Chapter One: Factors affecting wine price - supply and demand

Question 1

What 3 factors influence the demand for wine?

Answer 1

Social Factors
Economic Factors
Legislative and Political Factors

Question 2

What happened in 2008 and how did that affect wine consumption?

Answer 2

Global wine consumption dropped in 2008 after the financial crisis and has never completely rebounded.

Question 3

Which categories of wine are gaining popularity?

Answer 3

Sparkling and rose

Question 4

What is happening in traditional wine-drinking countries?

Answer 4

Wine consumption is falling, or static. Italy has begun to rise again

Question 5

Where is consumption increasing?

Answer 5

USA, China

Question 6

What are possible reasons for falling consumption?

Answer 6

• Younger people drinking less wine
• Health Concerns
• Changes in lifestyle
• Reduced availability of cheap wine

Question 7

Why are younger people drinking less wine?

Answer 7

May regard wine as old-fashioned. It’s what your parents and grandparents drink.
Turned their heads toward spirits, or other alcoholic drinks.
Spending less time in bars

Question 8

How are health concerns affecting wine consumption?

Answer 8

Greater awareness of the negative effects of alcohol.

Health related govt campaigns/policies

Question 9

How are changes in lifestyle affecting wine consumption?

Answer 9

Busy, modern lifestyles leave little room for longer meals where wine was traditionally drunk.
Lunchtime drinks are increasingly forbidden, and becoming socially unacceptable.

Question 10

Describe how reduced availability of cheap wine is affecting wine consumption

Answer 10

• in traditional wine-producing countries, there were large volumes of inexpensive wines produced, sold, and consumed locally.
• Various steps have been taken to reduce over-production such as vine pull schemes, resulting in smaller volumes available.
• Instead of buying more expensive wine, consumers simply switched to other, cheaper drinks.

Question 11

What consumer preferences are affecting wine consumption?

Answer 11

• Rose, prosecco sales have increased significantly in USA and UK.
• Demand for lower-alcohol wines (health reasons)
• Consumers turning away from fortified wines and medium-sweet wines.

Question 12

How do changes in reputation affect wine consumption?

Answer 12

Wine critics, online influences, key opinion leaders can have an impact on desirability of brands or styles of wine.

• Movies, TV, music lyrics, celebrity lifestyle news, peer opinions/behavior
• Loss of reputation can have opposite effect on prices.

Question 13

How do changes in spending patterns affect wine consumption?

Answer 13

• In price-sensitive markets (germany, UK) many consumers are unwilling to pay more than the lowest possible price for the style of wine they want.
• In the USA, many customers are willing to pay above minimum price in order to buy a wine they perceive to be of better quality.
• Spending patterns are likely to change.

Question 14

What are the economic factors that affect demand of wine?

Answer 14

• Strength of the economy
• Fluctuations in currency exchange
• Changes to the market

Question 15

How does the strength of the economy affect the demand for wine?

Answer 15

-Sales of wine will change with the level of consumer disposable income

Question 16

How do changes to the market affect the demand for wine?

Answer 16

• New companies always enter the market and others disappear.
• If a product disappears from a particular market, supply decreases. This creates opportunities for competition.
• If supply is limited, prices may rise.
• Introduction of new lower-priced or better-value wine may cause a fall in demand for other similar products and may force producers to lower their prices to remain competitive or look for other markets.

Question 17

What are the legislative and political factors affecting demand for wine?

Answer 17

• Laws prohibiting the sale of alcohol
• Govt policies to reduce alcohol consumption
• taxation
• International trade
• Wine laws

Question 18

How do laws prohibiting the sale of alcohol affect supply?

Answer 18

• minimum legal drinking age
• legality of alcohol in a given country
• any such controls inevitably limit the supply of wine and usually increase the price.

Question 19

How do laws prohibiting or affecting the sale of alcohol affect wine?

Answer 19

• Laws intended to encourage citizens to drink less
• Blood alcohol level limits
• imposition and tightening of drink-driving laws have been shown to reduce alcohol consumption.

Question 20

How does taxation affect wine?

Answer 20

• higher taxes may reduce consumption even though taxes on alcohol are a major source of revenue.
• taxation levels may vary according to category of drink
• Govt may reduce it to make certain categories more competitive.

Question 21

How does international trade affect wine?

Answer 21

• Trading relations between countries can fluctuate, affecting demand
• Customs duties to encourage consumption of domestic goods
• Tariffs an free-trade agreements
• Banning imports from a particular country (embargo)

Question 22

How do wine laws affect wine?

Answer 22

• Increasing global creation of Geographical Indications (PDO, AOP, DOCG) affect supply
• Many consumers are drawn to particular GIs because of strong reputation or positive experience.
• Creation of GI may increase recognition and demand, therefore price
• Rules of GIs in Europe can restrict how much, which grapes, methods of production, maturation, etc
• Producers outside the EU are rarely subject to such limitations leaving them free to react to market changes more quickly.

Question 23

What are the production factors that influence the supply of wine?

Answer 23

• Area under vine
• Human factors
• Natural factors

Question 24

What affects the area under vine?

Answer 24

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

Question 25

Explain vine pull schemes

Answer 25

generally when governments pay growers to pull up poor quality vines to curb over-production

Question 26

Why did the EU place restrictions on planting new vineyards?

Answer 26

Part of a broader policy to reduce wine production.

Question 27

Why would growers convert vineyard land to the uses?

Answer 27

More money to be made from different crops, higher value products.

Question 28

How is the abandonment of rural areas affecting wine?

Answer 28

• younger people moving into urban areas to live and work, reducing available workforce for vineyard work.
• family-run estates with no one to take over

Question 29

How are human factors affecting the supply of wine?

Answer 29

Even though vineyard areas may be decreasing, average yields have increased.

• Relaxation of irrigation laws
• site selection
• clonal selection
• improved canopy management
• pest and disease control
• mechanized harvesting
• modern winemaking technology
• all has resulted in greater-volume of higher-quality wines produced at a price consumers are willing to pay.

Question 30

How are natural factors affecting the supply of wine?

Answer 30

• Bad vintages in Europe will have an impact on global wine production as over half of the world’s vineyard area is there.
• Longer-term climate change causing serious droughts
• Reduced yield will generally lead to lower production, shortage in supply, higher prices, which consumers are not always willing to pay, especially if there is a drop in quality.

Question 31

Describe how legislation affects the supply of wine

Answer 31

-Increasing number of geographic indications (GI) in the EU which define where grapes for wines with specific geographical names can be grown, this limiting the amount of wine that can produced simply by defining the area in which the grapes must be grown, max yields, winemaking/maturation, ABV, etc
-Outside the EU, those restrictions do not exist
-If demand for a particular wine is rising, there is often pressure to extend the permitted production area. That may also mean a decrease in quality.
in Europe, PDOs have a governing bod which may limit the amount of wine which may be produced in any one year, ensuring the market is not oversupplied and maintains price levels.

Question 32

What are the aims of the European PDO system?

Answer 32

• Define the style of wine produced in a particular region

- Max yields, minimum abv, winemaking, maturation, which grapes must be grown

Question 33

Why did the French introduce the Vin de Pays system?

Answer 33

Strict PDO rules led to complaints from some European winemakers that they were not able to compete with their counterparts in less heavily-regulated regions. These still require 85% of grapes to come from a particular geographical area, but they permit a wider range of varieties and no not impose rules on viticulture and winemaking.

Question 34

What are the challenges of an oversupply of wine?

Answer 34

• Harder for producers to sell stock, there is unsold wine in tank taking up valuable tank space, may sell excess at a much lower price to free up tank space, sometimes below production cost = not making much/any profit
• Finding new markets or outlets, which takes time.
• May sell wine under a different label - private label, sell to a supermarket, deep discounter, bar or restaurant
• If a producer is forced to sell wine at a lower price, this can devalue the brand image and create lasting damage.

Question 35

What are the challenges of an undersupply of wine?

Answer 35

• Possibly disappointing valuable clients and customers, leading to strained business relationships.
• if producer has a contract with a large retailer, the retailer may impose a financial penalty or cancel the contract.
• Cheaper alternatives may be found, especially in price-sensitive markets
• Large companies (Gallo) will often have wines at different price points, styles, regions of origin. This means that if there is an undersupply of a particular wine, they will be able to offer an alternative from within their portfolio.