Costs through the Supply Chain Flashcards
Factors that affect the price of wine:
Vineyard establishment
- cost related to buying / renting the land (unless already owned)
- surveying the land to check its suitability for viticulture and deciding which grapes are most suitable (satellite imaging / soil samples)
- site clearance
- building access roads into the vineyard and between vineyard plots;
- buying and planting vines;
- buying stakes and wires etc. for establishing and maintaining trellising;
- installation of deep drainage channels and pipework (if needed)
- establishing an irrigation system – (if needed / allowed)
- protection against weather hazards (windbreaks / hail nets / frost protection)
- protection from animal pests (high fences, electric fences, netting)
- buying/hiring machinery and equipment (tractors, spraying equipment, harvesting
machines)
(Capital costs)
Factors that affect the price of wine:
Vineyard managment
Labour: varies according to size, topography and type of production (organic, biodynamic) and time of the year (harvest time: less skilled but higher work force is required / rest of the year: more skilled but smaller workforce)
Michinery and fuel: costs of maintaining the machinery / fuel required
Supplies: materials for repairs to trellising, and pruning shears and gloves for workers, ecc ecc
Vineyard treatments: Agro-chemicals (herbicides / fungicides / insecticides) used in coventional farmed vineyards // Sulfur, Bordeaux mixture in Organic and Biodynamic vineyards
Water: may be necessary to pay the authorities for the right to extract water from a river or buy it elsewhere / increased cost of irrigation can make grape growing unprofitable
**Electricity: ** for irrigation systems, bird scarer and frost protection equipment
Insurance and depreciation: additional costs to cover insurance for the vineyard (against risks such as fire or flood) and for the depreciation of the replaceable assets (tractors, trellising systems, presses and other equipment in the winery-vineyard)
(Operating costs)
Factors that affect the price of wine:
Winemaking costs
Winery establishment: The land on which the winery will be built may need to be purchased. There are then the costs of building the winery and fitting it out with equipment
Grape growing costs (see above) or the cost of bought-in fruit: costs relative to growing or buying fruit / cost vary considerably according to the quality of the grapes, the grape variety and the vintage
Labour: small number of mainly skilled staff full-time + some casual labour around harvest
Machinery and equipment running costs: fuel, electricity and maintenance
Winery materials: sugar for enrichment, de-acidification agents, acid for
acidification, cultured yeasts, carbon dioxide or other inert gasses, fining and filtering agents.
Water: Large amount of water used for cleaning / sometimes cost-effective to invest in water treatment plants to re-use water as much as possible
Electricity: Significant amount needed for refrigeration, ventilation, presses, pumps, lighting.
Maturation: storage space / costs of vessels (new oak barrels = very costly on an annual basis) / oak alternatives / labour to monitor the maturation process / loss of chashflow due to unreleased wine
Packaging: bottles, closures, labels, cartons and pallets / Hired bottling line + labour to operate it / send wine to another estate with bottling line on site
Factors that affect the price of wine:
Transportation costs
**IN BOTTLE **(bottles are packaged in boxes, which are in turn loaded into crates and pallets)
- Air: The cost of air freight is heavily dependent on weight, due to the additional fuel required. Bottles of wine are very heavy in relation to their size and value, so very expensive to transport by air.
- Road: Good for short-medium distances / Usually at the beginning or end of the journey
- Train: Cost vary according to the length of the journey and how goods are loaded onto the train (containers vs multiple single pallets)
- Sea: by far the cheapest method for transporting over long distances / Conteinerisation is essential / slow (australia to Uk = 40 days)
IN BULK
Bulk export from new world countries grown from 23% in 2001 to 43% by 2010 / Either in Plastic Flexitanks within a standard steel shipping container or non-flexible ISO tanks / tank is ligher than the bottles / more efficient (Standard container: around 10000lt of bottled wine / 24000lt of wine in flexitanks / 26000lt in ISO tanks) / more environmentally-friendly / only suitable for moving large volumes of the same wine
Insurance:
Essential that wine is insured throughout it’s journey in case is lost, damaged or spoiled
Factors that affect the price of wine:
Additional costs
Importation Costs
- Customs duties and taxes
- different labelling laws with which the imported wine will need to comply (Abv In Eu vs Abv in USA / USA law also requires bottles to display a health warning)
- Distributors: easier for producer to rely on distributors to deal with foreign markets (established list of potential clients / dealing with particular local laws)
- Distributor fee = the Margin: percentage calculated as the fee (operating costs and profit) divided by the revenue (multiplied by 100 for a percentage figure) = usualy between 5-25%
Factors that affect the price of wine:
Sales costs
(Retail and hospitality sector)
-
Property cost: retail,bar,restaurant premises / either buy the property or rent / decorating, furnishing / running costs (maintenance, security, water, energy and insurance,commercial property taxes, waste disposal)
-** Labour**: paying staff / minimum wage required in some countries / Low pay in supermarkets / Special wine retailers: highly skilled staff = higher pay / bar,restaurant: high cost due to need for staff to wait and clean tables / fine dining: high pay due to expected high knowledge of the sommelier, head sommelier - Equipment and materials: Retailer: till system, fridge (if chilled wine is to be sold), shelving, display cabinets, materials to enhance displays and cleaning equipment / Restaurant: kitchen and bar equipment, tableware and glasses, wine preservation systems
- Storage cost: bars, restaurants and shops will usually store their wine on the premises (may invest in fridgeds to keep wine at cellar temp) / Larger chains of supermarkets and shops have centralised warehouses where the wine is stored /
- Delivery cost: most expensive element if the supply chain: relatively heavy / extremely fragile (bottles may broke, wine might spoil) / cost depend on distance and time of the delivery / fixed delivery fee may be applied / avoided over a certain amount of quantity in order to apply a discount to the customer without reducing the price of the wine)
- Margin at the point of sale: specialist wine retailer: 30-50% / Bar,restasursant: usually around 66.6% (3 times the buying cost)
Factors that affect the price of wine:
Marketing cost
- Labour: in-house marketing team for large companies / external marketing companies for smaller producers / Industry associations (consorzio/VDP) or a generic trade body (wines of australia/wines of south africa) will market their member’s wines collectively
- Design and production of bottles and labels: internal or external depending of scale of operation
- Marketing campaign: cost of advertising and promotional materials / send sample bottles to tastings or competitions (free-of-charge from stock that could otherwise be sold)
Factors that affect the price of wine:
Impact of Lesgislation on cost
- Taxes, duties, trade barriers, subsidies, minimum pricing and labelling laws.
-Example: in the UK, excise duty is payable on wine entering the country unless it is stored in what is known as a ‘bonded warehouse’ = Duty payed only at sale point = help cashflow - Legal factors may also impact on a producer’s decision whether or not to enter a particular market: Import duty too high = better avoid that particular market and focus somewhere else
Factors that affect the price of wine:
Impact of Fluctuation in Currency on the cost
the constant fluctuation of the exchange rate between two currencies can affect the price of the wine considerably
How to mitigate the effect of the rate of fluctuation:
- Options: the company importing the wine to take an option/reserve on a certain amount of wine at an agreed price. This means that the producer must set aside the agreed volume of wine and, at an agreed time, the importer may decide whether or not they want to take it (decision based on the exchange rate although, some options fix the purchase price in advance, but it can also be influenced by market conditions at the time)
- Fixing the price in the currency of the importer at the date of ordering: Producers may not agree to this, or may charge a premium as it shifts the currency risk to them. (certainty of knowing how much they will receive for the wine, so prices are usually in the currency of the producer) / many importers prefer to fix the price in their currency
so that they have the certainty of knowing how much they are paying (can work out their retail price based on that figure)
- Buying currency to cover specific orders: requires a proactive stance / only larger companies are likely to have the in-house skills necessary to manage currency / not considered speculation
- Entering a contract to fix the exchange rate: Another strategy for hedging currency: formal contract with a bank or other supplier of foreign currency to purchase a given amount of currency at an agreed exchange rate on a specified date / The importer is legally committed to purchasing the currency (at a fixed exchange rate)
- Trading in USD/EUR: Many producers in countries with unstable currencies prefer to trade in more stable currencies such as the US dollar or euro
-** Opening a foreign currency account in a local bank:** If a buyer opens a foreign currency account in a local bank, payment for goods can be made direct to the seller in the seller’s own currency / currency still need to be bought at some point / not the most efficient way to use funds
- Opening an account in an overseas bank: 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.
