D2C02 Factors Affecting Wine Price - Supply and Demand Flashcards

Question

Name 5 legislative and political factors influencing demand

Answer 1

1. Laws prohibiting or limiting the sale of alcohol 2. Government policies to reduce alcohol consumption 3. Taxation 4. International trade (agreements) 5. 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.

Answer 2

* 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.

Answer 3

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.**

Answer 4

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.

Answer 5

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.

Answer 6

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. ## Footnote 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.

Answer 7

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. ## Footnote For example, the UK Government earned GBP 4.06 billion in duty from wine sales in 2016.

Answer 8

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.

Answer 9

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

Answer 10

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.

Answer 11

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

Answer 12

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.

Answer 13

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. ## Footnote 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.

Answer 14

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**.

Answer 15

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.

Answer 16

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**.

Answer 17

1. Italy 2. France 3. Spain 4. USA 5. Australia

Answer 18

1. Area under vine, such as establishing new vineyards 2. Human Factors, such as advances in viticulture and winemaking 3. Natural Factors, such as annual weather condition fluctuations

Answer 19

The world total area under vine is in decline since 2002 ## Footnote Please note the ‘area under vine’ data come from the International Organization of Vine and Wine (OIV) which does not separate vineyards producing wine grapes from other fruit, such as table grapes. However, it is estimated that, globally, 90 per cent of vineyards are used for wine production.

Answer 20

The area under vine in Europe has fallen in the 21st century. In contrast, there has been growth outside Europe and this is largely due to the establishment of new vineyard areas, particularly in China which now has the second largest area under vine in the world, even if production has yet to catch up.

Answer 21

1. Spain 2. China 3. France 4. Italy 5. USA

Answer 22

1. Vine pull schemes 2. EUR restrictions on planting new vineyards 3. Conversion of vineyard land to other uses 4. Abadonment of rural areas

Answer 23

By the mid 1980s, EU wine production was much greater than demand, creating a surplus that came to be known as the ‘wine lake’. National governments and then the EU itself paid growers to pull up poor quality vines, especially in southern France, Italy and Spain, with the result that, for example, in the 1980s, several hundred thousand hectares of European vines were pulled up.

Answer 24

In many parts of the world, **wine grapes are a low value agricultural crop** and growers may want to switch to higher value products. ## Footnote For example, some growers in Elgin (South Africa) are removing their vineyards and replacing them with apples which give five times more the financial return than grapes. In some regions, vineyard land is being bought up for property development, often for tourists, as in Madeira, but also for business, as in Santa Clara Valley (or Silicon Valley), California.

Answer 25

There has also been a trend for younger people to leave rural areas and go to live and work in urban areas. This is reducing the available workforce for vineyard work and in some cases leaving family-run estates with no-one to take them over. Generally speaking, **rural economies are suffering from a lack of labour and investment** and it is sadly not uncommon to see abandoned vineyards, even in prestigious wine regions.

Answer 26

Throughout the wine world **modern techniques** (**such as better site selection, clonal selection, improved canopy management and pest and disease control**) have made it possible to produce a greater amount of healthy grapes. This, coupled with **modern winemaking technology**, has resulted in a greater volume of higher-quality wines.

Answer 27

The **relaxation of laws banning irrigation** of vineyards in Spain, which means that areas that were previously not able to support vines are now viable, and the **increased use of more modern higher density planting** have increased production in certain areas, which has offset the reduction in the area under vine. ## Footnote Production in Spain has increased despite the area under vine decreasing. Average yields in Spanish vineyards have traditionally been (and still are overall) much lower than, for example, in France or Italy, due to the very dry climate in many of Spain’s wine-producing regions and also the use of traditional low-density planting systems.

Answer 28

1. Variation in weather conditions from year to year can have a significant impact on the volume of wine produced. Whilst good weather can lead to higher than average harvests and wine production, bad weather will have the opposite effect. 2. because over half the world’s vineyard area is in the EU bad vintages here will have a major impact on global wine production

Answer 29

* Serious droughts have recently affected South Africa and California, where low rainfall has reduced the level of water in the state’s main underground reserves to almost nil * the Chilean government estimates that 95% of the country’s vineyard area will have shortages of irrigation water by 2050.

Answer 30

The increasing number of geographic indications (GIs) around the wine world. ## Footnote All of these define where grapes for wines with specific geographical names can be grown, thus limiting the amount of wine that can be produced there (although GIs vary enormously in size).

Answer 31

All of the GIs define **where grapes can be grown** for wines with specific geographical names, thus limiting the amount of wine that can be produced there (although GIs vary enormously in size).

Answer 32

The PDO systems in **Europe have strict rules** on what grapes can be grown in that area, the maximum yields and what winemaking and maturation techniques may be used. Such restrictions limit the volume of wine produced. **Outside the EU, GIs only define where grapes can be grown**. Systems such as American Viticultural Areas (AVAs) in the USA, Wines of Origin in South Africa or the Geographical Indications of Australia have none of the strict rules found in the PDO systems of Europe.

Answer 33

1. to define the style of wine produced in a particular region. 2. to bring supply and demand more into line and so reduce the risk of downward price pressure. ## Footnote For example, if a retailer’s market research showed that a large number of that retailer’s customers wanted to buy a Sauvignon Blanc at an inexpensive price, the retailer would be able to select Sauvignon Blanc wines from around the world and to switch country of origin from one year to the next to gain the cheapest price. Alternatively, if market research showed that a large number of consumers wanted to buy Marlborough Sauvignon Blanc the retailer is constrained to buy from a small area (in global terms) in New Zealand. In the latter example the producer has more control over the price. The retailer cannot source the wine from anywhere else.

Answer 34

There is often **pressure to extend the permitted production area**, as has been the case, for example, for Prosecco DOP. Subject to limitations on the planting of new vines, this allows new vineyards to be planted and for production to be increased. Unfortunately, however, this **often involves extending the GI to less suitable sites and a dilution in overall quality**.

Answer 35

The strict PDO rules led to complaints from some that **European winemakers were not able to compete with their counterparts in less heavily-regulated regions**. ## Footnote For this reason, in the 1970s the French introduced the vin de pays system, which formed the basis of the European PGI system to offer greater freedom. These still require 85% of grapes to come from a particular geographical area but they permit a wider range of varieties and do not impose rules on viticulture and winemaking.

Answer 36

**Oversupply** Global wine production has consistently exceeded global wine consumption. The level of oversupply has been reduced in recent years thanks to growth in wine consumption in the USA and China and the limitations on production (see other cards).

Answer 37

* Prices tend to fall as **consumers can easily find a cheaper alternative**. * It is harder for producers to sell their stock and, in some cases, means that they may end up with **unsold wine in tank**. * In order to get some income from the wine and free up winery equipment for the next harvest, producers may be **forced to sell the excess wine at a much lower cost** than they would like - sometimes below production cost. * Other, more proactive producers will **try to find new markets and outlets** for their wines. However, it takes time for producers to develop contacts and so this may only be an option for those who already have a presence in a particular market or have a distributor who can find new customers for them. * Another option for producers with larger volumes of wine would be to **bottle the wine under a different label** and offer it to a supermarket, deep discounter, bar or restaurant as a private label wine. * If a producer is forced to sell their wine at a lower than usual price, or if a retailer orders too much wine and then has to lower the price to sell it, this can **devalue the ‘brand image’ of the wine** and **create lasting damage to the brand**.

Answer 38

The obvious problem for the producer is not having enough wine to sell, **disappointing clients** (and ultimately consumers) and leading to **strained business relationships**. If the producer has a contract with a large retailer, the retailer may impose a **financial penalty or cancel the contract** if the required volume of wine is not available. In most businesses, an excess of demand over supply would result in an **increased price for the product**. In some parts of the wine business that does happen (e.g. Bordeaux Premier Cru Classé and Grand CruBurgundy) but, in most cases, producers prefer to **issue wines to their main distributors on allocation**.

Answer 39

If wine buyers for retail outlets and their customers consider that the origin of a wine is not important, cheaper alternatives from other grape varieties and/or countries may be found. That is especially true in price-sensitive markets. The wine production business is much more fragmented than for spirits, beers or soft drinks: there are very few large-scale producers. Those few large companies will be able to offer an alternative from within their portfolio. They will also sell to different markets, meaning that if price increases because of undersupply cause sales to drop in one country, they can sell wine into less price-sensitive markets instead.

Answer 40

Costs which are incurred in establishing a business are known as capital costs.

Answer 41

1. In part, prices reflect **the land’s potential to produce high-quality fruit** and **the name of the appellation** within which the vineyard is situated. In California for example, the high land prices in Napa Valley arise from its reputation for producing high-quality grapes from which premium and super-premium wines can be made, whereas Central Valley is more usually associated with bulk wine production. 2. **Scarcity of land** can also increase the price. Land in prestigious regions such as Champagne and Burgundy rarely comes on the market and so, when it does, it will be sold to the highest bidder. Similarly, because GIs limit the area of land which can produce wine under that appellation, in small GIs, there is only a limited amount of land available.

Answer 42

* **surveying the land** to check its suitability for viticulture and deciding which grapes are most suitable – this may include satellite imaging and taking soil samples; * **site clearance**: e.g. removing vegetation, large rocks etc.; * **building access roads** into the vineyard and between vineyard plots; * buying and planting **vines**; * buying stakes and wires etc. for establishing and maintaining **trellising**; * if the site is badly drained, installation of **deep drainage channels** and pipework; * in dry areas, establishing an **irrigation system**: e.g. drilling boreholes, building reservoirs, laying pipes to bring water into the vineyard, installing pumps to bring up underground water; installing a system of delivering water to the vines; * **protection against weather** hazards: e.g. windbreaks, protective mesh (if the area is prone to the risk of hail), frost protection; * **protection from animal pests**: e.g. high fences, electric fences, netting; * buying **machinery and equipment**: e.g. tractors, spraying equipment, harvesting machines, and building garages or sheds to store them in. Some producers cannot justify the cost of buying expensive machinery and equipment which they only use for a short period of time each year. Instead, they will pay to hire it just when they need it.

Answer 43

* **Loans** are one way of raising the money; however, the interest and capital repayments will have to be factored into the long-term business plan. * Another way is to get **funding from investors**; however, they will expect a return on their investment and a share in any profits and some may wish to get involved in managing the business. * In some countries, governments are trying to encourage the establishment of vineyards (either specifically or as part of a wider agricultural policy) and offer **subsidies** to prospective producers to help with the capital costs. These can either take the form of tax incentives or lump-sum contributions.

Answer 44

* Labour * 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

Answer 45

The amount of labour required varies greatly according to the **topography and other factors** in the vineyard: ## Footnote for example, considerably more labour is required in the steep vineyards of the Mosel where mechanisation is impossible than in the flat vineyards of, for example, California’s Central Valley. Also, organic and biodynamic vineyards are more labour intensive than conventionally-farmed ones due to the additional procedures that need to be carried out.

Answer 46

The type of labour required in a vineyard varies through the year. At harvest time, the producer will hire a team of pickers – they can be relatively unskilled as the harvesting procedure can be quickly taught. **Harvesting labour is relatively cheap** but, if there is a shortage, they can choose to work for the highest offer. For the rest of the year, a **smaller staff of more expensive, skilled workers** will be needed, often under the supervision of a vineyard manager. **Organic and biodynamic viticulture in particular needs highly skilled staff**.

Answer 47

There are similar capital costs for establishing the winery as for setting up the vineyard: * The **land** on which the winery will be built may need to be purchased. * There are then the costs of **building the winery** and fitting it out with **equipment** such as presses, tanks, pipes and pumps, refrigeration equipment and a bottling line (unless the wine is going to be sold in bulk or a mobile bottling line hired).

Answer 48

* **Labour** – An estate is likely to employ a small number of mainly skilled staff full-time. Some casual labour may be required around harvest time to help with manual tasks in the winery, such as unloading crates and moving equipment. * **Machinery** and equipment running costs e.g. fuel, electricity and maintenance. * **Winery materials** e.g. sugar for enrichment, de-acidification agents, acid for acidification, cultured yeasts, carbon dioxide or other inert gasses, fining and filtering agents. * **Bought-in fruit** – If a winery is buying in grapes, rather than growing any or all of its own, the price of the fruit will be a significant cost. This can vary significantly according to the quality of the grapes, the grape variety and the vintage. If a winery has to meet a low price-point, it could blend cheaper varieties (e.g. Airén, Ugni Blanc, Colombard or Semillon) with a more expensive variety (e.g. Chardonnay) to reduce the production costs. * **Water** – Wineries use large volumes of water for cleaning. In areas where water is expensive or scarce, some wineries have found it cost-effective to invest in water treatment plants so they can re-use as much water as possible. * **Electricity** – Significant amounts of electricity are needed for refrigeration, ventilation, presses, pumps and lighting. Because of this, some estates generate some or all of their own electricity (e.g. using solar panels).

Answer 49

* If the wine is to be matured at the estate, the winery will need to include **storage space**. * **New oak barrels** from the top barrel producers can be very expensive. It can be much cheaper to buy second-hand barrels, although, of course, these will give little or no flavour characteristics to the wine. Another alternative is to use oak chips or staves but, whilst they are less expensive than oak barrels, they are still not cheap. * Wineries also need to employ **labour to monitor** the maturation process. * Another long-term, but less obvious, cost of maturation is the **loss of cashflow**: there can be a large amount of money tied up in maturing stock.

Answer 50

* If the winery bottles its own wine, it will need to buy **materials** such as bottles, closures, labels, cartons and pallets. Heavy or unusual bottles and more elaborate labels (embossed, textured paper) will often be more expensive than standard options. * A **bottling line** will be required to bottle the wine. Estates may invest in their own but these are very expensive and may not be cost-effective if they are only used once a year. They may therefore prefer to hire a bottling line, and the labour to operate it, when needed. Another alternative is to send the wine to another estate and pay to use their equipment. * As well as the labour required to bottle and package the wine, the estate may also wish to employ someone to **design their labels** (and sometimes even their bottles) for them.

Answer 51

In bottle These bottles are packaged in boxes, which are in turn loaded into crates and pallets.

Answer 52

* Freight forwarders. * JF Hillebrand * Whilst it is possible to send wine using the well-known multinational logistics companies, the wine industry tends to prefer those which specialise in the transportation of wine. Although they charge more, these companies have **considerable expertise** in transporting what is a very fragile product. **Bottles can be easily broken and the wine inside can spoil if subjected to hot temperatures, direct sunlight and excessive vibrations.** The specialist freight forwarders take steps to limit the risk of loss or damage, such as using highly-specialised (and consequently very expensive) temperature-controlled shipping containers.

Answer 53

1. **Air** – Cost of air freight is heavily dependent on weight, due to the additional fuel required. Bottles are very heavy and therefore very expensive to transport by air. Only **used in special circumstances**, such as sending bottles to a competition or samples to a trade/consumer fair, for very high value wines or where deadlines are important – such as Beaujolais Nouveau for the Japanese market. 2. **Road** – Most wines will travel **short distances** by road freight at the beginning and end of their journeys. For short journeys, road freight is very efficient as it takes the wine directly from the winery to the point of delivery. However, for long distances, it is excessively expensive. 3. **Rail** – The cost of rail freight will vary according to the length of the journey and how goods are loaded onto the train. If individual palates need to be loaded and unloaded from the train, the cost freight would probably be too high. However, that cost can be reduced by containerization. This could be cheaper than transporting the goods all the way by road; however, freight rates vary considerably depending on the route. 4. **Sea** (also known as ‘deep-sea’) – This is usually by far the cheapest method for **long distances**. Containerization is essential for deep-sea shipment. The downside to this method is that it is slow (for example, the journey time from Australia to the UK is typically 40 days), so companies that import wines must factor in that time when ordering goods, especially for peak trading periods.

Answer 54

Bulk wine is transported in either plastic flexitanks (more common) within a standard steel shipping container or non-flexible ISO tanks: 1. the largest **flexitanks** can carry up to 24,000 litres 2. **ISO tanks** can hold up to 26,000 litres.

Answer 55

Bulk transportation is much cheaper and more environmentally-friendly than transporting the wine in bottle, because wine in tank is much lighter anf more efficient than in bottle, reducing the amount of fuel required to transport the same amount of wine Over double the amount of wine can be carried in the same size of ISO or Flex container compared to a standard shipping container (that can hold around 9,000-10,000 litres of bottled wine).

Answer 56

One disadvantage of these tanks is that they are only suitable for moving large volumes of the **same** wine. If a single consignment is **less than 15,000 cases there is no cost advantage** over transporting in bottle. Therefore, whilst it is an attractive option for supermarkets and major brands who can sell large volumes of wine, it is not suitable for smaller-production wines.

Answer 57

* In the past decade, there has been a **large increase in bulk** transportation of wine. in 2016, 38% of the world’s wine was exported in bulk and it has been estimated that bulk wine accounts for 58% of German; 35% of UK and 24% of US still wine imports. * At first, bulk transportation was favoured for cheaper wines (whilst 35% of the world’s wine by volume was transported in bulk in 2017, this only accounted for 8% by value). However, there is now increasing interest in **transporting more expensive wines** in bulk too

Answer 58

This should be the party which assumes the risk for loss or damage. Normally, this will be the party who is sending the goods. ## Footnote for example, the winery will be responsible for ensuring the wine makes it safely to its distributor and the distributor will then be responsible for getting the wine safely to retailers. Using a specialist freight forwarder should reduce the risk and many offer insurance as part of their service (usually at extra cost).

Answer 59

1. Custom **duties & Taxes** 2. Custom localised **labeling** 3. Involving **distributors**

Answer 60

Different countries also have different labelling laws with which the imported wine will need to comply. Producers dealing with a number of different countries may therefore have to order a number of different labels for specific markets. This will be more expensive than if they were dealing with a single market, in which case they could simply order a larger number of a single label. ## Footnote for example, in the EU, the ABV of a wine must be shown to the nearest whole or half unit, whereas US law permits a 1.5% variance, meaning American wines may need to be relabelled if going to the EU. US law also requires bottles to display a health warning, which will need to be added to wines entering the country.

Answer 61

1. It would take producers a significant amount of time to learn about all the different requirements per country and comply with them 2. The importer has knowledge of their market and an established list of potential clients

Answer 62

The marging is the fee that distributors will charge (that will add to the cost of the wine). ## Footnote The margin is usually quoted as a percentage and is calculated as the profit divided by the revenue (multiplied by 100 for a percentage figure). For example, if a distributor added a fee of EUR 1.00 (EUR 1.00 of profit) to every bottle of wine that cost them EUR 10.00 to purchase, the percentage margin would be (1 ÷ 11) x 100 = 9.09 per cent.

Answer 63

The margin will vary from distributor to distributor and from country to country but can range **from 5-25 per cent**. As a general rule, those selling to the **hospitality sector tend to have higher costs** and a larger staff than those specialising in the retail sector and will therefore expect higher margins. **Wholesalers may charge more than agents** as they have to cover the cost of warehousing. Retailers buying from distributors may also need to pay delivery costs.

Answer 64

The point of sales of wine to end consumers, meaning both the retail and hospitality sector

Answer 65

1. Property costs 2. Labour 3. Equipment & Material 4. Storage costs 5. Delivery costs 6. Margin at point of sale

Answer 66

Retail premises of any sort are expensive: * Retail premises, especially bars and restaurants, tend to be in **prime locations** which are the most expensive to buy or lease * Retailers will need to spend money **decorating and furnishing** it to suit their business image. * Once the shop, bar or restaurant is open, there will be additional **running costs**. Some such as maintenance, security, water, energy and insurance are fairly universal; others vary from country to country, such as commercial property taxes and waste disposal.

Answer 67

Property costs will be lower for online-only retailers, as they only need to buy or lease warehousing space, which is often located in areas away from city centres where property prices are much cheaper

Answer 68

Some countries require staff to be paid a legal minimum wage. Other countries are more flexible but, in all cases, the higher the level of skill and expertise a member of staff has, the higher the level of wage that person will expect to receive: * In **supermarkets**, labour costs are **relatively low** as highly-skilled staff are not required on the shop floor. * However, **specialist wine retailers** will employ highly knowledgeable staff who can engage with customers and advise them on the range of wines available * **Bars and restaurants** have **much higher labour costs** than shops as additional staff are required to wait on tables, clean and wash up.

Answer 69

* In **‘non-destination’ restaurants** staff will not necessarily need to know much about wine and will therefore not be paid as much as more skilled and knowledgeable staff in **‘casual dining’ establishments**. * In a **‘fine dining’ restaurant**, staff will be expected to be highly knowledgeable about wine; there will also be a **head sommelier** who selects the wines for the wine list and must be able to offer diners detailed advice about which wines to select – these positions are very prestigious and can command impressively high salaries.

Answer 70

* A specialist wine retailer will need, at the very minimum, a till system, a fridge (if chilled wine is to be sold), shelving, display cabinets, materials to enhance displays and cleaning equipment. * A restaurant will need much more, including kitchen and bar equipment, tableware and glasses. * Bars and restaurants are also increasingly investing in expensive wine preservation systems to prevent wine available by the glass from oxidizing once it has been opened. However, in restaurants and bars which serve food, the profits made on food may also help cover costs.

Answer 71

**Delivery costs** Wine is relatively heavy and therefore costs more to deliver than other goods of a similar size. It is also extremely fragile and there is always the risk that bottles will get broken or the wine becomes spoiled in transit.

Answer 72

* Many retailers feel that their customers would not be willing to pay the full delivery cost. The actual cost to the retailer will also vary depending on distance. Retailers often therefore charge **fixed delivery fees**, knowing that in some cases it may cost them more to deliver the wine. * Some charge more for **special delivery**, delivering wine on a specific day or at a specific time requested by the consumer. * Some retailers also offer **free delivery for orders over a certain amount**, even though there is still a cost to them to deliver the wine. This is a way of giving the consumer a discount without reducing the price of the wine.

Answer 73

* **Specialist wine retailers** usually look for a margin of **30-50%**. * In many **bars and restaurants**, the margin is much higher, sometimes **as much as 66.6%** (i.e. the wine is sold for three times what the bar/restaurant bought it for). This is in part to cover the higher operation costs (see above). * Profit margins are usually higher on wines available by the glass, as there is the risk that, once opened, the wine may spoil and need to be poured away before the bottle has been emptied. * Some also allow customers to bring their own bottles of wine, which the restaurant will open for a fixed **‘corkage’ fee**.

Answer 74

* **Labour**. Larger producers and brand owners will employ their own in-house marketing teams, smaller producers will have to pay an external marketing company to do this for them. * Design and production of **bottles and labels.** this could either be done in house or by an external agency. * **Marketing campaigns.** e.g. advertising and promotional materials. Sample bottles including shipment for tastings or competitions, are provided free-of-charge from stock which could otherwise be sold.

Answer 75

Instead of pay the duty as soon as the wine arrives in the UK, importing companies who wish to hold on to stock can store the wine in a bonded warehouse and only release it when someone wants to buy it. This consumer will then cover 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.

Answer 76

If import duty is too high in a particular country, they may decide that they cannot sell their wine at a competitive price there and simply choose to focus on other markets. For example, there are relatively few mid-priced US wines on sale in the EU as, due to trade tariffs, they cannot compete on price with wines from countries such as Chile and South Africa which have trade agreements with the EU.

Answer 77

When wine is being imported and exported between countries with different currencies, the constant fluctuation of the exchange rate between those two currencies can affect the price of the wine considerably. These small differences can become significant if the order is for a large number of bottles and can impact on the profits which the producer or the buyer might earn. For example: Consider the situation if a buyer in the Eurozone orders wine from Australia when the exchange rate is AUD 1.50/EUR 1.00 but, by the time of delivery, the exchange rate has changed to AUD 1.37/EUR 1.00. If the buyer pays for the wine when ordering, they will save EUR 0.13 per bottle. However, if the buyer agrees to pay on delivery, they will end up paying an extra EUR 0.13 per bottle.

Answer 78

* Options * Fixing the price in the currency of the importer at the date of ordering * Buying currency to cover specific orders * Entering a contract to fix the exchange rate * Trading in USD/EUR * Opening a foreign currency account in a local bank * Opening an account in an overseas bank

Answer 79

One possibility is for a retailer to take an option/reserve on a certain amount of wine at an agreed price. This means that the producer must set aside the agreed volume of wine and, at an agreed time, the retailer may decide whether or not they want to take it. ## Footnote This decision could be based on the exchange rate but it can also be influenced by market conditions at the time. Because the producer runs the risk that the retailer will not take the wine, leaving them with unsold stock, the producer may want to charge a higher price than under a normal contract. However, usually, it is the larger retailers who have the negotiating power to demand such arrangements. It is also possible to take an option on a certain amount of currency at an agreed price, rather than stock.

Answer 80

Buying currency to cover (specific) wine purchase contracts This requires a proactive stance and only larger companies are likely to have in the in-house skills necessary to manage currency or currencies in this way. Please note currency management is an important business activity and is not considered speculation!

Answer 81

Many producers in countries with unstable currencies prefer to trade in more stable currencies such as the US dollar or Euro. This is also attractive to retailers who have greater certainty about the price of the wine. As the producer may buy vineyard and winery materials in dollars or Euros, it reduces the number of times they have to exchange currency, leaving them less exposed to the fluctuations in their domestic currency.