Chapter 3 - Types of Business Engaged in the Production of Wine

Question 1

Advantages and disadvantages of estate production

Answer 1

ADV:
-retains control over the entire process from growing, production, bottling
-all profit belongs to the estate, especially if wineries sell wines directly without intermediaries
-marketing benefits: consumers looking for “authenticity”, story behind estate/wine, all included in marketing materials.
DIS:
-Cost of managing the vineyard, equipping and running a winery
-Estates may need to hire out equipment, labor, etc which eat into profits
-Poor/damaged vintage, in order to make a profit, estate may have to sell wine for higher price than consumers are willing to pay.

Question 2

Define and estate winery

Answer 2

one where wine is produced from own vineyards

Question 3

What are growers?

Answer 3

• may or may not produce wine
• focus on growing fruit which they sell to winemakers and merchants
• can focus on growing high-quality fruit that may command very high prices and are prized by winemakers

Question 4

Advantage/disadvantage for growers

Answer 4

ADV
-Attractive option to owners of small vineyards who cannot justify the cost of buying or hiring expensive winery equipment, who do not want to market/sell wine, generates better cash flow because payment is due when grapes are sold vs when wine is made or sold
DIS
-Particularly at risk from poor vintages, vintage variation, fluctuations in supply and demand - all of which affect the price of fruit.
-Lose control over the style of finished wine

Question 5

What options to growers have for selling grapes? Describe each.

Answer 5

• Contract with particular producer or merchant - maybe for one vintage or several. This gives grower the certainty that they will be able to sell grapes at a given price, although many contracts specify that if grapes do not meet required quality standards, they may be rejected or sold for a lower price. Longer-term contracts give growers security
• Growers can sell grapes on the spot market.

Question 6

Describe the spot market

Answer 6

This is where grapes are not subject to contract and are bought and sold following harvest.
Can offer high risks, but greater rewards.
If there is a shortage of grapes from a particular harvest, spot sellers achieve a higher price. However, if there is a glut of grapes, spot price will be lower.

Question 7

Describe grower-producers

Answer 7

Growers who may produce wine from their grapes, but then sell it to a merchant to bottle and mature

Question 8

ADV/DAV of grower-producer

Answer 8

ADV:
grower-producer do not need to incur costs of maturation or marketing of the wine
DAV:
-Grower-producer will make a smaller profit than if they were to sell the finished wine.
-Lose control over the finished style of wine as the merchant will choose the length and type of maturation.

Question 9

Describe the role of a merchant (negociant)

Answer 9

• Traditionally, the role of the merchant was to buy immature wine, mature it, and sell it under the merchant’s name. In many cases, they would blend the wines of different producers prior to bottling.
• The chief risk was they had little control over the grape growing or winemaking process, so now, many produce their own wine from grapes or juice and provide technical support to their suppliers to ensure that the grapes, juice, or wine they buy are of the required quality.

Question 10

Describe the advantages of being a merchant

Answer 10

They may employ viticulturalists to advise suppliers, they do not have the expense of buying and managing vineyards.
-Particularly beneficial in regions such as Burgundy or Champagne where vineyard land is seldom sold, and very expensive when it does.
-Provides some protection and flexibility in bad vintages because merchants can buy from different growers and producers.
-Can produce a range of wines at all price points. From their own vineyards for premium wines, to bought-in grapes for mid-priced or inexpensive wines.
-

Question 11

Describe the disadvantages of being a merchant

Answer 11

• In bad vintages, may be forced to buy grapes from the spot market and pay higher prices.
• In regions such as Burgundy or Napa, grape prices have risen significantly, therefore more expensive to purchase grapes.

Question 12

What is a micro-negociant?

Answer 12

They specialize in small-production wines, usually from individual vineyards, that can achieve super-premium prices.

Question 13

How do merchants protect against price fluctuations?

Answer 13

Long-term contracts with suppliers, to whom they often provide technical support and advice.

Question 14

What is a co-operative?

Answer 14

-Owned by a group of growers and produce and sell wines made from grapes grown by their members.

Question 15

Describe the advantages of co-ops

Answer 15

• Benefit for members is that they can pool together their financial resources, meaning they can afford more expensive winemaking equipment and expertise that they could not afford individually. Access to expert viticultural and winemaking services and advice as well as marketing, packaging, and sales services.
• Marketing members wines collectively can be more efficient than members working on their own.
• Can make large volumes of entry-level wine, optional to make own-label wines.

Question 16

Disadvantage of co-ops?

Answer 16

Downside: Democratic decision-making process can be slow and cumbersome and agreed course of action may not always be to the liking of individual members.

Question 17

How are co-op members usually paid?

Answer 17

Members are usually paid a share of the co-ops annual profit, but method of calculating that varies.

• The more traditional co-ops, which consider their role simply to make wine on behalf of their members and then wait for someone to come buy it, will pay on volume. - Important model in Spain and Italy where vineyard sizes are small and its not economic for growers to produce and market their own wine. However, some are not quality-focused and may struggle to survive.
• Many co-ops are now more quality-focused and pay growers based on the quality of the fruit. They do not pay all their profits back to members, instead investing the money into latest technology, research, effective marketing and labelling. Among the most dynamic wine-producing businesses, producing high quality wine which can be an excellent value.

Question 18

Describe custom crush facilities

Answer 18

• Variant of co-operatives found mainly in north america, particular california.
• Established specifically to make wine for growers who do not have their own winemaking equipment.
• Growers do not own the facility, rather pay each time they require it’s services.
• Can make anything from super-premium, small batch wines to inexpensive, large-production wines.
• Finished wine is returned to grower who can then market as they see fit and take the sales profit.
• None of the disadvantages of co-ops.
• Advantage to the grower is that they do not need to invest in equipment. However they are handing over production to a third party so it is vital that the grower’s requirements are well understood. Must have a good working relationship.

Question 19

What is a virtual winemaker/winery?

Answer 19

Term used mainly in north america for winemakers who do not own vineyard land or winemaking facilities. Virtual winemakers buy grapes or juice, rent facilities/use custom crush service. Vary in scale from small to large.

Question 20

Describe conglomerates

Answer 20

• Large companies that often own many smaller businesses across the various stages of the supply chain - production to distribution.
• Can set up regional offices in markets that are important to them to market and sell their wine in that country or region.
• Greater control over all stages of the route to market and reduces need to pay intermediaries.
• Size and influence gives them significant negotiating power and can strike a hard bargain when buying grapes, juice, and wine from suppliers when selling to retailers.