Price Factors: Supply Chain Flashcards
What is a capital cost?
A capital cost is the money spent aquiring and maintaining long term assets (land, buildings and equipment)
What is an operational cost?
The day-to-day costs involved in producing and packaging wine
What is the primary cost in establishing a vineyard and what are the factors involved in its cost?
Land (buying or renting)
- Potential for high quality fruit/reputation of region
- Scarcity of land (high demand/limited by the GI)
What are 5 capital costs associated with making a vineyard operational?
- Surveying the land via Satellite/soil samples
- Site clearance
- Building access roads
- Buying and planting vines
- Buying materials for a trellising system
- Installing drainage channels/pipework
- Establishing an irrigation system
- Protection against weather hazards
- Protection from animals/pests
- Buying machinery/storage or renting machinery
- Operational costs for the 3 years before the vines yield suitable fruit
What are 3 ways that grape growers can help fund the capital costs of establishing a vineyard?
- Personal wealth
- Loan from a bank
- Investors
- Government subsidies
What considerations must you make before receiving a loan from a bank?
Interest and repayment plans must be factored into the long term business plan
What considerations must you make before receiving money from investors?
- They’ll want a share of profits
- They might want to be involved in managing the business
- You need to have connections with people who have the wealth to invest
What forms of government subsidies might exist for growers?
- Tax incentives
- Lump sum contributions
Dependent on growing area and local laws
What costs are associated with vineyard management?
- Labor
- Machinery and fuel
- Vineyard supplies
- Vineyard treatments
- Water
- Electricity
- Insurance and depreciation
What (5) factors go into labor cost?
- Topography/potential for mechanization
- Farming Methods
- Local labor costs vs. Machinery costs
- How much skilled labor is needed year round
- Local labor market
What is one way conventional farmers can reduce vineyard treatment costs?
Integrated Pest Managment (IPM)
- Reduces unnecessary treatment
- Requires spending on an up to date weather station or access to government weather station
What are two factors in water costs?
Local government- Paying for the right to extract water for irrigation.
Vintage variation- Will be more expensive in dry years, possibly making grape growing unprofitable.
What would electricity be used for in operating a vineyard?
Water pumps for irrigation
Bird scarers
Frost protection equipment
What are some examples of depreciation costs might you include in establishing a vineyard/winery
Machinery and trellising equipment
Press
What are some costs in establishing a winery?
- Land
- Winery design
- Storage and maturation vessels
- Tanks
- Cooling equipment
-Pipes/pumps - Bottling line
How might a winery that purchases grapes meet a lower price point for the finished product?
Blend with lesser known varietals
What might be more cost effective than purchasing water?
In water scarce areas, it might be more cost effective to invest in a water treatment plant so water can be reused
How might a winery lower electricity costs?
Generate their own (solar panels)
Why does maturation add cost to production?
- New oak is expensive
- Labor to monitor the maturation process
- Lack of cash flow for extended maturation (eg. Rioja Gran Reserva must be aged for 5 years prior to release)
What costs are involved in packaging?
- Label design (especially if it’s being imported to markets with different labelling requirements)
- Glass, closures, boxes, pallets
- Bottling line (estate, mobile, bottling somewhere else)
What are the most significant cost/bottle differences between high volume and ultra-premium producers?
- Labor
- Land (and real estate taxes)
- Depreciation of equipment
- Oak
- Cellar overhead (longer maturation)
Why would a producer ship wine with a specialized company?
More careful consideration towards spoilage/breakage from:
- Sunlight
- Temperature shifts
- Excessive vibrations
What are the pros/cons of shipping by air?
Pro:
- Quickest
- Good for shipments with strict deadlines (trade fairs, Beaujolais Noveau day)
Cons:
- Most expensive method of shipping
- Air shipment dependent on weight/fuel required, and wine is heavy in relation to its size and value
What are the pros and cons to traveling by road?
Pros:
- Great for short distances
- Less logistic planning because it can ship direct to POS
- Easiest way of moving wine through a port/over small bodies of water (trucks can travel via ferry)
Cons:
- 2nd most expensive method of shipping
- Not good for long distances because of fuel costs
What are pros/cons to shipping via rail?
Pros:
- Costs can greatly be reduced by shipping in containers rather than by individual palettes
Cons:
- Routes mostly reduced to rail hubs
- Rates depend considerably on route
- Delays can make shipping unreliable
- Not good for smaller producers (can’t fill whole train car & must work to consolidate with other producers, can’t ship their products in ISO/flexitanks due to small volume)
What are the pros/cons of shipping via sea?
Pro:
- Cheapest in $/Km for long distance travel
- Easy for bulk transportation
Cons:
- Slow, requires a lot of planning
- Temperature control can greatly increase costs
What trends exist within bulk transportation?
- Bulk transportation from New World countries doubled between 2001-2010
- World-wide, bulk accounts for ~35% of exports, and the number increases to 40%+ for new world countries
What are the two options for bulk shipping?
Flexitanks and ISO containers
What amount of wine would a standard shipping container be able to carry in different formats?
Bottled wine:
9,000-10,000 L
Flexitanks:
24,000 L
ISO tanks:
26,000 L
Pros/cons to shipping in Flexitanks
Pros:
- Eco-friendly, single use
- Lightweight container brings cost down
- Less labor-intensive to load/unload
- No costs associated with cleaning/detaining/or renting
Cons:
- Greater risk of puncturing the tanks
- Can damage the container if too full
Pros/cons of shipping in ISO containers
Pro:
- Very low risk of leakage
- Does not require additional packaging (flexitanks must be shipped in container)
Con:
- High demand, low availability
- Greater risk of oxygen bubble or cross contamination
- Higher labor cost and specialized equipment required
Pros/cons shipping in bulk
Pro:
- Cheaper shipping in $/L
- More eco-friendly
Con:
- Not suitable for small producers
- Can only ship one wine per tank
- Some PDO’s require estate bottling
Who is usually responsible for the safety/insurance of wine throughout transportation?
Insurance falls upon the party sending the wine.
Producers are responsible until it reaches the importer. Importers then ensure it reaches retailers in good condition.
What are some major costs associated with importing wine?
- Custom duties and taxes
- Labelling laws
- Distributors’ fees
What are some examples of laws that would require a producer to change their label?
- ABV (EU must be within .5, whereas USA must be within 1.5)
- Health warnings in USA
What are the pros/cons of working with distributors in foreign markets?
Pro:
- They should know all the local laws and regulations
- They have local networks with retailers
Cons:
- Distributor’s fee (AKA distributor’s margin)
How do you quote and calculate a margin?
- Quote in percentages
- Fee/total revenue x 100
eg. $1 Fee + $10 Bottle= $11 revenue.
(1/11) x 100 = 9.09%
Why might a distributor’s fee be higher or lower?
Specialization
Specialty importers or distributors that focus on hospitality might charge margins up to 35%.
What are the main costs for retailers
- Property
- Labor
- Equipment
- Storage
- Delivery
- Margins
What property costs do retailers have to consider?
- Buying (higher capital cost) vs leasing (ongoing rent, dependent on lease terms)
- Dependence on location (in-person vs online retailers)
- Decor & Furnishings
What labor costs do retailers need to consider?
- Skilled vs. Unskilled Staff
- Additional staff for service
What storage costs do retailers need to consider?
- Temperature
-Space
-External storage costs
What options exist for retailers charging delivery fees?
- No delivery
- Fixed fees
- Extra charge for specific delivery date
- Free delivery w/ minimum purchase
What options exist for producers to market their wines?
- Large producers might have in-house marketing teams
- Small producers can pay an external marketing company
- Pay for a membership into an industry association (VDP, Consorzio) or Trade Body (Wines of SA, Wines of Aus)
What’s one strategy importers in the UK can use to pass along excise duties taxes?
Bonded Warehouses
Duties are held here and paid only when the wine is sold, which passes the cost off onto the buyer. Storing in these warehouses is an additional cost passed along onto the buyer
What’s an example of import duties pricing producers out of a market?
Mid-priced American wines often can’t compete in the EU with wines from South Africa and Chile, which have free trade agreements with the EU
How are Options a tool to negotiate trades that might be subject to currency fluctuations?
Options allow buyers to reserve a set amount of wine at an agreed upon price and deadline of purchase with the producer. The buyer is not obligated to purchase at any point.
This can also be done with currency at banks rather than product.
Why would an importer use options when buying wine?
Options contracts allow buyers to wait for advantages currency exchange rates, without being obligated to purchase the wine at the end of the contract.
This is usually only available to importers with large purchasing power.
How do producers mitigate the risk of an options contract?
Because an options contract leaves the producer at risk of being left with unsold stock, they will usually agree upon a higher price than normal.
What are the pros/cons for an importer in fixing prices in their own currency?
Pros:
- For buyers, this gives them certainty in prices, and allows them to project retail prices
Cons:
- If the currency exchange rate becomes more advantageous after ordering, the buyer will lose out on potential profits
What are the pros/cons for a producer in fixing prices in the importer’s currency?
Pro:
- For producers, there’s a chance that their currency will be worth more at the time of ordering than delivery
Con:
- Producers are risking uncertainty of how much money they’ll receive for their wine
What are the pros/cons of buying currency for a specific transaction?
Pro:
- Much less risk regarding fluctuations in exchange rates
Con:
- Requires very specialized workers who can manage money in that way, only available to larger companies
What are the pros/cons of entering a contract to buy at a fixed exchange rate?
Pro:
Buyers can budget easier by knowing the exchange rate, and it protects them from fluctuations
Con:
They are legally obligated to purchase the currency, regardless of any increases or decreases in exchange rates
Why would a producer choose to trade in USD or EUR?
- The currencies are more stable, and importers have more certainty in regards to price
- They might be buying imported winery materials/land in USD or EUR, and trading their stock in USD or EUR means they’ll have to exchange currency less frequently, protecting them from fluctuation
Why would a buyer open a foreign currency account in a local bank?
This only makes sense if the buying is exclusively making transactions in the same currency (buying in Italy, finishing in Britain, selling in Germany), otherwise the purchase and holding of foreign currency would hurt the company’s cashflow
What are the disadvantages in opening a foreign currency account in an overseas bank?
Same disadvantages as local bank, but with more risk of misunderstanding foreign banking regulations
