D2 - from 2021 textbook Flashcards
What are the factors that influence the DEMAND for wine?
Social
Economic
Legal
Social
- Changes in CONSUMPTION HABITS (e.g., younger drink less, health concerns)
- Changing consumer PREFERENCES (e.g., rose, Prosecco, low alcohol)
- Changes in REPUTATION of region or wine (critic scores, influencers, films, TV)
- Changes in SPENDING PATTERNS (e.g., price sensitive markets vs. not, the “premiumization” of the US market)
Economic
- Strength of the ECONOMY
- CURRENCY EXCHANGE
- Changes to the MARKET (exit or entry)
Legal / Political
- LAWS prohibiting SALES and reducing CONSUMPTION of alcohol
- TAXATION
- International TRADE
Factors that influence SUPPLY of wine
Production
- area under vine
- vine pulls schemes
- EU restrictions on planting new vineyards
- Conversion of vineyards to other use
- Urbanization
- Human decisions in the vineyard e.g., irrigation
- Natural factors (weather, climate change)
Legislation
- PDOs in EU have rules on grapes, max yields,
- Some PDOs have rules on irrigation; other areas (Spain) are changing rules about irrigation.
What are challenges of an oversupply of wine
First, this is common.
- Prices fall as consumers can easily find alternatives.
- Producers may have to reduce price further to free up equipment.
- Selling at a lower price can devalue the brand, so
- Some producers will work to find new markets - private label, lower-tier brand.
What are the challenges of an under-supply of wine?
Producer doesn’t have enough wine to sell
Disappointing clients
Strained business relationships.
Prices increase - or producers issue wines to their main distributors on allocation.
Consumers will find cheaper alternatives.
BIG PICTURE: What are the key factors that influence cost of a bottle of wine?
Grape growing costs Winemaking costs Transportation costs Importation costs Sales costs Marketing costs
Also, legislation can impact cost.
Fluctuations in currency can impact cost.
Detail: What are the costs associated with growing grapes?
VINEYARD ESTABLISHMENT - buying the land - understanding it - surveying + soil analysis - site clearance - building access roads - buying and planting vines - buying stakes and wires - drainage and/or irrigation installation - protections against weather hazards - protection from animal pests - buying machinery and equipment Mostly capital costs.
VINEYARD MANAGEMENT
- Labor
- Machinery and fuel
- Supplies (tools, gloves, etc.)
- Vineyard treatments (for pests, etc.)
- Water
- Electricity
- Insurance & depreciation
Detail: What are the costs associated with winemaking?
WINERY ESTABLISHMENT
- Land
- Building winery
- Buying equipment (pumps, pipes, tanks, presses, refrigeration)
WINEMAKING COSTS
- Grape growing or “bought-in” fruit
- Labor
- Machinery and equipment running costs
- Winery materials (sugar, de-acidification agents, acid, cultured yeasts, CO2, fining and filtering agents)
- Water
- Electricity
- Maturation (space, vessels, labor, cash)
- Packaging
- Depreciation
What are the most common methods of transportation from most to least expensive?
Air - only for special circumstances (competition, Beaujolais Nouveau for Japanese market
Road - if long distance, expensive.
Rail - If containerized, do-able. If on pallets, expensive
Sea - cheapest by far. But slow.
What do we need to know about bulk transportation? Give stats by country in 2018.
In 2018, 34% by volume of world wine was exported by bulk.
2018 - Spain (55%) and USA, South Africa, Australia and Chile all exported»_space; 40% of wine exports in bulk.
Up to now, bulk was associated with inexpensive wine, but this may be changing.
Bulk transport - advantages and disadvantages
Advantages:
- wine in tank is much lighter than wine in bottles.
- also more space efficient. Same space can hold 24,000 liters in bulk vs 9000-10,000 liters in bottle. (i.e., 2x in same space can be transported)
- significantly reduces fuel needed
Disadvantage:
- only for large consignments
- if sale is less than 15,000 cases, there is no cost advantage over transporting in bottles
What are importation costs that contribute to the cost of a bottle of wine? What do these costs lead producers to do?
- duties & taxes
- labelling laws (different everywhere)
THUS, many producers use a distributor. A distributor will take between 5 and 25% margin.
What are the SALES costs that contribute to the cost of a bottle of wine?
- Property costs. The cost of the retail premise, including ongoing costs like security, maintenance, etc.
- Labor
- Equipment & materials to outfit store, bar or restaurant
- Storage costs (restos: Wine fridges; supermarkets: Warehouses)
- Delivery costs to end consumer (for retail shops)
- Margin at the point of sale (retailer profit)
- Specialist wine retailers: 30-50%
- Bars & restos: as much as 66% (3x what the bar purchased it for)
What are the MARKETING costs that contribute to the cost of a bottle of wine?
Labor - of the marketing team, in-house or outsourced.
Design and production of bottles & labels
Marketing campaign (adv, promo materials, sample bottles, events)
What is the impact of LEGISLATION on the cost of a bottle of wine?
Bonded warehouse in UK - costs money.
Tariffs
Onerous labelling laws
How can businesses in the wine industry mitigate the effect of exchange rate fluctuations?
Options - buy an option to buy the wine later at a specific price. Large importers may do this.
Fix the price in the currency of the importer at date of ordering. Shifts risk to producer who may not agree to this.
Buy currency to cover specific orders
Enter a contract to fix the exchange rate
Trade in EURO/USD
- more stable.
- if producer buys equipment in EUR/USD, it reduces the # of conversions made
Open a foreign current account in a local bank
Open an account in an overseas bank.
What are the types of businesses engaged in production of wine?
Estates
Growers (Beckstoffer)
Grower-producers (common in Burgundy - make the wine, sell it immediately)
Merchants (buy immature wine, mature it, sell it under merchant’s name)
Grower-merchants (E. Guigal)
Co-operatives (Plaimont. Grow grapes, make wine, market)
Custom-crush facilities (new world - CA)
Virtual Winemakers/Wineries
Conglomerates (E&J Gallo)
Between a high-volume inexpensive wine and a low-volume super-premium wine, where will you see the biggest cost differentials?
Cost of grapes
- Labor in the vineyard,
- real estate taxes,
- vineyard depreciation
Winemaking
- oak
- cellar overheads (ageing)
What % of total winemaking costs come from grape growing?
70%
In a free market, what are the options for getting a wine to the point of sale?
Producer can go to…
- retailer (not in the US!)
- distributors (aka, importer, agent, wholesaler)
- producer/distributor joint venture
- broker (a matchmaker essentially)
- direct to consumer, skipping the retailer (cellar door, events, wine clubs and online)
In a free market, what are the advantages and disadvantages to a producer of using a distributor?
Advantages:
- distributor’s knowledge of the market (players, consumer preference and trends)
- contacts
- retailers requirements and preferences
- help with admin burden (logistics, risk, legal compliance, labelling, language barrier)
- will market / promote a wine*
- you’re part of a portfolio
Disadvantages:
- $$$
- more expensive to hospitality than to retail
- *and you may lose control of your brand story / brand image
- you’re part of a portfolio
NET: You need to find the right distributor!
In a free market, what are the advantages & disadvantages of selling directly to the retailer?
Advantages:
- no middle man costs
- producer chooses which retailers stock their wines, retaining control over brand image
Disadvantage
- large administrative burden of getting wine to retailer (arranging collection, transporting, delivering the wine – and if exported, even more hassle - duties / taxkes / labelling & packaging.)
- You can use a freight forwarder for these things - $$$
- You retain full risk of wine being damaged in transport
- if going to foreign market, you must get to know retailers in target market, consumer preferences and legislation
What are advantages and disadvantages of cellar door?
Adv:
• Higher margin sales – no middle man.
• Direct relationship with the consumer with the authenticity of the site of production to build a personal relationship and develop loyal brand advocates.
• Can trial new products and get immediate and direct feedback (foregoing the need for market research).
• It is relatively easy to gather consumer data for ongoing marketing and sales.
• Can offer tastes of wine to help aid and encourage a confident consumer purchase.
• Within touristic regions or proximity to population density, will be relatively easy to attract visitors.
• Can position cellar door in urban areas if winery is too remote or isolated (though this can detract from some of the authenticity)
• Can collaborate with other like-minded industries (culinary, farming, artisans) to attract customers and offer an immersive experience.
Disadvantages:
- space / property and labor
- lack of suitable location
- a distraction
How are deep discounters able to sell at such low prices?
Lower profit margin - focused on volume
Stores are basic - products may be on pallets
Products are often private label ($2 Chuck or brands created with producer directly)
Rarely stock major brands
Often buy directly from the producer (in free market).
What are some trends associated with deep discounters?
Stock more expensive wine - when it’s gone, it’s gone.
Consumers purchase that + cheaper wine.
When they return, buy the cheaper wine.
In 2018, 37% of wine drinkers bought wine from a deep discounter in the UK.
Aldi & Lidl, Netto, Trader Joe’s
What are the options for reaching the end consumer in a free market, hospitality sector?
Bars
- specialized wine bars
- general bars
Restaurants
- non-destination restaurants
- casual dining
- fine dining
Describe the different types of restaurants.
Non-destination restaurants
- the meal is not the focus of the evening
- wines on offer need to apeal to a wide range of consumers
- tend to be from well-known regions and grade varieties.
- inexpensive or mid-priced;
- dominated by local wines
Casual dining
- wide variety - everything not in NDR or FD.
- high quality food & wine but not the formality of fine dining
- mid-priced to premium price wines
- chosen with food pairing in mind
- menu may suggest pairings
- mixture of better known regions and varieties and less well-known ones
- staff can advise
- dominated by local wines but other regions as well
Fine dining
- “Destination” restaurants - the experience and the meal are why you are there.
- Michelin stars or prestigious chef
- food and wine pairings are particularly important
- trained sommelier + highly-trained staff
- tasting menus w/ pairings
- super-premium wines
- source of pride to have your wine on their list
Name two monopoly markets for wine and provide the name of their system.
Canada - all provinces except Alberta. e.g., Liquor Control Board of Ontario.
Sweden - Systembolaget.
What are the three types of State systems in the United States?
Control state - state holds monopoly over one or more tiers. There are 17 control states.
Open state - state regulation of 3-tier system is minimal. Suppliers and distributors are free to enter into and exit out of agreements to sell and distribute brands freely.
Franchise state - States have strong franchise laws that severely restrict the freedom of suppliers to change distributor arrangements. Laws protect the distributors.
Tell me about the laws of Connecticut - what kind of state is it? What are the outcomes of these laws?
FRANCHISE STATE
- Very strict laws regarding sale of alcohol
- Very strict franchise laws
- Restricts the number of off-premise licenses an entity can hold
- Restricts number of licenses in each city and town
- CT prohibits qty discounts by distributors which limitse the competitive advantage of large shops
- Enforces “minimum bottle pricing” which limits price competition
- Until recently prohibits off-premises sales of alcohol
OUTCOMES:
- Many small businesses have prospered
- Warded off consolidation
But also “border wars” where CT people shop just across state lines
Why did the USA develop the 3-tier system after prohibition?
- Three tier system gives control to the states but requires that retailers and upper two tiers (distributors and suppliers) not be owned by the same entity.
- To reduce the chance of “tied houses” where retailers were tied to a producer (producer have a monopoly) and prices were high
- 3-tier creates jobs, easier regulation and collection of taxes AND additional taxes due to three tiers.
What are the downsides to consolidation in the US wine market?
Facts:
- number of distributors has decreased from 3000 to 1200.
- number of US wineries seeking entry to market has increased by factor of five (2000 to 9500)
- small producers may have trouble getting quality representation - big distributors are overwhelmed and focused on big producers; small boutique distributors don’t have nationwide coverage.
- distribution contracts hard to break
- Consolidation has stimulated activity in the “direct to consumer” category and state regulations are loosening there.
Define marketing and lay out the key stages
Marketing is the management process of identifying, anticipating and satisfying consumer requirements profitably.
Stages:
- Identify the product/brand to be marketed.
- Identifying the target market
- Setting the objectives of the marketing strategy
- Devising the marketing strategy (the marketing mix, 4Ps)
- Implementing and monitoring the marketing strategy.
What is the definition of a brand and what are the key ways a brand image is formed in a consumer’s mind?
A brand is the physical product and the experience and beliefs surrounding it - a unique combination which the name or logo of the product o service should evoke in the mind of the audience.
Create a positive image through STEPS LN
- SUBSTANCE
- Consumer TRUST
- Consumer ENGAGEMENT
- Price PREMIUM
- Brand STORY
- Longevity
- Strong brand NAME
Four stages of the PLC
Introduction: getting product into market, gaining recognition (awareness) and reputation. Distribution may be limited at first.
Growth - increasingly widely distributed and aimed at a broader target market to encourage strong growth
Maturity - Focus on differentiating product from others that have entered
Decline - take steps to extend life cycle through updating packaging, reducing price or seeking new markets
What are the levels of brand positioning?
Value
Standard
Premium
Super-premium
What comprises brand equity?
Brand awareness & brand image
What does private label mean vis a vis brands?
Wines produced specifically for supermarkets, larger chains of bars and restaurants.
May be made by well-known producers but label may not say that.
ONLY available from retailer or restaurant that created the brand.
What is a ladder brand? Give an example.
Accessible - least expensive, widely distributed - consumers will buy most often.
Stretch - affordable but only for special occasions
Aspiration - Most prestigious expression of the brand; most will never buy it; should cast super-premium identity over the entire ladder.
EXAMPLE:
Accessible - Pol Roger non-vintage
Stretch - Pol Roger vintage
Aspiration - Pol Roger Cuvee Winston Churchill
Accessible - Bourgogne Rouge
Stretch - Gevrey-Chambertin
Aspiration - Le Chambertin Grand Cru
Soft brand
Any cue used by a consumer when choosing to buy one product over another: Region, country, style, Geographical indicator, grape variety, etc
Hall split wine consumers into three segments. What are they?
Wine lovers - great knowledge, interest in wine + high income, high education.
Wine-interested - great interest in wine, moderate wine knowledge, university-educated with moderate income.
Wine curious - moderate interest in wine; limited knowledge, mod income, med education. See wine as a way to maintain social relations.
Wine intelligence created a set of “wine portraits” for various countries including US, China and UK.
What are the questions answered for each segment?
Who are they?
Why do they drink wine?
Where?
What do they drink?
For the US Wine Portraits, who were the six segments?
Engaged Explorers Premium Brand Suburbans Contented Treaters Social Newbies Senior Bargain Hunters Kitchen Casuals
Producers choose a market, including geographically where to sell. What are the different market maturities and countries in each segment?
Mature market - Germany, France, Switzerland, UK
Established market - Ireland, Italy, South Africa, Hong Kong
Growth markets - USA, Canada, Brazil, Poland
Emerging markets - China, Russia, Turkey, Taiwan
New emerging markets - India, Malaysia, Philippines, Thailand
What are some types of Promotion at the point of sale?
Price promotions - LOTS of types - list some (BOGO, 10% if X bottles, seasonal sales, discounts for elderly, etc.)
Competitions (e.g., a drawing)
Limited edition packaging / presentation
Consumer tastings
Staff incentives
Staff training
What are some Promotions away from the point of sale?
Advertising (TV, cinema, radio, press, billboards) Digital advertising Social media Websites Smartphone apps Reviews & Awards Wine Tourism PR Sponsorship Events & Festivals Free Merchandise
