Prices and businesses in the wine market Flashcards
What are three types of factors that influence demand for wine?
- Social factors
- Economic factors
*Legislative and political factors
What are four categories of social factors that influence demand for wine?
- Changes in consumption habits
- Changing consumer preferences
- Changes in reputation
- Changes in spending patterns
What are four possible reasons why wine consumption is falling in some countries?
- Younger people drink less wine (regard it as old fashioned)
- Health concerns
- Changes in lifestyle (no more long meals or day drinking)
- Reduced availability of cheap wine (due to vine pulling)
What are three examples of changing consumer preferences leading to increased demand?
- Rose (esp in USA)
- Prosecco (in USA and UK)
- Lower alc wines
What are two examples of changing consumer preferences leading to decreased demand?
- Fortified wines less popular
- Med-sweet German wines (like Liebfraumilch)
What are examples of how reputation of a region, producer, or grow be improved?
- Good reviews from professional reviewers
- Online influencers and key opinion leaders
- Product placement in mass media
- Peer opinions
- What are price-sensitive markets?
- Two examples?
- Markets in which many consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy
- Germany and UK
What is an example of a non-price sensitive market?
USA
What is premiumization and where has it been a trend?
- Consumers increasingly willing to pay more for individual bottles of wine, often because they are buying less by volume
- USA and even the UK
Why might producers not want to sell in a price-sensitive market?
Competition is fierce, as producers and competing within a reduced price range, making the market unprofitable for some producers
What are three categories of economic factors that influence demand for wine?
- Strength of the economy
- Fluctuations in currency exchange
- Changes to the market
How can strength of the economy impact demand for wine, and what is an example?
- In a recession, consumers will trade down to cheaper wines or switch to less expensive drinks like beer or cider
- Example of Champagne demand shrinking following the 2008 financial crash, while demand for cheaper sparkling wines grew
What is an example of a growing economy leading to more demand for expensive wine?
Chinese middle class driving wine sales and demand for aspirational wine, as from Bordeaux and Burgundy.
What is an example of how fluctuations in currency exchange can increase demand for wine?
The recent boom in Argentinian wines can be traced back to the early 21st century when a weak peso meant the wines were very competitively priced on the global market.
What are two examples of how changes to the market can impact demand for wine?
- If a product disappears, then demand for alternative products will increase
- However, if a new, lower-priced or better-valued wine appears, demand for existing products may decrease
What are five categories of legislative and political factors that impact demand for wine?
- Laws prohibiting or limiting the sale of alc
- Government policies to reduce alc consumption
- Taxation
- International trade
- Wine laws
What are three examples of government policies to reduce alc consumption?
- Reduction in advertising of alc drinks (e.g., Loi Evin in France in 1991)
- Minimum unit pricing to reduce availability of cheap alc (e.g., Scottish government)
- Limit on the amount of alc that can be consumed before driving a motor vehicle
What are two motivations for taxation of alc?
- Reduce consumption
- Generate revenue
What are two types of taxes imposed on alc?
- General sales tax (VAT)
- Excise duties or taxes on alc
What is the overall trend for excise duties on alc?
Increases over time (though exceptions, like Hong Kong’s exemption for wine to promote auctions)
What is an example of different tax levels impacting demand for products?
Ireland: Higher duties on sparkling wine has significantly reduced demand for it relative to still wine
What are two reasons for customs duties?
- Revenue generation
- Protect local producers
What were restrictions imposed by Argentina in the 2010s?
- Affected wine imports
- Severely limited imports of winery equipment, significantly increasing costs
- Restrictions on foreign ownership of land, slowing foreign investment significantly
What can happen after trade restrictions are lifted?
Negative feelings can continue, so consumers may avoid products from the countries
How do GIs increase demand?
The creation of a GI may increase recognition and demand for wines from that region and allow producers to increase the price of their wines.
What is an example of a legislative change that led to immediate change?
Anti-Extravagence campaign in China in 2012, leading to immediate drop in demand for Bordeaux Premier Cru Classé and Grand Cru Burgundy.
What are two factors that influence the supply of wine?
- Production
- Legislation
What are three categories of issues related to production that influence the supply of wine?
- Area under vine
- Human factors
- Natural factors
What are four factors that have led to a reduction of area under vine, especially in the EU?
- Vine pull schemes
- EU restrictions on planting new vineyards
- Conversion of vineyard land to other uses
- Abandonment of rural areas
With respect to vine pull schemes:
* What are three countries in the EU that have been the focus?
* What are three other countries where they have been used?
- Southern France, Italy, Spain
- Australia, NZ, Argentina
What are EU restrictions on planting new vineyards?
Since 2016, member states can increase vineyard area by up to 1% annually
What are three examples of conversion of vineyard to other uses?
- Switch to higher value products (like Elgin growers switching to apples)
- Switch to other products to combat oversupply (like to almonds/pistachios in CA)
- Vineyard land for property development, like tourism (Madeira) or businesses (Santa Clara Valley)
How can abandonment of rural areas impact supply of wine?
There simply may not be the labor available to work the vineyard
How can human factors increase production of wine?
Modern techniques can produce a greater amount of healthy grapes, producing a greater volume of higher-quality wines.
What are two human factors that have increased supply of wine in Spain?
- Relaxation of laws banning irrigation of vineyards
- Increased use of more modern, higher density planting
What are two examples of natural factors impacting the supply of wine?
- Vintage variation (e.g., in 2017, a 14% fall in production in Europe)
- Droughts (e.g., South Africa 2015-19, or California)
What is the main legislative influence on the supply of wine?
Increasing number of GIs around the world
What are two aims of the GIs (esp the PDO system)?
- Define the style of wine for a region
- Bring supply and demand more into line and reduce risk of downward price pressure (to reduce the risk of replacement from another GI)
What happens to a GI when demand is rising?
Pressure to extend the GI (e.g., for Prosecco DOC), often extending into less suitable sites and dilution of verall quality
What was introduced due to complaints about the strictness of the PDO system?
Vin de pays system in the 1970s (now PGI system) that requires at least 85% of grapes to come from the PGI but permit wide range of varieties and do not impose rules of viticulture or winemaking
What is one example of what a PDO governing body can do?
Some, for example the Comité Champagne and the Sherry Consejo Regulador, actively limit the amount of wine that may be released in any one year, ensuring the market is not oversupplied and maintaining price levels.
What are three things that producers can do in response to a fall in demand?
- Lower prices (to get some income from the wine and free up winery equipment for the next harvest)
- Find new markets and outlets (but this takes time)
- For large producers, bottle under a different label or offer it for white labeling
What can happen if a producer or retailer is forced to sell at a lower than usual price?
- Devalue brand image
- Create lasting damage to the brand
What can retailers and customers do if there is an under-supply of wine?
- If producer breaches contract with retailer, possible financial penalty (or at least loss of trust)
- Retailers and customers might seek substitutes (esp in price-sensitive markets)
What can the few large companies do when there is an under-supply of wine?
- Diverse portfolio: If there is an under-supply of a particular wine, they will be able to offer an alternative from within their portfolio
- Diverse markets: If price increases from under-supply cause sales to drop in one country, they can sell wine into less price-sensitive markets instead.
What will happen if there is a global over-supply of wine for:
* Inexpensive branded Chard?
* Super-premium Cab Sauv?
- low prices, competition from cheaper alternatives and the threat of being left with unsold wine in tanks as the next harvest approaches. Possibly sell below production costs
- Little impact on super-premium sector as volumes are very small.
What will happen if there is an economic recession:
* Inexpensive branded Chard?
* Super-premium Cab Sauv?
- Threat to sales
- Little impact on super-premium sector as volumes are very small and buyers of wine in this price band are less likely to be at risk during a recession
What are capital costs?
the money spent by a business in acquiring, improving or maintaining long-term assets such as land, buildings and equipment
What are operating costs?
the day-to-day costs relating to producing and packaging wine
What is the supply chain in the context of wine?
the network of organisations and activities involved from the creation of a product through to its distribution and sale to the final consumer
What are the two types of costs involved in grape growing?
- vineyard establishment
- vineyard management
What factors can impact the price of land?
- Potential to produce high-quality fruit (e.g., Napa Valley vs. the Central Valley)
- Scarcity of land (e.g., land in Champagne rarely comes to sale)
What are four ways to finance vineyard establishment costs?
- Personal or company wealth
- Loans (though interest and capital repayment need to be part of business plan)
- Investors
- Government subsidies
What are 10 examples of costs for vineyard establishment once land has been purchased?
- surveying the land to check its suitability for viticulture and deciding which grapes are most suitable
- site clearance
- building access roads into the vineyard and between vineyard plots
- buying and planting vines
- buying stakes and wires etc. for establishing and maintaining trellising;
- possible installation of deep drainage channels and pipework;
- in dry areas, establishing an irrigation system – for example drilling boreholes, building reservoirs, laying pipes to bring water into the vineyard, installing pumps to bring up underground water, installing a system of delivering water to the vines;
- protection against weather hazards – for example windbreaks, protective mesh (if the area is prone to the risk of hail), frost protection;
- protection from animal pests – for example high fences, electric fences, netting;
- buying machinery and equipment – for example tractors, spraying equipment, harvesting machines – and building garages or sheds to store them in
What are the 7 primary vineyard management costs?
- Labor
- Machinery and fuel
- Vineyard treatments
- Water
- Electricity
- Insurance and depreciation
What are two examples of factors that can increase overall labor costs in vineyard management?
- Vineyard attributes (e.g., steep vineyards of the Mosel)
- Organic and biodynamic
There is a tradeoff between labor costs for vineyard management and what?
Capital costs of machinery (as more mechanization means less labor requirements). However, staff need to be trained to use any machinery.
How do labor requirements for vineyard management vary over the year?
- At harvest, lots of unskilled labor required for hand picking
- For rest of year, smaller staff of more expensive, skilled workers under the supervision of a vineyard manager
While vineyard treatments can be reduced by integrated pest management, what is the potential cost?
Establishing a weather station or paying to subscribe to a government-run station
What are the two major categories of winemaking costs?
- Winery establishment (i.e., capital costs)
- Winemaking costs (i.e., operating costs)
What are three examples of capital costs in winemaking?
- Land for winery
- Winery buildings
- Winery equipment
What are 9 examples of operating costs in winemaking?
- Grape growing (or grape purchasing)
- Labor
- Machinery and equipment running costs (fuel, electricity, maintenance)
- Winery materials
- Water
- Electricity
- Maturation
- Packaging
- Depreciation
How can a winery reduce the cost of grapes?
Buying a cheaper variety and blending with a more expensive variety
What are some examples of winery materials required?
- Sugar for enrichment
- De-acidification agents
- Acid
- Cultured yeasts
- CO2 or other inert gases
- Fining agents
- Filtering agents
How can a winery reduce electricity costs?
Produce its own (e.g., solar panels)
How can a winery reduce water costs where water is expensive?
Build a water treatment plant to reuse as much as possible
What are the two cost components to wine maturation?
- The direct costs of space and vessels required
- The loss of cashflow by tying up a lot of capital in the maturing wine
How does profit margin differ between:
* high-volume, inexpensive branded Chard and
* low-volume, super-premium Cab Sauv?
- Tiny margin per unit sold, but aiming for high-volume sales
- Significant margin per unit sold, but only have a small number of units to sell
What is the biggest contribution to the increase in the per-bottle cost of grape growing for a super-premium wine, and why?
Labor costs, due to:
* more interventions in the vineyard
* more manual work
* smaller vineyard and lower yields, and thus no benefits from economies of scale
What are the second and third biggest contributions to the increase in the per-bottle cost of grape growing for a super-premium wine?
- Real estate tax, reflecting much more valuable land
- Depreciation, reflecting more capital (e.g., drainage, irrigation, frost protection, etc.)
What are the two biggest contributions to the increase in the per-bottle cost of winemaking for a super-premium wine?
- First, Oak
- Then cellar space (as it will be matured for a much longer period)
What are other examples of contributions to the increase in the per-bottle cost of winemaking for a super-premium wine?
- Much higher quality materials (bottles, corks, labels, etc.)
- One-off costs like design of labels, which generally cost more per bottle because of a lack of economies of scale
Who carries out the job of moving goods around the world?
Freight forwarders
How is wine most commonly transported?
In bottle, packaged in boxes, loaded into crates and pallets.
Whom does the wine industry tend to trust to transport wine?
Specialists in the transportation of wine (like JF Hillebrand). They charge more, but have expertise in transporting a fragile product.
What are the four ways of transporting wine around the world?
- Air
- Road
- Rail
- Sea
When is air used for transporting wine?
Very rarely because it is very expensive. Three examples:
* Sending bottles to a competition or trade fair
* Very high value wines
* Where deadlines are important (e.g., Beaujolais Nouveau for Japan)
When is road used for transporting wines?
- For short distances at beginning and end of their journeys
- For short distances, not long (and perhaps not even driving a truck on/off of a ferry)
When is rail used for transporting wines?
- Esp when containerization can be employed
- Could be cheaper than transporting by road, but rates vary considerably
When is sea used for transporting wines? What is notable about it?
- Usually by far the cheapest for transporting over long distances
- Containerization is essential
- It is very slow (e.g., Australia to UK usually takes 40 days)
What is the advantage and disadvantage of shipping wine in bulk?
- Advantage: Much cheaper
- Disadvantage: Only suitable for moving large volumes of the same wine, and so only works for supermarkets and major brands
Is bulk transportation used solely for cheaper wines?
Primarily for cheaper wines, but there is increasing interest in transporting more expensive wines in bulk too
Who normally assumes risk from transportation, and thus should bear the cost of insurance?
The party sending the goods.
For example:
* Producer responsible for risk of transport to importer
* Importer responsible for risk of transport to retailers
What is an example of wine lost during transportation?
in 2013, the container ship MOL Comfort broke and sank off Mumbai. Among the cargo were two containers of wine from New Zealand’s St Clair winery destined for Sweden.
What are two examples of increased costs due to importing into another country?
- Customs duties and taxes
- Different labeling laws
What are examples of different label laws across countries?
- In USA, alc can be within 1.5%, and nearest whole or half unit in EU
- In USA, health warning required
What can be done to help a producer comply with requirements of a foreign market?
Hire a distributor
How do distributors usually charge, and what is a common range?
- A “margin” quoted as a percentage, and calculated as the fee divided by revenue (i.e., price of bottle purchased from distributor)
- Can range 5-25%, varies between distributors and countries
- Hospitality sector tends to have higher costs and larger staff than those in the retail sector (and thus have higher fees)
- Retailers buying from distributors may also need to pay delivery costs
What are the 6 primary costs for retailers?
- Property costs
- Labor
- Equipment and materials
- Storage costs
- Delivery costs
- Margin at the point of sale
Are property costs higher or lower for online-only retailers?
Lower because they will only need warehousing space, far from city centers
What are typical property costs?
- Buying or renting property
- Decorating/furnishing
- Maintenance, security, water, energy, insurance
- Possibly: property taxes and waste disposal
What leads to higher cost of labor for retailers, and what kinds of retailers face higher labor costs?
- More skilled staff requires higher compensation
- Specialist wine retailers tend to have higher skilled staff than supermarkets
What are labor costs in a fine dining restaurant?
- More for staff, who are expected to be highly knowledgeable about wine
- Head sommelier, who selects the list and offer detailed advice – impressively high salaries
Where can storage be for retailers, and what are cost implications?
- On-site, perhaps in expensive wine cellars: bars, restaurants, shops
- Off-site: if there isn’t enough room, or for larger chains
How expensive is delivery in the cost of a bottle?
One of the most expensive elements of the supply chain.
How is delivery typically charged?
- Often a fixed fee, while the actual costs to the retailer vary
- May be free above a certain order value, as a way of offering a discount without reducing the price of the wine
- What is a typical margin for a specialist wine retailer?
- For a bar or restaurant?
- 30-50%
- 66.6% (i.e., wine is sold for 3x what it was bought for)
What are 8 sets of costs that affect the price of a bottle of wine through the supply chain?
- Grape growing costs
- Winemaking costs
- Transportation costs
- Importation costs
- Sales costs
- Marketing costs
- Impact of legislation (e.g., tariffs and labeling requirements)
- Currency fluctuations
What are three marketing costs that can add to the cost of a bottle of wine?
- Labor (in house marketing, a marketing company, and possibly a levy paid to an industry organization)
- Design and production of bottles and labels (in-house or external)
- Marketing campaigns (samples for tastings or competitions; price promotions)
What can an importer do in the UK to delay payment of customs duties?
It can store wine in a “bonded warehouse” and pay the duty only when taken out (e.g., when delivered to a buyer)
What are 7 methods that can be used to mitigate the effect of exchange rate fluctuations?
- Options
- Fixing price in importer’s currency on order date
- Buying currency to cover specific orders
- Contracting to fix exchange rate
- Trading in USD/EUR (i.e., using them as opposed to a less stable local currency)
- Opening a foreign currency account in a local bank
- Opening an account in an overseas bank
How can an option on wine be used to mitigate the effect of exchange rate fluctuations?
- Importer gets an option on a certain amount of wine at a price in local currency
- Importer chooses whether to exercise the option (which depends in part on currency conversion rates)
What kinds of importers can get an option on wine?
Larger importers with negotiating power
What are the two types of options that can be used in mitigating currency fluctuations?
- Option on wine
- Option on currency
What currency is the price between a producer and an importer usually priced in? How can this change?
- Usually in the producer’s currency
- Producer might agree to use importer’s currency in exchange for a premium (as they will then bear the currency risk)
Who is likely to use buying currency to cover specific orders?
Only larger companies are likely to have the in-house skills to do this.
What are the disadvantages of opening a foreign currency account at a local or foreign bank?
Keeping large sums of foreign currency may not be efficient use of those funds
What is a disadvantage of opening an account at a foreign bank?
Foreign banking regulations need to be understood
