D2C03 Business Engaged In Wine Production Flashcards
LEARNING OUTCOME 2.2 Understand the types of businesses engaged in the production of wine ASSESSMENT CRITERIA 2.2.1 Evaluate the different types of businesses engaged in the production of wine.
List major types of business engaged in the production of wine
Estates Growers Grower-producers Merchants Co-operatives Custom crush facilities Virtual winemakers/wineries Conglomerates
What is an estate producer
Produces wines exclusively from their own vineyards (wholly owned or leased)
Advantages of estate producers
> Retain control over entire process - choose final style of wine
> Total profit - Estates which also market and sell their wines directly, without using intermediaries, additionally take the full profit from the sale of the wine.
> Marketing benefits: ‘estate-bottled’ authenticity, tell story
Disadvantages of estate producers
> Cost of managing vineyard and equipping and running winery: some will need to hire such equipment — especially the case for equipment required once per year e.g. bottling line
> Difficult vintage: reduced production, higher price which customers may not be willing to pay
Why are large estates financially more viable than smaller ones?
They can produce greater volumes of wine more cheaply because the same equipment can be re-used to produce different wines.
Also, larger vineyards are easier to mechanize – a series of smaller vineyards, especially if they are not neighbouring one another, makes mechanization difficult.
Give two reasons why the average vineyard tends to be small in many traditional wine-producing regions
Historical factors: French succession laws
Geography: in hillier regions, vineyards are limited by the terrain
What kind of business is particularly attracted to the grower option?
Owner of small vineyards who cannot justify the cost of buying or hiring expensive winery equipment and do not want to have to market and sell wine
Advantages of grower
Better cash flow: payment due when grapes are sold
Focus all efforts on producing best possible grapes
Disadvantages for growers
> Vintage variation
Fluctuation in supply and demand
Both of these factors will significantly affect the price they can achieve for their grapes.
In a bad year, they will have less fruit to sell – although a general shortage of grapes will push up the price of healthy fruit – or, in a worst-case scenario, nothing to sell at all. When supply exceeds demand, due to a bumper vintage or too much competition, growers will have to reduce their prices and may not be able to sell all their grapes. In either case, this will result in reduced profits or a loss.
Two options for growers to sell grapes? Advantages and disadvantages?
> Enter into contract with producer or merchant: certainty, security, strong working relationship; need to meet certain standard, cannot obtain higher price when demand increases.
> Sell on the spot market: higher risks but potentially greater rewards
What are grower-producers?
Growers that produce wine from their grapes but sell to a merchant to mature and bottle, common in Burgundy
What are the advantages and disadvantages of grower-producers?
Adv: no cost of maturation or marketing
Dis: smaller profit; lose control over style of finished wine; may be blended with wine from other producers
What is a négociant?
Traditionally, a négociant is a merchant that buys immature wine, which it matures and sells under its own name, often blending different producers prior to bottling
To take control over the grape growing or winemaking, now there are also grower-merchants who own vineyards alongside making wines made from bought-in grapes, juice or wine.
Advantages of merchants
> No cost of buying and managing vineyards, especially beneficial in Burgundy, Champagne etc
> Protection and flexibility in bad vintages
> Have quantities large enough to supply private label wines, which essentially provides another route to market
Disadvantages of merchants
> Little control over grape growing or winemaking process; can mitigate by offering technical support to their suppliers.
> Spot market price can be high; can mitigate by entering long-term contracts with suppliers.
Explain the rise of micro-négociant in Burgundy
Land is seldom sold, and price of land is very high in any case.
Micro-négociants therefore specialise in small-production wines usually from individual vineyards that often achieve super-premium prices.
Some work closely with particular growers, others buy on the spot market to be assured of best-quality fruit.
What is en primeur?
Wine futures, a method of selling wine before it has been bottled.
Purchasers buy the wine whilst it is still in barrel and it remains in the producer’s cellar until ready for bottling.
Purchaser receives the wine once bottled, usually a few years later.
Advantages of en primeur
For producers: generate cash-flow earlier, get a sense of the market for setting price
For purchasers: cheaper and easier to buy wine
What kind of wines are sold en primeur?
Those that benefit from a period of maturation in barrel (usually 18m or more) and those prized by investors, such as Bordeaux, Burgundy, Rhône, Super Tuscans, Vintage Port
What are co-operatives
Owned by a group of growers, co-operatives produce and sell wines made from grapes grown by their members.
Benefit of co-operatives
> Pool financial resources: afford more expensive winemaking equipment and expertise; access to expert viticultural and winemaking services and advice as well as marketing, packaging and sales services
> Marketing collectively can be more efficient and effective, e.g., Plaimont in south-west France, Badischer Winzerkeller in southern Germany
> Can make own-label wines since they can make a large volume of entry-level wine, e.g., La Chablisienne in Chablis, Mont Tauch in Fitou
Disadvantages of co-operatives
> Democratic control means that management must consult members before major decisions are made - slow and cumbersome decision making process, not always to the liking of individual members
> Some are not quality focused, e.g. if growers are paid only by weight of grapes
Discuss the models of co-operatives
> Pool resources
Democratic control
Paid a share of annual profit but the method of calculating varies:
> > traditionally, members are paid profits based on weight (Spain and Italy); these co-operatives may not be quality-focused.
> > other co-operatives pay on the quality of fruit; these co-operatives may save profits and invest in the latest technology, research, and effective marketing and labelling; more likely to be producing very good quality wine, and can be excellent value.
What is custom crush facility?
A variant of the co-operative model found mainly in North America, particularly California
Growers do not own facility but pay each time they require its services
Advantages and disadvantages of custom crush facilities
Advantages:
> None of the downside of cooperatives
> Do not need to invest in expensive equipment, can focus on grape growing and marketing
> Benefit from expertise of professional winemakers
Disadvantages: communication is vital. Otherwise grower will pay to have a wine style not wanted.
What are virtual winemakers/wineries?
Winemakers who do not own vineyard land or winemaking facilities.
They buy grapes and juice, and rent facilities in another winery or employ the service of a custom crush facility.
What are conglomerates?
Very large companies who own many smaller businesses across various stages of the supply chain, from production to distribution. Some of them have interest across all the alcoholic products
List top 10 wine-producing companies in 2016
E&J Gallo, USA Constellation Brands, USA The Wine Group, USA Treasury Wine Estate, Australia Viña Concha y Toro, Chile Castel Frères, France Accolade Wines, Australia Pernod Ricard, France Grupo Peñaflor, Argentina FeCoVitA, Argentina
Major advantages of conglomerates
Have businesses across the supply chain
Can set up regional offices in markets important to them
Greater control at all stages of the route to market
Reduce need to pay intermediaries
Significant negotiating power, can strike hard bargain
Examples of major companies buying into the wine sector
Moët Hennesy-Louis Vuitton: Moët Chandon, Veuve Clicquot, Krug, Cloudy Bay
Insurance company AXA: top estates in Bordeaux and Burgundy, Quinta do Noval
