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WSET D2 Wine Business > 3 > Flashcards

3 Flashcards

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1
Q

What are the contributing factors that are factored into the price of a bottle of wine? (outside supply and demand)

A

-impact of legislation on the cost of wine

-impact of fluctuations in currency on the cost of wine

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2
Q

The Impact of Legislation on the Cost of Wine

Cost is affect by types of legislations:

A

S M a L D o T T

Subsidies Duties

Minimum Pricing Taxes

Labeling law Trade barriers

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3
Q

The Impact of Legislation on the Cost of Wine

-describe the benefits of using a bonded warehouse?

A

-UK has excise duty payable upon entrance.

‘bonded warehouse’ helps to delay paying duty until customer orders wine. Take wine out of bond. Distributor pays for bond warehouse space, can help cashflow

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4
Q

The Impact of Legislation on the Cost of Wine

-what may factors into a producer’s decision to participate in a particular market

A
  • Producers cannot choose whether or not to comply with laws if they are participating in that market
  • Import duty is too high-not competitive price & go to different market
  • eg- few mid-priced US wines on sale in EU, tariffs whereas Chile and SA have trade agreements w/ EU
  • label laws may also affect entrants
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5
Q

The Impact of Fluctuations in Currency on the Cost of Wine

A

An agreement on when payment occurs can have significance on the final cost of wine.

Eg. EU buyer orders wine, payment due at order or payment due at delivery? Exchange rates may have changed during that time will affect cost.

The larger the order the more significant the profits earned (producer) or saved (customer)

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6
Q

The Impact of Fluctuations in Currency on the Cost of Wine -mitigation methods to a fluctuation exchange rate include?

A

F E B T O O L -Fixing price in the currency of the importer on date of ordering

  • Entering a contract to fix the exchange rate
  • Buying currency to cover specific order
  • Trading in USD/EUR -Options
  • open an account in an overseas bank
  • open a foreign currency account in a local bank
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7
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - options

A

Key strategy in hedging-retailer takes an ____/reserve for a volume of wine at an agreed $

  • producers agrees to a risk the retailer decide whether or not to take it based on the exchange rate at the agreed time
  • producer may wish to charge a premium (off set potential for unsold portion)
  • Retails who buy in large volumes have more negotiating power
  • Option may be triggered by agreed change price, rather than stock
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8
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - fixing price in the currency of the importer on date of ordering

A

This shift the currency risk to producer (may charge a premium for this / but producer know how much they will receive (prices in currency of producer)

  • Retailer prefer this b/c know how much they are paying and work out the retail based on that figure
  • if buyer choose not to fix the price when ordering, subsequent change in the exchange rate could mean they end up paying more /less for the wine than if they paid at delivery.
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9
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation- buying currency to cover specific order

A

-requires a proactive stance & only larger co are likely to have in-house skills necessary to manage currency or currencies in this way.

-Purchasing currency to cover wine purchase contract, is an important business activity -not considered speculation

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10
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - entering a contract to fix the exchange rate

A
  • Formal contract w/ bank or other supplier of foreign currency to purchase a given amount of currency at an agreed exchange on a specified date
  • retail buyer is legally committed to purchasing the currency purchase
  • exchange rate may go up/down
  • retailer has the assurance of a fixed exchange rate & budget accordingly
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11
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - trade in USD/ EUR

A

Many producers in countries w/ unstable currency prefer to trade in more stable US/ EU

  • attractive to retailer= greater certainty about price
  • producer -reduces # of times they have to exchange currency
  • less exposure to fluctuation in domestic currency
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12
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - opening a foreign currency account in a local bank

A

A buyer opens a foreign currency account in a local bank (where the buyer is)

  • payment can be made directly to the seller in seller’s own currency-at some point buyer will still need to buy foreign currency to keep in that account
  • suitable in the case of a manufacture who buys component parts in Italy, produces final product in US but sells in Germany. Trans in EU
  • unsuitable where good are bought in one currency and sold in another
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13
Q

The Impact of Fluctuations in Currency on the Cost of Wine

-mitigation - opening an account in an overseas bank

A

Opening an account in an overseas bank has all the disadvantages of opening a foreign currency account in a local bank but with an added cause for caution.

Banking regulations differ greatly in different countries and care must be taken to ensure that all the rules are thoroughly understood.

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14
Q

List type of producer engaged in the production of wine?

A

M E G G a V a C C C

Merchant Virtual Winemakers/ Wineries

Estate Co-Operatives

Growers Custom Crush Facilities

Grower-Producer Conglomerates

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15
Q

type of producer- Define an Estate

A

___ is a producer produces wine exclusively from their own vineyard -wholely owned or leased

  • retains control over the entire process from growing to producing wine
  • can choose style and ensure quality control at every stage
  • profits wholly belongs to _____
  • market and sell directly w/o intermediaries
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16
Q

type of producer- Estate producer marketing advantage?

A

-authenticity of the wine

-Knowing what part of the vineyard the grapes came form/

-how produced

-tell the whole story

17
Q

type of producer- Estate producer disadvantage

A

-respoinsible for all costs of managing the vineyard & equipment & running the winery

  • need hired help to manage all of this
  • may hire equipment but balance if that choice eats into profits
  • risk of difficult vintage – crop destroyed by frost/ hail
  • may only be possible to produce a small amount of wine at a higher price that consumers may or may not be willing to pay.
18
Q

type of producer- Comments on the size of an Estate producer?

A

-Vary largely in size from tiny small holdings to large plots

-larger vineyards tends to be more financially viable

-produce greater volumes with same equipment for different wines -easier to mechanize

  • small are still numerous in number
  • may have resulted from historical factors: French succession laws -or dictated by the geography of the region—hilly limits terrain
19
Q

type of producer- Define Growers

A

Choose not to produce own wine and sell fruit to winemakers or merchants.

  • attractive to small vineyards b/x cost of production is great and get paid when fruit is sold
  • focus then is on being the source of high-quality fruit for prized winemakers
20
Q

type of producer- Risks of being a Grower?

A

2 things that affect the achievable sale price of fruit

-vintage variation

-Fluctuation in supply and demand

General shortage push price up

  • bad year – less fruit generally push up price
  • when supply > demand too much competition = reduced price Could be loss
21
Q

type of producer- What are options for grower to sell their grapes?

A

Contract with producer/ merchant

Sell grapes on the spot

22
Q

type of producer- What are the advantages / disadvantages of a grower contracting with a producer or merchant?

A

Advantage:

  • long term can give stability - sell their grapes at a given price give a prescribed standard
  • grower and producer/ merchant work actively together to ensure fruit meets standard

Disadvantage:

-not unheard of where merchant terminates contract

23
Q

type of producer- Define sell grapes on the spot for a grower?

A

Higher risk avenue than being in a contract

-Grapes are bought and sold following harvest

– but also, could be greater rewards

  • Shortage- sell higher than contract
  • abundance- likely sell less than contract price might have brought
24
Q

type of producer- Define Grower-Producers

A

Growers that produce wine from own grapes then sell it to a merchant to mature and bottle

-common approach in Burgundy

Advantage: -avoid cost of maturing -no barrel & cellar space

  • Avoid cost in marketing
25
Q

type of producer- Define Grower-Producers – what are the disadvantages?

A

-smaller profit than finished wine

-lose control of style of finished

-merchant choose length & type of maturation and has opportunity to blend different producers

26
Q

type of producer- Define Merchant producers

A

Traditional role- Negociant, buy immature wine, mature it and sell it -often blend wines from different prior to bottling

-Burgundy’s micro-négociants who specialize in small production wines can offer supper premium wines

  • Grower merchant that own vineyards & produce wine alongside buying grapes
  • advantage produce a range of wines at all price points

=keep the best fruit for own wine production

27
Q

type of producer- Risks of wine merchant?

A

-little control over the grapes growing or winemaking process

-many provide technical support to their suppliers to ensure they are buying what quality required

28
Q

type of producer- Advantage of merchant?

A

-working with many growers means protection & flexibility in bad vintage years – turn to spot market

  • can either buy with or without contracts
  • there is protection against price fluctuations with long term contract w/ supplier to who they provide tec support/ advise
  • don’t have costs of buying /managing a vineyard
  • common in Burgundy and Champagne -high price of land
29
Q

type of producer- En primeur

A

-wine futures

  • method of selling wine before it has been bottled
  • purchaser will receive wine at a later date, could be few years
  • wine (when bought) is still in barrel & remains in producer’s cellars until bottling and ready to drink
30
Q

type of producer- How did the en primeur system come about?

A
  • most closely related associated w/ Bordeaux
  • WWII when chateaux struggle to survive financially
  • long term mature before able to sell -tied up cash
  • to sell wine in barrel = generate cash flow earlier than wait to sell -covers the production costs to include bottling
  • purchaser cheaper/ easier - more expensive after ageing but not guaranteed.
  • limited amount could cause price increase
  • also seen in Burgundy, Rhone, Super Tuscans, and Vintage Ports
31
Q

type of producer- Define Co-operatives

A
  • owned by a group of growers and produce and sell wine made from grapes grown by members.
  • benefit: pool financial resources, afford more expensive equipment & expertise than could afford working individually
  • members may also choose to access expert vinicultural & winemaking services to advise
  • Advise may also include topics of marketing, packaging, sales
  • some have created own marketed wine brands
  • produce large volumes of entry level wine or own label
32
Q

type of producer- Management structure of a co-operative?

A
  • owned by members & many have democratic control
  • consult member before major decisions are made
  • could be slow process to agree on course of action
33
Q

type of producer- How are members of a co-op paid?

A
  1. Membership usually is paid a share of annual profit

  • Spain & Italy common -member role to produce wine and wait for someone to buy it, get paid on weight
  • small producer that may or may not be focused on quality
    2. quality focused membership, invest some profits into technology, research, marketing, labeling
  • dynamic wine producing business
34
Q

type of producer- Define Custom Crush Facilities?

A

-Variant on the co-operative model found in North Am. (mostly in CA)

-Winery facility to produce wine for growers for a fee

  • Super-premium, small batch to inexpensive, large production
  • no down sides with co-operatives
  • grower doesn’t need to invest in expensive equip, focus growing
  • get to benefit from professional winemaker
  • finished wine is returned to grower who can market it however
35
Q

type of producer- What is the success of a custom crush facility with the growers

A

-____ have been successful in wine regions w/ a number of small volume wine producers

-need to have clear understanding between grower and facility to ensure produce wine that grower intended.

36
Q

type of producer- Define Virtual winemakers?

A

Used mainly in North America -buy in grapes or juice and may rent facilities in another winery or employ the services of a custom crush facility​

Winemakers that do not own vineyard land or wine making facilities

  • vary in scale small batch of super premium to high quality wine to organization which create a brand of wine
  • sourcing fruit or juice from large number of sources
37
Q

type of producer- Define a wine conglomerate?

A
  • very large companies -interests across all alcoholic products
  • often own many smaller businesses across various stages of the supply chain producers (estate winery, merchant) to distribution
  • regional offices in markets important to sell their wines grater control and reduce intermediaries -increasing trend
  • size & influence have significant negotiating power
  • number of insurance cost has been investing in vineyards portfolio
38
Q

type of producer- 2016’s major Conglomerates

A

Co % world production

  1. E & J Gallo, USA 2.7% 2. Constellation Brands, USA 1.7%
  2. The Wine Group, USA 1.5% 4. Treasury Wine Estate, Australia 1.12%
  3. Viña Concha y Toro, Chile 1.03% 6. Castel Frères, France 1.02%
  4. Accolade Wines, Australia 0.97% 8. Pernod Ricard, France 0.97%
  5. Grupo Peñaflor, Argentina 0.9% 10. FeCoVitA, Argentina 0.7%

WSET D2 Wine Business (12 decks)

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