Wine Business Flashcards
Give 2 examples of wine market supply shocks - one up, one down
2013 high rainfall in Castilla-La Mancha increased volume from 36 million to 45 million hectolitres
in 2017, spring frosts in Europe, produced lowest volume in 50 years
What happens when demand exceeds supply?
Prices are likely to go up. Some customers may pay, others may look at substitutions (alternative wine, or beer, spirits)
What happens when supply exceeds demand?
Prices drop as producers try to retain market share. New customers may try wine.
What macro trends are there in wine consumption?
Global demand has increased in recent years, due to growth China and America, offsetting falling demand in established countries (France, Italy)
What reasons are there for falling consumption?
Younger people drinking less wine (and alcohol overall)
Health concerns and government policies to reduce alcohol consumption
Changes in lifestyle (e.g. no drinking at lunch)
Reduction of over-supply in EU (wine lakes)
What recent consumer preferences trends have been seen in some of the bigger global markets?
Prosecco in the UK
Rose in the US
Move to lower alcohol, away from fortified wine
Move away from German medium sweet
What external factors can lead to change in reputation?
Leading critic reviews
Wine in popular culture
What type of market has consumers who are unwilling to pay more than the minimum?
Price-sensitive
What key categories are there for factors that can impact demand for wine?
Supply
Social factors
Economic factors
Legislative and legal
What factors impact supply of wine?
Weather
Legislation
Production
How does the strength of the economy impact demand?
In a strong economy, disposable income increases and people may start drinking wine, or trade up
In a crash, people may trade down, or change drinks
What economic factors are there that impact wine demand?
Strength of the economy
FX
Changes to competitors - new/withdrawn/temporarily unavailable products
What are Porter’s 5 forces?
- Competition in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
What legislative and political factors impact demand for wine?
Laws prohibiting or limiting the sale of wine - e.g. monopolies in Scandinavia, or the US three tier system
Drinking age
Trading hours
Policies to reduce alcohol consumption
Drink driving legislation
Taxation
Wine laws - e.g. PDO rules that restrict grapes and styles from a given region
Give some examples of government policies to reduce alcohol consumption
Scotland - minimum pricing of 50p a unit
France - restricted advertising (1991, Loi Evin)
Norway and Sweden have 20mg/100ml blood alcohol level for driving (50-80mg more common)
How can international trade in wine be hampered/enhanced?
Custom duties (tariffs for revenue, or protectionism)
Trade deals, e.g. EU and South Africa/ Chile
Argentinian import tariffs in 2010 that impacted winery equipment
Recent Chinese tariffs on US wine
What broad trend has been seen in international wine production over the last 20 years?
Areas under cultivation have dropped in Europe, but risen China
Why have some countries reduced areas under vine?
Vine pull schemes to reduce the EU wine lake
EU restrictions on new vineyards to maintain quality over quantity
Price of land (Santa Clara valley in California, or Madeira)
Switch to higher value crop (e.g. apples in South Africa)
Urbanization leaving no one to care for a vineyard
What natural factors impact wine production?
Weather variation across vintages
Longer term climate change impacting drought and irrigation (e.g. South Africa and California)
How do GIs impact wine supply?
PDO system in Europe is very restrictive, which can impact the ability to adapt to a changing market
AOP in France/ DOC-G in Italy: both can limit yields, variety, winemaking and maturation
Distinct styles do reduce the pricing power of the customer (e.g. large retail) to swap, as styles become linked with places, so NZ sauvignon blanc can’t be swapped out for a different sauvignon blanc
Comite Champagne restricts supply to maintain demand
What is a PDO?
Protected Denomination of Origin
What is a GI?
Geographical Indication
What is the impact of wine oversupply for a producer?
Stock may not sell, or be sold below cost
Brand may be devalued as a result
New markets may take time to build up to pick up the surplus stock
What is the impact of an undersupply of wine?
Strained business relationships if contracts cannot be met
Consumers may switch to cheaper markets
Large producers can swap between products
List categories of grape growing cost
Vineyard establishment
- land cost (Medoc AOP can be 100 times Bordeaux AOP)
- surveys
- clearance
- constructing roads and buildings
- trellising
- irrigation systems
- machinery and equipment
Vineyard management
- labor
- machinery running costs
- replacement materials
- treatments
- water
- power
List categories of winery costs
Winemaking costs:
- labor
- machinery and equipment
- ingredients/materials
- bought in fruit
- water
- power
Maturation costs:
- oak barrels/ tanks
Packaging
- equipment
- materials
List transportation types
Air - fast but limited due to cost
Road - for shorter distance
Rail - probably combined with other methods
Sea - cheapest and slowest
What are the costs/benefits of bulk transportation?
Massive increase in recent years to 35% of exports due to cost savings
Shipping container capacity increases from 10,000 bottles to 24,000
Require flexitanks within a shipping container
Need a few containers a year to be worthwhile
Insurance
List import costs
Labelling is trade block specific
Distributor costs to get local knowledge (5% to 25%)
List sales costs
Outlets include restaurants (casual to fine dining), retail (supermarkets to specialist high-end). Consider how costs differ for each of these
- Premises
- Labour
- On site storage
- Delivery to door
List marketing costs
External marketing company
In house staff for larger firms
Design and production of labels
Marketing campaigns
- advertising
- samples
- competition entries
- discounts
How can a wine importer improve cash flow?
Duties only have to be paid on wine stored when it leaves a bonded warehouse
How can FX exposure be managed?
Risk can be borne by the winemaker or the buyer (fix the price in either currency
FX futures to cover specific trades
Trade in the foreign currency (i.e. open an overseas bank account, or a foreign currency account at home)
Trade in a third currency - USD/ EUR
What is an estate producer, and its advantages and disadvantages
Produces wine from owned vineyards
- tight quality control at all levels
- total choice of wine style
- all profit (and losses) wholly owned
- ‘authentic’ product to market
- additional costs and complexity in the business
- volatility of product from crop risk
- may need size to be financially viable
What is a grower and its advantage and disadvantages?
Grape growing, with harvested product sold to a winery, either sold spot price or on a fixed contract
- beneficial to small holdings that could not support the whole process
- upfront cash flow
- focus on high-quality fruit
- higher risk of vintage variation and supply and demand
What is a grower-producer and its advantages and disadvantages?
Growers that produce wine from their own grapes, but sell it to a merchant to mature and bottle (common in Burgundy)
- better cash flow
- more straightforward business to manage
- reduced profit
- lack of control on maturation and blending
What is the French term for merchant?
Négociant
What is the role of a merchant?
Mature young wines, and blend prior to bottling
Quite often they will provide technical advice to growers, and/or buy in grapes for fermentation to maintain control
Long term contracts may be required to protect against price fluctuations (for both parties)
Some merchants may own vineyards to cover part of their product range
Examples include Guigal - a grower-merchant in Rhone
What are the advantages and disadvantages of the role of a typical French merchant?
Advantages:
- reduced expense of owning, managing and cultivating land (e.g. in Burgundy and Champagne where land is infrequently sold, and expensive)
- some may buy grapes/wine at spot price to be assured of the best quality fruit, although there is a price risk
Disadvantages:
- limited control over growing and winemaking
How do merchants in Burgundy typically differ from Bordeaux?
Bordeaux merchants typically deal with wine already made.
Burgundian producers typically are much more involved in the production of wine
What is en primeur and how does it work?
En primeur is advance purchasing of wine before it has been bottled and remains in barrel
It is a method for the chateaux to generate cash inflow without having to wait for a long maturation period
It may result in a cost saving for the consumer, or be the only opportunity to acquire a limited release wine
What is a co-operative?
A co-operative is owned by several members - typically growers, who then produce and sell their wine together
e.g. Plaimont in south-west France, Badisher Winzerkeller in southern Germany
What are the advantages and disadvantages of a co-operative?
- pool financial resources to afford better equipment
- shared access to experts, advice, marketing, packaging and sales services
- more efficient working
- democratic control may slow decision making
- cooperative may be focused on volume, or quality and inflexible on changing
What is a custom crush facility?
A variant on the co-operative model with a pay-as-you-go model.
Can make anything from inexpensive, large production, to super-premium
The finished wine is returned to the grower for sale and marketing
What are the advantages and disadvantages of custom crush facilities?
Low capital costs for growers, particularly new businesses
Close working relationships are vital to ensure the final product matches the desired style
