.

Wineries will use “Freight Forwarders” to combat these risks :

• Specialized in safely transporting wine, e.g. JF Hillebrand.
• Using highly-specialized temp-controlled shipping containers in order to limit risk of loss or damage.
• Insurance against broken bottles or spoiled wine.
• More expensive than general multinational logistics companies.

Question 36

What costs are associated with transporting wine by AIR?

When is this method of transportation used ?

Answer 36

Costs dependent on weight. Heavier = more fuel = more expensive

Very expensive so only used in special circumstances :

• Samples for competitions, trade/consumer fair
• Very high value wines
• Where deadlines are important, e.g. Beaujolais Nouveau for Japanese market.

Question 37

What costs are associated with transporting wine by ROAD?

When is this method of transportation used ?

Answer 37

Road transportation :

• Efficient for short distances (e.g. Epernay - Brussels) = efficient
• Too expensive for long distances (e.g. Mendoza - NY)
• For short distances across water (e.g. English Channel or irish Sea), truck can easily move on and off ferry = quickest and cheapest way of moving goods through a port.

Question 38

What costs are associated with transporting wine by RAIL?

When is this method of transportation used ?

Answer 38

Rail transportation :

• Cost vary due to length of journey + route + method of loading goods.
• Individual pallets : freight costs would be too high.
• Containerization : the goods are loaded into a standard container which is lifted onto the back of a truck and then onto the rail wagon

Question 39

What costs are associated with transporting wine by SEA?

When is this method of transportation used ?

Answer 39

Sea transportation :

• Cheapest method for long distances, e.g. from USA, S. America, Australasia => EU.
• Containerization is essential.
• Downside is slow, e.g. Australia - UK = ~40 days, so timing of pre-ordering must be considered.

Question 40

How has the volume of wine transported in bulk changed in the past decade ?

What are the 2 methods of transporting wine in bulk ?

Answer 40

Bulk wine shipping

• Large increase in the past decade
• Still favored for cheaper wine (In 2019 : 34% in volume but only 8% in value)
• Increasing interest in transporting more expensive wines in bulk too.

Two methods :

• Flexitanks (Flexible - Plastic)
• ISO tanks (Non Flexible - Stainless Steel)

Question 41

What are the PROS of transporting wine in BULK ?

Answer 41

PROS of transporting wine in BULK :

• Much lighter to transport than in bottles
• Much more efficient : A standard shipping container can hold around 10,000 litres of bottled wine, whereas the largest flexitanks can carry up to 24,000 litres of wine in bulk and ISO tanks can hold up to 26,000 litres of wine in bulk.
• Significantly reduces fuel used = cheaper and more environmentally friendly.

Question 42

What are the CONS of transporting wine in BULK ?

Answer 42

CONS of transporting wine in BULK :

• Only suitable for moving large volumes of the same wine, i.e. if vol. is less than 15K cases = no cost advantage to bulk transport.
• Suitable for supermarkets / major brands, but not smaller-production wines.

Question 43

Why is it essential to correctly insured wine transporation ?

Who usually pays for it ?

What can a producer do to avoir dealing with transportation ?

Answer 43

• It is essential that wine is correctly insured throughout its journey, in case it is lost, damaged or spoiled.
• It is usually the party sending the goods that will take the insurance:
  
  • The winery will be responsible for ensuring the wine makes it safely to its distributor.
  • The distributor will then be responsible for getting the wine safely to retailers.
• Using specialist wine freight forwarders (e.g. JF Hillebrand) lessens these risks + usually offer insurance as part of service.

Question 44

What are the categories of costs associated with IMPORTATION (3)?

Answer 44

• Custom duties and taxes.
• Labelling laws (multiple labels needed for different markets)
• Distributor costs

Question 45

How do labelling laws affect importing costs ?

Answer 45

Different territories have different labelling restrictions. Therefore, if the wine is to be sold in multiple markets, multiple labels will need to be made = more $$$

Examples :

• EU : ABV must show the nearest whole or half unit
• US : the ABV permits a 1.5% variance
• US : wine will have to be relabeled when going into the EU market.
• US : requires a health warning on labels

Question 46

What are the PROS of a producer using a distributor ?

Answer 46

• saves significant amounts of time needed to learn about the target/foreign market.
• distributor already has knowledge, contacts and established network of potential retailers / restaurants to sell to.

Question 47

What are the CONS of a producer using a distributor ?

Answer 47

• distributors charge a fee which adds to final cost of wine.
• delivery charges may be levied on retailers/restaurants.

Question 48

What is a distributor’s MARGIN and how is this calculated ?

Answer 48

The MARGIN is the percentage of the REVENUE from of a wine that is kept as profit by the distributor.

FEE (added onto COST)

(divided by)

REVENUE

e.g. if COST of wine to distributor is $10, and they add a $1 fee, then margin is $1 / ($10+$1) = 9.09% margin.

Question 49

What is the normal range for a wine distributor’s margin?

What factors affect the margin?

How can a retailer/producer avoid having distributor margins added to their costs?

Answer 49

• differs from distributor to distributor, markt to market, but typically 5-25% margin.
• generally, selling to hospitality = higher costs and larger staff = higher margins vs retail sector.
• margins can be avoided if retailer buys directly from producer, but not always legal and many find having a reliable distributor is worth paying for.

Question 50

What are the different categories of Sales Costs?

Answer 50

Sales costs :

• Property Costs
• Equipment and Materials
• Labor
• Delivery Costs
• Storage Costs
• Margin at POS

Question 51

What costs are involved with Property Costs?

What are the two main options?

Answer 51

Property Costs :

• Premises, esp. restaurants/bars tend to be in prime location which are most expensive
• Decorating / furnishing to suit image
• Running costs, maintenance, security, water, energy, insurance
• Online only retailers: costs be less expensive, away from city centers.

Two options :

• Lease = cheaper initially, may be forced to move out, more flexible.
• Buying = high capital costs, can be funded via loan or mortgage.

Question 52

What retail costs are involved with Labor?

Answer 52

Labors costs :

• Cost varies according to skill level and type of outlet
• Supermarket (low skilled staff, low labor costs) vs specialized wine retailers (highly knowledgeable staff that can engage w/ customers and advise them)
• Bars & restaurant labor costs = higher than shops (wait staff, cleaning staff).
• Training staff is a significant business cost

Question 53

In terms of Labor Costs, how do different categories of restaurant compare with each other ?

Answer 53

Non-destination restaurants : Low labor costs, staff will not necessarily need to know much about wine.

Casual dining : Medium labord costs. More skilled and knowledgeable staff than NDR.

Fine Dining : High labord costs. Very high skilled staff. Head Sommelier selects wine list, offers detailed advice regarding wine selections to guests.

Question 54

How do different types of retail outlets incur different costs for Equipment and Materials?

Answer 54

Vary considerably between different types of retail outlet

• Specialist Winer Retailer : at the very minimum, a till system, a fridge (if chilled wine is to be sold), shelving, display cabinets, materials to enhance displays and cleaning equipment.
• Restaurant: will need much more, including kitchen and bar equipment, tableware and glasses. Food service profits can help cover costs.

Question 55

How do different types of retail outlets incur different costs for Storage?

Answer 55

Individual bars, restaurants and shops

• Will usually store their wine on the premises.
• They may invest in expensive wine fridges to keep the wines at a constant cellar temperature.
• In some cases, a lack of storage space means they have to keep the wine in external storage until it is needed, incurring additional costs for the storage space and transporting the wine to and from it

Larger chains (especially of supermarkets and shops)

• Have centralised warehouses where the wine is stored (often in a cheaper, easily accessible, out-of-town location) and then distributed to branches as and when needed

Question 56

What costs are incurred in terms of Delivery to the end consumer ?

What are some options available to retailers in terms of administering these fees ?

Answer 56

Delivery to consumer is one of the most expensive elements of the supply chain

• Heavy, fragile bottles / risk of breakage or spoilage in transit
• End consumer will be expected to pay for delivery, but some retailers wish to circumvent this.

Options :

• Fixed fees, knowing that it might cost retailer more to deliver wine, depending on size of order.
• Higher fees for delivery on specific days or at specific times.
• Free delivery for orders over certain $amount, therefore giving a discount w/out reducing price of wine.

Question 57

What costs are incurred due to Margin at POS (4)?

Answer 57

Retailers must make profit to be financially viable.

• Specialist Retailers= 30-50% margin.
• Bars & restaurants = closer to 66.6% i.e 3x cost.
• Profits are usually higher on wines available by the glass, as once opened risk of spoilage before the bottle has been emptied.

Question 58

What are the 3 categories of Marketing Costs?

Answer 58

Labor

Design and production of bottles and labels

Marketing Campaigns

Question 59

What kind of Labor costs are involved in Marketing?

Answer 59

• Larger producers = in-house marketing teams.
• Smaller producers = external marketing team which is paid for services.
• Produers may be members of industry association, e.g. consorzio in Italy, VDP in Germany, or trade body, e.g. Wines of Australia, Wines of S. Africa. These organisations will help with marketing but are member-funded, so $$$

Question 60

What kind of Marketing Campaign costs are involved with Marketing (5)?

Answer 60

Marketing Campaign Costs :

• Advertising and promotional materials
• Sending samples to tastings, competitions, retailers.
• Retailer price promotions.

Usually the producer that bears the cost of these

Many small producers are successful w/little marketing. Larger brands have large marketing budgets for ads/campaigns, the costs of which are reflected in the price of the wine.

Question 61

Explain the purpose of storing wine in a ‘bonded warehouse’, a practice that is often seen in the UK (3):

What is the purpose of this?

Answer 61

• In UK, excise duty is payable on imported wines unless it is stored in a ‘bonded’ warehouse.
• Importers/distributors can choose to pay duty on wines upon their entrance (storing them in their own facilities) or storing in the BW until someone wishes to buy.
• the purchaser will then cover the cost of taking the wine out of bond (duty).

PURPOSE: hiring space in BW costs $$$, but it means that retailers don’t need to use their own to pay duty, which can aid cashflow.

Question 62

What legal factors might influence a producer’s decision on whether or not to enter a market ?

Answer 62

As has already been seen, the cost of wine can be affected by various types of legislation including

• Taxes, duties, subsidies, minimum pricing
• Trade barriers : If import duty is too high, it might no be possible to sell the wine at a competitive price and simply choose to focus on other markets
• Labelling laws : Onerous labelling laws may put off new entrants to a particular market.

Question 63

Explain how Fluctuations in Currency can affect the cost of wine :

Answer 63

The constant fluctuation of the exchange rate between currencies can affect the price of the wine considerably.

• If the exporting country’s currency gains value compared to that of the importing country => Importing will be more expensive and vice versa
• These small differences can become significant if the order is for a large number of bottles and can impact on the profits which the producer or the buyer might earn.

Question 64

What are the different methods that those in the wine industry can use to mitigate the effect of exchange rate fluctuations ?

Answer 64

Methods used to mitigate the effect of exchange rate fluctuations :

• Options.
• Price fixing in currency of importer at date of ordering.
• Buying currency to cover specific orders.
• Entering contract to fix ex. rate.
• Trading in USD/EUR
• Opening a foreign currency acct at local bank.
• Opening acct in overseas bank.

Question 65

How do OPTIONS help those in the wine industry mitigat the effects of currency fluctuations (7)?

Answer 65

• key strategy in “currency hedging”
• importer can take an option / reserve on a certain amt of wine @agreed price.
• producer sets aside agreed vol, importer will then decide if they want it or not.
• decision to take or not based on exchange rate, market conditions.
• risk for producer because may result in unsold stock, so higher price may be charged.
• however, it’s usually larger importers who have negotiating power to dictate such arrangements.
• Possible to take an option on a certain amount of currency at an agreed price, rather than stock - can be used to mitigate the effect of currency fluctuations.

Question 66

How does Fixing the price in currency of importer at date of ordering help those in the wine industry mitigate the effects of currency fluctuations (4)?

Answer 66

• shifts currency risk to producer from retailer, so producer may charge a premium.
• Usually, prices are set in currency of producer = certainty of how much $ they will receive f
• Retailers prefer this method, so they can work out retail price according to amount paid.
• not agreeing on price means subsequent changes in exchange rate cou result in paying higher (or lower) prices on delivery.

Question 67

How does buying currency to cover specific orders help the wine industry mitigate the effects of currency fluctuation (2)?

Answer 67

• only viable for larger companies which have the in-house skills necessary to manage currencies in this way.
• currency is purchased in order to cover wine purchase contracts; not considered speculation!

Question 68

How does entering a contract to fix the exchange rate help the wine industry mitigate the effects of currency fluctuation (2)?

Answer 68

• retailers which do a lot of business in a particular currency will enter into a formal contract w/bank or other supplier to purchase a given amt of currency at an agreed rate on a specified date.
• even though rate may fluctuate, gives retailer certainty of fixed rate, allows them to budget accordingly.

Question 69

How does trading in USD/EUR help the wine industry mitigate the effects of currency fluctuation (2)?

Answer 69

• producers in countries w/unstable currencies prefer to trade in more stable currencies, e.g. USD/EUR
• if producers also purchase vineyard/winery materials in USD or EUR, minimizes the number of exchanges, less vulnerable to fluctuations in domestic currency.

Question 70

How does opening a foreign currency acct in a local bank help the wine industry mitigate the effects of currency fluctuation (4)?

Answer 70

• buyer can open a foreign currency acct in local bank, therefore paying for goods directly in seller’s currency.
• foreign $ still needs to be purchase, might not be an effecient usage of funds to have large amounts of $ tied up in foreign $.
• more useful when many processes are being conducted using the same currency, e.g. equipment bought from Italy, manufacture in UK, selling in Germany = all EUR transactions.
• less useful when goods are bought in one $ and sold in another.

Question 71

How does opening an acct in an overseas bank help the wine industry mitigate the effects of currency fluctuation (2)?

Answer 71

• all the same pros/cons as opening foreign $ acct in local bank.

PLUS: banking regulations vary from country to country; time must be taken to ensure that rules are thoroughly understood.