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WSET LVL 4: Business > Price Factors: Supply And Demand > Flashcards

Price Factors: Supply And Demand Flashcards

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1
Q

Profit vs. Revenue

A

Revenue is total income. Profit is Revenue minus Costs.

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2
Q

What are the main factors that affect demand?

A

Social
Economic
Legislative
Political

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3
Q

How do changes in consumption habits affect demand?

A

Certain markets may grow (China & USA) or shrink (Italy & France)

Certain styles/categories of wine can become more popular (Sparkling and Rosé) or lose popularity (high ABV wines & sweeter wines)

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4
Q

What are some factors that currently affect consumption habits? (7 total)

A
  • Young people drinking less wine
  • Health concerns of alcohol
    -Lifestyle changes
    -Availability of cheap wine
    -Change in consumer preferences
    -Change in reputation of grapes/regions/producers
    -Change in spending patterns
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5
Q

For what reasons might young people be drinking less wine?

A

-They view it as old-fashioned
-Preferences shifted towards other alcoholic beverages (Gin in Spain)
-Less in-person social activity

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6
Q

What kind of lifestyle changes have affected wine consumption?

A

-Busier lives = shorter meals, less drinking
-Less social acceptance of drinking during work days in certain countries

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7
Q

What has affected availability of cheap wine?

A

Certain countries have tried to stop over-producing, leading to higher costs and consumer shifts

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8
Q

What are some recent examples of changing consumer preferences?

A

-Prosecco and rose demand has increased in UK & USA
-Preference towards low ABV and dry wines (fortified and sweeter wines out of fashion)

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9
Q

What could change a wine’s reputation?

A

-Growth in reputation of a region, producer or specific wine
-Critical acclaim from wine publications or trusted opinion leaders
-Presence in media & pop culture
-Peer opinions

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10
Q

What is a price sensitive market?

A

A market in which, regardless of affluence, consumers refuse to spend more than the minimum on the wine they want.

UK and Germany are historically price sensitive, but the UK is slowly starting to change

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11
Q

How do producers compete in a Price Sensitive market?

A
  • They could choose to not sell there altogether
  • Eat any increase in cost of production, resulting in a better value, but risking the market not being profitable
    -Build “Brand Loyalty” through marketing campaigns
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12
Q

What is “Premiumisation”

A

A slow change in consumer spending towards fewer bottles of higher priced wine. Trend in the USA and UK.

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13
Q

What economic factors affect demand?

A
  • Strength of the economy (consumers’ disposable income)
    -Fluctuations in currency exchange
    -Changes in the market
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14
Q

What relation does economic strength have with demand?

A
  • Better economy -> more disposable income -> higher spending on wine

-Worse economy -> less disposable income -> cheap wine or alternative beverages

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15
Q

How does brand/scale of production affect sales in weak economies?

A

Large, inexpensive: Consumers will have less disposable income, fewer sales, more competition with alternatives

Small, ultra-premium: consumer base less affected by economic rifts, sales won’t decrease

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16
Q

If an exporting economy is doing better than the importing, what choices does a producer have to make regarding pricing?

A

They can keep their prices the same, and risk losing sales in the market due to loss of value

They can lower prices and lose out on profits

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17
Q

If an importing economy is doing better than the exporting, what choices does a producer have to make regarding pricing?

A

They can keep their prices the same and represent a better value in the market

They can raise prices and improve profits.

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18
Q

What does a weak economy mean for a wine producer in regards to cost of production?

A

Imported supplies (barrels, yeast, corks) will be more expensive

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19
Q

If supply of a product within a market decreases, what could change?

A
  • The prices could go up because of lower supply

-Consumer preference could shift towards a cheaper/more readily available competitor

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20
Q

If a better value wine goes on the market, what choices does its competition face?

A
  • Lower prices
  • Find another market
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21
Q

What Legislative/Political factors affect demand?

A
  • Laws prohibiting/limiting sale of alcohol
  • Laws aimed at reducing consumption
  • Taxation
    -International Trade
  • Wine Laws
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22
Q

Why would a government limit alcohol consumption?

A
  • Strain on health services
  • Higher rates of drunkenness is connected to higher rates of crime
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23
Q

What are some examples of laws that limit the sale of alcohol?

A
  • Outlawing it completely
  • State-run monopolies (Sweden, Norway, Canada)
  • Three Tier System (USA)
  • Legal Drinking Age
  • Regulating sales to specific hours of the day
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24
Q

What are some examples of laws that aim to limit consumption of alcohol?

A
  • Loi Evin, in France, which restricted advertising
  • Minimum unit pricing, in Scotland, increased prices based on ABV
  • Maximum BAC for driving
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25
Q

What are two kinds of tax you might see imposed on wine?

A
  • Sales tax (VAT in the EU), paid by the consumer at the point of sale
  • Excise Duties, paid by manufacturer
26
Q

How do Excise Duties influence demand?

A

They can be applied to specific categories more than others (Ireland & sparkling wine), which adds to the final price for consumers and reduces demand.

Hong Kong abolished excise duties tax on wine in 2008, which made it a global hub for wine trading and auction sales.

27
Q

How much has the total value of global wine exports changed in the last 15 years?

A

It has more than doubled, meaning that the supply of imported wine has grown globally.

28
Q

What’s one protectionist policy a government would impose that would affect demand for imported wine?

A

Custom duties, passed down to the consumer, which are meant to increase demand for domestic goods rather than imports

29
Q

How could an exporting country gain a competitive edge in a foreign market?

A

Free-trade agreements (eg. the EU) allow trade tariff free, bringing cost down to consumers

30
Q

What’s an example of how free-trade agreements might influence consumer habits?

A

Australia might be able to negotiate for free trade with the UK now that they’re no longer in the EU. This could lower the cost of Australian wine in the UK, making it more appealing for British consumers.

31
Q

What’s an example of protectionist policy being passed?

A

Argentina in the early 2010’s
- Tariffs on imported production equipment (yeast, corks, barrels) raised production costs.
- Limiting foreign land ownership slowed down foreign investment in Argentinian wine.

32
Q

What’s an extreme form of protectionist policy?

A

Embargo

An example is Russia’s current conflict which has resulted in multiple embargoes, and a decrease in wine imports

33
Q

Why are PDO’s a burden for producers faced with shifting consumer demand?

A

If consumer preferences change, a strictly regulated PDO is slower to react than a GI with fewer laws, meaning they can shift to reflect consumer preferences quicker

34
Q

How might establishing a GI affect demand?

A

It makes a region more recognizable in the market, possibly increasing its reputation and prices

35
Q

What’s an example of a sudden change in wine laws that quickly affected demand?

A

In 2012, Xi Jinping launched an Anti-Extravagance campaign against “lavish gifts” (traditionally things like Grand Cru Burgundy/Premier Cru Classe Bordeaux) being given by government officials, paid for by the government.

This decreased demand for premium wines and spirits almost immediately

36
Q

What are the factors that affect supply of wine?

A
  • Production
  • Legislation
  • Social
  • Economic
37
Q

Whats a primary limiting factor to wine production?

A

The Area Under Vine (which is slowly decreasing worldwide)

38
Q

Which countries have the most area under vine?

A
  1. Spain (~1m ha)
  2. *China (~800k ha)
  3. France (~800k ha)
  4. Italy (~700k ha)
  5. USA (~400k ha)

*China is the largest producer of table grapes, and a large portion of vines here are making food, not wine

39
Q

What is the purpose of a vine pull scheme?

A

It pays growers to rip out old/poor quality vines as a means of controlling overproduction.

Used in the EU in 1980’s, but also Aus, NZ, Arg

40
Q

Why would you place restrictions on new vineyard plantings

A

Same reason as vine pull scheme: control overproduction

Since 2016, EU members have been able to plant new vineyards up to 1% of existing vines each year (France and Italy are rising)

41
Q

Why would a grower choose to convert their vineyards to another crop?

A

Grapes don’t provide as large of a financial return as other crops (eg. apples in Elgin, SA)

42
Q

What are two current examples of vineyard conversion?

A

Grapes -> Pistachios & Almonds (USA, to control production)

Grapes -> Property Development (Tourism in Madeira, Business in SoCal)

43
Q

How are current lifestyle trends affecting production?

A

Young people are choosing to live in more urban areas. The labor force and new investment in rural areas are decreasing, resulting in abandoned vineyards.

44
Q

What factors are allowing Spain to increase production w/o increasing area under vine?

A

Relaxation of irrigation laws is supporting areas that traditionally couldn’t support vines

Higher density planting is increasing yields without using more space

45
Q

What human advancements in production have allowed for higher yields of quality grapes?

A
  • Better site selection
  • Better clonal selection
  • Improvements in canopy management
  • Better pest/disease management
  • Machine harvesting
46
Q

Why is the global wine supply affected by vintage variation in Europe?

A

A majority of the global area under vine lies in France, Spain and Italy. Vintage variation in these countries will have a significant impact globally (Eg. 2017 suffered frost, hail and summer heat waves, lowering europe’s total production by 14%)

47
Q

What are some natural factors that would create short term threats to supply?

A
  • Frost (disrupts production for 2 years)
  • Hail
  • Wildfires/heatwaves
  • Pests/disease
48
Q

What could be considered the largest long term threat to supply?

A
  • Drought (Eg. it’s estimated 95% of Chilean vineyards will face irrigation shortage by 2050)
49
Q

What restrictions would PDO’s in Europe place on producers that you wouldn’t see in other regions?

A
  • Maximum yields
  • Maturation requirements
  • Winemaking techniques
50
Q

What are some benefits to more strictly regulated PDO’s?

A
  • More consumer familiarity with regional styles
  • Can concentrate demand around specific regions (eg. consumers don’t just want pinot noir, they want Burgundy)
51
Q

Who governs a PDO?

A

Most European PDO’s have some form of governing body (Comite Champagne, Consejo Regulador in Sherry, CIVB in Bordeaux)

52
Q

What can a PDO do when there is an increase in demand?

A
  • They can raise prices, but they risk losing market share
    -They can expand the PDO’s growing area, but this might dilute quality

Prosecco is a good example. Demand has grown significantly in the past 15 years, mainly because of its accessible price, and the DOC has had to grow to keep up with demand.

53
Q

What was one thing created to help producer’s in France compete with more loosely regulated areas?

A

The Vin de Pays system, created in 1971.

85% of grapes must come from a specified geographic area, but there are no rules for viticulture or winemaking. Very important in the South of France.

54
Q

What decisions can a producer make if they have an oversupply of wine?

A
  • Lower prices
  • Sell in bulk
  • Sell to a new market
  • Sell as a second label or a private label
55
Q

What are the pros and cons of selling bulk?

A

Pro: you free up space for the next vintage. Particularly important for young-drinking styles of wine like rose.

Con: Loss of potential profit

56
Q

What are the pros and cons of selling into a new market?

A

Pro: sell more wine at the desired price

Con: requires more investment (time and money) in sales/marketing

57
Q

What are the pros and cons of creating and selling under a second label?

A

Pro: sell off excess wine, doesn’t diminish primary brand by lowering prices

Con: Lower prices, higher cost of production for new packaging/transport, requires more investment in marketing

58
Q

What are the pros and cons of selling excess wine under a private label?

A

Pro: sell off excess wine, probably at a higher price than bulk sales

Con: Requires existing business contacts, would be a problem in lower-yield vintages where you can’t produce enough to fulfill your contract

59
Q

What are the pros and cons of lowering prices?

A

Pro: Sell off excess wine, keep production/marketing costs the same

Con: Devalues the “brand image” and create lasting damage to future prices

60
Q

What solutions exist for a producer facing a low supply?

A

Depends on scale/brand of winery. Large, inexpensive producers have different solutions than small, boutique producers.

61
Q

What can a small, boutique producer do if demand outweighs supply?

A
  • Raise prices, risk losing sales

-Switch to an allocation method of distribution

62
Q

What can a large, inexpensive producer do when supply won’t meet demand?

A
  • Buy more wine (if it’s available)
  • Disappoint consumers and lose brand loyalty
  • Raise the price, risk losing market share (especially in price sensitive markets)
  • Focus sales in less price sensitive markets

WSET LVL 4: Business (14 decks)

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