Chapter 1: Factors that Affect the Price of a Bottle of 1 Wine – Supply and Demand

Question 1

Name the factors that Influence the Demand for Wine

Answer 1

• Social Factors
• Economic Factors
• Legislative and Political Factors

Question 2

Define Social Factors that influence the Demand for wine

Answer 2

Changes in the habits and preferences of wine drinkers.

Question 3

Name the Social Factors that influence the Demand for wine

Answer 3

• Younger people drinking less wine
• Health concerns
• Reduced availability of cheap wine
• Changing Consumer Preferences
• Changes in Reputation
• Changes in Spending Patterns
• Changes in lifestyle

Question 4

Describe Changes in Consumption habits from 2003 to 2019

Answer 4

• Global wine consumption Increased rapidly in the first part of the 2000s
• Fell back after the 2008 financial crisis and volume levels havent yet come back
• Popularity of certain categories, such as rose and sparkling wine, has increased significantly in the past decade
• For example, sparkling wine consumption increased by an average of 3 per cent annually between 2002 and 2018.

Question 5

Italy, France, & Germany consumption habits 2003-2019

Answer 5

Wine consumption is falling or static in the ‘traditional’ wine-drinking countries. There have been significant drops in France and Italy (although consumption has started to rise again in Italy).

Question 6

USA Consumption habits 2003-2019

Answer 6

Consumption has been increasing in countries where wine drinking has not historically been a major part of the culture.

In the last 20–30 years, wine drinking has increasingly become
part of mainstream culture in the USA, helped by the increasing globalisation of the food and drinks industry, as well as both increases and improvements in wine production in the domestic market.

Question 7

China Consumption habits 2003-2019

Answer 7

Wine consumption has also increased significantly in China over the last two decades.

China has a growing middle class and one way this group can show their improved wealth and status is by moving from local drinks to wine.

At first they chose primarily French wines, but now they are increasingly looking elsewhere, for example Australia and Chile, whose wines benefit from a bilateral trade agreement. Consumption figures appear to have declined slightly in China over the last two years, perhaps signalling the end of a period of rapid growth

Question 8

Changing consumer preferences examples

Answer 8

• Demand for Rose and Prosecco particlarly in USA & UK
• Due to the health issues referred to above, there is also increased demand for lower- alcohol wines.
• Drinkers are turning away from fortified wines – 15–22% alcohol by volume (abv)
• Another style of wine that has gone out of fashion is medium-sweet German wines, such as Liebfraumilch

Question 9

Explain how Changes in Lifestyle can influence the demand for wine

Answer 9

• Busy, modern lifestyles mean less time for longer meals where wine is consumed
• Consuming alcohol during the workday is less socially acceptable

Question 10

Explain how changes in spending patterns can influence the demand for wine in reference to price-sensitive markets

Answer 10

In some countries, such as Germany and the UK, many consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy. These are known as ‘price-sensitive markets’

In contrast, in other markets, such as the USA, many consumers are willing to pay above the minimum price in order to buy a wine that they perceive to be of better quality than the cheapest option on offer.

Question 11

Changes to Reputation

Answer 11

• As the reputation of a region, producer or even an individual wine grows, demand will increase and producers may be able to justify higher prices
• Good reviews from leading wine publications, critics, & influencers are also drivers of demand

Question 12

Competition in Price-Sensitive Markets

Answer 12

Competition is often fierce in price-sensitive markets, as producers are competing within a reduced price range. This results in lower prices for consumers, but makes these markets unprofitable for some producers, who may simply choose not to sell to them.

In price-sensitive markets, producers are often reluctant to pass on increases in production costs to consumers for fear of losing sales to competitors. Some producers hope to avoid that problem by building up ‘brand loyalty’ for their product as part of their marketing campaigns.

Question 13

Explain recent trends regarding changing spending patterns

Answer 13

In recent years, there has been a trend for ‘premiumisation’ in the USA and even in price-sensitive markets such as the UK. This means that consumers are increasingly willing to pay more for individual bottles of wine, often because they are buying less wine by volume.

Question 14

Define the Economic Factors that influence the Demand for wine

Answer 14

How much money consumers have to spend on wine and how much they are willing to pay will be affected by the wider economic situation, both at a national and global level.

Question 15

Name the Economic Factors that influence the Demand for wine

Answer 15

• Strength of the Economy
• Fluctuations in Currency Exchange
• Changes to the Market

Question 16

Explain the Strength of the Economy in regards to sales of wine

Answer 16

• Sales of wine will change with the level of consumer disposable income. When disposable income falls, as in a recession, wine consumers are likely to trade down to cheaper wines or switch to other, less expensive alcoholic drinks
• When an economy is growing, disposable income increases and consumers are often willing to buy more expensive wine.

Question 17

Give examples of how strength of the economy influences demand for wine

Answer 17

• During the recession following the 2008 financial crash, demand for Champagne shrank while that for other, cheaper sparkling wines grew.
• The emerging middle class in China has driven the increase in wine sales and the demand for aspirational wines, such as those from Bordeaux and Burgundy, has increased.

Question 18

Explain Fluctuations in Currency Exchange

Answer 18

Changes in exchange rates can significantly affect the demand for imported wines, particularly in price-sensitive markets.

Question 19

If a wine-exporting country’s currency gains value compared to that of the importing country, a producer has two options:

Answer 19

• Keep the price stable and therefore risk losing sales as the product represents less value for money in the importing market
• Decrease the price of the wine and lose profit.

Question 20

If a wine-exporting country’s currency loses value compared to that of an importing country, a producer can:

Answer 20

• Keep the price stable, which should boost sales as the product represents better value for money in the importing market
• Increase the price and improve profits for future investment.

Question 21

Other downside to a weak currency

Answer 21

It costs producers more to import equipment and supplies, such as barrels, corks and yeast, which may offset any additional profits

Question 22

Explain Changes to the Market

Answer 22

Markets are constantly changing: new companies and products are always entering, while others disappear.

Question 23

Describe the changes to the market if a product disappears

Answer 23

Supply decreases.

This will create opportunities for the competition, which could increase their sales

Question 24

Describe the changes to the market if there is an introduction of a new lower-priced or better-value wine

Answer 24

May cause a fall in demand for other similar products and may force producers to lower their prices to remain competitive or look to alternative markets.

Question 25

Define the Legislative & Political Factors that influence the Demand for wine

Answer 25

Government policy on alcohol consumption may change over time and laws may be passed at either a national or local level to implement that policy. These factors vary from country to country

Question 26

Name the Legislative & Political Factors that influence the Demand for wine

Answer 26

• Laws Prohibiting or Limiting the Sale of Alcohol
• Government Policies to Reduce Alcohol Consumption
• Taxation
• International Trade
• Wine Laws

Question 27

Explain laws prohibiting or limiting the sale of alcohol

Answer 27

• Any such controls inevitably limit the supply of wine and usually increase prices.
• Even in countries where alcohol is freely available, there is usually a minimum legal drinking age and sales of alcohol are generally limited to particular hours of the day.

Question 28

Give an example of a law prohibiting or limiting the sale of alcohol

Answer 28

• In France, the Loi Evin, introduced in 1991, has greatly restricted the advertising of alcoholic drinks and is considered a significant factor in the reduction in wine consumption in France.
• The Scottish government is the first to introduce ‘minimum unit pricing’ to reduce the availability of cheap alcohol. The minimum price of an alcoholic drink is GBP 0.50 per unit, meaning that a 75 cL bottle of white wine with 12% abv (i.e. 9 units as defined in the UK) must cost at least GBP 4.50, whereas bottles were previously available for as little as GBP 3.00

Question 29

Explain how taxation influences the demand for wine

Answer 29

Another aspect of government policy is the imposition of taxes and duty on alcoholic drinks. On the one hand, higher prices may reduce consumption; on the other hand, tax and duty on alcoholic drinks is a major revenue generator for many governments.

Question 30

Give an example of taxation

Answer 30

• Because the level of duty usually varies between different categories of drink, it can influence demand.
• For example, in the Republic of Ireland the large difference between the excise duty on still (EUR 3.19/bottle) and sparkling wines (EUR 6.37/bottle) has greatly reduced the demand for sparkling wine.

Question 31

Explain Government Policies to reduce alcohol consumption

Answer 31

• Excessive consumption of alcohol is a concern in many countries.
• For this reason, a number of countries have implemented laws intended to encourage their citizens to drink less.
• Most countries also impose a limit on the amount of alcohol that can be consumed before a person drives a motor vehicle.

Question 32

Explain how international trade influences demand of wine

Answer 32

Many countries impose customs duties (also known as trade tariffs) on imported goods. In some cases this is simply a form of revenue generation but, in many instances, it is the basis of a protectionism policy intended to encourage the sale of domestic rather than imported goods.

Question 33

Trade with the EU

Answer 33

The EU is a free-trade area allowing member states to import and export goods between themselves tariff-free.

Tariffs are still payable on goods imported from most non-members (e.g. Australia), making them relatively more expensive.

Some non-member states (such as South Africa and Chile) have entered into trade agreements with the EU, as a result of which they enjoy tariff-free or reduced-tariff trade, giving wines from those countries a competitive edge over those from Australia.

Question 34

International trade UK/Australia

Answer 34

Since the UK has now left the EU, it may be able to negotiate free-trade arrangements with other countries, such as Australia, which could make Australian wine comparatively cheaper than EU wine. This could change the wine-buying habits of the British public.

Question 35

Argentina early 2010’s international trade

Answer 35

• trade restrictions were imposed that not only affected wine imports but also severely limited imports of winery equipment, such as barrels, cork and yeast. This significantly increased wine production costs.
• As part of the same policy, the government also imposed restrictions on foreign ownership of land, significantly slowing down the foreign investment that had played an important role in its rapid growth.

Question 36

Trade Embargo

Answer 36

An extreme form of protection is when a country bans imports from or exports to a particular country (an embargo). This can be for political or economic reasons. For example, wine imports into Russia have fallen considerably due to various trade embargos imposed for political reasons on Russia and by Russia.

In many cases, trade wars can result in negative feelings among consumers and therefore, even when restrictions are lifted, consumers may continue not to buy these products out of a matter of principle.

Question 37

Wine laws

Answer 37

Another legal factor is the increasing global creation of Geographical Indications (GIs), such as Protected Denominations of Origin (PDOs) and Protected Geographical Indications (PGIs).

Question 38

Explain how wine laws influence the demand of wine

Answer 38

• Many consumers are drawn to wines from a particular GI, either because they have enjoyed wines from there in the past or because of its strong reputation.
• The creation of a GI may therefore increase recognition and demand for wines from that region and allow producers to increase the price of their wines

Question 39

Give an example of wine laws influencing the demand of wine

Answer 39

• In Europe, PDO rules can be very strict limiting producers to certain grape varieties, methods of production, maturation periods and so on.
• In contrast, producers outside the EU are rarely subject to such limitations, leaving them free to react more quickly to changes in wine consumers’ preferences and maintain demand for their wine, in a way that producers governed by PDO rule cannot.
• Sometimes sudden changes in legislation can have particularly significant effects. For example, in China in 2012, the new leader, Xi JinpingAn Anti-Extravagance campaign was launched explicitly to prohibit the gifting to or consumption by government officials of luxury wines and spirits. As a result, demand for those wines dropped almost immediately.

Question 40

Global wine production by country

Answer 40

• Italy
• France
• Spain
• USA
• Argentina

Question 41

Area under vine Italy, France, Spain, USA, China
2003- 2019

Answer 41

• Area under vine is slightly decreasing in France, Italy, and Spain
• Increasing rapidly in China
• Stagnent in USA

Question 42

Factors that Influence the Supply of Wine

Answer 42

• Production Factors
• Human Factors
• Natural Factors
• Legislation

Question 43

Name the Production Factors that influence the supply of wine

Answer 43

• Area under Vine
• Vine pull schemes
• EU restrictions on planting new vineyards
• Conversion of vineyard land to other uses
• Abandonment of rural areas

Question 44

Explain Area under vine

Answer 44

Generally speaking, the greater the area under vine, the greater the volume of wine that can be produced.

Question 45

Explain vine pull schemes

Answer 45

By the mid-1980s, EU wine production was much greater than demand, creating a surplus that came to be known as the ‘wine lake’. National governments and then the EU itself paid growers to pull up poor quality vines

Question 46

Explain EU restrictions on planting new vineyards

Answer 46

The EU scheme was part of a broader policy to reduce wine production, which also included limits on the planting of new vineyards

Question 47

Explain Conversion of vineyard land to other uses

Answer 47

In many parts of the world, wine grapes are
a low value agricultural crop and growers may want to switch to higher value products

some growers in Elgin (South Africa) are removing their vineyards and replacing them with apples, which give a greater financial return than grapes.

Question 48

Explain Abandonment of rural areas

Answer 48

Generally speaking, rural economies are suffering from a lack of labour and investment, and it is not uncommon to see vineyards that are difficult to work abandoned, even in prestigious wine regions.

Question 49

Describe how Human Factors influence the supply of wine

Answer 49

A decline in vineyard area need not result in reduced production: for example, average production in Spain has increased despite the area under vine decreasing.
The relaxation of laws banning irrigation of vineyards in Spain, which means that areas that were previously not able to support vines are now viable

Also better techniques in vineyard & winery

Question 50

Explain how Natural Factors influence the supply of wine

Answer 50

Variation in weather conditions from year to year can also have a significant impact on the volume of wine produced.

Europe is particularly susceptible to vintage variation and, because over half the world’s vineyard area is located there, bad vintages will have a major impact on global wine production.

Question 51

Consequences of Reduced Yields due to natural factors

Answer 51

Reduced yields will generally lead to lower production and, due to the shortage in supply, higher prices, which consumers are not always willing to pay, especially if the adverse conditions also result in a drop in quality

Question 52

Explain how Legislation influences the supply of wine

Answer 52

The main legislative influence on the supply of wine is the increasing number of GIs around the wine world.

Question 53

Example of how legislation influences the supply of wine

Answer 53

the Comité Champagne and the Sherry Consejo Regulador, actively limit the amount of wine that may be released in any one year, ensuring the market is not oversupplied and maintaining price levels.

in the 1970s the French introduced the vin de pays system, which formed the basis of what became the European PGI system to offer greater freedom. These still require 85 per cent of grapes to come from a particular geographical area, but they permit a wider range of varieties and do not impose rules on viticulture and winemaking

Question 54

Describe the recent trend when there is an over-supply of wine

Answer 54

• Global wine production has consistently exceeded global wine consumption
• The level of over-supply has been reduced in recent years thanks to growth in wine consumption in the USA and China and the limitations on production discussed in the previous sections.

Question 55

Describe the challenges related to an over-supply of wine

Answer 55

• When there is more wine available to sell than consumers wish to buy, prices tend to fall as consumers can easily find a cheaper alternative.
• Over-supply makes it harder for producers to sell their stock and, in some cases, means that they may end up with unsold wine in tanks

Question 56

Producer Options for an over-supply of wine

Answer 56

• Producers may be forced to sell the excess wine at a much lower cost than they would like, sometimes below production cost.
• More proactive, producers will try to find new markets and outlets for their wines. However, it takes time for producers to develop contacts
• Another option for producers with larger volumes of wine would be to bottle the wine under a different label and offer it to a supermarket, deep discounter, bar or restaurant as a private label wine

Question 57

Consequences of an over-supply of wine

Answer 57

If a producer is forced to sell their wine at a lower than usual price, or if a retailer orders too much wine and then has to lower the price to sell it, this can devalue the ‘brand image’ of the wine (how consumers perceive the brand) and create lasting damage to the brand

Question 58

Example of under-supply of wine

Answer 58

A global lack of supply of wine is unusual, although it can happen: for example, following the bad harvests across Europe in 2017. However, under-supply is more common in the case of particular wines.

Question 59

Describe the challenges related to an under-supply of wine

Answer 59

The obvious problem for the producer is not having enough wine to sell, disappointing clients (and ultimately consumers) and leading to strained business relationships.

If the producer has a contract with a large retailer, the retailer may impose a financial penalty or cancel the contract if the required volume of wine is not available.

Question 60

Premium Producer Options to an under-supply of wine

Answer 60

In most businesses, an excess of demand compared to supply would result in an increased price for the product. In some parts of the wine business that does happen (e.g. Bordeaux Premier Cru Classé and Grand Cru Burgundy) but, in most cases, producers prefer to issue wines to their main distributors on allocation.

Question 61

Large Company Options to an under-supply of wine

Answer 61

The few large companies (e.g. Accolade Wines, Treasury Wine Estates, E & J Gallo) will often have wines at different price points, styles and regions of origin. This means that, if there is an under-supply of a particular wine, they will be able to offer an alternative from within their portfolio. They will also sell to different markets, meaning that if price increases from under-supply cause sales to drop in one country, they can sell wine into less price-sensitive markets instead.

Question 62

Effect on high-volume, inexpensive branded chardonnay during an over-supply of wine

Answer 62

Over-supply can lead to low prices, competition from cheaper alternatives and the threat of being left with unsold wine in tanks as the next harvest approaches. This can force a producer to sell at a lower price than asked for initially, and may be below production cost.

Question 64

Effect on high-volume, inexpensive branded chardonnay during a recession

Answer 64

Threat of recession and/or slowed economic growth results in a threat to sales.

Question 65

Effect on low-volume, expensive branded Sauvignon Blanc during a recession

Answer 65

Threat of recession and/or slowed economic growth may have little impact on super-premium sector as volumes are very small and buyers of wine in this price band are less likely to be at risk during a recession.

Question 66

Effect on low-volume, expensive branded Sauvignon Blanc during an over-supply of wine

Answer 66

Little impact on super-premium sector as volumes are very small.