How Supply/Demand Affects the Price of Wine

Question 1

4 main factors that affect the demand for wine

Answer 1

Social
Economic
Legislative
Political

Question 2

4 main Social factor changes that impact the demand for wine:

Answer 2

Changes in Consumer Habits
Changes in Consumer Preferences
Changes in Reputation
Changes in Spending Pattern

Question 3

General trends in global wine consumption:

Answer 3

• increased rapidly in first half of the 2000s
• decreased after financial crisis of 2008
• consumption has not yet returned to pre-2008 levels
• Rosé & Sparkling wine has seen a significant increase in the last decade. Sparkling wine consumption increased by 3% annually between 2002 - 2018

Question 4

Which countries have seen an increase in demand for wine and why? (Consumer habits)

Answer 4

USA, China and other countries where wine drinking has not historically been a part of major culture

Because of:
Increased globalization of the food and drinks industry - inc in accessibility
Increases and improvements in wine production domestically - inc in accessibility
A growing middle class - inc spending power
Increase in reputation & relevance in mainstream culture

Question 5

Which countries have seen a decrease in demand for wine and why? (Consumer habits)

Answer 5

Old World countries ie. France

1. Younger people drinking less wine - wine is not fashionable now. In Spain, gin is very fashionable. People are spending less time in bars, preferring to connect with friends over social media
2. Health concerns - increased awareness of the negative health effects of alochol. Government campaigns and policies have increased this awareness
3. Changes in lifestyle - Modern lifestyles are busier, more fast paced and often less tiem for longer meals. Drinking during lunch time is also forbidden/socially unacceptable now
4. Reduced availability of cheap wine - reduction in over-population resulted in smaller volumes of cheap wine available. Caused many to switch to other cheaper alcohol drinks or non-alcoholic drinks

Question 6

What are some current Changing Consumer Preference Trends?

Answer 6

1. Increase in Rosé & Sparkling wine preference (Prosecco & increased DOC area)
2. Increased demand for lower-alcohol wines due to health issues - decrease in demand for fortified wines
3. Decreased demand for medium-sweet - sweet wines. Prefer drier styles now

Question 7

What can cause changes in the reputation of a wine/winery? What can this lead to in terms of demand?

Answer 7

Reviews by leading wine critics
Online influencers and key opinion leaders
Presence in popular culture - movies, tv, music, celebrity lives
Influence of peer opinions and behavior

Positive changes can result in increased demand and therefore prices

Negative changes can result in less popularity but usually takes several years to have an impact on price

Question 8

Changes in Spending Patterns : Price-sensitive markets - which countries and describe

Answer 8

Germany, UK
When consumers are unwilling to pay more than the lowest price possible for the style of wine they want
High competition, lower overall prices, limited availabilities because producers who find the market unprofitable will just choose to exit it
Hard to pass on increases in production costs to consumers - the avoid this, they hope to build up brand loyalty as part of their marketing campaign

Question 9

Changes in Spending Pattersn : Premiumization - which countries and describe

Answer 9

US, UK in the recent years

Consumers are willing to pay more for a wine they perceive to be of better quality than the cheapest option available
Often this is caused by a decrease in purchase volume so they are willing to spend more on individual bottles

Question 10

How does changes in the strength of the economy affect demand?

Answer 10

It changes levels of consumer disposable income

When disposable income falls (ie. Financial crisis), consumers will drink cheaper wine/other alcohols (ie. traded in Champagne for other sparkling)

When disposable income increases, the whole market increases and more expensive wines are bought

Question 11

What are the economic factors that impact demand?

Answer 11

Strength of the economy
Fluctuations in currency exchange
Changes to the market (companies entering/exiting)

Question 12

What happens when a wine-exporting country’s currency gains value compared to the importing country?

Answer 12

Wine will seem more expensive

Solutions:

1. Decrease cost to maintain competitiveness but take a loss in profit
2. Keep cost the same but risk losing sales

Question 13

What happens when a wine-exporting country’s currency loses value compared to the importing country?

Answer 13

Wine will seem cheaper

Solutions:

1. Keep price the same and hopefully see an increase in sales bc it now represents a better value
2. Increase prices for a higher profit

Question 14

What are the upsides and downsides to a weak currency?

Answer 14

Upside: Your product is more competitively priced now and/or you can increase price to increase profits

Downside: If you import your materials (ie barrels, corks, etc), these are all going to become more expensive so you may be forced to increase prices just to maintain the same profit margin

Question 15

In what type of market does changes in exchange rates affect the most?

Answer 15

Price-sensitive markets

Question 16

How do changes to the market affect demand?

Answer 16

Companies are always entering and exiting the market

Increase in demand: Too many companies exiting will decrease supply and create opportunity for competition, increase the prices

Decrease in demand: Too many companies entering will increase supply, decrease prices, force producers to look for alternative markets

Question 17

Legislative/political factors that decrease the demand for wine:

Answer 17

Laws prohibiting/limiting sales of alcohol
- limiting sales: monopolies, USA 3 tier system - these limit the supply and increases the price of alcohol. Setting minimum drinking age. LImiting sales to particular hours/days of the week

Government Policies to Reduce Alcohol Consumption

• In France, the Loi Evin restricts the advertising of alcoholic drinks and has decreased consumption
• In Scotland, they have implemented a ‘minimum unit pricing’ that reduces the availability of cheap alcohol
• BAC limitations when driving

Taxation - reduces consumption AND increases revenue for the gov’t

• gov’ts can levy different tax rates on different products
• increasing taxation will deter people from spending the money
• exception: HK - abolished excise duty on wine to become the ‘wine trading hub’ of East Asia. This has resulted in a massive increase in auction sales of fine wine thru HK

Question 18

How do countries encourage/deter exports?

Answer 18

Deter: Impose custom duties aka trade tariffs
Introduce trade restrictions - ie Argentina in early 2010’s
Trade wars - US/China
Embargoes
these deterences can have negative feelings among consumers and even when they’re lifted, consumers may still continue to not buy these products

Encourage: free-trade agreement/favorable trade agreements

Question 19

What has been the trend in international trade?

Answer 19

Value of wine exports has more than doubled during the last 15yrs. Constant steady increase

Question 20

Wine Laws - how do GI’s, (EU: PDO’s/PGI’s) affect demand?

Answer 20

A popular GI may increase demand for wines from that region (Sancerre) and increase the price of these wines (possibly)

Non-PDO/PGI producers have more flexibility in keeping up with demand bc they are subject to much less production rules

Question 21

What are the factors that influence the supply of wine?

Answer 21

Production

Legislation

Question 22

What are the specific production factor that influence supply?

Answer 22

Area under vine - decreasing bc: vine pull scheme, EU restrictions in planting new vineyards, Conversion of land to other uses, abandonement of rural areas
Human factors
Natural factors

Question 23

How have human factors increased production?

Answer 23

Increased:
Allowed irrigation in certain regions
High density plantings
Modern technology in the vineyard and winery - clonal selection, pest/disease control, rootstock selection, canopy management, machinery, frost protection, machine harvesting

Question 24

Natural factors in production:

Answer 24

Climate change

Vintage variation

Question 25

How can legislation increase/decrease supply? (In terms of GI’s)

Answer 25

Legislation can decrease supply - strict PDO/PGI rules. This is a quality assurance though that the consumer is getting the style of wine they want so some people may be willing to pay more for it

Legislation can increase supply - new relaxed GI’s like France’s vin de pays system, increasing the GI’s permitted production area (prosecco DOC)

Question 26

How can legislation (GI’s) bring supply/demand more into line and reduce the risk of downward price pressure?

Answer 26

It allows consumers to be more particular about their preferences and therefore producers to charge more for what’s in high demand. Ie the popularity for Sancerre. Retailers cant just stock all of the cheapest SB’s on the market to fulfill the demand

Question 27

What can producers do when there’s an over-supply of wine?

Answer 27

• Sell the excess at a discount - con of this is that it may devalue the brand image

Better ideas:

• Find new markets
• Bottle the wine under a different label and sell it off to a deep discounter
• Private label for a restaurant/bar/retailer

Question 28

What happens when there is an under-supply of wine

Answer 28

Causes strained business relationships - not being able to fulfill contracts
Sell on allocation
Sell primarily DTC - most profitable and most loyal customers
Increase price - but consumers may then start looking for cheaper alternatives (esp in price-sensitive markets)

If you are a bigger company, you will have will have alternatives to offer. If prices increase and sales drop, you will have multiple markets to transfer that product to sell instead