Factors that affect the price of wine: Supply and Demand

Question 1

Define Supply and Demand

Answer 1

Supply is the amount of a good or a service available for sale.

Demand is the willingness of consumers or businesses to buy a good or a service

Question 2

Factors that Influence the Demand for Wine

Answer 2

Social factors: Changes in Consumption Habits :
- consumption increased in the first part of the 2000s
- began to fall back again after the global financial crisis of 2008
- rosé and sparkling wine has increased significantly in the last decade

Question 3

Reasons for decreasing of alcohol consumption:

Answer 3

• Health Concerns
• Wine regarded as old-fashioned
• other drinks available/popular (cocktails on cans)
• Young people spend less time socialising in bars
• Sticter drink drive laws
• Government campains or policies
• Less day-time drinking / lunch drinks no socially acceptable anymore
• ## Changes consumer prefwerences: less fortified wines, medium-sweet gerrman wines / more sparkling (prosecco, rose’)

Question 4

Factors that affect the price of wine

Economic factors:

Answer 4

• Strenght of the economy: Sales of wine will change with the level of consumer disposable income
• Fluctuations in Currency Exchange:
  1) If a wine-exporting country’s currency gains value a producer can: keep the price stable = risk losing sales (product represents less value for money in the importing market) / decrease the price = lose profit.
  2) if the exporting country’s currency loses value a producer can: keep the price stable = boost sales as the product represents better value for money in the importing market / increase the price = improve profits for future investment
• Changes to the Market: Markets are constantly changing: new companies and products are always entering, while others disappear

Question 5

Factors that affect the price of wine

Legislative and Political factors

Answer 5

• Laws Prohibiting or Limiting the Sale of Alcohol (minimum legal drinking age / sales of alcohol limited to particular hours of the day)
• Government Policies to Reduce Alcohol Consumption (in France, the Loi Evin, introduced in 1991, has greatly restricted the advertising of alcoholic drinks / ‘Minimum unit pricing’ introduced by the Scottish governemnet to reduce the availability of cheap alcohol / Amount of alcoholm that can be consumed before driving)
• Taxation: (Sales tax – known as value added tax (VAT) in the European Union (EU) = paid at the point of sale / Duty tax = payable at the point of manufacture)
• International Trade: exports play a very important role in the global wine industry = wine exports has more than doubled during the last 15 years / trading relations between countries can fluctuate over time = affecting demand for products traded between those countries / customs duties (also known as trade tariffs) on imported goods (form of revenue generation + intended to encourage the sale of domestic rather than imported goods
• Wine Laws: The creation of a GI may increase recognition and demand for wines from that region = allow producers to increase the price of their wines / PDO rules very strict while GI’s outside of EU are free to react more quickly to changes in wine consumers’ preferences / In China in 2012, the new leader, Xi Jinping stopped the practice of ‘lavish gifting’ dropping the import of fine wine almost immediately

Question 6

Factors that Influence the Supply of Wine:

PRODUCTION

Answer 6

Area aunder vine: size of vineyard plantings

Gradual reduction in Area under vine in EU:
- Vine pull schemes: National governments and then the EU itself paid growers to pull up poor quality vines (Southern France, Italy, Spain)
- EU restrictions on planting new vineyards (since 2016 member states have been able to authorise planting of up to an annual growth
of 1 per cent of the vineyard area already planted)
- Conversion of vineyard land to other uses ( Apples in Elgin / Almonds, Pistachio in USA / Tourist facilities in Madeira / Business facilities in Santa Clara Valley and Silicon Valley California)
- Abandonment of rural areas (lack of labour and investment / family-run estate with no one to take them over / vineyard abandoned even in prestigious regions)
-** Human Factors**: Despite decreased area under vine, production has increased thanks to modernisation of viticolture (better site selection, clonal selection, improved canopy management, pest and disease control and machine harvesting)
- Natural Factors: Variation in weather conditions from year to year have a significant impact on the volume of wine produced (2017: spring frosts + hailstorms + severe heat waves = -14% in production in Europe compared to 2016 / 2015-2019 = severe drought in South Africa / by 2050 = shortage of irrigation in 95% of chilean vineyards)

Question 7

Factors that Influence the Supply of Wine:
LEGISLATION

Answer 7

Aims of GI’s:
- Define the style of wine produced in a particular region
- Bring supply and demand more into line and so reduce the risk of downward price pressure

Demand for a particular wine = pressure to extend the permitted production area (Ex: Prosecco DOC) = increased production (often involves extending the GI to less suitable sites and a dilution in overall quality)

PDOs have a governing body that actively limit the amount of wine that may be released in any one year, ensuring the market is not oversupplied and maintaining price levels (Comité Champagne / Sherry Consejo Regulador)

Vin de Pays = introduced in France in the 1970s (basis of what became the European PGI system) to offer greater freedom

Question 8

Challenges if there is an Over-supply:

Answer 8

Over supply:
- prices fall as consumers can easily find a cheaper alternative.
- harder for producers to sell their stock
- may end up with unsold wine in tanks
- may be forced to sell the excess wine at a much lower cost (sometimes below production cost)
- might devalue the ‘brand image’ of the wine (how consumers perceive the brand) and create lasting damage to the brand

Solutions:
- Find new markets (difficult and time consuming)
- Sell under different label and offer it to a supermarket, deep discounter, bar or restaurant as a private label wine

(Example: Australia in early 2000’s)

Question 9

Challenges if there is an Under-supply:

Answer 9

unusual / more common in the case of particular wines

• not having enough wine to sell = disappointing clients (and ultimately consumers)
• retailer may impose a financial penalty or cancel the contract if the required volume of wine is not available
• increased price of the product / producers prefer to issue wines to their main distributors on allocation
• cheaper alternatives from other grape varieties and/or countries may be found (if origin is not important)

(Example: Bad harvests in Europe of 2017)