D2W2 QUIZ on wine business

Question 1

This is a term used, mainly in North America, for winemakers who do not own vineyard land or winemaking facilities. Often buy in grapes or juice and may rent facilities in another winery.

Answer 1

Virtual winemakers

Question 2

Large companies, which have interests in different kinds of alcoholic beverages. Often own many smaller businesses through the supply chain.

Answer 2

Conglomerates

Question 3

Makes wine exclusively from their own vineyards. The entire production process (grape growing to bottling) takes place on site.

Answer 3

Estates

Question 4

Traditionally buy immature wine, mature it and sell it under the their own name. Sometimes blend the wines of different producers before bottling.

Answer 4

Merchants

Question 5

Owned by a group of growers and produce and sell wines made from grapes grown by their members.

Answer 5

Co-operatives

Question 6

Only concentrate on growing grapes to be sold on to winemakers or merchants.

Answer 6

Growers

Question 7

Grow their own grapes and make the wine, but pass the wine on to merchants to mature and bottle.

Answer 7

Grower-producers

Question 8

Sites where growers do not own the facility but pay each time they require a winemaking facility.

Answer 8

Custom crush facilities

Question 9

An estate producer produces wine exclusively from their own vineyards (vineyards that are wholly owned or leased). Using bullet points, detail the advantages and disadvantages of Estate run wine production.

Answer 9

Advantages

• Retain control from vineyard to bottle
• Can choose the style of wine made
• Ensure quality assurance and quality control
• Profit belongs to the estate
• Can have control over marketing potentially reducing the intermediaries
• Consumer can look for authenticity relating to the ‘story’ of a wine

Disadvantages

• High capital cost
• Small estate producers have potential high percentage crop loss due to vintage variation which impacts on cash-flow
• Economies of scale disadvantageous to small producers
• Succession laws

Please refer to chapter 4.1. Estates in the D2 textbook for more information.

Question 10

True or false?

Growers receive payment when the wine produced is sold.

Answer 10

False

Growers receive payment when their grapes are sold. This creates a better cash-flow situation as they don’t have to wait for wines to be produced, matured and then sold.

For more information on this topic see 4.2 Growers in the D2 textbook.

Question 11

What risks do growers have to be particularly aware of?

Select one or more:

A. Malfunctioning winery equipment

B. Reduction in demand for particular wines

C. Increase in supply of a particular wine

D. Vintage variation

Answer 11

B. Reduction in demand for particular wines. If demand for the wines their grapes are used to produce falls, then their grapes may not be required.

C. Increase in supply of a particular wine. Growers may find it hard to sell their grapes if a particular type of wine has been over produced.

D. Vintage variation. In high yielding years, growers may not be able to demand their usual prices for their grapes due to oversupply and in some instances not sell all their grapes. In poor vintages, the quality of the grapes may be compromised and growers will not be able to get the usual price for their grapes.

Question 12

Identify the two options that are available to growers when it comes to selling their grapes.

Then, briefly describe the advantages and disadvantages of each option.

Answer 12

Option 1: Entering into a contract with a producer/merchant

Advantages:

• The grower gets some certainty that they will be able to sell their grapes at a given price, which is particularly advantageous for long-term contracts as cash flow is guaranteed.
• Long-term contracts foster strong working relationship between the parties and producers/merchants may actively work with the grower to produce the best quality fruit.

Disadvantages

• If the grapes provided by the grower do not meet the required quality standard or specifications (e.g. minimum potential alcohol) they can be rejected or a lower price will be payable.
• Contracts can be terminated without notice.

Options 2: Selling grapes on the spot market

Advantages

• If there is a shortage of grapes from a particular harvest, spot sellers could achieve a higher price for their grapes than they could if under a contract.
• There’s the opportunity to make more money if the market works in a grower’s favour.

Disadvantages

• If there is a glut of grapes, the spot price is likely to be less than the contract price.
• Cash flow is not guaranteed.

Please refer to chapter 4.2. Growers in the D2 textbook for more information.

Question 13

What are the main advantages for grower-producers?

Select one or more:

A. They can be sure the finished wine is only made from their grapes.

B. They keep control over the style of the finished wine.

C. They do not need to be responsible for the marketing of the product.

D. They do not incur the costs of maturation.

E. They do not need to be responsible for the sales of the product.

F. They will make a larger profit than if they were to sell the finished wine.

Answer 13

C. They do not need to be responsible for the marketing of the product. Many grower-producers have limited marketing expertise and so may be happy to leave marketing to the more experienced merchants.

D. They do not incur the costs of maturation. Grower-producers do not need to incur the costs of maturation (e.g. barrels and cellar space)

NOT CORRECT:

A. They can be sure the finished wine is only made from their grapes. Merchants often blend together wine from different producers. Grower-producers lose control of their wine once it has been passed over to the merchants.

B. They keep control over the style of the finished wine. Grower-producers lose control of their wine once it has been passed over to the merchants.

E. They do not need to be responsible for the sales of the product. Many grower-producers take back their wine in bottle and sell it themselves

Question 14

In the past, what has been a significant risk to merchants?

Select one:

A. Lack of experience blending different wines.

B. Lack of control over the grape growing or winemaking process.

C. Lack of control over the maturation process.

D. The expense of maintaining land.

Answer 14

B. Lack of control over the grape growing or winemaking process.

Nowadays, to resolve this issue, many merchants produce their own wine from grapes or juice and provide technical support to their suppliers to ensure that the grapes, juice or wine they buy are of the required quality.

Question 15

What circumstances have led to the rise of micro-négociants in some regions, and what is their role?

Answer 15

In some regions (particularly in France i.e. Burgundy and Champagne), land is very expensive and rarely available for purchase. As a result micro-négociants have been on the rise and they specialise in small production wines and often from only one vineyard or domain. To be a micro-négociant is a good option for a grower/producer that wants to expand their portfolio of wines without the added cost of buying the land.

For more information on this topic please see chapter 4.4 Merchants in the D2 textbook.

Question 16

Merchants can be in a precarious position as their business depends on good quality grapes at affordable prices. Identify three ways merchants may choose to try and protect themselves from price fluctuations and vintage variation.

Answer 16

1. Buying grapes on the spot market from multiple growers and producers when vintages are poor, although this may incur high prices.
2. Create long-term contracts with suppliers to protect themselves against fluctuations in cost. In these circumstances, the merchants can also provide technical support to the suppliers to ensure a higher quality product.
3. Own their own vineyards so wines can be produced at all desired price-points. They may choose to only produce premium wines made from the grapes from their vineyards and buy in grapes or wine from other suppliers to sell at lower price points.

Question 17

What is the French term used to define the method of selling wine before it has been bottled.

Answer 17

En primeur

When a purchaser (often merchants) buys wine en primeur, the wine is still in barrel and it remains in the producer’s cellar until it is ready for bottling

Question 18

Buying wines en primeur holds both advantages and disadvantages for the purchaser. Fill in the table with advantages and disadvantages of buying wines via this method.

Answer 18

Advantages

Cheaper to buy, easier to buy; the price of wine normally increases when it comes to maturation and ready for sale; guarantee of having stock for sale as these wines are limited in quantity.

Disadvantages

Have to pay for a product before they receive it; demand for that wine is not guaranteed when it becomes available for sale, therefore the price might decrease from the en primeur price.

Question 19

There are similarities and differences between the ways co-operatives are run. Match the statements below to whether they apply to all co-operatives, or whether it only applies to some of them:

A. Co-operatives are owned by their members

B. Primary focus is the quality of the wines

C. Democratically controlled and management must consult members before major decisions are made

D. Members are always paid a share of the co-operative’s annual profit

E. Pay on the weight of the wine

F. Use profits to invest in technology, research and effective marketing and labelling, as well as paying their members

Answer 19

All co-operatives:

A. Co-operatives are owned by their members

C. Democratically controlled and management must consult members before major decisions are made

Some co-operatives:

B. Primary focus is the quality of the wines

D. Members are always paid a share of the co-operative’s annual profit

E. Pay on the weight of the wine

F. Use profits to invest in technology, research and effective marketing and labelling, as well as paying their members

Question 20

Custom crush facilities are usually found in North America. What other business type are they a variant on though?

Select one:

A. Grower

B. Micro-négociant

C. Co-operatives

Answer 20

C. Co-operatives

The difference between custom crush facilities and co-operatives is that growers do not own the custom crush facility, but rather pay each time they require its services.

Question 21

Which of the following do virtual winemakers own/make themselves?

Select one:

A. Vineyard land

B. Winemaking facilities

C. Juice made from their own grapes

D. None of the above

Answer 21

D. None of the above

Virtual winemakers may sources grapes or juice from a number of sources, and do not own their own vineyard sites or winemaking facilities.

Question 22

There is a key group of big companies that have interests across the alcohol industry, including wine. Name and order the top 5 conglomerates from largest to smallest, indicate their approximate percentage of world alcohol production.

Answer 22

1. E&J Gallo, USA, 2.7% of world production
2. Constellation Brands, USA, 1.7% of world production
3. The Wine Group, USA, 1.5% % of world production
4. Treasury Wine Estate, Australia, 1.12% of world production
5. Viña Concha y Toro, Chile, 1.03% of world production

Question 23

Due to their size and financial position, conglomerates can control the market to a greater degree than other types of wine businesses. List 5 tactics conglomerates can use to control the wider market.

Answer 23

• have interests in many different alcoholic products
• own some of the largest wine brands in the world
• the brands cover a range of price points, reaching a wider market
• often own many smaller businesses across the supply chain which can reduce costs, giving a competitive edge over other business types.
• can afford to set up regional and national offices, increasing their market presence across the globe.