D2C02 Factors Affecting Wine Price

Question 1

What are the high level typical factors contributing to the price of a bottle of wine?

Answer 1

• Grape Growing
  
  • vineyard establishment
  • vineyard management
• winemaking
  
  • winery establishment
  • vinification (labour, materials, fruit, water/electricity, packaging/closures)
• transportation
• marketing costs
• sales cost (property, labout, equipment, storage, delivery, margin at POS)
  
  • retail
  • hospitality
• importation cost (compliance, duties/tax, distributors)
• currency fluctuation mitigations

Question 2

Comment on key factors how vineyard establishment contrubutes to the price of wine.

Answer 2

• vineyard establishment
  
  • land purchase
    • pruchase price of land (location, production potential, availability/scarcity, prestige of area (eg AOC)​
  • funding
    
    • own / bank (loan) / investors
    • government subsidies / tax incentives (China…)
  • land preparation
    
    • surveying (satelite imaging, soil samples)
    • irrigation/drainage/fencing for protection
    • clearing, trellising, planting materials
    • Machinery and equipment
    • access roads

Question 3

Comment on key factors how vineyard management contrubutes to the price of wine.

Answer 3

• Labour (perm/seasonal/skilled etc)
  
  • Type of vineyard and how much cb mechanised
• Machinery & Equipment running costs, e.g. fuel and maintenance
• Vineyard materials, e.g. replacing vines and trellising
• Vineyard treatments, e.g. herbicides, fungicides, insecticides
• Water, water extraction costs
• Electricity, e.g. irrigation, bird scarers, frost protection equipment

Question 4

What are typical initial costs of establishing the winery?

Answer 4

There are similar capital costs for establishing the winery as for setting up the vineyard:

• land purchased (own / bank loan/ investors)
• building the winery
  
  • ​equipment such as presses, tanks, pipes and pumps, refrigeration equipment , ?? bottling line

Question 5

Comment on typical costs in winemaking / vinification?

Answer 5

• Labour – some more, others less skilled
• Machinery and equipment running costs
• Winery materials
  (sugar for enrint, de-acidification agents, acid for acidification, cultured yeasts, carbon dioxide or other inert gasses, fining and filtering agents. )
• Bought-in fruit - according to own vol grown (might be small in early years) and according to regulation allowance, poss for blending)
• Water
• Electricity
• Maturation (actually takes up space, barrels?? cost, labour to monitor, ties up cashflow)
• Packaging / closure (label design) (this is with or without the investment in a bottling line)

Question 6

Comment on how transportation costs contribute to a bottle of wine?

Answer 6

Bottle or Bulk options

• Freight forwarders chosen are likely to be specialists in wine transportation (JF Hillebrand)*
• Heavy, easily broken, can be spoiled by mishandling (light/vibration), should be insured by one of the parties (normally freight forwarder)*

Most wine transported in bottle

• Air - very expensive and very unusual, except samples, promotions, or extremely fine wine.
• Land - quickest, safest and most cost efficient if routes are not too long.
• Rail – Becomes favourable if containerisation is the method used, freight rates vary considerably depending on the route.
• Sea -sometimes the only option. Becomes viable if consigment is >15000 bottles, has certain advantages if in bulk.

Bulk

• Flexitank 24000l
• ISO tank 26000l
• Used for inexpensive as well as more expensive wines.
• Advantages
  
  • lighter - for the same space 10000 bottled litres:24000 bulk litres
  • Cheaper, less fuel, more env friendly

Question 7

Name the 3 costs other than transportation/insurance involved in importing wine to another country.

Answer 7

• Custom duties & Taxes
• Compliance with labeling laws
  
  • countries may have different labelling laws - means producer may need different labels per country (e.g. abv level in USA has a 1.5 unit margin - but not in EU where it must be indicated to nearest 1 or .5 unit)
• Involving distributors
  
  • saves producers time to learn about all the different compliance requirements per country
  • leverage of local market knowledge and established client list
  • costs 5 - 25% margin added by Dist. - may be higher for hospitality than retail, and generally will exclude delivery

Question 8

List the key costs of the Retailer (both on/off trade) which will impact the price of wine.

Answer 8

• Property costs
  
  • location, running costs, equipment and display (if hospitality incl furnishings and decor)
  • A saving if retailer is online only (warehouse needed still)
• Labour
  
  • slighly cheaper in retail (depends on specialist selling cap) and in hosp def more skill needed.)
  • Online needs web dev / maintenance
• Equipment & Material
  
  • till, fridge, display, equipment, in hosp. the entire kitchen/bar
• Storage costs
  
  • A concern for all but potentially less for hospitality
  • Keeping any stock off site adds additional transport costs
• Delivery costs - vary according to distance
  
  • If offered, noted for online trade as a signficant topic
  • retailer may absorb some of the cost to stay competitive
  • may offer free delivery for order of specific value or qty
• Margin at point of sale
  
  • Retailers normally add between 30 - 50% to cover all their costs and deliver a small profit
  • in hospitality it is closer to 66% to cover operating costs, as well as potential spoilage (remaining) if wine sold by the glass.

Question 9

What are thecosts associated with marketing which can add to the price of a bottle of wine?

Answer 9

• Labour.
• Design and production of bottles and labels.
• Marketing campaigns.

To be studied in detail in later decks.

Question 10

Duties on imported goods can be paid several ways. Using a bonded warehouse might offer some advantages (UK scenario). Explain.

Answer 10

• Duty not paid on wine arrival in receiving country.
• wine is stored in a bonded warehouse and released when someone wants to buy it.
• That customer pays the cost of taking the wine out of bond, including the duty payable.
• Whilst 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 11

Legal factors may impact on a producer’s decision whether or not to enter a particular market. Explain

Answer 11

Following legislative requirements add to cost

• Taxes and Duties
  
  • May cause a producer not to enter if too high to remain competitive
• Trade Barriers / Subsidies / Trade Agreements
  
  • Trade Agreements between countries result in their products being more favourably priced than others - e.g. EU agreements with Chile/SA
• Minimum pricing - might tip the scale on affordability in the given market segment.
• Labelling Laws - maybe too onerous and discourage a producer

Question 12

Explain how exchange rates can impact on the profits which the producer or the buyer might earn; and describe the ways in which this issue can be mitigated.

Answer 12

Fluctuation in exchange rate can negatively impact an export/import transaction. Mitigate as follows

• Options
  
  • This means that the producer must set aside the agreed volume of wine for a specific value of currency and, at an agreed time, the retailer may decide whether or not they want to take it.
• Fixing the price in the currency of the importer at the date of ordering
  
  • Producer carries the risk
  • Retailers prefer as this gives a fixed point for selling price calculation
• Buying currency to cover specific orders - requires inhouse skill, likely only at the bigger companies (not speculation)
• Entering a contract to fix the exchange rate - with a bank, will be for a fixed sum which is payable even if currency strengthens
• Trading in USD/EUR - because they do not fluctuate vastly in general
• Opening a foreign currency account in a local bank
• Opening an account in an overseas bank