D2: Wine Business Flashcards
Give 2 examples of wine market supply shocks - one up, one down
2013 high rainfall in Castilla-La Mancha increased volume from 36 million to 45 million hectolitres
in 2017, spring frosts in Europe, produced lowest volume in 50 years
What happens when demand exceeds supply?
Prices are likely to go up. Some customers may pay, others may look at substitutions (alternative wine, or beer, spirits)
What happens when supply exceeds demand?
Prices drop as producers try to retain market share. New customers may try wine.
What macro trends are there in wine consumption?
Global demand has increased in recent years, due to growth China and America, offsetting falling demand in established countries (France, Italy)
What reasons are there for falling consumption?
Younger people drinking less wine (and alcohol overall)
Health concerns and government policies to reduce alcohol consumption
Changes in lifestyle (e.g. no drinking at lunch)
Reduction of over-supply in EU (wine lakes)
What recent consumer preferences trends have been seen in some of the bigger global markets?
Prosecco in the UK
Rose in the US
Move to lower alcohol, away from fortified wine
Move away from German medium sweet
What external factors can lead to change in reputation?
Leading critic reviews
Wine in popular culture
What type of market has consumers who are unwilling to pay more than the minimum?
Price-sensitive
What key categories are there for factors that can impact demand for wine?
Supply
Social factors
Economic factors
Legislative and legal
What factors impact supply of wine?
Weather
Legislation
Production
How does the strength of the economy impact demand?
In a strong economy, disposable income increases and people may start drinking wine, or trade up
In a crash, people may trade down, or change drinks
What economic factors are there that impact wine demand?
Strength of the economy
FX
Changes to competitors - new/withdrawn/temporarily unavailable products
What are Porter’s 5 forces?
- Competition in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
What legislative and political factors impact demand for wine?
Laws prohibiting or limiting the sale of wine - e.g. monopolies in Scandinavia, or the US three tier system
Drinking age
Trading hours
Policies to reduce alcohol consumption
Drink driving legislation
Taxation
Wine laws - e.g. PDO rules that restrict grapes and styles from a given region
Give some examples of government policies to reduce alcohol consumption
Scotland - minimum pricing of 50p a unit
France - restricted advertising (1991, Loi Evin)
Norway and Sweden have 20mg/100ml blood alcohol level for driving (50-80mg more common)
How can international trade in wine be hampered/enhanced?
Custom duties (tariffs for revenue, or protectionism)
Trade deals, e.g. EU and South Africa/ Chile
Argentinian import tariffs in 2010 that impacted winery equipment
Recent Chinese tariffs on US wine
What broad trend has been seen in international wine production over the last 20 years?
Areas under cultivation have dropped in Europe, but risen China
Why have some countries reduced areas under vine?
Vine pull schemes to reduce the EU wine lake
EU restrictions on new vineyards to maintain quality over quantity
Price of land (Santa Clara valley in California, or Madeira)
Switch to higher value crop (e.g. apples in South Africa)
Urbanisation leaving no one to care for a vineyard
What natural factors impact wine production?
Weather variation across vintages
Longer term climate change impacting drought and irrigation (e.g. South Africa and California)
How do GIs impact wine supply?
PDO system in Europe is very restrictive, which can impact the ability to adapt to a changing market
AOP in France/ DOC-G in Italy: both can limit yields, variety, winemaking and maturation
Distinct styles do reduce the pricing power of the customer (e.g. large retail) to swap, as styles become linked with places, so NZ sauvignon blanc can’t be swapped out for a different sauvignon blanc
Comite Champagne restricts supply to maintain demand
What is a PDO?
Protected Denomination of Origin
What is a GI?
Geographical Indication
What is the impact of wine oversupply for a producer?
Stock may not sell, or be sold below cost
Brand may be devalued as a result
New markets may take time to build up to pick up the surplus stock
What is the impact of an undersupply of wine?
Strained business relationships if contracts cannot be met
Consumers may switch to cheaper markets
Large producers can swap between products
List categories of grape growing cost
Vineyard establishment
- land cost (Medoc AOP can be 100 times Bordeaux AOP)
- surveys
- clearance
- constructing roads and buildings
- trellising
- irrigation systems
- machinery and equipment
Vineyard management
- labour
- machinery running costs
- replacement materials
- treatments
- water
- power
List categories of winery costs
Winemaking costs:
- labour
- machinery and equipment
- ingredients/materials
- bought in fruit
- water
- power
Maturation costs:
- oak barrels/ tanks
Packaging
- equipment
- materials
List transportation types
Air - limited due to cost
Road - for shorter distance
Rail - probably combined with other methods
Sea - cheapest and slowest
What are the costs/benefits of bulk transportation?
Massive increase in recent years to 35% of exports due to cost savings
Shipping container capacity increases from 10,000 bottles to 24,000
Require flexitanks within a shipping container
Need a few containers a year to be worthwhile
Insurance
List import costs
Labelling is trade block specific
Distributor costs to get local knowledge (5% to 25%)
List sales costs
Outlets include restaurants (casual to fine dining), retail (supermarkets to specialist high-end). Consider how costs differ for each of these
- Premises
- Labour
- On site storage
- Delivery to door
List marketing costs
External marketing company
In house staff for larger firms
Design and production of labels
Marketing campaigns
- advertising
- samples
- competition entries
- discounts
How can a wine importer improve cash flow?
Duties only have to be paid on wine stored when it leaves a bonded warehouse
How can FX exposure be managed?
Risk can be borne by the winemaker or the buyer (fix the price in either currency
FX futures to cover specific trades
Trade in the foreign currency (i.e. open an overseas bank account, or a foreign currency account at home)
Trade in a third currency - USD/ EUR
What is an estate producer, and its advantages and disadvantages
Produces wine from owned vineyards
- tight quality control at all levels
- total choice of wine style
- all profit (and losses) wholly owned
- ‘authentic’ product to market
- additional costs and complexity in the business
- volatility of product from crop risk
- may need size to be financially viable
What is a grower and its advantage and disadvantages?
Grape growing, with harvested product sold to a winery, either sold spot price or on a fixed contract
- beneficial to small holdings that could not support the whole process
- upfront cash flow
- focus on high-quality fruit
- higher risk of vintage variation and supply and demand
What is a grower-producer and its advantages and disadvantages?
Growers that produce wine from their own grapes, but sell it to a merchant to mature and bottle (common in Burgundy)
- better cash flow
- more straightforward business to manage
- reduced profit
- lack of control on maturation and blending
What is the french term for merchant?
Négociant
What is the role of a merchant?
Mature young wines, and blend prior to bottling
Quite often they will provide technical advice to growers, and/or buy in grapes for fermentation to maintain control
Long term contracts may be required to protect against price fluctuations (for both parties)
Some merchants may own vineyards to cover part of their product range
Examples include Guigal - a grower-merchant in Rhone
What are the advantages and disadvantages of the role of a typical French merchant?
Advantages:
- reduced expense of owning, managing and cultivating land (e.g. in Burgundy and Champagne where land is infrequently sold, and expensive)
- some may buy grapes/wine at spot price to be assured of the best quality fruit, although there is a price risk
Disadvantages:
- limited control over growing and winemaking
How do merchants in Burgundy typically differ from Bordeaux?
Bordeaux merchants typically deal with wine already made.
Burgundian producers typically are much more involved in the production of wine
What is en primeur and how does it work?
En primeur is advance purchasing of wine before it has been bottled and remains in barrel
It is a method for the chateaux to generate cash inflow without having to wait for a long maturation period
It may result in a cost saving for the consumer, or be the only opportunity to acquire a limited release wine
What is a co-operative?
A co-operative is owned by several members - typically growers, who then produce and sell their wine together
e.g. Plaimont in south-west France, Badisher Winzerkeller in southern Germany
What are the advantages and disadvantages of a co-operative?
- pool financial resources to afford better equipment
- shared access to experts, advice, marketing, packaging and sales services
- more efficient working
- democratic control may slow decision making
- cooperative may be focussed on volume, or quality and inflexible on changing
What is a custom crush facility?
A variant on the co-operative model with a pay-as-you-go model.
Can make anything from inexpensive, large production, to super-premium
The finished wine is returned to the grower for sale and marketing
What are the advantages and disadvantages of custom crush facilities?
Low capital costs for growers, particularly new businesses
Close working relationships are vital to ensure the final product matches the desired style
What is a virtual winemaker?
A virtual winemaker owns no land or equipment and uses third party providers for all aspects of winemaking. e.g. buying grapes from a vineyard and organising shipping to a custom crush facility
Virtual winemakers may produce all levels of wine
List the top 5 wine conglomerates globally
E&J Gallo, US
Constellation Brands, US (owns Ravenswood)
The Wine Group, US
Treasury Wine Estate, Australia (includes Lindemans and Penfolds)
Vina Concha y Toro, Chile (owns Cono Sur, Casillero Del Diablo)
What are the advantages of large conglomerates?
- scale when negotiating contracts
- vertically integrated for cost control and efficiencies
What legal controls are typically in place for limiting wine sales?
Sales taxes specific to alcoholic beverages
Limiting sales hours
Minimum drinking ages
What three main types of market are there?
Free (producers are free to sell direct, or via intermediaries)
Monopoly (all sales are via government owned shops)
Three tier system (US specific system)
What categories are there for wine sales?
Retail off-premises off-trade retailers Hospitality on-premises on-trade HoReCa
What are the advantages and disadvantages of retail sales?
Advantages
- control over promotions, particularly with smaller outlets
- no intermediary taking a fee
Disadvantages:
- increased administration on logistics, managing relationships and regulatory/legal implications (taxes and labelling)
- international relationships can be challenging to start and maintain. Trade fairs may assist
What role does a distributor typically play?
Distributors selling to retailers are normally located in the same country as the retailer
Distributors may have:
- exclusive rights of distribution
- hold stock
- import
A distributor provides:
- knowledge of the market (consumer tastes, key retailers, trends)
- manage relationships
- administration (tax collection, logistics)
- take the risk for lost/damaged wine
What are the advantages and disadvantages of using a distributor?
Advantages:
- local market knowledge
- compliance and legal knowledge
- marketing resources (e.g. visiting trade fairs)
- increased exposure
Disadvantages:
- lack of marketing control
- loss of some profit margin
- part of a portfolio of producers
- may need sufficient sales
- may need to match distributor size with producer size
What is a joint venture?
Two parties of comparable size at different points in the supply chain creating a new joint entity
It requires clear contractural responsibilities and obligations
What are the advantages and disadvantages of a joint venture?
Advantages:
- more control
- shared costs
- shared risks
Disadvantages:
- harder to unwind in event it is not successful
- legal expertise to set up
What is a broker, particularly in comparison to a distributor? In which market are brokers common?
Brokers are legally independent of either party it deals with, whereas a distributor is typically an agent of one.
A broker is not a legal party to an agreement, it is a facilitator, taking a small marking (1% to 5%)
They are common in Bordeaux, with a legal status acting as intermediaries between Chateaux and Negociants
What are the advantages and disadvantages of using a broker?
Advantages:
- typically detailed knowledge/ highly specialised
- facilitating rare/fine wine sales
Disadvanges:
- a further cost eroding margin
What are the advantages and disadvantages of selling direct to consumers?
Advantages:
- retail full profit
- retail full control of marketing
- potentially cheaper for the consumer
- build brand loyalty
- personal connections
- word of mouth marketing
Disadvantages:
- administrative burden (website/ premises/ staffing)
- logistics (returns/ breakages)
- needs suitable location
What are the options for direct sales?
- “cellar door”
- events
- wine clubs
- online
How do cellar door sales typically take place?
Anything from an actual cellar door, to a purpose built visitors centre and shop, where visits are combined with vineyard tours. Some have restaurants
Price may be cheaper than online
Outlet may actually be offsite in a nearby town
What type of direct sales ‘events’ are carried out?
Tasting fairs
Food festivals
Advantages:
- Attract a large number of people
- new clients
Disadvantages:
- travel expenses
- compete for attention
What are wine clubs’ advantages/ disadvantages?
Popular in new world countries. These give priority access to consumers for an annual fee
Advantages:
- earn annual fee
- ease of marketing
Disadvantages:
- additional work required
- needs reliable freight partner
- challenge in USA 3 tier system
What are the advantages/ disadvantages for direct online sales?
- retain higher profit
- consumer may save
- costs to manage a website
Pros/Cons of supermarkets in free markets
Generally high volume, big brands stocked, dominated by local wine where relevant
pros
- known brands attract consumers
- can stock exclusive labelled products (private label), even if sold differently elsewhere (e.g. M&S)
- private label wines can promote loyalty
- can just easily add supermarket brand as a supplementary label (e.g. Sainsbury’s ‘Taste the difference’)
- artisan/smaller chains may stock artisan producers
cons
- widely available wine is price competitive as it is well known
- lack brand loyalty when widely available; very price sensitive
- massive negotiating power increases risk for producer
- strict quality control requirements increase risk
Pros/Cons of deep discounters in free markets
Advantages:
- lower price for consumer, due to lower profit margin and fewer intermediaries
- stable pricing
- may work with smaller producers and ‘when it’s gone, it’s gone’
Disadvantages:
- poorly promoted products
- limited ranges
Pros/Cons of convenience stores in free markets
Advantages:
- typically 24 hour sales (if allowed by law)
Disadvantages:
- smaller ranges overlap with supermarkets
- typically more expensive than supermarkets
List types of retail outlets in free markets
- Supermarket
- Deep discounters
- Convenience Stores
- Specialist retailers
- Hybrids (try and buy)
- Online
- Global travel retail
- Wine investment companies
Pros/Cons of specialist wine retailers in free markets
Typically sell additional products like cheese and meat alongside wine. Typically higher priced wine
Advantages:
- retailer can specialise (e.g. biodynamic)
- charge more for specialist advice
- can sell new products on recommendations
Disadvantages:
- potential lack of purchasing power
Pros/Cons of hybrid retailers in free markets
Advantages
- try before you buy for consumers
- regularly changing tasting selection for consumers
Disadvantages:
- retailer may have to stay open late
- increased bureaucracy
Pros/Cons of online retailers in free markets
advantages
- cut costs on premises
- stock larger ranges
- supplement information with reviews, recommendations, recipes
disadvantages
- may require regular purchases
- may need to work in tandem with bricks and mortar
- cost and effort of delivery
- needs easy to use website, and ongoing technical support
Pros/Cons of global travel retailers in free markets
Advantages
- lack of competition on site
- high value sales typically
Disadvantages
- high outlet costs
Define wine investment companies
These buy investment grade wines on behalf of retail investors - the most expensive and sought after wines, e.g. Bordeaux Premier Cue Classes; Burgundy Grand Crus
Some also have normal retail. Others are just investment vehicles, or brokers
List hospitality outlets in a free market
Specialise wine bars
General bars
Non-destination restaurants
Casual dining
Fine dining
List pros/cons of specialist wine bars in free market hospitality
Similar to specialist retail outlets
advantages:
- knowledgable staff
- interesting/ broad ranges
- consumers will pay a higher price
- good for specialists, e.g. natural wines
- can offer food with wine
- regularly changing selection
- bigger ones may have their own label
disadvantages:
- cannot compete on pricing power
List pros/cons of general bars in free market hospitality
advantages:
- good for known brands
disadvantages:
- lack of wine focus
- limited range
List pros/cons of non-destination restaurants in free market hospitality
advantages:
- inexpensive/ mid-priced wines
disadvantages:
- need to offer widely appealing wines
List pros/cons of casual dining in free market hospitality
advantages:
- independently owned/ small chains
- potential to offer limited pairings
- some staff advice may be offered
disadvantages:
- limited choice
List pros/cons of fine dining in free market hospitality
advantages:
- high price, high margin
- paired with food well
- highly qualified/ knowledgable staff
disadvantages:
- very high price!
- small volume
Define monopoly markets
Typically government run retail outlets are the only places that wine can be bought (Scandinavia and Canada)
Bars and restaurants may have limited access to other intermediaries
Typically alcohol is highly taxed and expensive, to limit consumption
Pros/ Cons of monopoly markets
Advantages:
- free of incentive or bias to sell any given product
Disadvantages:
- slow to respond to change/ bureaucratic: typically tender process to stock products that takes 7-8 months
- inefficient
Define the USA’s three-tier system
State by state rules are complex and slow to change
Three tiers are
- Suppliers (producers/importers)
- Distributors (wholesalers, brokers)
- Retailers (on and off-trade)
Current rules prevent retailers from being cross-owned by either suppliers or distributors.
e.g. Producers may import, but not wholesale
In principle, distributors cannot be bypassed. Although increasing number of states allow producers to sell direct to consumers
Define the USA’s three categories of typical state control of the three tier system
Control states - where the state has a monopoly over one or more tier. e.g. Michigan has a retail monopoly on the sale of spirits
Open states - state involvement is minimal
Franchise states - restrict the freedom of suppliers to change distributor arrangements. This is to protect a distributor from being forced out by a larger distributor. It is hard to change distributors, even for poor performance.
What are the challenges of the state system of control?
Each state has unique laws and they may highly prescriptive
e.g. Connecticut - limits off-premises licences numbers for a given entity, the total number of licences in a town or city. This may vary dependent on population. There is minimal bottle pricing.
What are the main challenges to the three tier system?
Small producers struggle to get to market
Inefficient/ costly - too many producers and not enough distributors
Incumbent system raises lots of taxes, so reluctance to change
Market is weighted towards the distributors who have consolidated and have the greatest control
What are the key stages in implementing a marketing strategy?
- Identify product/brand to market
- Identify target market
- set marketing objectives
- devise marketing strategy
- implement and monitor the strategy
Define marketing
The management process responsible for identifying, anticipating and satisfying consumer requirements profitably
How may a marketing objective be initiated?
Intuition
Aspiration
Analysis - analyse market segments and consider who is under represented in the market
What are the factors in the mnemonic PESTLE
Political Economic Sociological Technological Legal Environmental
What is the potential range of political impacts on the industry?
Ranges from prohibition at the extreme end, to a range of taxes that discourage drinking; to promotional support for cultural products
What key economic factors impact the industry?
Currency strength
FX rate stability
Recession vs. boom
What key social factors impact the industry over time?
Trends changing between generations
Cultural attitudes change towards alcohol over time
Production can be impacted in rural areas by changes in society
Other changes can be towards global trade, use of synthetic chemicals, national sentiment
What key technological factors influence winemaking and distribution?
Production techniques
Types of equipment
Internet sales and social media
What key environmental factors impact different parts of the industry?
Climate change increasing ripening
Pressure on alternative land use
Impact on logistics, waste, entergy
What is the nature of legal and regulatory factors impacting wine?
Regulation of production and trade
What are the stages in a product lifecycle and the marketing approach to each?
Introduction - build recognition/ limited distribution
Growth - wider distribution aimed at a broader market
Maturity - consider competition
Decline - extend/maximise the life cycle
What factors make up a brand?
Substance - consistency and quality of product
Consumer trust - based on historical experience
Consumer engagement with the existing product and brand
Brand story - creates emotional attachment
Price premium - viewed as mark of quality
Longevity
Strong brand name - easy to remember, international
Brand position - value/ standard/ premium/ super-premium
Define ladder brands
Different rungs on a brand ladder that increase in quality and reduce in volume
Accessible
Stretch
Aspiration
Define soft brand
A factor used by a consumer when choosing products
e.g. country, region, geographical indicator, variety, and potentially style
Define luxury brand
No agreed definition. Typically considered a super-premium product, which promotes itself as scare
How can markets be segmented?
Geographic - where consumers live
Demographic - age/ gender/ ethnicity/ income/ family status/ education/ occupation/ socioeconomic status
Psychological - lifestyle, personality, values, interests
Behavioural - observable behaviour (e.g. when buy wine, how much, what brands, etc)
What ways might market research be carried out?
survey/ focus group/ interviews/ observing/ secondary research
What three main options are there for setting a marketing strategy?
mass marketing - whole market, or majority market with a single product
niche - aiming a product at a specific market segment
multiple - one brand into multiple segments, or several brands targeted at different segments
What objectives should a marketing strategy have?
Type of strategy
Aims of strategy (new launch, product improvement, increase sales on existing product, etc)
How to measure success
What time period?
It should have a budget
What 5 Ps are useful in determining marketing mix?
Product Price People Place Promotion
What marketing considerations can be considered under Product?
Characteristics
Presentation
Experience
Differentiating characteristics
What marketing considerations can be considered under Price?
Main product
Delivery
Discounts
Promotions
What marketing considerations can be considered under People?
Attitudes and behaviours of the target market
Training, attributes and skills of staff
What marketing considerations can be considered under Place?
Where sold
What marketing considerations can be considered under Promotion at the point of sale, and the pros/cons of promotions?
Price promotions: discount; multi-buy
Free merchandise
Limited edition packaging
Competitions
Tastings
Staff training
Pros:
- Reach new customers
Cons:
- Weaken brand
- Potentially provide only temporary uplift
What marketing options are there away from the point of sale?
Advertising - TV/ Cinema - Radio - Press - Online - Billboards - Sponsorship Websites Social Media Smartphone apps Wine tourism Events and festivals Reviews and awards
List typical PR activities?
Representatives attending public events
Press releases
Newsletters
Social Media
Brand ambassadors
How can a marketing strategy be monitored?
Sales figures
Website traffic
Market research
What options are there for carrying out marketing?
Internal team
PR company/ advertising agency
Industrial associations
Trade bodies
