D2: Factors influencing demand for wine (1)

Question 1

Wine laws: The creation of GI’s or PDO’s:

Answer 1

They can have an significant impact on the level of supply of wine

Question 2

PDO and GI is more a guarantee on a specific style rather than a quality guarantee:

Answer 2

Also many consumers are drawn to wines from a particular GI, because they enjoyed wines from them in the past or due its strong reputation.

• therefore the producer of the region can increase the price due the demand of the wine

Question 3

Legal changes often com about relatively slowly, giving producers the time to adapt. however XI Jinping:

Answer 3

Wanted to stop the practice of ‘lavish gifting’ giving gifts to clients or collegues the more expensive, the better.

This leaded to the Decreased the demand for extravagant luxury wines and the growing middle class can now buy wines for enjoyment and status.

—- so sales of wines and spirits have also rebounced recently, but not by lavish gifting, more by personal consumption

Question 4

The amount of wine produced will clearly have a strong impact on the level of supply, there can be seriusly fluctuations that can occur from year to year.

Answer 4

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Question 5

generally: the greater the area under the vine, the greater the volume of wine that can be produced:

Answer 5

In EU the area unde vine has fallen in the 21 century

• in contrast there is a growth outside EU and this is largely due the establishment of new vineyard areas (China) which now have the second largest area under vine in the world: even if production has yet to catch up
• *** these numbers are coming from OIV (international organisation of vine and wine) and these do not separatte vineyards producing wine grapes from other fruits, such as table grapes
• • but globally 90% is for wine production

Question 6

Several factors have resulted in the loss of vineyard land, particularly in the EU:

Answer 6

1) Vine pull schemes
2) EU restrictions on planting new vineyards
3) convertions of vineyard land to other uses
4) abandonment of rural areas

Question 7

Vine pull schemes:

Answer 7

1) by the mid 80’s eu wine production was much greater than demand
- – National governements and the EU itself paid growers to pull up poor quality vines (Spain Italy And France)
- — so in the 80sseveral hundred thousand hectares of eu vines were pulled up
* also used in Australia, NZ and argentina

Question 8

EU restrictions on planting new vineyards:

Answer 8

1) the eu limited the plantings of new vineyards
2) but now the restrictions are relaxed, although the raise of quality wine production rather than excessive bulk production

Question 9

Conversion of vineyard land to other uses:

Answer 9

1) in many parts of the world wine grapes are a low value agricultural crop and growers may want to switch in higher value products
* eg Elgin: removing their vineyards for apples, which gives five times more the financial return than grapes

2) also vineyards are bought for property development often for tourist (madeira, Santa clara valley- business

Question 10

Abandonment of rural (landelijke) areas:

Answer 10

This is a trend for younger people to leave the rural areas and work in urban areas
– this is reducing workforce for vineyard work and in some case leaving family-run estates with no-one to take them over

• rural economies suffering froma a lack of labour and investments and its sadly not uncommon to see abandoned vineyards, even in prestigious wine regions

Question 11

A decline in vineyard area need not result in reduced prduction:

Answer 11

1) Production in spain has increased despite the under vine area is decreased
2) this is due the relaxation of laws for irrigation of vineyards so the low yielding low density vineyards are now slightly turning in higher density more yielding vineyards

Question 12

Modern techniques (better site selection, clonale selection, iproved canopy management and pest and disease) have made it possible to make a greater amount of healthy grapes, this coupled with modern winemaking techniques has lead to a greater volume of higher quality wines that can be produced at a retail price which consumers are willing to pay

Answer 12

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Question 13

Bad vintages can have a major effect:

Answer 13

EU is very susceptible to vintage variations and this can have a major impact on global wine production as the half of the world vineyard area is in the EU

– 2017 (hail, frost, heatwaves results in 14% fall in production in europe compared to 2016

Question 14

Longer term climate changes:

Answer 14

1) serious droughts have recently affected South Africa and California
- - low rainfall has reduced the level of water in the state’s main underground reserves to almost nil and the chilean governement estimates that 95% of the country’s vineyard area will have shortages of irrigation water by 2050

2) these natural factors will influence the yields, therefore not the quality but due the low yields the price will rise

Question 15

The demand for certain wines of certain pdo’s can let the producer have more control over the price

Answer 15

eg: market shows consumers drink inexpensive SB, so the retailer can control price and buy and change every year from SB from different sources and countries.

— an opposite situation is that the market shows that the consumer drink more Marlborough SB so the retailer is constrained (beperkt) to buy from a small area

Question 16

Where demand for a particular wine is rising:

Answer 16

There is often pressure to extend the permitted production area
EG: Prosecco DOP, subject limitations on the planting of new vines, this results in more production

— however extending the gi, will lead to vineyards on less suitable sites and dilution in overall quality

Question 17

In europe pdos have governing body to help enforce the rules

Answer 17

eg: comité champagne and the sherry consejo regulador
- – limit the amount of wine which may be released in any one year ensuring the market is not oversupplied and maintaining the price levels

Question 18

Global wine production has consistently exceeded global wine consumtion.

Answer 18

The level of oversupply has been reduced in recent years thanks to the growth in wine consumption in USA and China and the limits of production discussed in the previous sections

Question 19

When there is more wine available to sell than the consumers wish to buy:

Answer 19

1) Prices tend to fall as consumers can easily find a cheaper alternative
2) oversupply makes it harder to sell their stock and can end with unsold wine in tank
3) producers may be forced to sell the excess wine at much lower prices than production cost

4) other more proactive producers will find a new market and outlets for their wine, but it require efford and develop contacts
- - other with lot of oversupply in bulk can sell their wine under a different label in the supermarket deep discounter or bar and restaurant as a private label

Question 20

If a producer or retailers producers or buy too much wine and need to lower the prices, this can devalue the brand image of a wine

Answer 20

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Question 21

Undersupply:

Answer 21

1) dissapointing clients (and ultimately consumers)
2) leading to strained business relationships
3) if the producer has contact with a larger retailer, the retailer may impose a financial penalty or cancel the contract if the required volume of wine is not available

Question 22

cheaper alternatives are easily found if this is the desired winestyle for the consumer:

Answer 22

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Question 23

grape growing starts the first stage of the supply chain and can be divided in two categories:

Answer 23

1) the initial cost of establishing a vineyard

2) cost of managing and producing the grapes

Question 24

Vineyard establishment:

Answer 24

1) cost for a prospective wine producer relate to buying the land on which the vineyards will be planted
- - this can vary from place to place

2) Prices reflect the lands potential t produce high quality fruit and the name of the appelation which the vineyard is situated
3) scarcity of land will also play a role: land in prestigious regions such as champagne or burgundy rarely comes on the market and when it does it is sold to the highest bidder

Question 25

Once the land is purchased, there are considerable costs that will need to be incurred before the vineyard can become operational these will depend on the nature of the sit but also:

Answer 25

1) surveying the land to check it suitability for viticulture and deciding which grapes are most suitable (this may include satelite imaging and soil samples

2) site clearance: eg removing vegetation, large rocks etc
3) building access roads into the vineyard and in between the vineyard plots

4) buying and planting vines
5) buying stakes and wires
6) drainage systems
7) irrigation (drilling boreholes, building reservoirs laying pipes
8) protection agains weather hazards
9) protection against animal pests eg high fences, electiric fences

10) buying machinery: tractors, spraying equipment, harvesting machines, building garages or sheds to store them

!!! these are capital costs!!! and also that a new established vineyard needs 3- 5 years to produce healthy grapes, so this will affect the capital cost

Question 26

in some countries the governements are trying to encourage the establishment of vineyards (either specifically or as a part of a wider agricultural policy)

Answer 26

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Question 27

Labour:

Answer 27

1) the amount of labour required varies greatly according to the topography and other factors in the vineyard

• • steep vineyards of mosel (no mechanisation)
• – flat lands of californias central valley
• • also organic and biodynamic vineyards are more labour intensive than conventionally-farmed ones

2) balance need to be found between labour cost and the capital cost of machinery: eg chili: labour cost low so less incentive to invest in machinery but where theyre high or labour is difficult to find, machinery could be a better option (coonawara)

Question 28

costs:

Answer 28

1) machinery and equipment running costs eg fuel and mainatanance
2) labour costs vary through the year (lots of labour due the harvest but unskilled, skilled due the rest of the year together withbio and organic ..

3) vineyard materials eg: replacement vines and trellising
4) vineyard treatments: sprays,…

Question 29

Agrochemical use can be reduced by using the principes of integrated pest management however regularly updated weather information is needed to give warning of conditions which could encourage fungal diseases

Answer 29

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Question 30

irrigation:

Answer 30

if a vineyard needs water it may be necessary to pay the autorities for the right to extract water from a river or buy it from elsewhere
– in dry years, when the price of irrigation water rises, the increased cost of irrigation can make grape growing unprofitable (australia, it can reach 3,000 AUD per megalitre)

Question 31

electricity:

Answer 31

Certain systems in the vineyard require electricity: irrigation systems, birdscarers and some frost protection equipment

Question 32

The cost of winemaking can also be broken down into the initial cost of establishing the winery and the ongoing cost of managing it and producing, maturing and packaging the wine:

Answer 32

Establishment of winery:

• the land where the winery will be build on can need to be purchased
• • fitting it out with equipment such as presses, tank, pipes and pumps refrigeration equipment and bottling line

** the funding for this can come from a bank, vineyard owner or investors

Question 33

Winemaking costs:

Answer 33

1) Labour: employ small number of mainly skilled staff full time, casual labour around harvest time
2) machinery and equipment running costs: fuel electricity and maintanance
3) Winery materials: sugar enrichment, de acidification agents, acid, cultured yeast carbon dioxide or other inert gases fining and filtering agents ``
4) bought in fruit
5) water: wineries use large volumes of water for cleaning (so scarce water will need to recover as much water as possible)
6) a lot of practices need electricity (refrigiration, ventilation, presses, pumps and lighting) because this some estates generate some or all of their own electricity (solar panels)

Question 34

Maturation costs:

Answer 34

1) storage place
2) new oak barrels very expensive (so second hand barrels

** cheaper oak staves and chips

3) also cashflow: there can be a lot of money tied up in maturing stock

Question 35

Packaging costs:

Answer 35

1) it will need to buy materials such as bottles, closuresn labels, cartons and pallets

2) a bottling line can be very expensive and not always cost effective (so hiring a bottling line)
- - or send the wine to another estate and pay for their equipment

3) designing label

Question 36

The most common way to transport the wine is in bottle

Answer 36

these bottles are packaged in bottles which are in turn loaded into crates and pallets

Question 37

Transport company that is specialised in the transportation of wine:

Answer 37

JF Hillebrand

Question 38

Air transportation:

Answer 38

1) cost dependent on weight (fuel)

- - therefore only used in special circumstances (samples)

Question 39

Road transportation:

Answer 39

For short journeys this can be very cost effective as the product is transported directly from the producer to its destiny, for long journeys eg Mendoza to New York, this can be expensive

Question 40

Rail:

Answer 40

the cost will depending on journey and how goods are loaded on the train

• • if individual pallets are needed to load on and of the train this will be too expensive
• • but this can be reduced by containerization (back on a truck and then on the train, this can reduce costs

Question 41

Sea:

Answer 41

By far the most cheapest way (in cost per mile) for wine over long distance, this can only turn into long time deliverment

Question 42

Bulk trasport:

Answer 42

Past decade increase in bulk transportation

• • 2016: 38% of the worlds wine was exported in bulk a
• • Bulk wine accounts for 58% of German, 35% of UK and 24% of US still wine imports

Question 43

Bulk wine is transported in either plastic flexitanks (more common) within a standard steel shipping container or non- flexible ISO tanks

Answer 43

Much lighter than bottle

– also much more efficient: standard shipping container can hold around 9000- 10000 l of bottled wine where the largest flexitank can hold 24000 l of wine in bulk so the double can be transported

– so less fuel, so also cheaper and environmentally-friendly

– can only hold 1 sort of wine so only for brands who sell large amounts

Question 44

Now there is now increasing interest in transporting more expensive wines in bulk too.

Answer 44

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Question 45

Insurance during transportation is very important:

Answer 45

1) very important in case if the wine is damaged lost or spoiled

2) modern transportation is very safe and reliable, but accidents do happen:
* in 2013 the containership MOL Comfort broke and sank off mumbai amongst the cargo were two containers of wine from New Zealands St Claire winery destined for Sweden.

Question 46

The Party taking out the insurane should be the one which assumes the risk for loss or damage, eg

Answer 46

1) The winery will be responsible for ensuring the wine makes it safely to its distributors and the distributrs will then be responsible for getting the wine safely to retailers
2) Using a specialist freight forwarder should reduce the risk and many offer insurance as a part of their service (usually at extra cost)

Question 47

On top of transportation costs, there are additional costs which will payable if a wine is to be imported to an other country.

Answer 47

Different countries also have different label laws:

• in the EU the abv % on the label must be shown to the nearest whole or half unit
• • US laws permit 1,5% variance, so American wines may need to be relabelled if going to the EU
• US laws also requires bottles to display a health warning, which will need to be added to wines entering the country

*** so producers dealing with a number of different countries, may therefore have to order a number of different labels for specific markets (so this can be more expensive)

Question 48

It would take producers a significant amount of time to learn about all these different requirements and comply (voldoen)

Answer 48

which is why many producers employ distributors to deal with foreign (buitenlands) markets

Question 49

Distributors will charge a fee which will add cost to a wine this is called the ‘Margin’

Answer 49

Margin is usually quoted as a percentage and is calculated as the profit (winst) divided (gedeeld door) by the revenue (omzet)

EG:
If a distributor added a fee of 1€ (1€ of profit) to every bottle of wine that cost them € 10 to purchase the margin will be

(1: 11) x 100= 9.09 per cent

Rules are different but generally can range from 5-25%
* the hospitality sector tend to have higher costs and a larger staff than those specialising in the retail sector

Question 50

Distributors margins can be avoided if retailers buy directly from producers

Answer 50

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Question 51

The retailers maincosts are as follows (also hospitality):

Answer 51

1) Property costs: or buying a property or leasing it for a period of time. buyin will incur a significant capital cost and the buyer can need a property loan (zakelijke lening) to fund its investments
Leasing is will be initially cheaper (but rent need to be payd and if lease comes to an end, they may have to move out

Question 52

Retail premises (pand), especially bars and restaurants, tend to be in prime locations which are the most expensive to buy or lease

Answer 52

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Question 53

Whether the retailer buys or takes a lease of their premises, they will need to spend money decorating and furnishing it to suit the business image.

Answer 53

• once ste shop, bar or restaurant is open there will be additional running costs, such as maintanance, security, water, energy and insurance are fairly universal

– others vary from country to country, such as commercial property taxes and waste disposal (verwijdering)

Question 54

Property costs will be lower for online retailers as hey need to buy or lease warehousing space, which is often located areas away from city centres where property prices are much cheaper

Answer 54

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Question 55

Labour:

Answer 55

1) staff cost vary according the type of retail outlet
- - some countries require staff to be paid at a minimus wage (whereas other countries can be more flexible)

2) The higher the level of skill and expertise a member of staff has, the higher the level of wage that person will expect to receive.
3) training staff to bring them up to the required level of skill and spertise can and be an significant business cost
4) supermarkets, labour costs are relatively low as highly skilled staff are not required on the shop floor, however specialist wine retailers will employ highly knowledgeable staff who can engage with customers and advise them on the range of wines available

Question 56

In fine dining restaurants, staff need to be skilled and knowledgeable, and salarises should reflect this expertise

Answer 56

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Question 57

Delivery costs: delivery of wine to the end consumer is one of the mors expensive elements of the supply chain:

Answer 57

1) wine is relatively heavy and therefore costs more to deliver than other goods of a similar size
2) it is also extremely fragile (risk that bottles will get broken)

Question 58

Margin at the point of sale:

Answer 58

To be financially viable, retailers need to make a profit from selling the wine. the amount of margin varies between countries and types of retailers. specialist wine retailers usually look for a margin of 30-50%

Question 59

In restaurants or bars the margin is much higher (sometimes such as 66%) i.e. the wine is sols for three times what the bar/ restaurant bought it for)

Answer 59

Profit margins are usually higher with wines available by the glass, as there is a risk that once opened, the wine may spoil and need to be poured away before the bottle has been emptied.

Question 60

There are certain costs associated with marketing which can add the price of a bottle of wine:

Answer 60

1) labour: Large producers and brand owners will employ their own in-house marketing teams. however,
- - this is expensive for smaller producers (so external marketing company will be needed

2) Design and production of bottles and labels

3) marketing campaign: advertising or promotional materials
- - sending samples to tastings or competitions (they will have to provide them free of charge from stock, which could otherwise be sold
- - price promotions are an important part of wine marketing especially in larger retailers, however it is usually the producer that bears the cost of these

Question 61

A producer may be a member of an industru association (such as a consorzio in italy or the VDP in Germany) or a generic trade body (Wines of Australia or wines of south Africa)

Answer 61

One of the roles of these organisations is to market their members wines collectively

• • they are funded by a levy paid by members, usually on the value of their sales
• • this will also need to be reflected in the final cost of the wine

Question 62

Producers cannot choose whether or not they comply with these laws but, in certain circumstances they can decide how to do so:

Answer 62

In UK Excise duty is payable on wine entering the country unless it is stored in what is known as a bonded warehouse. importing companies (e.g distributors) who wish to hold on to stock therefore have a choice to either pay the duty as soon as the wine arrives in the UK and then store it in their own facility or store the wine in a bonded warehouse and only release it when someone wants to buy it

– whirlst hiring space in bonded warehouse costs money, it means the importer does not need to pay duty out of their own funds which can help their cashflow situation

Question 63

There are number of methods that those in the wine industry can use to mitigate the effect of exchange rate fluctuations:

Answer 63

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Question 64

Options

Answer 64

This is one of the key strategies used in currency edging:
1) one possibility is for a retailer to take an option/ reserve on a certain amount of wine at an agreed price

2) that means the producer set aside the agreed volume of wine and at an agreed time, the retailer may decide wether or not they want to take it (this decision could be based on the exchange rate)
3) Because the producer runs the risk that the retailer will not take the wine, leaving them with unsold stock, the producer may want to charge a higher price than under a normal contract

– however usually it is the larger retailers who have the negotiating power to demand such arrangements

4) it is also to take an option on a certain amount of currency at an agreed price, rather than stock

Question 65

Fixing the price of the currency of the importer at the dae of ordering

Answer 65

1) producers may not agree to this or charge a premium as it shifts the currency risk to them
2) they welcome the certainty of knowing how much they will receive for the wine so prices are usual in the currency of the producer
3) many retailers prefer to do this so that they have the certainty of how much the wine will effectively cost and base their retail prices on this

– if the buyer chooses not to fix the price of the wine when ordering, subsequent changes in the exchange rat could mean they end up paying more or less for the wine than if they paid on delivery

Question 66

Buying currency to cover specific orders:n

Answer 66

1) This requires an proactive stance (houding) and only larger companies are likely to have in the in house skills to manage currencies in this way
2) this is an important business activity and is not considered speculations

Question 67

Entering a contract to fix exchange rates:

Answer 67

1) an other common strategy for hedging currency
2) so entering a formal contract with the bank (if a lot of business is done in the same currency) to purchase a given amount of currency at an agreed exchange rate on a specified date

– the retailer buyer is legally committed to purchasing the currency purchase

– whilst the exchange rate may go up or down, again a retailer has the certainty of a fixed exchange rate and can budget accordingly

Question 68

Traiding in USD/EUR

Answer 68

1) many producers in countries with unstable currencies prefer to trade in more stable currencies such as the US dollar or EURo
2) this is also attractive for the retailers to have greater certainty about the price of wine
3) as the producer may buy vineyards or materials in dollars or eu, it reduces the number of times they have to exchange currency, leaving them less exposed to the fluctuations in their domestic currency

Question 69

opening a foreign currency account in a local bank

Answer 69

1) payents for goods can be made in the currency of the seller

2) not allways efficient as the foreign currency need to be bought and there is a certain sum of currency over
- - can make more sence in the case of a manufracturer who buys component parts in italy and spain, produces the final product in UK, but sells it in germany all the transactions will be in euro

– this is not really suitable where goods are bought in one currency and sold in another

Question 70

Opening an account in an overseas bank

Answer 70

This has all the diadvantages of opening foreign currency account in a local bank but with an added cause for caution (reden tot voorzichtigheid)
– banking regulations differ greatly in different countries and care must be taken to ensure that all the rules are thoroughly understood