2. Factors That Affect Price of a Bottle - Costs Via Supply Chain

Question 1

What is the Supply Chain?

Answer 1

The network of organizations and activities involved from product creation to distribution and sale to the consumer.

Question 2

What are capital costs vs operating costs?

Answer 2

Capital: Money spent by a business in acquiring, improving or maintaining LT assets like land, buildings, equipment.

Operationg: day-to-day costs relating to producing and packaging wines

Question 3

What are the 2 major grape growing costs, and what type of cost are they?

Answer 3

Vineyard establishment (capital) & vineyard management (operating)

Question 4

What 3 features can factor into the cost of renting or buying land?

Answer 4

• Fruit quality
• Appellation reputation
• Scarcity

Question 5

What are 10 capital costs of preparing a vineyard?

Answer 5

1) Surveying (for suitability and varietal selection)
2) Site clearance
3) Access road construction
4) Acquiring & planting vines
5) Trellising
6) Drainage system (if needed)
7) Irrigation system (boreholes, reservoirs, pipes, pumps)
8) Weather hazard protection (windbreaks, mesh, frost protection)
9) Pest prevention (fences, netting)
10) Machinery & equipment acquisition

Question 6

What are 4 means of funding a new vineyard or winery?

Answer 6

1) Out of pocket
2) A loan, with interest and scheduled repayments
3) An investor, who profit shares, and may have mgmt involvement
4) Government lump-sum or tax incentive subsidies

Question 7

What are 8 operating costs of vineyard management?

Answer 7

1) Labour
2) Machinery maintenance & fuel
3) Supplies (trellising, pruning shears, gloves)
4) Treatments (agro-chemicals, natural, or access to weather stations for pest mgmt)
5) Water (rights to extract for irrigation or outright purchase)
6) Electricity (for irrigation, bird scarers, frost protection)
7) Insurance (against flood or fire)
8) Capital Asset Depreciation

Question 8

What are some factors that impact labour cost in the vineyard?

Answer 8

1. Size and topography
2. Philosophy - ie. Organic and Biodynamic are more labour intensive
3. Rate of pay and availability - expensive labour or shortages may lead to more investment in machinery
4. Nature of work: harvest is unskilled/cheaper; rest of year more skilled labour is required/higher rate

Question 9

What are the 2 major winemaking costs, and what type of costs are they?

Answer 9

Winery establishment (capital) and winemaking (operating)

Question 10

What are the main capital costs of winery establishment?

Answer 10

1) Land cost
2) Construction
3) Equipment (tanks, bottling line, etc.)

Question 11

What are the 9 main operating costs of winemaking?

Answer 11

1) Growing or purchasing Fruit
2) Labour (FT staff and harvest contractors)
3) Machinery and equipment running costs (fuel, electricity, maintenance)
4) Additives/Gasses
5) Water (for cleaning)
6) Electricity (for refrigeration, pumps, ventilation, lighting)
7) Maturation (storage, vessels, staves, labour, foregone cash flow)
8) Development and Acquisition of Packaging (includes renting a bottling line if applicable)
9) Depreciation of capital assets

Question 12

What is the effect of scale on a high-volume, inexpensive wine?

Answer 12

The aim is to sell more product to achieve profitability. It may sell at a low margin to remain competitive.

As such A large initial investment in machinery that provides efficiency may be justified

Question 13

What is the effect of scale on a low-volume, premium wine?

Answer 13

It may sell fewer units and hence the margin must be larger to turn a profit.

Especially necessary since equipment and storage may have a higher cost.

Question 14

What is the role of a freight forwarder in transportation?

Answer 14

They move wine globally. Some specialize in moving wine (temp control containers and special anti-breakage care), but they are more expensive (ie. JF Hillebrand).

They may also offer insurance at a cost.

Question 15

What are the 4 methods of transportation, from least to most expensive?

Answer 15

Sea –> Rail –> Road –> Air

Question 16

When is air transportation used and why?

Answer 16

To send wine to buyers, competitions, events; or to send time sensitive high value wines (ie. Beaujolais Nouveau for Japan)

Expensive due to high weight of wine and added fuel required

Question 17

When is road transportation used and why?

Answer 17

For short journeys or at the start or end of a journey. Ferries may be taken at an added cost

Highly efficient, but long journeys are expensive

Question 18

When is rail transportation used and why?

Answer 18

Longer journeys. Containerized is cheaper; individual pallets more expensive.

Rates depend on route, length, and how wine is loaded

Question 19

When is sea transportation used and why?

Answer 19

Long journey. For containerized product only.

Cheapest in terms of cost per km. But extremely slow (ie. Aus&raquo_space; UK = 40 days)

Question 20

What are some global stats surrounding bulk transportation?

Answer 20

• 2001 to 2010 - 23 –> 43% of exports from New World are in bulk
• 2018 - 34% of total world exports are in bulk
• Spain (55%), US, South Africa, Australia, Chile transport 40%+ exports in bulk
• 34% of exports in bulk only account for 8% in value

Question 21

What are the options for transporting wine in bulk, and what are the capacities?

Answer 21

a) Flexitank in a steel shipping container (24,000L)

b) Non-flexible ISO Tank (26,000L)

Question 22

What are the advantages of shipping in bulk?

Answer 22

Lighter weight and take less space than bottles (ie. 24-26,000L vs 9-10,000L)

Question 23

What is the disadvantage of shipping in bulk?

Answer 23

Only holds a large amt of one type of wine.

Not suitable for small producers

Question 24

Why would a producer obtain insurance for transportation?

Answer 24

To protect against loss, spoilage, or damage, and because producers are usually responsible for transit to the importer.

Question 25

What are the 3 main costs associated with importation?

Answer 25

1) Customs, duties, and taxes 2) Labelling laws/requirements (ie. US can be within 1.5% ABV; EU within 0.5-1%; US requires health warning) 3) Distributor costs

Question 26

What are the advantages (3) of working with a distributor?

Answer 26

a) Advises on market requirements and regulations b) Has established clients and buyers c) Deals with much of the logistics

Question 27

What is a "margin" and how is it calculated? What is the typical range?

Answer 27

A fee charged by a distributor expressed as (Fee/Revenue) x 100 Typically 5-25% in hospitality (lower in retail)

Question 28

What are the 6 main sales costs for a retailer that impacts the cost of a bottle? (Hosp or retail)

Answer 28

1) Property 2) Labour (incl. training) 3) Equipment and materials 4) Storage, onsite or offsite (incl. transport) 5) Delivery 6) Margin at POS (30-50% for specialist retailer; 66% restaurants)

Question 29

What are typical property costs for a retailer?

Answer 29

1. Buying or leasing (lower for online retailer) 2. Decor and furnishing 3. Maintenance, security, water, energy, insurance 4. Commercial property tax or waste disposable (varies by country)

Question 30

What are typical equipment and material costs for a hospitality or retail retailer?

Answer 30

Specialist retailer: till, fridge, shelving, display materials, cleaning equip Restaurant: kitchen & bar equip, tableware, glassware, wine preservation system

Question 31

What are 3 main marketing costs for a producer that impact the cost of a bottle?

Answer 31

1) Labour (internal or external, incl trade bodies) 2) Design and production of labels/bottles 3) Marketing campaigns

Question 32

Give 2 examples each of industry associations and trade bodies

Answer 32

Industry assoc - Consorzio in Italy, VDP in Germany Trade bodies - Wine of Aus, South Africa

Question 33

What are 4 common Marketing Campaign costs that affect the price of a bottle?

Answer 33

1. Advertising 2. Sample bottles for tastings/competitions 3. Price promotions 4. promo materials

Question 34

What are 6 matters of legislation that impact the cost of a bottle?

Answer 34

``` Taxes Duties Trade barriers Subsidies Min. pricing Labelling laws ```

Question 35

What is a bonded warehouse, and what is the advantage? (UK)

Answer 35

Allows wine to be stored in the country without paying excise duty. Otherwise, as soon as it enters the country, and is destined for a distributor's facility, excise is payable by the producer. It allows a producer to store product until someone wants to buy it, then excise is paid upon release. Better for cash flow as the buyer's funds cover the cost.

Question 36

Give an example of import duty affecting competitiveness in a market.

Answer 36

There are few mid-priced USA wines in the EU because tariffs are much higher than they are for Chile or South Africa

Question 37

Calculate the EUR price of a 2.00 AUD bottle of wine (ex cellar) if the exchange rate is 1.50 AUD/1.00 EUR

Answer 37

2.00 AUD/1.5 AUD = 1.33 EUR

Question 38

Exchange rates can change quickly, even while wine is in transit. 7 Options to mitigate and hedge currency fluctuations:

Answer 38

1) Option 2) Fixing Price 3) Buying currency 4) Fixed exchange rate contracts 5) Trading in USD/EUR 6) Foreign currency account at local bank 7) Overseas bank

Question 39

What is an "option" in referring to currency management? How might a producer approach this?

Answer 39

The importer takes one on a certain amt of wine or currency at an agreed price. At an agreed time, the importer may decide whether they want it. Large importer have the buying power for these. The producer may wish to charge a premium since they risk losing the sale.

Question 40

What is involved in fixing price, in relation to currency management? What is the advantage/disadvantage?

Answer 40

Fixing prices in the currency of the importer at the date of order Offers certainty to the importer, and risk to the producer. As such the producer may charge a premium.

Question 41

What is involved in buying currency when managing exchange rate fluctuations?

Answer 41

Proactively buying foreign currency to cover specific orders. Usually only undertaken by large, proactive companies

Question 42

What is a fixed exchange rate contract?

Answer 42

Entered into by an importer with a bank or other supplier of foreign currency, which specifies the amount and date, and forces a legal obligation to purchase currency at the given rate

Question 43

Why would a producer/importer chose to trade in USD/EUR?

Answer 43

It's more stable and predictable than many currencies. Can also be used for vineyard and winery supplies, which makes it efficient as fewer exchanges are made.

Question 44

What are the advantages and disadvantages of an importer opening a foreign currency account at a local bank, or opening an overseas bank?

Answer 44

A buyer can pay the producer directly in their own currency. But currency still needs to be bought; and it may not be efficient to have funds sitting until purchased. Foreign banking regulations may also need to be contended with (Not suitable where goods are bought in one currency and sold in another; moreso for when components need to be purchased, then assembly and sales occur in various countries. )