Supply and Demand: Factors Affecting Price of a Bottle of Wine

Question 1

Define:

Supply

Answer 1

The amount of a good or a service available for sale.

Question 2

Define:

Demand

Answer 2

The willingness of consumers or businesses to buy a good or a service.

Question 3

Select the correct answer.

Widely speaking, when a wine’s supply exceeds demand, prices tend to:

1. Decrease
2. Increase
3. Stay the same

Answer 3

1. Decrease

Question 4

Select the correct answer.

Widely speaking, when the demand of a wine exceeds supply, prices tend to:

1. Decrease
2. Increase
3. Stay the same

What will some consumers do when faced with these rising prices?

Answer 4

Increase

1. Some consumers will be willing to pay the higher prices, usually when they feel there is no good substitute or alternative;
2. Some consumers will not be willing to pay the higher prices and will switch brands or choose a different category altogether.

Question 5

As the reputation of a region, producer or even an individual wine grows, demand will _________ and producers may be able to do what?

Answer 5

• Increase;
• Justify higher prices.

Question 6

Give three reasons why a producer can justify higher prices.

Answer 6

• Improved reputation of the brand or region;
• Positive reviews from media publications;
• Online influencers or Key Opinion Leaders - these influencers can impact brand desirability via their lifestyle and placement of the brand.

Question 7

Demand for wine – be it a particular brand, grape, or style, or from a particular country or region – is affected by several factors which all must be considered together.

What are those four factors?

Answer 7

1. Social;
2. Economic;
3. Legislative;
4. Political.

Question 8

Give two reasons why the U.S. has become the country with the largest consumption of wine worldwide.

Answer 8

1. Over the last generation, wine drinking has progressively become more mainstream, driven by increasing globalization*;
2. Wine production improvements and growth in the domestic market.

*growth of multi-national corporations; increased ability of companies to export
products across national borders; consumers more able and willing to embrace new tastes

Question 9

Give four reasons why wine consumption continues to fall in countries that have already witnessed decreased wine consumption.

Answer 9

1. Younger people are drinking less wine;
2. Health concerns;
3. Lifestyle changes;
4. Reduced availability of cheap wine.

Question 10

Consumer preference swings over the last decade or so.

1. Which styles have become more popular?
2. Which have become less popular?

Answer 10

1. More popular: Rosé, Prosecco
2. Less popular: Fortified wines, medium-sweet German wines

Question 11

What is a ‘price-sensitive market’?

Answer 11

A market where many consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy.

The UK and Germany are examples of ‘price-sensitive markets.’

Question 12

Name three hurdles for producers in ‘price-sensitive markets’ where consumers are only willing to spend money on the cheapest, most rock bottom prices.

Answer 12

• Competition amongst producers is fierce within this reduced price range;
• Reluctancy to pass cost increases to consumers for fear of losing sales to competitors;
• These markets may be unprofitable for the producer.

Question 13

If the economy of a country is in decline and consumers’ disposable income shrinks, what typically happens with consumers’ wine spending habits?

Answer 13

They are likely to choose less expensive wines or switch to alternate, cheaper alcoholic drinks, such as cider or beer.

Question 14

When an economy is seeing economic growth and consumers’ disposable income increases, what typically happens with consumers’ wine spending habits?

Answer 14

They are willing to spend more on wine (and buy more expensive bottles).

Question 15

For wine producers, name two downsides if their country experiences a weak or devalued currency?

Answer 15

1. Costs increase;
2. It will be more expensive to import equipment and supplies (barrels, corks and yeast), which may offset any profits.

Question 16

If a producer is in a country whose currency gains in value (compared to that of the importing country to which they are exporting their wine), what are some options a producer can exercise?

Answer 16

1. Keep the price stable and therefore risk losing sales as the product represents less value for money in the importing market;
2. Decrease the price of the wine and lose profit.

Question 17

If an exporting country’s currency loses value against that of an importing country, what are 2 potential options a producer can exercise?

Answer 17

1. A producer can either keep the price stable, which should boost sales as the product represents better value for money in the importing market;
2. Increase the price and improve profits for future investment.

Question 18

When new, lower-priced or better-value wines are introduced to a market, name three impacts this has on existing brands within the same category?

Answer 18

• Demand for the existing brands may decrease;
• It may force producers to lower their prices to remain competitive;
• Brands may look to alternative markets.

Question 19

List four ways in which legislative and political factors can affect wine availability and pricing.

Answer 19

1. Laws prohibiting or limiting the sale of alcohol;
2. Government policies to reduce alcohol consumption;
3. Taxes/tarrifs;
4. International trade.

Question 20

In counties, regions, or countries where the sale of alcohol is tightly controlled, what effects does that have on the supply and pricing of alcohol?

Answer 20

1. Supply of wine is limited;
2. Prices increase or are high.

Question 21

Name four policies governments have implemented to reduce alcohol consumption.

Answer 21

1. Restricting the advertising of alcohol;
2. Setting minimum pricing;
3. Imposing blood alcohol limits;
4. Taxation.

Question 22

What is the difference between tariffs and an embargo?

Answer 22

1. Tariffs are customs duties.
2. An embargo is when a country bans imports from or exports to a particular country.

Question 23

What are two benefits of tariffs for the country imposing them?

Answer 23

1. They’re a form of revenue;
2. Encourages sales of domestic goods rather than imported goods.

Question 24

Geographical Indications that are widely recognized have the potential to enhance the following three aspects:

Answer 24

1. The reputation of that GI;
2. Demand for wines from that GI;
3. Prices for wines from that GI.

Question 25

What is a major factor influencing volume of wine production?

Answer 25

Area under vine / size of vineyard plantings.

Generally speaking, the greater the area under vine, the greater the volume of wine that can be produced.

Question 26

Specifically in the EU, what are four factors contributing to the loss of vineyard land?

Answer 26

1. Vine pull schemes;
2. EU Restrictions on planting new vineyards;
3. Conversion of vineyard land to other uses, such as development or crops that generate greater revenue;
4. Abandonment of rural areas.

Question 27

In winegrowing areas that have stayed the same or decreased in size, one would think that the production would stay the same or decrease, too. However, many of these areas have offset this thinking and actually increased production.

What are some human factors that have contributed to offsetting the reduction in the area under vine?

Answer 27

1. Relaxation of laws banning irrigation;
2. Higher density planting;
3. Modern techniques which help produce healthier grapes – better site and clonal selection, improved canopy management and pest and disease control;
4. Modern winemaking technology.

Question 28

What are four environmental factors of a “bad vintage” that significantly impact yields and the volume of wine produced?

Answer 28

1. Spring frosts;
2. Hail;
3. Heat waves;
4. Severe drought.

Reduced yields lead to lower production; lower production leads to supply shortage and higher prices, which consumers are not always willing to pay (especially if the adverse conditions result in a drop in quality).

Question 29

What is the main legislative influence on the global supply of wine?

Answer 29

The increasing number of geographical indications (GIs) around the wine world.

Question 30

One goal of Geographical Indications, particularly those within the European PDO system, is to define the ___ of wine produced in a particular region.

Answer 30

Style

Question 31

What is a potential consequence of a PDO broadening its production area, allowing new vineyards to be planted in less suitable sites, and production to be increased?

Answer 31

Dilution in overall quality, both perceived and actual.

Question 32

What is a main function of governing bodies that oversee PDOs in the EU?

Answer 32

They limit the amount of wine which can be released in any given year.

This ensures the market will not be saturated and that prices will remain level.

Question 33

Name four results from an oversupply of wine.

Answer 33

• Prices tend to fall;
• Producers are left with unsold supply which takes up space in their winery (which may lead the producer to sell at or below their own cost);
• Producers may feel they need to break into new markets where they do not have any contacts;
• In retail settings, wines that go on sale can devalue the brand image.

Question 34

What are three complications of an undersupply of wine?

Answer 34

• Strained relationships or cancellation of contracts if the producer doesn’t have enough wine to sell (relationship can be between producer and importer, importer and distributor, or distributor and buyer);
• Increased price which some people will not want to pay;
• Buyers and consumers may pivot to cheaper alternatives.

Question 35

What are seven headlining factors that affect the price of a bottle of wine?

Answer 35

1. Cost of land, if purchasing, for vineyard and winery;
2. Costs of establishing the vineyard and building the winery;
3. Costs for making, maturing, storing, and packaging the wine;
4. Costs for shipping, tranportation, importing, off-site storage, and delivery;
5. Insurance and marketing;
6. Costs for retailer or restaurant (e.g. rent, labor);
7. Currency fluctuations/exchange rates.

Question 36

In the wine industry, grape growing forms the first stage of the supply chain.

The cost of growing the grapes can be broken down into ___ costs and ___ costs.

Answer 36

1. capital costs, the money invested in a business to generate income (money spent by a business in acquiring, improving or maintaining long-term assets such as land, buildings and equipment);
2. operating costs, the day-to-day costs relating to producing and packaging
   wine.

Question 37

What are ten capital costs incurred when establishing a new vineyard or vineyards?

Answer 37

1. Buying the land;
2. Surveying the land to determine its suitability for viticulture and deciding which grapes befit the terroir;
3. Clearing the vineyard;
4. Creating access roads to/in the vineyard, to the winery, and/or to other plots;
5. Purchase and planting of vines;
6. Buying trellising equipment;
7. Installing irrigation system and drainage, if needed;
8. Weather hazard protection, if going to be used (e.g. protective mesh for hail);
9. Animal pest protection, if desired (e.g. nets, fencing)
10. Vineyard equipment, including tractors and harvesting machines.

Question 38

Name six costs of running and managing a vineyard.

Answer 38

1. Labor (from pickers to cellar hands);
2. Upkeep of machinery and equipment;
3. Vineyard materials (e.g. vines and trellis replacements);
4. Vineyard treatments, whether for conventional, organic, or biodynamic vineyard;
5. Water;
6. Electricity.

Question 39

Name two capital costs incurred when establishing a new winery.

Answer 39

1. Buying the land;
2. Building and outfitting the winery with equipment (e.g. presses, pumps, tanks, hoses, forklifts, etc.)

Question 40

What are six major costs of making wine?

Answer 40

1. Labor;
2. Upkeep of machinery and equipment;
3. Winemaking materials (e.g. de-acidification agents, cultured yeasts, filtering equipment, nitrogen, etc.);
4. Grapes or juice, if being purchased;
5. Water;
6. Electricity.

Question 41

What are three major costs for storing and maturing wine?

Answer 41

1. New barrels;
2. Skilled labor;
3. Loss of cashflow (while the wine is in barrel, it’s not making any money).

Question 42

What are seven key costs of packaging?

Answer 42

1. Bottling line, if purchasing;
2. Labor to operate the bottling line;
3. Bottles;
4. Closures;
5. Labels and graphic designer to design the labels;
6. Cartons/boxes;
7. Pallets.

Question 43

How is wine shipped around the world?

Answer 43

By freight forwarders who (should) use temperature-controlled shipping containers.

Question 44

From most expensive to least expensive, list the four ways wine can be shipped around the world.

Answer 44

1. Air;
2. Road;
3. Rail;
4. Sea.

Question 45

What are three advantages of bulk transportation?

Answer 45

• The wine in tank is much lighter than in bottle;
• It’s more efficient than standard shipping containers (flexitanks and ISO tanks hold over double the amount of wine vs. the same size container holding cases of wine);
• It’s cheaper and more environmentally friendly than transporting the wine in bottle (less fuel used).

Question 46

What are two disadvantages of bulk transportation?

Answer 46

1. Flexitanks are only suitable for moving large volumes of the same wine;
2. Suitable only for large-volume wineries (not for smaller ones).

Question 47

What are three costs associated with importation and/or distribution that affect the price of wine?

Answer 47

1. Costs of labels as they have to be specific for the country to which they are going;
2. Customs duties and taxes;
3. Margin sought by importer and distributor.

Question 48

What is a bonded warehouse, and whom does it benefit?

Answer 48

A warehouse that stores alcohol for importers and distributors that release it only when someone wants to buy it – that purchaser then covers the cost of taking the alcohol out of bond (a cost which includes paying the duty).

The importer or distributor benefit by not paying the duties which can help their cashflow situation even though they still pay for storing alcohol at the bonded warehouse.

Question 49

Name seven ways to mitigate the effects of exchange rate fluctuations.

Answer 49

1. “Options” for retailers or restaurants – when they reserve a certain amount of wine at a previously agreed-to price and take it only when they need it;
2. Fixing the price in the currency of the importer at the date of ordering;
3. Buying currency to cover specific orders (feasible only for large companies);
4. Entering a contract to fix the exchange rate;
5. Countries with unstable currencies can trade in currencies with more stablity, e.g. USD or Euro;
6. Opening a foreign currency account in a local bank;
7. Opening an account in an overseas bank.