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 managment and upkeep of a 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 (6)?

What are 2 other factors that affect the price?

Answer 2

GRAPE GROWING COSTS

WINEMAKING COSTS

TRANSPORTATION COSTS

IMPORTATION COSTS

SALES COSTS

MARKETING COSTS

OTHERS: Legislation (taxes, duty, tarrifs, etc…) and Currency Fluctuations

Question 3

What does the price of land reflect, in terms of its characteristics (3)?

Answer 3

• 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 often the first 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

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 (3)?

Answer 6

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

Question 7

What costs need to be considered before a vineyard becomes operational?

SCAB SCWIMP

Answer 7

SCAB SCWIMP

1. Surveying Land
2. Site Clearace
3. Access road construction (into vineyard/between plots)
4. Buying / Planting Vines
5. Buying Stakes / Wires for trellising
6. Drainage Channel installation
7. Weather hazard protection
8. Irrigation systems
9. Machinery / Equipment
10. Pest Management

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

If site is badly drained = installing deep drainage channels / pipework.

Question 11

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

Answer 11

Drilling boreholes, resevoirs, laying pipes to transport water, installing pumps for underground water, sprinkler / dripper systems.

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 Pest Prevention?

Answer 13

High fences, electric fences, netting, pesticides.

Question 14

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

Answer 14

Tractors, spraying equipment, harvesting machines (plus garages/sheds for them). Machinery will be 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 does funding for these come from (4)?

Answer 15

Capital costs are those incurred in first establishing a business.

• can be from personal wealth
• can be in the form of loans (interest and repayments must be factored into LT biz plan)
• can be from 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

Labor

Machinery and Equipment running costs

Vineyard Treatments

Water

Electricity

Question 17

Factors that affect Vineyard Management costs associated with Labor (3)?

Answer 17

• labor costs vary greatly depending on size/topographical features, e.g. much higher in steep Mosel Valley (hand-harvesting) vs flat Central Valley of Cali.
• Organic / Biodynamic viticulture more $$ due to additional procedures which must be carried out.
• If labor $ are low and plentiful (e.g. Chile), less incentive to invest in equipment vs labor $ 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 (4)?

Answer 18

HARVEST: If by hand, producer will hire a team of pickers, can be unskilled as harvesting procedure can be quickly taught.

• labor is cheap, but if scarce, workers can choose to work for highest bidder.

REST OF YEAR: smaller staff of higher-paid, skilled workers working under a vineyard manager.

• if machinery is used, number of staff can be reduced, but staff must be trained to operate equipment.

Question 19

What Vineyard Management costs are associated with Machinery / Equipment?

Answer 19

Fuel, maintenance, vineyard materials (replacement vines / trellsing).

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.
• weather must be monitored, whether by paying for access to gov’t run station or constructing one’s own.

ORGANIC / BIODYNAMIC:

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

Question 21

What Vineyard Management costs are associated with Water Usage (2)?

Answer 21

• if irrigated, 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 (9)?

Answer 23

Winery Establishment

Labor

Machinery / Equipment running costs

Winery Materials

Bought-in Fruit

Water

Electricity

Maturation

Packaging

Question 24

What Winemaking Costs are associated with Winery Establishment (2)?

Where do the funds for these costs come from?

Answer 24

• purchase land to build the winery.
• fitting with equipment

Presses, tanks, pipes, pumps, refrigeration, bottling line

Funds can come from owner, bank, or investors

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 (3)?

Answer 27

• buying grapes = significant cost.
• this varies (quality of grapes, variety, vintage).
• for lower $$, cheaper varieties can be blended (Airén, Ugni Blanc, Colombard, Sémillon) with a more $$ variety e.g. Chardonnay.

Question 28

What Winemaking Costs are associated with Water Usage?

What can be done in order to conserve water usage?

Answer 28

• large volumes of water used for cleaning.
• 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 (5)?

Answer 30

• if matured at the estate, storage space needed for wine.
• vessels can also be expensive (new oak from top coopers = $$$, esp if purchased on an annual basis).
• second-passage barrels = much cheaper, but less flavor.
• oak alternatives e.g. staves / chips can save significantly.
• labor also needed to montor 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 (4)?

Answer 32

• if bottling their own wine, wineries must purchase materials such as bottles, closures, labels, cartons, pallets.
• heavy / unusually shaped bottles, elaborate labels (embossed/textured paper) = more $$$
• bottling line must also be purchased, but might be ore cost-effective to outsource bottling, as it is usually only used once a year.
• 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 (2)?

What costs are involved?

Answer 35

RISKS: Broken bottles, spoiled wine due to fluctuating temperatures, direct sunlight, excessive vibrations.

Wineries will use “Freight Forwarders” to take on transportation of wine, usually favoring those that specialize in safely transporting wine, e.g. JF Hillebrand.

These companies will take steps such as using highly-specialized temp-controlled shipping containers in order to limit risk of loss or damage.

As a result, these companies will usually charge more than general multinational logistics companies.

Question 36

What costs are associated with transporting wine by AIR (4)?

Answer 36

• dependent on weight, heavier = more fuel
• Method only used in special circumstances because $$$:

competitions, samples for trade/ consumer fair, very high value wines

-also where deadlines are important, e.g. Beaujolais Nouveau for Japanese market.

Question 37

What costs are associated with transporting wine by ROAD (4)?

Answer 37

• most travel short distances (e.g. Epernay - Brussels) = efficient
• long distances (e.g. Mendoza - NY) = excessively expensive

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.

• Costs of overall journey may outweigh above benefit.

Question 38

What costs are associated with transporting wine by RAIL (3)?

Answer 38

cost vary due to length of journey + route + method of loading goods.

Individual pallets = freight costs too high.

CONTAINERIZATION = loading goods into single container then onto rail wagon = cost minimized.

Question 39

What costs are associated with transporting wine by SEA (3)?

Answer 39

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 (3)?

What are the 2 methods of transporting wine in bulk?

Answer 40

Large increase in bulk wine shipping:

in 2016, 38% of world’s wine exported in bulk; 58% of German, 35% of UK, 24% of US still wine imports.

• at first, favored for cheaper wines (only 8% of wine by value), now more expensive wines being shipped in bulk too.
• Plastic flexitanks (more common) or non-flesible ISO stainless steel tanks.

Question 41

What are the PROS of transporting wine in BULK (3)?

Answer 41

• much lighter to transport than in bottles.
• much more efficient (9-10K L in bottle vs 24K (flexitank)-26K (ISO tank) L in bulk).
• significantly reduces fuel used = cheaper and more environmentally friendly.

Question 42

What are the CONS of transporting wine in BULK (2)?

Answer 42

• 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

What transportation costs are associated with Insurance (6)?

Answer 43

Wine must be correctly insured throughout journey in case it is lost, damaged, spoiled.

Very safe but accidents happen, e.g. 2013 container ship MOL Comfort sank off Mumbai, losing 2 containers of wine from NZ’s St. Clair winery bound for Sweden.

The party taking out the insurance should be the one which assumes the risk for loss or damage = Normally the sender of goods

• winery will be responsible for ensuring wine makes it to distributor
• distributor takes responsibility to ensure wine makes it 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 (5)?

Answer 45

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

• 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 (2)?

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 (2)?

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 (3)?

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?

DiMPLES

Answer 50

Delivery Costs

Margin at POS

Property Costs

Labor

Equipment and Materials

Storage Costs

Question 51

What costs are involved with Property Costs (4)?

2 main options?

Answer 51

2 options:

Lease = cheaper initially, may have to move out vs Buying = high capital costs, can be funded via loan or mortgage.

• 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.

Question 52

What retail costs are involved with Labor (5)?

Answer 52

• training staff is a significant business cost
• Cost varies according to skill level and type of outlet
• Some paid minimum wage, higher level of skill & expertise = higher wage.
• 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).

Question 53

In terms of Labor Costs, how do different categories of restaurant compare with each other (3)?

Answer 53

• “Non-destination” restaurants (lower wages, less specialized knowledge of wine)

vs “casual dining” (more skill, higher wages)

vs “Fine Dining” (high knowledge of wine of all staff expected, Head Sommelier selects wine list, offers detailed advice regarding wine selections to guests, prestigious positions / impressive salaries).

Question 54

How do different types of retail outlets incur different costs for Equipment and Materials (3)?

Answer 54

Specialist Winer Retailer: MINIMUM = till system, fridge, shelving, display cabinets, Material to enhance displays and cleaning equipment

Restaurant: much more equipment = kitchen/ bar equipment, tableware, glasses, wine preservation systems for wines BTG

Food service profits can help cover costs.

Question 55

How do different types of retail outlets incur different costs for Storage (3)?

Answer 55

Individual bars/restaurants/shops = On premise storage (expensive cellar-temp wine fridges).

• sometimes lack of storage on prem necessitates external storage = additional costs for space, transportation to/from location.
• larger chains (supermarkets, shops) will have centralized warehouse (usually cheaper, easily accessible, OOT location).

Question 56

What costs are incurred in terms of Delivery to the end consumer (3)?

What are some options available to retailers in terms of administering these fees (3)?

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

Bottle/Label Design/Production: In-house or External.

Marketing Campaigns

Question 59

What kind of Labor costs are involved in Marketing (3)?

Answer 59

Larger producers = in-house marketing teams. Smaller = 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 orgs will help with marketing but are member-funded, so $$$

Question 60

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

Answer 60

• paid marketing/promotions.
• sending samples to tastings, competitions, retailers.
• retailer price promotions.
• all 3 costs are borne by the producer.
• 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 (3)?

Answer 62

• if import duty is too $$$ , may not be able to sell wine at competitive price and choose other countries/markets.
  e. g. very few mid-priced US wines in the EU market due to trade tarrifs: cannot compete with wines from Chile/S. Africa, which benefit from trade agreements.
• onerous labeling laws also troublesome.

Question 63

Explain how Fluctuations in Currency can affect the cost of wine (5):

Answer 63

• Basically, the stronger the currency of the EXPORTING country, the more expensive the wine will be for the IMPORTING country.
  e. g. if the Australian dollar gains in strength over the EUR, a bottle of wine will become more $$$

if someone from the EU orders a bottle of wine from Australia, the price may change due to currency fluctuations by the time it reaches its destination.

If paid in advance, importer knows the price they will be paying. If paid on delivery, price may go up or down depending on currency strength.

These small differences can become very significant if a large number of bottles is being ordered.

Question 64

What are the different methods that those in the wine industry can use to mitigate the effect of exchange rate fluctuations (7)?

Answer 64

• 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”
• retailer can reserve a certain amt of wine @agreed price.
• producer sets aside agreed vol, retailer 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 retailers who have negotiating power to dictate such arrangements.
• options can include an agreed currency with the amount of wine at an agreed price which 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.