D2C02 Factors Affecting Wine Price - Supply and Demand Flashcards
LEARNING OUTCOME 2.1 Understand the factors that contribute to the price of wine. ASSESSMENT CRITERIA 2.1.1 Explain how supply and demand influence the price of wine. 2.1.2 Explain how costs associated with grapegrowing, winemaking, transportation, importation and sales and marketing contribute to the price of wine. 2.1.3 Describe how legislation and fluctuations in currency exchange influence costs and how the impact of these can be limited.
Explain the ‘perfect world’ balance in supply and demand.
Producers would be able to sell all the wine they make at the price which covers the cost of production, pays a dividend to any shareholders, finances future investment and still leaves a profit.
Consumers would be able to buy the wine they want, of a style they enjoy and at a price they are willing to pay.
Explain the effects when supply of a particular product exceeds demand, in very broad terms
Prices tend to fall as consumers have a greater choice of cheaper alternatives.
Producers therefore need to lower their prices (so reducing profits) to remain competitive.
However, the fall in prices may lead to increased demand which may benefit producers in the long run.
Explain the effects when demand of a particular product exceeds supply
Prices are likely to increase.
(Generally when perceiving that there are no alternatives,) consumers may be willing to pay higher prices for some wines.
Other consumers may not be willing to pay more and may simply switch to another wine or a different alcoholic drink altogether.
What are the generic factors affecting the demand of wine?
(A variety of)
- Social factors
- Economic factors
- Legislative factors
- Political factors
(These are all connected and cannot be considered in isolation)
What categories of habits and preferences of wine drinkers will affect demand?
Changes in…
- Consumption habits
- Consumer preferences
- Reputation
- Spending patterns
How did global wine consumption (habits) change since 2001?
- Rapidly increased in first part of the 2000s
- Fall back after global financial crisis in 2008, as many consumers reduced spending on non-essential products
- Sales of still wines declined very slighlty in recent years
- Sales of still wines due to remain stable to 2021
- Strong growth seen in sparkling wine sales in recent years, due to continue to 2021
What are the top 5 countries for wine consumption?
- USA
- France
- Italy
- Germany
- China
How has wine consumption (habits) changed in the top 5 countries for wine consumption?
- Falling or static in the ‘traditional’ wine drinking countries
- Increasing in countries were wine has not historically been a major part of culture (such as USA and China)
What is the country with the largest wine consumption worldwide? And how did this change in recent years?
- In 2011 USA overtook France & Italy to become the #1 consumer of wine
- Last 20-30 years wine drinking became part of mainstream culture
Which 2 drivers helped wine drinking to become mainstream culture in the USA?
- Increasing globalisation of food & drinks industry
- Increased & improvements in wine production in USA’s domestic market
What drives the wine consumption in China? And what wine markets profit from this?
China has a growing middle class that wishes to show their wealth and status by drinking wine instead of local drinks.
At first they chose primarily French wines (above wine produced domestically).
Not they are increasingly looking elsewhere, for example Australia and Chile, profiting from bilateral trade agreements.
Name 4 possible reasons for the falling wine consumption (in traditional wine drinking countries)
- Younger people drinking less wine
- Health concerns
- Changes in lifestyle
- Reduced availability of cheap wine
Why do younger people drink less wine in many countries?
What 2 lifestyle changes cause decreasing wine consumption?
- Busy, modern lifestules mean that there is often less time for longer meals at which wine was traditionally drunk
- Consuming alcohol during the working day (lunchtime) is being increasingly forbidden by employers
How did consumer preferences change in recent years?
- Rosé has become extremely popular, especially in USA
- Prosecco has become popular, e.g. in UK
- Sparkling wine is increasingly popular globally
- Increased demand in lower-alcohol wines due to health issues
- Decreased demand in fortified wine (15-22%) due to health issues
- Medium-sweet German wines gone out of fashion
What can positively change the reputation of wines?
- Good review from leading wine publications and critics
- Online influencers and key opinion leaders (KOLs) in some markets
- Presence of certain wines in popular culture, e.g. product placement in films, TV series, music lyrics or celebrity lifestyle news
- Influence of peer opinions and behaviour
Define ‘price-sensitive markets’
Markets in which consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy.
(Examples are UK, Germany)
Define ‘premiumisation’ of markets
Markets in which consumers are increasingly willing to pay more for individual bottles of wine, often because they are buying less wine by volume.
(examples are USA and partly even the ‘price-sensitive’ UK)
How do some producers hope to avoid losing sales to competition in price sensitive markets?
By building up ‘brand loyalty’ for their products as part of their marketing campaigns.
What economic factors will influence the demand for wine?
- Strength of the economy
- Fluctuations in currency exchange
- Changes to the market
How will the strength of the economy influence the consumer demand?
Sales of wine will change with the level of consumer disposable income (i.e. the amount of money a person has after paying taxes):
When disposable income falls, as in a recession, wine consumers are likely to trade down to cheaper wines or switch to other, less expensive alcoholic drinks (e.g. beer or cider).
When an economy is growing, such as has been seen in China, disposable income increases and consumers are often willing to buy more expensive wine.
Explain the effect of currency exchange on wine demand.
What is the downside of a weak currency (next to the positive effect of an improved price advantage)?
The downside to a weak currency, however, is that it costs producers more to import equipment and supplies, such as barrels, corks and yeast, which may offset any additional profits. Nevertheless, the recent boom in Argentinian wines can be traced back to the early 21st century when a weak peso meant the wines were very competitively priced on the global market.
Explain the effects if a product disappears from a particular market.
If a product disappears from a particular market, supply decreases. This will create opportunities for the competition, which could increase their sales.
However, the introduction of a new lower-priced or better-value wine may cause a fall in demand for other similar products and may force producers to lower their prices to remain competitive or look to alternative markets.
On a very simple level, for example, if a supermarket has run out of Echo Falls White Zinfandel, demand for Blossom Hill White Zinfandel may increase (or vice versa). If supply is limited, it may also be possible to raise prices.
Name 5 legislative and political factors influencing demand
- Laws prohibiting or limiting the sale of alcohol
- Government policies to reduce alcohol consumption
- Taxation
- International trade (agreements)
- Wine laws
These factors vary from country by country and those working in the wine industry should always be aware of those which are relevant to any markets with which they may be dealing.
Name some examples of laws prohibiting or limiting sale of alcohol
- The sale of alcohol is completely prohibited in a number of countries.
- Other countries permit sales but these are tightly-controlled: for example, by limiting the sale of alcohol to state-owned monopoliesand the USA’s three-tier system. Any such controls inevitably limit the supply of wine and usually increase prices.
- Even in countries where alcohol is freely available, there is usually a minimum legal drinking age and sales of alcohol are generally limited to particular hours of the day.
Why is excessive alcohol a concern in many countries?
Excessive consumption of alcohol is a concern in many countries. Illness and injuries caused by regular or heavy drinking are placing an increasing strain on health services and drunkenness is seen as a significant factor in criminal behaviour.
What is the Loi Evin?
In France, the Loi Evin introduced in 1991, has greatly restricted the advertising of alcoholic drinks and is considered a significant factor in the reduction in wine consumption in France.
However, as a result, France is not now regarded by other wine-producing countries as a market with growth potential for premium wines.
What policy did the Scottish Government implement to reduce alcohol consumption?
The Scottish Government is the first to introduce ‘minimum unit pricing’ to reduce the availability of cheap alcohol. The minimum price of an alcoholic drink will be GBP 0.50 per unit, meaning that a 75cl bottle of white wine with 12% abv (i.e. 9 units as defined in the UK) must cost at least GBP 4.50, whereas bottles were previously available for as little as GBP 3.
What policies do countries implement to reduce death and injury in traffic?
Most countries impose a limit on the amount of alcohol that can be consumed before a person drives a motor vehicle. The Blood Alcohol Concentration (BAC) limit varies between different countries but tends to move in a downward direction as countries try and reduce death and injury caused by drunk drivers.
For example, both New Zealand and Scotland have recently reduced the maximum BAC from 80mg/100ml to 50mg/100ml. However, this is still higher than some countries: the maximum BAC in Norway and Sweden, for example, is 20mg/100ml. Again, the imposition and tightening of drink-driving laws have been shown to reduce alcohol consumption.
What do government taxation policies on alcoholic drinks aim for?
Another aspect of government policy is the imposition of taxes and duty on alcoholic drinks. On the one hand, higher prices may reduce consumption; on the other hand, tax and duty on alcoholic drinks is a major revenue generator for many governments.
For example, the UK Government earned GBP 4.06 billion in duty from wine sales in 2016.
What are the effects of taxation on alcoholic drinks?
Because the level of duty usually varies between different categories of drink, it can influence demand.
For example, in the Republic of Ireland, the large difference between the excise duty on still (EUR 3.20/bottle) and sparkling wines (EUR 6.37/bottle) has greatly reduced the demand for sparkling wine.
Sales tax (known as VAT in the EU) applies to alcoholic drinks in the same way as other products and is paid at the point of sale. However, many countries also impose specific excise duties or taxes on alcohol, which are payable at the point of manufacture. This is also a minimum pricing mechanism, although the rates are much lower than envisaged under the Scottish ‘minimum unit pricing’ system discussed above.
What did the Government of Hong Kong try to achieve by abolishing the duty on wine altogether?
In 2008, the government of Hong Kong (a Special Administrative Region of China) abolished excise duty on wine altogether with the aim of becoming the ‘wine trading hub’ of East Asia. The result has been a massive increase in auction sales of fine wine through Hong Kong
How did the value of wine exports develop in the last fifteen years?
exports have come to play a very important part in the global wine industry and the value of wine exports has more than doubled during the last fifteen years.
What are trade tarrifs? And why are they applied?
Trade tarrifs are customs duties on imported goods imposed by many countries.
In some cases, this is simply a form of revenue generation but, in many instances, it is the basis of a protectionism policy intended to encourage the sale of domestic rather than imported goods
What are the effects of (EU) trade agreements?
The European Union is a free-trade area allowing member states to import and export goods between themselves tariff-free.
Some non-member states (such as South Africa and Chile) have entered into trade agreements with the EU, as a result of which they enjoy tariff-free or reduced-tariff trade, giving wines from those countries a competitive edge over those from Australia.
What are the effects of a trade war?
In many cases, trade wars can result in negative feelings among consumers and therefore, even when restrictions are lifted, consumers may continue not to buy these products out of a matter of principle.
A timely example is the US/China trade war in which China has imposed tariffs on US wine (and other products) in response to US tariffs on Chinese products.
What can be the positive effects of creating a Geographical Indication (GI)?
Many consumers are drawn to wines from a particular GI, either because they have enjoyed wines from there in the past or due to its strong reputation. The creation of a GI may therefore increase recognition and demand for wines from that region and allow producers to increase the price of their wines.
What can be the negative effects of creating a Geographical Indication (GI)?
In Europe, PDO rules can be very strict, limiting producers to certain grape varieties, methods of production, maturation periods and so on, whereas producers outside the EU are rarely subject to such limitations, leaving them free to react more quickly to changes in wine consumers’ preferences and maintain demand for their wine, in a way that producers governed by PDO rule cannot.
Legal changes often come about relatively slowly, giving producers the time to adapt. However, sometimes sudden changes in legislation can have particularly significant effects.
Give an example of a legal change that had a direct and significant effect on wine sales?
For example, in China in 2012, the new leader, Xi Jinping, wanted to stop the practice of ‘lavish gifting’, the tradition of showing respect to business colleagues, customers or suppliers by giving gifts – the more expensive the better. These gifts often included super-premium priced wines, especially Bordeaux Premier Cru Classé and Grand Cru Burgundy. An Anti-Extravagance campaign was launched explicitly to prohibit the gifting to or consumption by government officials of luxury wines and spirits. As a result, demand for those wines dropped almost immediately.
How did wine production in Europe versus outside Europe change in recent years?
What are the top 5 wine producing countries? And how did they develop in recent years?
- Italy
- France
- Spain
- USA
- Australia