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WSET Level 4 D2 - Wine Business - Update 2023 > 2. Factors that Affect the Price of a Bottle of Wine > Flashcards

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

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1
Q

What are the 2 categories of Grape Growing Costs?

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

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

A

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
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3
Q

What does the price of land reflect?

A

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
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4
Q

What are the initial costs associated with Vineyard Establishment?

How can these costs vary?

2 eg.s?

A
  • 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.
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5
Q

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

A

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.

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6
Q

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

A

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.
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7
Q

What are the costs associated with establishing a new vineyards ?

A

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
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8
Q

What vineyard establishment costs are involved with Surveying Land?

A

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

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9
Q

What vineyard establishment costs are involved with Site Clearance?

A

Removing vegetation, large rocks, etc…

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10
Q

What vineyard establishment costs are involved with Drainage Capabilities?

A

Drainage system:

Installing deep drainage channels and pipework.

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11
Q

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

A

Irrigation System :

  • Buying reservoirs, pipes, pumps, sprinklers, dripper systems
  • Drilling boreholes, laying pipes, installing pumps for underground water
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12
Q

What vineyard establishment costs are involved with Weather Hazards?

A

Protection against weather hazards:

Establishing

  • windbreaks,
  • anti-hail protective mesh,
  • frost protection (sprinklers, smudge pots, wind machines).
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13
Q

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

A

Animail / Pest / Fungus Prevention :

  • Animals : High fences, electric fences, netting
  • Pests : Pesticides
  • Fungus : Fungicides
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14
Q

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

A

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.
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15
Q

What are Capital Costs ?

Where can the funding come from ?

A

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.
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16
Q

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

A

Vineyard managment costs :

  • Labor
  • Machinery and Equipment running costs
  • Vineyard Treatments
  • Water
  • Electricity
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17
Q

Factors that affect Vineyard Management costs associated with Labor?

A

Labor cost 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 local labor costs : If labor costs are low and plentiful (e.g. Chile), less incentive to invest in equipment vs where labor costs are high and scarce (e.g. Coonawarra), machinery is better option.
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18
Q

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

A

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.
  • If labor is 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.
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19
Q

What Vineyard Management costs are associated with Machinery / Equipment?

A
  • Machinery Fuel
  • Machinery Maintenance
  • Vineyard materials (replacement vines / trellising).
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20
Q

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

A

Conventional :

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

Organic / Biodynamic :

  • Smaller amounts of traditional treatments (sulfur / Bordeaux mixture)
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21
Q

What Vineyard Management costs are associated with Water Usage?

A

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 expensive and grape growing unprofitable.

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22
Q

What Vineyard Management costs are associated with Electricity Usage?

A

Electricity is used for

  • Irrigation systems,
  • bird scanners,
  • frost protection equipment.
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23
Q

What are the categories of Winemaking Costs?

A

Winemaking costs :

  • Winery Establishment
  • Labor
  • Machinery / Equipment running costs
  • Winery Materials
  • Bought-in Fruit
  • Water
  • Electricity
  • Maturation
  • Packaging
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24
Q

What Winemaking Costs are associated with Winery Establishment?

A

Winery Establishment costs:

  • Purchase land to build the winery.
  • Buying the equipment : Presses, tanks, pipes, pumps, refrigeration, bottling line
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25
Q

What Winemaking Costs are associated with Labor?

A
  • Usually a small number of skilled, full-time staff.
  • Some casual labor may be needed during harvest time for unloading crates / moving equipment.
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26
Q

What Winemaking Costs are associated with Winery Materials?

A
  • Sugar (for enrichment)
  • Deacidification agents (e.g. calcium carbonate)
  • Acid for acidification (tartaric acid),
  • Cultured yeasts
  • CO2, inert gases
  • Fining / filtering agents.
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27
Q

What Winemaking Costs are associated with Brought-in Fruit?

A
  • 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.
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28
Q

What Winemaking Costs are associated with Water Usage?

What can be done in order to conserve water usage?

A
  • 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.
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29
Q

What Winemaking Costs are associated with Electricity Usage?

What can be done in order to conserve electricity usage?

A
  • 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).
30
Q

What Winemaking Costs are associated with Maturation?

A

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.
31
Q

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

A
  • 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 longer ageing.
  • e.g. Brunello di Montalcino DOCG: 5 years ageing in total (2 in oak).
32
Q

What Winemaking Costs are associated with Packaging?

A

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)
33
Q

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

A
  • Air
  • Road
  • Rail
  • Sea (aka ‘Deep-Sea’)
34
Q

What is the most common way to transport wine?

A

Bottle => Box or Crate => Pallet

35
Q

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

What do most wineries do to combat these risks ?

A

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.
36
Q

What costs are associated with transporting wine by AIR?

When is this method of transportation used ?

A

Air transportation:

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

Very expensive so only used in special circumstances :

  • Samples for competitions, trade/consumer fairs
  • Very high value wines
  • Where deadlines are important, e.g. Beaujolais Nouveau for Japanese market.
37
Q

What costs are associated with transporting wine by ROAD?

When is this method of transportation used ?

A

Road transportation :

  • Efficient for short distances (e.g. Epernay - Brussels)
  • 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.
38
Q

What costs are associated with transporting wine by RAIL?

When is this method of transportation used ?

A

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
39
Q

What costs are associated with transporting wine by SEA?

When is this method of transportation used ?

A

Sea transportation :

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

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

What are the 2 methods of transporting wine in bulk ?

A

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)
41
Q

What are the PROS of transporting wine in BULK ?

A

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.
42
Q

What are the CONS of transporting wine in BULK ?

A

CONS of transporting wine in BULK

  • Only suitable for moving large volumes of the same wine, i.e. at least 15,000 liters of same wine
  • Suitable for supermarkets / major brands, but not smaller-production wines.
43
Q

Why is it essential to correctly insure wine transporation ?

Who usually pays for it ?

What can a producer do to avoid dealing with transportation ?

A
  • 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
    • they usually offer insurance as part of their services.
44
Q

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

A

IMPORTATION COSTS:

  • Custom duties and taxes.
  • Labelling laws (multiple labels needed for different markets)
  • Distributor costs
45
Q

How do labeling laws affect importing costs ?

A

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 expensive

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
46
Q

What are the PROS of a producer using a distributor ?

A

PROS of using a distributor:

  • 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.
47
Q

What are the CONS of a producer using a distributor ?

A

CONS of using a distributor:

  • distributors charge a fee which adds to final cost of wine.
  • delivery charges may be levied on retailers/restaurants.
48
Q

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

A

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.

49
Q

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?

A
  • margin 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.
50
Q

What are the different categories of Sales Costs?

A

Sales costs :

  • Property Costs
  • Equipment and Materials
  • Labor
  • Delivery Costs
  • Storage Costs
  • Margin at POS
51
Q

What costs are involved with Property Costs?

What are the two main options?

A

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.
52
Q

What retail costs are involved with Labor?

A

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
53
Q

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

A
  • Non-destination restaurants : Low labor costs, staff will not necessarily need to know much about wine.
  • Casual dining : Medium labor costs. More skilled and knowledgeable staff than NDR.
  • Fine Dining : High labor costs. Very high skilled staff. Head Sommelier selects wine list, offers detailed advice regarding wine selections to guests.
54
Q

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

A

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.
55
Q

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

A

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
56
Q

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 ?

A

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 a certain amount, therefore giving a discount w/out reducing price of wine.
57
Q

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

A

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.
58
Q

What are the 3 categories of Marketing Costs?

A

Marketing costs:

  • Labor
  • Design and production of bottles and labels
  • Marketing Campaigns
59
Q

What kind of Labor costs are involved in Marketing?

A

Labor costs in Marketing:

  • Larger producers = in-house marketing teams.
  • Smaller producers = external marketing team which is paid for services.
  • Producers may be members of industry associations, e.g.
    • Consorzio in Italy,
    • VDP in Germany, or
    • trade body, e.g. Wines of Australia, Wines of South Africa

These organisations will help with marketing but are member-funded

60
Q

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

A

Marketing Campaign Costs :

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

Usually the producer 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.
61
Q

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?

A
  • 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 bonded warehouse until someone wishes to buy.
  • the purchaser will then cover the cost of taking the wine out of bond (duty).
  • PURPOSE: hiring space in bonded warehouse is expensive, but it means that retailers don’t need to pay duty before the wine is sold, which can aid cashflow.
62
Q

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

A

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
  • Labeling laws : Onerous labeling laws may put off new entrants to a particular market.
63
Q

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

A

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.
64
Q

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

A

Methods used to mitigate the effect of exchange rate fluctuations :

  • Buying currency or wine options.
  • Price fixing in currency of importer at date of ordering.
  • Buying currency to cover specific orders.
  • Entering contract to fix exchange rate.
  • Trading in USD/EUR
  • Opening a foreign currency account at local bank or overseas bank.
65
Q

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

A

Wine options:

  • key strategy in “currency hedging”
  • retailer can reserve a certain amount of wine @agreed price.
  • producer sets aside agreed volume, 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.
66
Q

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)?

A
  • shifts currency risk to producer from retailer, so producer may charge a premium.
  • Usually, prices are set in currency of producer = gives them certainty of how much they will receive
  • 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 could result in paying higher (or lower) prices on delivery.
67
Q

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

A
  • 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!
68
Q

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

A
  • 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 amount 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.
69
Q

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

A
  • 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, it minimizes the number of currency exchange, less vulnerable to fluctuations in domestic currency.
70
Q

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

A
  • buyer can open a foreign currency account in local bank, therefore paying for goods directly in seller’s currency.
  • foreign currency still needs to be purchased, might not be an effecient usage of funds to have large amounts of money tied up in foreign currency.
  • more useful when many processes are being conducted using the same currency, e.g. equipment bought from Italy, manufacturing in France, selling in Germany = all EUR transactions.
  • less useful when goods are bought in one currency and sold in another.
71
Q

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

A
  • 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.

WSET Level 4 D2 - Wine Business - Update 2023 (19 decks)

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