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WSET level 4 diploma D1 / D2 > D2: Wine Business > Flashcards

D2: Wine Business Flashcards

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1
Q

Give 2 examples of wine market supply shocks - one up, one down

A

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

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2
Q

What happens when demand exceeds supply?

A

Prices are likely to go up. Some customers may pay, others may look at substitutions (alternative wine, or beer, spirits)

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3
Q

What happens when supply exceeds demand?

A

Prices drop as producers try to retain market share. New customers may try wine.

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4
Q

What macro trends are there in wine consumption?

A

Global demand has increased in recent years, due to growth China and America, offsetting falling demand in established countries (France, Italy)

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5
Q

What reasons are there for falling consumption?

A

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)

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6
Q

What recent consumer preferences trends have been seen in some of the bigger global markets?

A

Prosecco in the UK

Rose in the US

Move to lower alcohol, away from fortified wine

Move away from German medium sweet

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7
Q

What external factors can lead to change in reputation?

A

Leading critic reviews

Wine in popular culture

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8
Q

What type of market has consumers who are unwilling to pay more than the minimum?

A

Price-sensitive

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9
Q

What key categories are there for factors that can impact demand for wine?

A

Supply

Social factors

Economic factors

Legislative and legal

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10
Q

What factors impact supply of wine?

A

Weather

Legislation

Production

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11
Q

How does the strength of the economy impact demand?

A

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

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12
Q

What economic factors are there that impact wine demand?

A

Strength of the economy

FX

Changes to competitors - new/withdrawn/temporarily unavailable products

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13
Q

What are Porter’s 5 forces?

A
  1. Competition in the industry
  2. Potential of new entrants into the industry
  3. Power of suppliers
  4. Power of customers
  5. Threat of substitute products
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14
Q

What legislative and political factors impact demand for wine?

A

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

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15
Q

Give some examples of government policies to reduce alcohol consumption

A

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)

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16
Q

How can international trade in wine be hampered/enhanced?

A

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

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17
Q

What broad trend has been seen in international wine production over the last 20 years?

A

Areas under cultivation have dropped in Europe, but risen China

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18
Q

Why have some countries reduced areas under vine?

A

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

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19
Q

What natural factors impact wine production?

A

Weather variation across vintages

Longer term climate change impacting drought and irrigation (e.g. South Africa and California)

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20
Q

How do GIs impact wine supply?

A

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

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21
Q

What is a PDO?

A

Protected Denomination of Origin

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22
Q

What is a GI?

A

Geographical Indication

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23
Q

What is the impact of wine oversupply for a producer?

A

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

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24
Q

What is the impact of an undersupply of wine?

A

Strained business relationships if contracts cannot be met

Consumers may switch to cheaper markets

Large producers can swap between products

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25
Q

List categories of grape growing cost

A

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
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26
Q

List categories of winery costs

A

Winemaking costs:

  • labour
  • machinery and equipment
  • ingredients/materials
  • bought in fruit
  • water
  • power

Maturation costs:
- oak barrels/ tanks

Packaging

  • equipment
  • materials
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27
Q

List transportation types

A

Air - limited due to cost

Road - for shorter distance

Rail - probably combined with other methods

Sea - cheapest and slowest

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28
Q

What are the costs/benefits of bulk transportation?

A

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

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29
Q

List import costs

A

Labelling is trade block specific

Distributor costs to get local knowledge (5% to 25%)

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30
Q

List sales costs

A

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
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31
Q

List marketing costs

A

External marketing company

In house staff for larger firms

Design and production of labels

Marketing campaigns

  • advertising
  • samples
  • competition entries
  • discounts
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32
Q

How can a wine importer improve cash flow?

A

Duties only have to be paid on wine stored when it leaves a bonded warehouse

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33
Q

How can FX exposure be managed?

A

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

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34
Q

What is an estate producer, and its advantages and disadvantages

A

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
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35
Q

What is a grower and its advantage and disadvantages?

A

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
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36
Q

What is a grower-producer and its advantages and disadvantages?

A

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
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37
Q

What is the french term for merchant?

A

Négociant

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38
Q

What is the role of a merchant?

A

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

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39
Q

What are the advantages and disadvantages of the role of a typical French merchant?

A

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

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40
Q

How do merchants in Burgundy typically differ from Bordeaux?

A

Bordeaux merchants typically deal with wine already made.

Burgundian producers typically are much more involved in the production of wine

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41
Q

What is en primeur and how does it work?

A

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

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42
Q

What is a co-operative?

A

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

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43
Q

What are the advantages and disadvantages of a co-operative?

A
  • 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
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44
Q

What is a custom crush facility?

A

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

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45
Q

What are the advantages and disadvantages of custom crush facilities?

A

Low capital costs for growers, particularly new businesses

Close working relationships are vital to ensure the final product matches the desired style

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46
Q

What is a virtual winemaker?

A

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

47
Q

List the top 5 wine conglomerates globally

A

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)

48
Q

What are the advantages of large conglomerates?

A
  • scale when negotiating contracts

- vertically integrated for cost control and efficiencies

49
Q

What legal controls are typically in place for limiting wine sales?

A

Sales taxes specific to alcoholic beverages

Limiting sales hours

Minimum drinking ages

50
Q

What three main types of market are there?

A

Free (producers are free to sell direct, or via intermediaries)

Monopoly (all sales are via government owned shops)

Three tier system (US specific system)

51
Q

What categories are there for wine sales?

A 
Retail
  off-premises
  off-trade
  retailers
Hospitality
  on-premises
  on-trade
  HoReCa
52
Q

What are the advantages and disadvantages of retail sales?

A

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
53
Q

What role does a distributor typically play?

A

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
54
Q

What are the advantages and disadvantages of using a distributor?

A

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
55
Q

What is a joint venture?

A

Two parties of comparable size at different points in the supply chain creating a new joint entity

It requires clear contractural responsibilities and obligations

56
Q

What are the advantages and disadvantages of a joint venture?

A

Advantages:

  • more control
  • shared costs
  • shared risks

Disadvantages:

  • harder to unwind in event it is not successful
  • legal expertise to set up
57
Q

What is a broker, particularly in comparison to a distributor? In which market are brokers common?

A

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

58
Q

What are the advantages and disadvantages of using a broker?

A

Advantages:

  • typically detailed knowledge/ highly specialised
  • facilitating rare/fine wine sales

Disadvanges:
- a further cost eroding margin

59
Q

What are the advantages and disadvantages of selling direct to consumers?

A

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
60
Q

What are the options for direct sales?

A
  • “cellar door”
  • events
  • wine clubs
  • online
61
Q

How do cellar door sales typically take place?

A

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

62
Q

What type of direct sales ‘events’ are carried out?

A

Tasting fairs
Food festivals

Advantages:

  • Attract a large number of people
  • new clients

Disadvantages:

  • travel expenses
  • compete for attention
63
Q

What are wine clubs’ advantages/ disadvantages?

A

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
64
Q

What are the advantages/ disadvantages for direct online sales?

A
  • retain higher profit
  • consumer may save
  • costs to manage a website
65
Q

Pros/Cons of supermarkets in free markets

A

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
66
Q

Pros/Cons of deep discounters in free markets

A

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
67
Q

Pros/Cons of convenience stores in free markets

A

Advantages:
- typically 24 hour sales (if allowed by law)

Disadvantages:

  • smaller ranges overlap with supermarkets
  • typically more expensive than supermarkets
68
Q

List types of retail outlets in free markets

A
  • Supermarket
  • Deep discounters
  • Convenience Stores
  • Specialist retailers
  • Hybrids (try and buy)
  • Online
  • Global travel retail
  • Wine investment companies
69
Q

Pros/Cons of specialist wine retailers in free markets

A

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

70
Q

Pros/Cons of hybrid retailers in free markets

A

Advantages

  • try before you buy for consumers
  • regularly changing tasting selection for consumers

Disadvantages:

  • retailer may have to stay open late
  • increased bureaucracy
71
Q

Pros/Cons of online retailers in free markets

A

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
72
Q

Pros/Cons of global travel retailers in free markets

A

Advantages

  • lack of competition on site
  • high value sales typically

Disadvantages
- high outlet costs

73
Q

Define wine investment companies

A

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

74
Q

List hospitality outlets in a free market

A

Specialise wine bars

General bars

Non-destination restaurants

Casual dining

Fine dining

75
Q

List pros/cons of specialist wine bars in free market hospitality

A

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

76
Q

List pros/cons of general bars in free market hospitality

A

advantages:
- good for known brands

disadvantages:

  • lack of wine focus
  • limited range
77
Q

List pros/cons of non-destination restaurants in free market hospitality

A

advantages:
- inexpensive/ mid-priced wines

disadvantages:
- need to offer widely appealing wines

78
Q

List pros/cons of casual dining in free market hospitality

A

advantages:

  • independently owned/ small chains
  • potential to offer limited pairings
  • some staff advice may be offered

disadvantages:
- limited choice

79
Q

List pros/cons of fine dining in free market hospitality

A

advantages:

  • high price, high margin
  • paired with food well
  • highly qualified/ knowledgable staff

disadvantages:

  • very high price!
  • small volume
80
Q

Define monopoly markets

A

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

81
Q

Pros/ Cons of monopoly markets

A

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
82
Q

Define the USA’s three-tier system

A

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

83
Q

Define the USA’s three categories of typical state control of the three tier system

A

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.

84
Q

What are the challenges of the state system of control?

A

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.

85
Q

What are the main challenges to the three tier system?

A

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

86
Q

What are the key stages in implementing a marketing strategy?

A
  1. Identify product/brand to market
  2. Identify target market
  3. set marketing objectives
  4. devise marketing strategy
  5. implement and monitor the strategy
87
Q

Define marketing

A

The management process responsible for identifying, anticipating and satisfying consumer requirements profitably

88
Q

How may a marketing objective be initiated?

A

Intuition

Aspiration

Analysis - analyse market segments and consider who is under represented in the market

89
Q

What are the factors in the mnemonic PESTLE

A 
Political
Economic
Sociological
Technological
Legal
Environmental
90
Q

What is the potential range of political impacts on the industry?

A

Ranges from prohibition at the extreme end, to a range of taxes that discourage drinking; to promotional support for cultural products

91
Q

What key economic factors impact the industry?

A

Currency strength

FX rate stability

Recession vs. boom

92
Q

What key social factors impact the industry over time?

A

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

93
Q

What key technological factors influence winemaking and distribution?

A

Production techniques

Types of equipment

Internet sales and social media

94
Q

What key environmental factors impact different parts of the industry?

A

Climate change increasing ripening

Pressure on alternative land use

Impact on logistics, waste, entergy

95
Q

What is the nature of legal and regulatory factors impacting wine?

A

Regulation of production and trade

96
Q

What are the stages in a product lifecycle and the marketing approach to each?

A

Introduction - build recognition/ limited distribution

Growth - wider distribution aimed at a broader market

Maturity - consider competition

Decline - extend/maximise the life cycle

97
Q

What factors make up a brand?

A

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

98
Q

Define ladder brands

A

Different rungs on a brand ladder that increase in quality and reduce in volume

Accessible
Stretch
Aspiration

99
Q

Define soft brand

A

A factor used by a consumer when choosing products

e.g. country, region, geographical indicator, variety, and potentially style

100
Q

Define luxury brand

A

No agreed definition. Typically considered a super-premium product, which promotes itself as scare

101
Q

How can markets be segmented?

A

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)

102
Q

What ways might market research be carried out?

A

survey/ focus group/ interviews/ observing/ secondary research

103
Q

What three main options are there for setting a marketing strategy?

A

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

104
Q

What objectives should a marketing strategy have?

A

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

105
Q

What 5 Ps are useful in determining marketing mix?

A 
Product
Price
People
Place
Promotion
106
Q

What marketing considerations can be considered under Product?

A

Characteristics
Presentation
Experience
Differentiating characteristics

107
Q

What marketing considerations can be considered under Price?

A

Main product
Delivery
Discounts
Promotions

108
Q

What marketing considerations can be considered under People?

A

Attitudes and behaviours of the target market

Training, attributes and skills of staff

109
Q

What marketing considerations can be considered under Place?

A

Where sold

110
Q

What marketing considerations can be considered under Promotion at the point of sale, and the pros/cons of promotions?

A

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
111
Q

What marketing options are there away from the point of sale?

A 
Advertising
- TV/ Cinema
- Radio
- Press
- Online
- Billboards
- Sponsorship
Websites
Social Media
Smartphone apps
Wine tourism
Events and festivals
Reviews and awards
112
Q

List typical PR activities?

A

Representatives attending public events

Press releases

Newsletters

Social Media
Brand ambassadors

113
Q

How can a marketing strategy be monitored?

A

Sales figures
Website traffic
Market research

114
Q

What options are there for carrying out marketing?

A

Internal team

PR company/ advertising agency

Industrial associations

Trade bodies

WSET level 4 diploma D1 / D2 (5 decks)

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