WINE BUSINESS 📊 Flashcards
What happens if high supply and low demand
Low prices.
What happens if low supply and high demand
High prices.
Social factors that influence the demand for wine
- Consumption habits.
- Consumer preferences.
- Reputation.
- Spending patterns.
Explain the evolution of consumption habits in the last 20 years
A rapid increase in the first part of the 2000s, fall down in 2008, stable to 2021; drops in France and Italy, increment in the USA (largest wine consumption worldwide in 2011) and China, a stable market in Germany.
The possible reasons for the drop in consumption habits
- younger people drinking less wine (wine is old-fashioned, more time on social media so less time in the bar);
- health concerns (increasing awareness of the negative health effects of alcohol, for example Loi Evin in France);
- changes in lifestyle (less time for long meals, no alcohol during working days);
- reduced availability of cheap wine (consumers buy other cheaper alcoholic drinks).
How changes in consumer preferences affect the demand for wine
Rosé is popular (USA), Prosecco is increasing (UK), high demand for lower-alcohol wines, drop of fortified wines (from 4% to 2,5%), out of fashion for medium-sweet German wines (Liebfraumilch).
How changes in reputation affect the demand for wine
Good reviews increase prices (Wine Spectator in the USA, Jancis Robinson in the UK), also online influencers or key opinion leaders, presence in popular culture (films, tv series).
How changes in spending patterns affect the demand for wine
How much consumers are willing to spend on wine (Germany and UK no more for the lowest price possible, the USA above the minimum); competition in price-sensitive markets (consumers are building up brand loyalty); premiumisation in the recent years (pay more for a single bottle but less volume, USA and UK).
Economic factors that influence the demand for wine
- Strength of the economy.
- Fluctuations in currency exchange.
- Changes to the market.
How the strength of the economy affects the demand for wine
Sales of wine will change with the level of consumer disposable income; if disposable income falls, consumers choose cheaper wines or switch to other (2008 from Champagne to Prosecco); when an economy is growing, such as has been seen in China, disposable income increases and consumers are often willing to buy more expensive wine (Bordeaux, Burgundy).
How fluctuations in currency exchange affect the demand for wine
They can affect the demand for imported wines:
- wine-exporting country’s currency gains value than importing, producer can increase price (risk losing sales) or keep the price stable (lose profit);
- wine-exporting country’s currency loses value than importing, exporter can lower the price (boost sales) or keep the price stable (more profit).
How changes to the market affect the demand for wine
Markets are constantly changing (product disappears = supply ↓ ⇨ new opportunities for competition (limited supply, ↑ prices)).
Legislative and political factors that influence the demand for wine
- Laws prohibiting or limiting the sale of alcohol.
- Government policies to reduce alcohol consumption.
- Taxation.
- International trade.
- Wine laws.
How laws prohibiting or limiting the sale of alcohol affect the demand for wine
Minimum legal drinking age, particular hours for the sales, sales control by monopolies and the USA’s three-tier system.
How government policies to reduce alcohol consumption affect the demand for wine
Criminal behaviour; Loi Evin in 1991 in France has restricted the advertising of alcoholic drinks; Scottish Government introduced minimum unit pricing to reduce the availability of cheap alcohol; alcohol limit before driving the car (BAC, Blood Alcohol Concentration), for example New Zealand and Scotland have reduced from 80mg/100ml to 50mg/100ml.
How taxation affects the demand for wine
Reduce consumption and revenue generator for governments; categories of wine have different levels of taxation (the Republic of Ireland has 3.20€/bottle of still wine and 6.37€/bottle of sparkling wine).
How international trade affects the demand for wine
Export has doubled in the last 15 years; custom duties on imported goods to generate revenue and encourage the domestic market; embargo (exports to a particular country is banned); free-trade agreement in EU, so countries that accept the agreement are more competitive than those don’t (South Africa and Chile vs Australia); trade wars.
How wine laws affect the demand for wine
GIs have a significant impact on the supply level; slow reaction on the market with PDO rules; stop of lavish gifting in China in 2012.
Which factors influence the demand for wine
- Social.
- Economic.
- Legislative and political.
Which factors influence the supply of wine
- Production.
- Legislation.
Production factors that influence the supply of wine
- Area under vine.
- Human.
- Natural.
Factors that have influenced the loss of vineyard land (particularly in the EU)
- vine pull schemes (surplus of wine in the mid-1980s, wine lake, so pulled up poor quality vines);
- EU restrictions on planting new vineyards to increase the quality and avoid excessive production;
- conversion of vineyard land to other uses (wine grapes are low value agricultural crop, e.g. in Elgin from vineyards to apples);
- abandonment of rural areas (people live and work in urban areas).
How human factors influence the supply of wine
Modern techniques (e.g. area under vine is decreasing but the production in Spain is increasing thanks to the use of modern higher density planting).
How natural factors influence the supply of wine
Weather variations (spring frosts, hailstorms, severe heat waves in 2017 = -14% compared to 2016; drought in South Africa and California, Chilean government estimates that 95% of the country’s vineyards will be irrigated in 2050), low yields (not related to low quality) means higher prices.
Wine lake
Surplus of wine produced. The national government and then the EU itself paid growers to pull up poor quality vines, especially in southern France, Italy and Spain (1980s).
How legislation influences the supply of wine
- Increasing of GIs – definition of where grapes for wines with specific geographical names can be grown, so limit in the production; several restrictions in the EU, no strict rules for AVAs in the USA or Wines of Origin in South Africa.
- GIs define the style of the wine and find the right balance of supply and demand.
- Usually, when demand for a specific wine is rising, there is pressure to extend the area (Prosecco), so planting on not suitable areas and drop of overall quality.
- PDOs have a governing body which helps set and enforce the rules (Comité Champagne and the Sherry Consejo Regulador).
- EU winemakers couldn’t compete with their counterparts in less heavily-regulated regions because of PDO, so France introduced the “vin de pays” system in the 1970s that requires 85% of the grapes from a particular area but doesn’t impose rules on viticulture and winemaking.
The issues of wine oversupply for a producer
- reduced prices;
- unsold wines;
- storage space.
How to sell more wines in case of oversupply
- reducing prices for the excess wine below production cost (it can devaluate the brand image);
- looking for new markets and outlets (develop contacts is hard so it’s a good way only if there is already a presence in that market or a distributor that can find new customers);
- different label (private label) for producers with a large volume.
General consequences of undersupply
- increased price for the product;
- disappointed clients;
- contracts can have a financial penalty otherwise retailer can cancel it.
Consequences of undersupply for producers of large-volume, inexpensive, varietally labelled wine
- price of the final product increases;
- loyal customers may move to another label (great portfolio);
- final quality of the product may be compromised in order to meet volume demands.
Consequences of undersupply for producers of super-premium, single-vineyard wine
- increased price of the final product;
- wine is more likely to be sold on allocation;
- increased exclusivity.
Which costs influence the supply chain
- Grape Growing.
- Winemaking.
- Transportation.
- Importation.
- Sales.
- Marketing.
Which are the grape growing costs
- Vineyard establishment.
- Vineyard management.
The costs related to vineyard establishment
- the land’s potential to produce high-quality fruit and the name of the appellation (Napa Valley for premium and super-premium wines, while Central Valley for bulk wines);
- scarcity increases the price (land in Champagne and Burgundy are rarely on the market);
- capital costs (by loan, investors or incentives from countries) - costs to make the vineyard operational like surveying the land to check its suitability for viticulture, site clearance, building access roads, buying and planting vines, trellising system, drainage channels, irrigation systems, protection against weather hazards or from animal pests, buying machinery and equipment;
- in some countries, governments are trying to encourage the establishment of vineyards and offer subsidies to prospective producers to help with capital costs.
The costs related to vineyard management
- labour, it’s related to the topography and other factors (Mosel has steep slopes so no mechanisation); ↓ labour cost (Chile) ⇨ ↓ equipment investment, ↑ labour cost (Coonawarra) ⇨ ↑ equipment investment; hire a team of pickers during the harvest; small staff of highly skilled workers during the year; organic and biodynamic agricultures need highly skilled staff;
- machinery and equipment running costs;
- vineyard materials (replacement vines and trellising);
- vineyard treatments (conventional agriculture use large amounts of agrochemicals);
- water;
- electricity (irrigation systems, bird scarers, frost protection).
Which are the winemaking costs
- Winery establishment.
- Winemaking costs.
- Maturation.
- Packaging.
The costs related to winery establishment
- similar to the vineyard site (land);
- building and equipment (presses, tanks, pumps).
The costs related to winemaking
- labour (small or big staff, occasional workers for harvest);
- machinery and equipment (fuel, electricity, maintenance);
- winery materials (sugars, acids, yeasts, carbon dioxide, fining agents);
- bought-in fruit (it can vary according to the quality of the grapes, the grape variety and the vintage);
- water (for cleaning, investment in water treatment plants);
- electricity (refrigeration, ventilation, presses, pumps, lighting).
The costs related to maturation
- space to the storage;
- new oak barrels are very expensive;
- employ to monitor the maturation process;
- loss of cash flow (a large amount of money tied up in maturing stock).
The costs related to packaging
- materials (bottles, closures, labels, cartons, pallets);
- bottling line (own or hired, send the wine to another estate);
- labour (bottle, package, design of the labels).
Which are the transportation costs
- Transportation of wine in bottle.
- Bulk transportation.
- Insurance.
Transportation of wine in bottle - pros/cons
The most common way, packaged in boxes, loaded into crates and pallets, fragile products, use of specialised logistics companies (JF Hillebrand). Transport by air, road, rail, and sea.
Ways of transporting wine around the world
- Air.
- Road.
- Rail.
- Sea.
Air transport for wine in bottle - pros/cons
Cost depends on weight (bottles are heavy in relation to their size), used in special circumstances (competitions, samples for fair, high value wines, when deadlines are important such as Beaujolais Nouveau for Japanese market).
Road transport for wine in bottle - pros/cons
Very efficient for short journeys but expensive for long distances, quickest when cross a small body of water (ferry) but costs can be high.
Rail transport for wine in bottle - pros/cons
Vary according to the length of the journey and how goods are loaded onto the train, loading and unloading of pallets can increase the cost, containerization can reduce the cost.
Sea transport for wine in bottle - pros/cons
The cheapest method (in cost per mile) for long distances, containerization is essential, it’s slow (40 days from Australia to the UK).
Containerization
The goods are loaded into a standard container which is lifted onto the back of a truck and then onto the rail wagon or ship.
Bulk transportation - pros/cons
Very common in past (barrels), increase in the last decade (38% in 2016), transport in either plastic flexitanks or non-flexible ISO tanks, much lighter than in bottle, much more efficient (9000/10000 l of bottled wine, 24000 l wine in bulk, 26000 l ISO tanks), much cheaper (reduction of fuel required), more environmentally-friendly, suitable only for large volumes of the same wine, ideal over 15000 cases, not suitable for smaller-production wines, usually for cheaper wines.
Insurance - pros/cons
Wine should be correctly insured throughout its journey, in case it is lost, damaged or spoiled; usually, winery is responsible for the journey to distributor and distributor is responsible for retailers; using a specialist freight forwarder include insurance in its services.
The capacity of flexitank, ISO tank and container filled with bottles, having the same volume available
24,000 litres - flexitank
26,000 litres - ISO tank
9,000/10,000 litres - in bottles
The costs related to importation
- Different labelling laws (ABV in EU is whole or half unit instead of the US that allows 1.5% variance, the US requires health warning).
- Time to learn all the requirements (importer knows them and have a list of potential clients).
- Distributors charge a fee (margin, the profit divided by the revenue, in percentage) of 5-25% (higher for those selling to the hospitality sector than retail); possibility to avoid margins if retailers buy directly from producers but no benefits of using a distributor.
Margin
The profit divided by the revenue, in percentage. Usually, it’s between 5% and 25% for distributor and 30-50% for wine retailers.
The costs related to sales
- Retailers – buy or lease property (bar and restaurants need premium locations), business image (decorating and furnishing), additional running costs (maintenance, security, energy).
- Online-only retailers – buy or lease warehousing space (usually away from city centres, so cheaper).
- Labour – training staff (supermarkets don’t need staff so cheaper costs, fine dining restaurants require highly skilled staff).
- Equipment and materials – based on the type of retailer.
- Storage costs (bars and restaurant have expensive fridges, while supermarkets have centralised warehouses).
- Delivery costs (depending on distance, free over a certain amount).
- Margin at the point of sale – usually, 30-50% for specialist wine retailers, corkage fee to avoid large margins.
The costs related to marketing
- Labour – marketing team or external company.
- Industry association or generic trade body (they market their member’s wines collectively).
- Design and production of bottles and labels.
- Marketing campaign.
Types of legislation which affect the cost of wine
- taxes;
- duties;
- trade barriers;
- subsidies;
- minimum pricing;
- labelling laws.
Examples of how legislation impacts the cost of wine
- In the UK, excise duty when wine enters the country unless it is stored in a “bonded warehouse” (excise duty is paid when someone wants to buy the wine, this action helps cashflow situation of importing companies).
- Legal factors have an impact on the producer’s decision to enter or not in a market (a few mid-priced US wines in the EU, they cannot compete with Chilean and South African wines).
- Onerous labelling laws may put off new entrants to a particular market.
Methods to reduce the effect of fluctuations in currency
- options;
- fixing the price in the currency of the importer at the date of ordering;
- buying currency to cover specific orders;
- entering a contract to fix the exchange rate;
- trading in USD/EUR;
- opening a foreign currency account in a local bank;
- opening an account in an overseas bank.
“Options” to reduce the effect of fluctuations in currency - pros/cons
A key strategy in currency edging; the retailer takes an option/reserve on a certain amount of wine at an agreed price; producer reserves a stock to the retailer, the decision is based on the currency exchange, the retailer may not buy the wine, so high risk for the producer and he can set a higher price than under a normal contract; larger retailers have the negotiating power; possibility to take an option on a certain amount of currency at an agreed price, rather than stock.
“Fixing the price in the currency of the importer at the date of ordering” to reduce the effect of fluctuations in currency - pros/cons
Risk for the producer (he may not agree or charge a premium as it shifts the currency risk to him), prices are usually in the currency of the producer, it’s preferred by many retailers because they have the certainty of knowing how much they are paying and can work out their retail price based on that figure.
“Buying currency to cover specific orders” to reduce the effect of fluctuations in currency - pros/cons
Only large companies (they have the skills necessary to manage currency).
“Entering a contract to fix the exchange rate” to reduce the effect of fluctuations in currency - pros/cons
Common in currency edging; ideal for retailers which conduct a lot of business in a particular currency; contract with bank/other supplier of foreign currency, legally committed; fixed rate on a specified date.
“Trading in USD/EUR” to reduce the effect of fluctuations in currency - pros/cons
Ideal for producers in countries with unstable currency, attractive for retailers who have greater certainty about the price of wine; it reduces the number of exchanges, less exposition to the fluctuations.
“Opening a foreign currency account in a local bank” to reduce the effect of fluctuations in currency - pros/cons
Not really suitable where goods are bought in one currency and sold in another, ideal if Italy-UK-Germany.
“Opening an account in an overseas bank” to reduce the effect of fluctuations in currency - pros/cons
Disadvantages of foreign currency account and an added cause for caution; banking regulations differ greatly in different countries, so be careful.
Estates - what they are, pros/cons
- They produce wine exclusively from their own vineyards.
- From small to huge sizes (not related to the size of the companies).
- Larger estates are more financially viable than smaller ones (same equipment for more wines, mechanization).
- Average vineyard is still very small (historical factors, geography).
✅ Control over the entire process, chose the style of the wine, quality control at every stage, max profit, marketing (storytelling), authenticity for the consumer.
❌ High capital cost (possibility to hire the equipment), small estate producers risk high percentage crop loss due to vintage variation which impacts on cash-flow, economies of scale disadvantageous to small producers, succession laws.
Growers - what they are, pros/cons
- Focus on growing grapes, so they sell grapes to a winemaker or a merchant.
- Ideal for owners of small vineyards.
- Two options to sell the grapes:
1. Contract (for one or multiple vintages)
✅ Certainty to sell the grapes at given prices, security for the contract, strong working relationship.
❌ Vintage, rejection or lower prices for grapes without standard requirements.
2. Spot.
✅ Higher prices if shortage of grapes.
❌ Lower prices if glut of grapes.
✅ No costs for cellar equipment, better cash flow, high-quality grapes (all the efforts in the viticulture, e.g. Andy Beckstoffer for Cabernet Sauvignon on prime sites in Napa Valley).
❌ Vintage variation, fluctuations of demand/supply.
Growers-Producers - what they are, pros/cons
- They produce wine and sell it to a merchant to mature and bottle (common in Burgundy).
✅ No costs for maturation and marketing (maybe limited skills in marketing).
❌ Smaller profit than to sell the finished wine, lose control over the style.
Merchants - what they are, pros/cons
- They buy immature wine, mature it and sell it under the merchant’s name (usually blend of different producers).
- Long-term contracts with their suppliers.
- Premium wines from the owned vineyards and inexpensive wines from other growers in order to have a range of wine at all price points (Guigal is a grower-merchant in Rhône Valley, no different name if wine is made from owned grapes but distinction on vineyard: single vineyard for owned grapes, regional appellation for bought grapes; Domain Dujac in Burgundy diversifies the brand, so Domain Dujac for owned grapes while Dujac Père et Fils for bought grapes).
- If large quantities of wine, private labels for supermarkets, deep discounters and bars/restaurants.
- They operate differently from region to region (in Burgundy they’re much involved in the wine production than in Bordeaux).
✅ No expense to buy and manage vineyards, protection and flexibility in bad vintages (high prices).
❌ Little control over grape growing (technical support to their suppliers to achieve standard quality) or winemaking.
En Primeur
- Method of selling wine before it has been bottled.
- Purchasers buy the wine in barrel and it remains in the producer’s cellar until it’s ready for bottling.
- Selling wine whilst it is still in barrel can generate cash flow earlier (en primeur covers the costs from wine production to bottling).
- Fixed price for purchasers, wine in limited quantities so en primeur is the only occasion to buy that wine.
Co-operatives - what they are, pros/cons
- They are owned by a group of growers and produce/sell wines from the members’ grapes (democratic control).
- Payment on weight or quality-fruit.
- From small to large companies.
✅ Expensive equipment is shared, expert viticultural and winemaking services, marketing.
❌ Slow process of decision-making.
